As filed with the Securities and Exchange Commission on August 2, 2006
Registration No. 333-__________________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
PARK CITY GROUP, INC.
------------------------------------------------------------
(Exact name of Small Business Issuer as specified in charter)
Nevada (7374) 37-1454128
---------------------------- ------------------------- ----------------
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation Industrial Classification Identification
or Organization) Code Number Number)
333 Main Street
Park City, Utah 84060
(435) 649-2221
(Address and telephone number of principal executive office)
Randall K. Fields
Chief Executive Officer
333 Main Street
Park City, Utah 84060
(435) 649-2221
--------------------------------------------------------
(Name, address and telephone number of agent for service)
with copies to:
A.O. Headman, Jr., Esq.
Cohne, Rappaport & Segal
257 East 200 South, Seventh Floor
(801) 532-2666
Salt Lake City, Utah 84111
Approximate date of commencement of As soon as practicable after this
proposed sale to the public: Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Title of Each Amount Offering Aggregate Amount of
Class of Securities Being Price Per Offering Registration
Being Registered Registered (1) Unit (2) Price Fee
----------------------------------------- ------------------- -------------- ------------------- --------------
Common Stock, $.01 par value (3) 157,143,764 $.07 $11,000,064 $1,178
----------------------------------------- ------------------- -------------- ------------------- --------------
Common Stock Underlying Warrants (4) 40,841,935 $.07 $ 2,858,936 $ 306
========================================= =================== ============== =================== ==============
Total 197,985,699 $13,859,000 $ 1,484
========================================= =================== ============== =================== ==============
(1) Includes shares of our common stock, par value $.01 per share which may be
offered pursuant to this Registration Statement and shares issuable upon the
exercise of warrants.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of
1933, using the average of the high and low price as reported on the
Over-The-Counter Bulletin Board on June 20, 2006, which was $.07 per share.
(3) Includes 90,909,106 shares of common stock owned by selling stockholders
acquired in a private offering transaction which closed in June 2006 and
66,234,658 shares owned by one other selling stockholder.
(4) Includes shares of common stock issuable upon outstanding warrants. The
warrants are exercisable at prices ranging from $.04 to $.07 with expiration
dates ranging from August 16, 2007 to June 21, 2011.
In accordance with Rule 416 of the Securities Act, this Registration
also covers such indeterminate amount of additional shares of common stock as
may be issuable upon the exercise of the warrants to prevent dilution as a
result of stock splits, dividends and anti-dilution provisions of the warrants.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
TABLE OF CONTENTS
Page
Prospectus Summary 2
Risk Factors 4
Use of Proceeds 12
Dilution 13
Market for Common Equity and Related Stockholder Matters 13
Management's Discussion and Analysis 14
Business of Park City Group, Inc. 20
Description of Property 25
Legal Proceedings 25
Management 25
Management Compensation 28
Security Ownership of Certain Beneficial Owners and Management 31
Description of Securities 32
Commission's Position on Indemnification for Securities
Act Liabilities 33
Certain Relationships and Related Transactions 34
Plan of Distribution 34
Selling Security Holders 36
Experts 39
Legal Matters 40
Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 40
Additional Information 40
Financial Statements F-1
The information in this prospectus is not complete and may be changed. The
selling security holders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and neither the selling
security holders nor we are soliciting offers to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 2, 2006
PROSPECTUS
PARK CITY GROUP, INC.
197,985,699 SHARES OF COMMON STOCK
This prospectus relates to the sale by the selling stockholders of up
to 197,985,699 shares of our common stock, $.01 par value. The shares being
registered consist of the following: up to 90,909,106 shares of common stock
owned by selling stockholders who purchased such shares in a private offering
that was completed in June 2006, 66,234,658 shares of common stock owned by
Riverview Financial Corp, an affiliate of Randall K. Fields, our chief executive
officer, and up to 40,841,935 shares of common stock underlying warrants to
purchase common stock owned by selling shareholders. The warrants are
exercisable at prices ranging from $.04 to $.07 with expiration dates ranging
from August 16, 2007 to June 14, 2011.
The selling stockholders may sell common stock from time to time in the
principal market on which the stock is traded at the prevailing market price or
in negotiated transactions. The selling stockholders may be deemed underwriters
of the shares of common stock, which they are offering. We will pay the expenses
of registering these shares.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934 and is traded on the Over-The-Counter Bulletin Board under
the symbol "PKCY". The last reported sales price per share of our common stock
as reported by the Over-The-Counter Bulletin Board on August 1, 2006, was $.07.
----------------------
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
----------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
----------------------
The date of this prospectus is ________, 2006
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making any investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements, and the notes to the financial
statements.
Overview
Park City Group, Inc. ("Park City Group", "We", `Us", or the "Company")
develops and markets patented and other proprietary computer software and profit
optimization consulting services for the retail industry. Our products and
services are designed to help our retail customers reduce their inventory and
labor costs, the two largest controllable expenses in the retail industry. The
technology was the foundation of the success of Mrs. Fields Cookies, also
co-founded by our CEO, Randall Fields. Park City Group is headquartered in Park
City, Utah and maintains a website at http://www.parkcitygroup.com.
Principal Products
Our primary products include the following:
Fresh Market Manager ("FMM") is a suite of software applications
primarily designed to manage perishable food department operations including
bakery, deli, seafood, produce, dairy, frozen foods, meat, home meal
replacement, and floral within supermarkets and convenience stores.
ActionManager(TM) is a suite of software applications that addresses
the second most important cost element facing today's retailers - labor.
ActionManager(TM) addresses labor issues by forecasting labor demand and
scheduling the right staff resources with the appropriate skills at the right
time. Additionally, ActionManager(TM) automates workflow and replaces costly
paper-based and manual processes with systems that substantially reduce time
spent on administrative tasks, non-productive (non-selling) labor costs, and
excess headcount in the retailer's corporate office. ActionManager(TM)
applications provide an automated method for managers to plan, schedule, and
administer virtually every time-consuming task in the store.
Supply Chain Profit Link. Supply Chain Profit Link is a software
application and consulting service that is designed to facilitate collaboration
between suppliers and their retail customers. Supply Chain Profit Link increases
the visibility of out-of-stocks and shrink (waste) for both the supplier and
retailer enabling better category management practices.
Customers
We have sold our products and/or provided services to a variety of
customers in the U.S. and abroad. Included in our customer base are The Home
Depot, Anheuser Busch Entertainment, Perdue, Monterey Mushrooms, Pacific
Sunwear, Wawa and Tesco Lotus.
Common Stock
Common stock outstanding 446,561,686 shares
Common Stock underlying all outstanding
Options and Warrants * 48,839,624 shares
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Shares registered for selling stockholders 197,985,699 shares
We are contemplating a 1-for-50 reverse stock split which we believe
will be effected within 120 days. If such reverse split is effected, the share
numbers listed above will be reduced accordingly
Common Stock Offered by Selling Stockholders
A total of 197,985,699 shares of our common stock are being registered
pursuant to the registration statement on Form SB-2 of which this prospectus is
a part. A total of 90,909,106 of these share were issued to investors in a
private offering that was completed in June 2006 (the "June 2006 Private
Offering"). A total of 66,234,658 of these shares are owned by Riverview
Financial Corp, an affiliate of Randall K. Fields our Chief Executive Officer. A
total of 40,841,935 of these shares are issuable upon the exercise of currently
outstanding warrants (the "Warrants"), including 9,090,911 shares underlying
warrants issued to Taglich Brothers, Inc., the placement agent in the June 2006
Private Offering.
Use of Proceeds
We will not receive any proceeds from the sale of the common stock by
the selling stockholders. We will receive proceeds from the exercise of the
Warrants to the extent the Warrants are exercised. Provided however, all of the
Warrants have cashless exercise provision which could result in the issuance of
shares of our common stock upon the exercise of the Warrants with out our
receipt of cash. Any cash proceeds from the exercise of warrants will be used by
the Company for general corporate purposes.
Over-the Counter Bulletin Board Symbol
Our common stock is traded in the over the counter market and is quoted
on the Over-the-Counter Bulletin Board (OTCBB). Our trading symbol is PKCY. If
we effect the anticipated reverse split, we expect that we will be assigned a
new trading symbol.
June 2006 Private Offering
In June 2006, we completed the sale of 90,909,106 shares of our common
stock to 100 accredited investors (the "Investors"), all of whom are included in
the selling stockholders group. In connection with our sale of common stock, we
entered into a Securities Purchase Agreement with each investor. The Securities
Purchase Agreement contained provision that requires us to register all of the
shares sold in the June 2006 private Offering. The shares of common stock sold
in the June 2006 private Offering were sold at a price of $0.055 per share. We
received a total of $5,000,000 of gross proceeds in the offering. In connection
with the June 2006 Private Offering, we hired Taglich Brothers, Inc. as our
placement agent. We paid Taglich Brothers, Inc. a cash placement fee of 8% of
the total offering proceeds or $400,000. As additional compensation, we issued
Taglich Brothers, Inc. a warrant to purchase 9,090,911 shares of our common
stock (1 shares for every 10 shares sold in the offering) at a price of $.062
per share and registration rights provisions with each of the Investors. We have
included all 90,909,106 shares of common stock issued to these investors in this
registration as well as all 9,090,911 shares issuable upon the exercise of the
Taglich Brothers warrant.
Offices
Our principal place of business is 333 Main Street, Park City, Utah
84060, telephone (435)-649-2221, fax (435) 645-2110, or e-mail at
randy@parkcitygroup.com. Our website is parkcitygroup.com. Park City Group and
3
its officers, directors, and significant shareholders, file reports with the
Securities and Exchange Commission under the Securities Exchange Act of 1934.
RISK FACTORS
An investment in Park City Group has a high degree of risk. Before you invest
you should carefully consider the risks and uncertainties described below and
the other information in this prospectus. If any of the following risks actually
occur, our business, operating results, and financial condition could be harmed
and the value of our stock could go down. This means you could lose all or a
part of your investment.
Risks Related To the Company
We have incurred losses in the past and there can be no assurance that we will
operate at a profit in the future. Continued losses could result in a reduction
of operations and could have a detrimental effect on the long-term capital
appreciation of our stock.
Our marketing strategy emphasizes sales activities for the Fresh Market
Manager, ActionManager, and Supply Chain Profit Link applications to
Supermarkets, Convenience Stores, Specialty Retail, Financial Services, and Food
Manufacturers. If this marketing strategy fails, revenues and operations will be
negatively affected. A reduction in revenues will result in increases in
operational losses.
For the nine months ended March 31, 2006, we had a profit of
$1,424,261. For the years ended June 30, 2005 and June 30, 2004, we had net
losses of $3,408,037 and $675,243 respectively. There can be no assurance that
we will operate at a profit during future fiscal quarters or fiscal years. If we
do not operate profitably in the future our current cash resources will be used
to fund our operating losses. If this were to continue, in order to continue
with our operations, we would need to raise additional capital. Continued losses
would have an adverse effect on the long term value of our common stock and your
investment in the Company. We cannot give any assurance that we will ever
generate significant revenue or have sustainable profits.
Our liquidity and capital requirements will be difficult to predict, which may
adversely affect our cash position
in the future.
We have recently completed the sale of shares of our common stock from
which we received gross offering proceeds of $5,000,000. We anticipate that we
will have adequate cash resources to fund our operations for at least the next
12 months. Thereafter, our liquidity and capital requirements will depend upon
numerous other factors, including the following:
o The extent to which our products and services gain market
acceptance;
o The progress and scope of product evaluations;
o The timing and costs of acquisitions and product and services
introductions;
o The extent of our ongoing research and development programs;
and
o The costs of developing marketing and distribution
capabilities.
If in the future we are required to seek additional financing in order
to fund our operations and carry out our business plan, there can be no
assurance that such financing will be available on acceptable terms, or at all,
and there can be no assurance that any such arrangement, if required or
otherwise sought, would be available on terms deemed to be commercially
acceptable and in our best interests.
4
Operating results may fluctuate, which makes it difficult to predict future
performance.
Management expects a portion of the Company's revenue stream to come
from license sales, maintenance and services charged to new customers, which
will fluctuate in amounts because software sales to retailers are difficult to
predict. In addition, the Company may potentially experience significant
fluctuations in future operating results caused by a variety of factors, many of
which are outside of its control, including:
o Demand for and market acceptance of new products;
o Introduction or enhancement of products and services by the
Company or its competitors;
o Capacity utilization;
o Technical difficulties, system downtime;
o Fluctuations in data communications and telecommunications
costs;
o Maintenance subscriber retention;
o The timing and magnitude of capital expenditures and
requirements;
o Costs relating to the expansion or upgrading of operations,
facilities, and infrastructure;
o Changes in pricing policies and those of competitors;
o Changes in regulatory laws and policies, and;
o General economic conditions, particularly those related to the
information technology industry.
Because of the foregoing factors, future operating results may
fluctuate. As a result of such fluctuations, it will be difficult to predict
operating results. Period-to-period comparisons of operating results are not
necessarily meaningful and should not be relied upon as an indicator of future
performance. In addition, a relatively large portion of our expenses will be
fixed in the short-term, particularly with respect to facilities and personnel.
Therefore, future operating results will be particularly sensitive to
fluctuations in revenues because of these and other short-term fixed costs.
We will need to effectively manage our growth in order to achieve and sustain
profitability. Our failure to manage growth effectively could reduce our sales
growth and result in continued net losses.
To commence profitable operations on a fiscal year basis, we must have
significant growth in our revenues from the sale of our products and services.
If we are able to achieve significant growth in our future sales and to expand
the scope of our operations, and our management, financial, and other
capabilities, our existing procedures and controls could be strained. We cannot
be certain that our existing or any additional capabilities, procedures,
systems, or controls will be adequate to support our operations. We may not be
able to design, implement, or improve our capabilities, procedures, systems, or
controls in a timely and cost-effective manner. Failure to implement, improve
and expand our capabilities, procedures, systems, and controls in an efficient
and timely manner could reduce our sales growth and result in continued net
losses.
5
Our officers and directors have significant control over us that may lead to
conflicts with other stockholders over corporate governance.
Our officers and directors, other than our Chief Executive Officer,
control approximately 6.72% of our common stock. Our Chief Executive Officer,
Randall K. Fields, individually, controls 48.51% of our common stock.
Consequently, Mr. Fields, individually, and our officers and directors, as
stockholders acting together, will be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors and significant corporate transactions, such as mergers or other
business combination transactions.
Our corporate charter contains authorized, unissued "blank check" preferred
stock that can be issued without stockholder approval with the effect of
diluting then current stockholder interests.
Our certificate of incorporation currently authorizes the issuance of
up to 30,000,000 shares of "blank check" preferred stock with designations,
rights, and preferences as may be determined from time to time by our board of
directors. Our board of directors is empowered, without stockholder approval, to
issue one or more additional series of preferred stock with dividend,
liquidation, conversion, voting, or other rights that could dilute the interest
of, or impair the voting power of, our common stockholders. The issuance of a
series of preferred stock could be used as a method of discouraging, delaying,
or preventing a change in control.
Because we have never paid dividends, you should exercise caution before making
an investment in our common stock.
We have never paid dividends nor do we anticipate the declaration or
payments of any dividends in the foreseeable future. We intend to retain
earnings, if any, to finance the development and expansion of our business. Our
Board of Directors will determine future dividend policy at their sole
discretion and future dividends will be contingent upon future earnings, if any,
our financial condition, capital requirements, general business conditions and
other factors. Future dividends may also be affected by covenants contained in
loan or other financing documents, which may be executed by us in the future.
Therefore, there can be no assurance that dividends of any kind will ever be
paid.
Our business is dependent upon the continued services of our founder and Chief
Executive Officer, Randall K. Fields; should we lose the services of Mr. Fields,
our operations will be negatively impacted.
Our business is dependent upon the expertise of our founder and Chief
Executive Officer, Randall K. Fields. Mr. Fields is essential to our operations.
Accordingly, you must rely on Mr. Fields' management decisions that will
continue to control our business affairs after the offering. We currently
maintain key man insurance on Mr. Fields' life in the amount of $10,000,000;
however, that coverage would be inadequate to compensate for the loss of his
services. The loss of the services of Mr. Fields would have a materially adverse
effect upon our business.
If we are unable to attract and retain qualified personnel, we may be unable to
develop, retain or expand the staff necessary to support our operational
business needs.
Our current and future success depends on our ability to identify,
attract, hire, train, retain and motivate various employees, including skilled
software development, technical, managerial, sales, marketing and customer
service personnel. Competition for such employees is intense and we may be
unable to attract or retain such professionals. If we fail to attract and retain
these professionals, our revenues and expansion plans will be negatively
impacted.
6
Our officers and directors have limited liability and indemnification rights
under our organizational documents, which may impact our results.
Our officers and directors are required to exercise good faith and high
integrity in the management of our affairs. Our certificate of incorporation and
bylaws, however, provide, that the officers and directors shall have no
liability to the stockholders for losses sustained or liabilities incurred which
arise from any transaction in their respective managerial capacities unless they
violated their duty of loyalty, did not act in good faith, engaged in
intentional misconduct or knowingly violated the law, approved an improper
dividend or stock repurchase, or derived an improper benefit from the
transaction. As a result, you may have a more limited right to action than you
would have had if such a provision were not present. Our certificate of
incorporation and bylaws also require us to indemnify our officers and directors
against any losses or liabilities they may incur as a result of the manner in
which they operate our business or conduct our internal affairs, provided that
the officers and directors reasonably believe such actions to be in, or not
opposed to, our best interests, and their conduct does not constitute gross
negligence, misconduct or breach of fiduciary obligations.
Business Operations Risks
If our marketing strategy fails, our revenues and operations will be negatively
affected.
We plan to concentrate our future sales efforts towards marketing our
applications and services. These applications are designed to be highly flexible
so that they can work in multiple retail and supplier environments such as
grocery stores, convenience stores, quick service restaurants, and route-based
delivery environments. There is no assurance that the public will accept our
applications and services in proportion to our increased marketing of this
product line. We may face significant competition that may negatively affect
demand for our applications and services, including the public's preference for
our competitors' new product releases or updates over our releases or updates.
If our applications and services marketing strategy fails, we will need to
refocus our marketing strategy to our other product offerings, which could lead
to increased marketing costs, delayed revenue streams, and otherwise negatively
affect our operations.
Because we are changing the emphasis of our sales activities from an annual
license fee structure to a monthly fee structure, our revenues may be negatively
affected.
Historically, we offered our applications and related maintenance
contracts to new customers on a one-time up front license strategy and provided
an option for annually renewing their maintenance agreements. Because our
one-time licensing fee approach was subject to inconsistent and unpredictable
revenues, we now offer prospective customers an option for monthly licensing of
these products. Our customers may now choose to acquire the software in an
Application Solution Provider basis, resulting in monthly charges for use of our
software products and maintenance fees. Our conversion from a one-time licensing
strategy to monthly-based fees is subject to the following risks:
o Our customers may prefer one-time fees rather than monthly
fees;
o Because public awareness pertaining to our Application
Solution Provider services will be delayed until we begin our
marketing campaign to promote those services, our revenues may
decrease over the short term; and
o There maybe a threshold level (number of locations) at which
the monthly based fee structure may not be economical to the
customer, and a request to convert from monthly fees to annual
fee could occur.
We face competition from competing and emerging technologies that may affect our
profitability. The markets for our type of software products and that of our
competitors are characterized by:
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o Development of new software, software solutions, or
enhancements that are subject to constant change;
o Rapidly evolving technological change; and
o Unanticipated changes in customer needs.
Because these markets are subject to such rapid change, the life cycle
of our products is difficult to predict; accordingly, we are subject to the
following risks:
o Whether or how we will respond to technological changes in a
timely or cost-effective manner;
o Whether the products or technologies developed by our
competitors will render our products and services obsolete or
shorten the life cycle of our products and services; and
o Whether our products and services will achieve market
acceptance.
If we are unable to adapt to our constantly changing markets and to continue to
develop new products and technologies to meet our customers' needs, our revenues
and profitability will be negatively affected.
Our future revenues are dependent upon the successful and timely
development and licensing of new and enhanced versions of our products and
potential product offerings suitable to our customer's needs. If we fail to
successfully upgrade existing products and develop new products, and those new
products do not achieve market acceptance, our revenues will be negatively
impacted.
Our business is currently dependent upon a limited customer base; should we lose
any of these customer accounts, our revenues will be negatively impacted.
We expect that existing customers will continue to account for a
substantial portion of total revenues in future reporting periods. The ability
to retain existing customers and to attract new customers will depend on a
variety of factors, including the relative success of marketing strategies and
the performance, quality, features, and price of current and future products.
Accordingly, if customer accounts are lost or customer orders decrease, revenues
and operating results will be negatively impacted. We have experienced the loss
of long term maintenance customers because the product is so reliable they do
not want to continue to pay for maintenance that they do not need or use, and in
some cases, the customer has decided to replace Park City Group applications. We
continue to focus on these long term clients by providing new functionality and
applications to meet their business needs. We also expect to lose some
maintenance revenue due to consolidation of industries or customer operational
difficulties that lead to their reduction of size. In addition, future revenues
will be negatively impacted if we fail to add new customers that will make
additional purchases of our products and services.
We may be unable to expand our now limited customer base.
We must increase our customer base to expand our operations and
increase our revenues. Our future customer base is dependent upon the Company
generating sufficient new customer accounts. If we fail to generate sufficient
new customer accounts, our revenues will not expand and may decline, which will
negatively impact our operations and financial condition. Additionally, the
retail industry may be facing consolidation which could lead to a reduced
prospective customer base from which to transact business.
8
We face risks associated with proprietary protection of our software.
Our success depends on our ability to develop and protect existing and
new proprietary technology and intellectual property rights. We seek to protect
our software, documentation and other written materials primarily through a
combination of patents, trademarks, and copyright laws, trade secret laws,
confidentiality procedures and contractual provisions. While we have attempted
to safeguard and maintain our proprietary rights, there are no assurances there
we will be successful in doing so. Our competitors may independently develop or
patent technologies that are substantially equivalent or superior to ours.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or obtain and use
information that we regard as proprietary. In some types of situations, we may
rely in part on "shrink wrap" or "point and click" licenses that are not signed
by the end user and, therefore, may be unenforceable under the laws of certain
jurisdictions. Policing unauthorized use of our products is difficult. While we
are unable to determine the extent to which piracy of our software exists,
software piracy can be expected to be a persistent problem, particularly in
foreign countries where the laws may not protect proprietary rights as fully as
the United States. We can offer no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not reverse
engineer or independently develop similar technology.
We incorporate a number of third party software providers' licensed technologies
into our products, the loss of which could prevent sales of our products or
increase our costs due to more costly substitute products.
We license technologies from third party software providers and such
technologies are incorporated into our products. We anticipate that we will
continue to license technologies from third parties in the future. The loss of
these technologies or other third-party technologies could prevent sales of our
products and increase our costs until substitute technologies, if available, are
developed or identified, licensed and successfully integrated into our products.
Even if substitute technologies are available, there can be no guarantee that we
will be able to license these technologies on commercially reasonable terms, if
at all.
We may discover software errors in our products that may result in a loss of
revenues or injury to our reputation.
Non-conformities or bugs ("errors") may be found from time to time in
our existing, new or enhanced products after commencement of commercial
shipments, resulting in loss of revenues or injury to our reputation. In the
past, we have discovered errors in our products and as a result, have
experienced delays in the shipment of products. Errors in our products may be
caused by defects in third-party software incorporated into our products. If so,
we may not be able to fix these defects without the cooperation of these
software providers. Since these defects may not be as significant to the
software provider as they are to us, we may not receive the rapid cooperation
that may be required. We may not have the contractual right to access the source
code of third-party software and, even if we do have access to the source code,
we may not be able to fix the defect. Since our customers use our products for
critical business applications, any errors, defects or other performance
problems could result in damage to our customers' business. These customers
could seek significant compensation from us for their losses. Even if
unsuccessful, a product liability claim brought against us would likely be time
consuming and costly.
Some competitors are larger and have greater financial and operational resources
that may give them an advantage in the market.
Many of our competitors are larger and have greater financial and
operational resources. This may allow them to offer better pricing terms to
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customers in the industry, which could result in a loss of potential or current
customers or could force us to lower prices. Any of these actions could have a
significant effect on revenues. In addition, the competitors may have the
ability to devote more financial and operational resources to the development of
new technologies that provide improved operating functionality and features to
their product and service offerings. If successful, their development efforts
could render our product and service offerings less desirable to customers,
again resulting in the loss of customers or a reduction in the price we can
demand for our offerings.
Risks Relating To Our Common Stock
If we fail to remain current on our reporting requirements, we could be removed
from the OTC Bulletin Board, which would limit the ability of broker-dealers to
sell our securities and the ability of stockholders to sell their securities in
the secondary market.
Companies trading on the OTC Bulletin Board, like us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in our reports under Section 13 to maintain price quotation
privileges on the OTC Bulletin Board. If we fail to remain current on our
reporting requirements, we could be removed from the OTC Bulletin Board. As a
result, the market liquidity for our securities could be severely and adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Our common stock is subject to the "penny stock" rules of the SEC and the
trading market in our securities is limited, which makes transactions in our
stock cumbersome and may reduce the value of an investment in our stock.
The Securities and Exchange Commission has adopted Rule 15g-9, which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
an exercise price of less than $5.00 per share, subject to certain exceptions.
For any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for
transactions in penny stocks; and
o the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience
objectives of the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has
sufficient knowledge and experience in financial matters to be
capable of evaluating the risks of transactions in penny
stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
10
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities, and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
The limited public market for our securities may adversely affect your ability
to liquidate your investment
Although our common stock is currently quoted on the OTC Bulletin Board
(OTCBB), there is limited trading activity. We can give no assurance that an
active market will develop, or if developed, that it will be sustained. If you
acquire shares of our common stock, you may not be able to liquidate your
investment in such shares should you need or desire to do so.
Future issuances of our shares may lead to future dilution in the value of our
common stock, and will lead to a reduction in shareholder voting power, and
preventing a change in Company control.
The shares may be substantially diluted due to the following:
o Issuance of common stock in connection with funding agreements
with third parties and future issuances of common and
preferred stock by the Board of Directors; and
o The Board of Directors has the power to issue additional
shares of common stock and preferred stock and the right to
determine the voting, dividend, conversion, liquidation,
preferences and other conditions of the shares without
shareholder approval.
Stock issuances may result in reduction of the book value or market
price of outstanding shares of common stock. If we issue any additional shares
of common or preferred stock, proportionate ownership of common stock and voting
power will be reduced. Further, any new issuance of common or preferred shares
may prevent a change in control or management.
Our upcoming stock split may reduce our overall market capitalization.
We anticipate that we will take action to affect a 1-for-50 reverse stock split
in the near future. At that time the reverse split will occur. The reverse split
may have the effect of reducing the overall market capitalization of the
Company.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and any prospectus supplement contain forward-looking
statements. We have based these forward-looking statements on our current
expectations and projections about future events. In some cases, you can
identify forward-looking statements by words such as "may," "should," "expect,"
"plan," "could," "anticipate," "intend," "believe," "estimate," "predict,"
"potential," "goal," "continue," or similar terminology.
In addition, these forward-looking statements include, but are not
limited to, statements regarding:
o implementing our business strategy;
11
o marketing and commercialization of our products;
o pricing for our products;
o plans for future products and services and for enhancements of
existing products and services;
o our intellectual property;
o our estimates of future revenue and profitability;
o our estimates or expectations of continued losses;
o our expectations regarding future expenses, including research
and development, sales and marketing, and general and
administrative expenses;
o our analysis of the market, market opportunities, and customer
demand;
o difficulty or inability to raise additional financing, if
needed, on terms acceptable to us;
o our estimates regarding our capital requirements and our needs
for additional financing;
o attracting and retaining customers and employees;
o rapid technological changes in our industry and relevant
markets;
o sources of revenue and anticipated revenue;
o plans for future acquisitions; and
o competition in our market.
These statements are only predictions. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. We are not required to, and do not intend to, update any of the
forward-looking statements after the date of this prospectus or to conform these
statements to actual results. In light of these risks, uncertainties, and
assumptions, the forward-looking events discussed in this prospectus might not
occur. Actual results, levels of activity, performance, achievements, and events
may vary significantly from those implied by the forward-looking statements. A
description of risks that could cause our results to vary appears under the
heading "Risk Factors" in the annual and quarterly reports incorporated by
reference into this prospectus, and elsewhere in this prospectus.
In this prospectus, we refer to information regarding our potential
markets and other industry data. We believe that we have obtained this
information from reliable sources that customarily are relied upon by companies
in our industry, but we have not independently verified any of this information.
Unless we are required to do so under either U.S. federal securities or
other applicable laws, we do not intend to update or revise any forward-looking
statements.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by the selling stockholders. We will not
receive any proceeds from the sale of shares of common stock in this offering.
However, we will receive the sale price of any common stock we sell to the
selling stockholder upon exercise of the warrants. In addition, the holder's
warrants to purchase 25,322,453 shares of common stock at a weighted average
exercise price of $0.04 are also entitled to exercise their warrants on a
cashless basis. In the event that any investor exercises its warrants on a
cashless basis, then we will not receive any proceeds from the exercise of those
warrants. We expect to use the proceeds received from the exercise of the
warrants, if any, for general working capital purposes.
12
DILUTION
We are not selling any common stock in this offering. As such, there is
no dilution resulting from the Common Stock to be sold in this offering.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC "Bulletin Board" under the symbol
"PKCY." During the last two years, there has been only limited trading in our
common stock. The prices reported below reflect inter-dealer prices and are
without adjustments for retail markups, markdowns, or commissions, and may not
necessarily represent actual transactions.
High Bid Low Bid
------------ ------------
Calendar Year Ended December 31, 2004
First Quarter $0.20 $0.03
Second Quarter 0.17 0.07
Third Quarter 0.09 0.05
Fourth Quarter 0.09 0.04
Calendar Year Ended December 31, 2005
First Quarter $0.08 $0.04
Second Quarter 0.06 0.02
Third Quarter 0.06 0.03
Fourth Quarter 0.11 0.04
Calendar Year Ended December 31, 2006
First Quarter $0.08 $0.04
Second Quarter 0.11 0.04
Third Quarter through August 1, 2006 0.07 0.06
Holders of Common Equity
Our Common Stock is issued in registered form and the following
information is taken from the records of our transfer agent, Liberty Transfer
Co. located in Huntington, NY. As of June 30, 2006, we had 2,463 shareholders of
record and 446,561,686 shares of common stock outstanding. This number of
shareholders of record does not include an unknown number of persons who hold
shares through brokers and dealers in street name and who are not listed on our
shareholder records.
Dividends
We have not declared any dividends on any class of our equity securities since
incorporation and we do not anticipate that we will declare any dividends in the
foreseeable future. Our present policy is to retain future earnings (if any) for
use in our operations and the expansion of our business.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of our financial condition and results of
operations should be read in conjunction with our Financial Statements and Notes
thereto, and the other financial information included elsewhere in this
prospectus. This Management's Discussion and Analysis of Financial Condition and
Results of Operations contain descriptions of our expectations regarding future
trends affecting our business. These forward-looking statements, and other
forward-looking statements made elsewhere in this document, are made in reliance
upon safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The following discussion sets forth certain factors that we believe could
cause actual results to differ materially from those contemplated by the
forward-looking statements.
Overview
Park City Group develops and markets patented computer software and
profit optimization consulting services that help its retail customers to reduce
their inventory and labor costs; the two largest controllable expenses in the
retail industry, while increasing the customer's sales and gross margin. Our
products, Fresh Market Manager, ActionManager(TM) and Supply Chain Profit Link
are designed to address the needs of retailers in store operations management,
manufacturing and both durable goods and perishable product management. Because
the product concepts originated in the environment of actual multi-unit retail
chain ownership, the products are strongly oriented to an operation's bottom
line results. The products use a contemporary technology platform that is
capable of supporting existing offerings and can also be expanded to support
related products.
We have experienced recent significant developments that we expect to
have a positive impact on our company, although there is no assurance that the
expected positive impact will take place. Recent developments include the
following:
o In March the Company signed new ActionManager license
agreements with Kwik Trip, an existing customer, and RaceTrac
Petroleum, Inc.
o In March the Company signed an agreement to allow Oracle to
use one of the company's patents.
Liquidity and Capital Resources
At March 31, 2006
We had a working capital deficit at March 31, 2006 of $950,438 verses
$4,129,588 at March 31, 2005.
For the quarter ended March 31, 2006, we had a net loss of $385,791
compared to a net loss of $832,982 for the quarter ending March 31, 2005.
We had interest expense of $319,491 and $300,517 for the quarters
ending March 31, 2006 and 2005 respectively. This slight increase was caused by
the company refinancing and converting over $5,400,000 of debt during this
quarter. The Company notes payable decreased by $4,876,922 during the last nine
months which we anticipate will result in lower interest expenses of
approximately $900,000 over the next twelve months. To date, the Company has
financed its operations through operating revenues, loans from directors,
officers and stockholders, loans from our chief executive officer and majority
shareholder, and private placements of equity securities. The Company may be
unable to raise additional equity capital until it achieves profitable
operations and refinances its debt. The Company anticipates that it will meet
its working capital requirements primarily through increased revenue, while
controlling costs and expenses. However, no assurances can be given that the
Company will be able to meet its working capital requirements.
14
As of Year Ended June 30, 2005
The Company had $209,670 in cash at June 30, 2005 compared with
$312,817 at June 30, 2004, a decrease of $103,147. Working capital deficit at
June 30, 2005 increased to $4,994,269, compared to $587,977 at June 30, 2004.
The increase in the working capital deficit was principally attributable to the
upcoming maturity dates on the notes payable to Whale Investments, as well as an
increase in the related party line of credit with Riverview. Subsequent to June
30, 2005, the Company was able to pay off the entire Whale Investment note of
$2,000,000, and $350,000 of the Riverview operating line of credit.
During the year ended June 30, 2005 the operations of the Company used
$794,318 of cash, compared to operations providing $62,264 of cash in 2004.
The company focused on developing several strategic sales channels in
FY2005. The primary focuses are, Large Grocery Chains, Medium Grocery Chains,
Large C-Store Chains, Medium C-Store Chain, Specialty Retailers through Alliance
Partners, Financial Services and Call Center operations, and Perishable and Non
Perishable Product Manufacturers. Each of these channels has a Senior Executive
responsible for the development of the channel. In addition the Company has
entered into agreements with the Alliance Partners and independent commissioned
sales personnel as needed to facilitate introductions and relationships within
the channel.
In addition to our channel focus, the Company subsequent to June 30,
2005, entered into a license agreement with Cannon Solutions as disclosed in our
Form 8-K filed on August 11, 2005. Although there is no certainty, the Company
believes that this working relationship with the Cannon Solutions and their
operating companies have significant potential for revenue generation. Joint
management operating meetings are being conducted to discuss future business
opportunities.
We expect that these channels will take 12 to 18 months to initiate and
we started seeing results in Q2FY2006 The company has started a total of 10 new
engagements from these channels during the first 9 months of our channel focus
implementation. We also currently have over 40 active prospects in our pipeline,
although no assurance of positive results from these strategic sales channels
can be given. Our working capital and other capital requirements for the
foreseeable future will vary based upon a number of factors, including: (i)
changes in the software industry and environment which may require additional
modifications to our software and platforms; (ii) the pace at which our products
are accepted by and sold into the market and the related sales and marketing
effort and support requirements, and (iii) changes in existing financing
arrangements. The Company is pursuing opportunities to sell its
ActionManager(TM) and Fresh Market Manager products through alliances with other
software vendors (CRS Retail Systems) and companies (Kurt Salmon Associates)
selling to the retail industry. This selling strategy is dependent on
successfully maintaining these alliances and the efforts of the other companies.
To date, the Company has financed its operations through operating
revenues, loans from directors, officers and stockholders, loans from the CEO
and majority shareholder, and private placements of equity securities. The
Company has been constrained by not having a desirable level of working capital.
Although the Company anticipates that it will meet its working capital
requirements primarily through increased revenue, while controlling costs and
expenses, no assurances can be given that the Company will be able to meet its
working capital requirements. Should the Company desire to raise additional
equity or debt financing, there are no assurances that the Company could do so
on acceptable terms.
Results of Operations
Three and Nine Month Period Ended March 31, 2006 Compared to the Three and Nine
Month Period Ended March 31, 2005
15
Three Months Ended March 31, 2006 and 2005
Total revenues were $1,369,688 and $805,865 for the quarters ended
March 31, 2006 and 2005, respectively, a 70% increase. Software license revenues
were $573,900 and $149,760 for the quarters ended March 31, 2006 and 2005,
respectively, a 283% increase. This increase is primarily attributable to
software license sales to existing customers and a large agreement with Oracle,
during the quarter ended March 31, 2006. Maintenance and support revenues were
$535,311 and $531,682 for the quarters ended March 31, 2006 and 2005,
respectively. ASP revenues were $48,525 and $28,950, respectively for the
quarters ending March 31, 2006 and 2005; an increase of 68%. This increase was
the result of our success in the Perishable Manufacturing Channel where we have
signed 6 new contracts in the last 8 months. Consulting and other revenue was
$211,952 and $95,473 for the quarters ended March 31, 2006 and 2005,
respectively, a 122% increase. This increase is due to increased FMM
implementation services resulting from the Cannon Equipment agreements.
Cost of revenues, as a percent of total revenues was 29% and 49% for
the quarters ended March 31, 2006 and 2005, respectively. This decrease came
from the additional revenues during the quarter ended March 31, 2006 as compared
to the quarter ended March 31, 2005.
Research and development expenses were $225,180 and $256,309 for the
quarters ended March 31, 2006 and 2005 respectively, a 12% decrease. This
decreased expense reflects the fact that both ActionManager and FMM software
suites have had major releases completed in addition to the streamlining of our
development process. The Company has also started to utilize off-shore
development resources.
Sales and marketing expenses were $395,055 and $310,081 for the
quarters ended March 31, 2006 and 2005, respectively, a 27% increase over the
previous year. The Company continues to deploy a commissioned based sales force
which allows them to maintain a lower fixed level of costs to generate sales
however, additional sales did increase costs slightly due to the travel required
to create these sales. The Company also hired one additional full time sales
person during the quarter ended March 31, 2006. General and administrative
expenses were $418,777 and $377,748 for the quarters ended March 31, 2006 and
2005 respectively, an 11% increase. The addition of new employees and salary
increases during this quarter accounted for this change.
Nine Months Ended March 31, 2006 and 2005
Total revenues were $6,182,209 and $2,736,604 for the nine months ended
March 31, 2006 and 2005, respectively, a 126% increase in 2006 over the
comparable period for 2005. Software license revenues were $3,434,927 and
$453,615 for the nine months ended March 31, 2006 and 2005, respectively, a 657%
increase. License sales in 2005 include the Cannon Equipment license sale as
referenced in the Company's Form 8-K filed August 11, 2005. Maintenance and
support revenues were $1,750,068 and $1,793,215 for the nine months ended March
31, 2006 and 2005, respectively, a 2% decrease. This decrease is primarily
attributable to two existing ActionManager customers reducing their maintenance
fees due to store closures. ASP revenues were $147,675 and $61,100 for the nine
months March 31, 2006 and 2005, respectively, a 142% increase in 2006 over the
comparable period for 2005. This increase is driven by the companies' success
selling Supply Chain Profit Link to perishable manufacturers. Consulting and
other revenue was $849,539 and $428,674 for the nine months ended March 31, 2006
and 2005, respectively, a 98% increase. This increase is driven by the Cannon
Equipment agreement and increased ActionManager consulting during the quarter
ended September 30, 2005.
16
Cost of revenues for the nine months were 20% and 38% of total revenues
for the nine months ending March 31, 2006 and 2005 respectively. This decrease
is attributable to the increase in revenues in the two compared periods.
Research and development expenses were $684,776 and $763,159 for the
nine months ended March 31, 2006 and 2005 respectively, a 10% decrease. This
decrease represents the general stabilization of both the Fresh Market Manager
and ActionManager 4X software and the company's use of off-shore resources.
Sales and marketing expenses were $988,688 and $985,804 for the nine
months ended March 31, 2006 and 2005, respectively. Sales and marketing expenses
are did not change significantly for the nine months ended March 31, 2006 as
compared to the same period in the prior year.
General and administrative expenses were $1,048,370 and $1,356,678 for
the nine months ended March 31, 2006 and 2005, respectively, a 23% decrease. The
2005 expenses include a $165,200 expense for the settlement of a legal case.
Year Ended June 30, 2005, as Compared to Year Ended June 30, 2004
During the year ended June 30, 2005, the Company had total revenues of
$3,631,812 compared to $6,029,823 in 2004, a 40% decrease. Software license
sales were $479,615 and $3,245,557 for 2005 and 2004, respectively, an 85%
decrease. This decrease was primarily attributable to the postponement of large
sales for Fresh Market Manager at fiscal year end. One customer did sign an
agreement in July 2005 for $3,000,000 in licenses as well as $500,000 in
consulting services and $75,000 for one year exclusivity rights for the Point of
Purchase Display manufacturing industry, and $100,000 for the first right of
refusal on stock offers through December 2005, and then six months of First
Right of Offer for company offered stock sales. Maintenance and Support revenues
increased by 6% over 2004, primarily from the increase in ASP sales agreements.
Consulting revenue increased by 44% to $735,522 for 2005, compared to $509,928
for 2004. This increase is primarily attributable to ongoing operational
consulting services for Fresh Market Manager customers and the successful launch
of our new financial services operational consulting services products. The
Company expects maintenance and support revenue for the year ending June 30,
2006 to increase over 2005, although there is no assurance that it will
increase. Some customers may discontinue maintenance agreements, but maintenance
agreements with new customers should replace discontinuing customers, and may
result in a similar growth in maintenance revenue.
Deferred revenue was $883,425 and $1,111,915 at June 30, 2005 and 2004,
respectively, a decrease of 21%.
Research and development expenses were $1,019,411 and $1,176,222 for
2005 and 2004, respectively, a 13% decrease. This decrease is primarily because
both the Fresh Market Manager and ActionManager(TM) products have reached a
mature development state. Research and development costs continue for both
products for enhancements and upgrades as well as the development of Supply
Chain Profit Link.
Sales and marketing expenses were $1,337,318 and $1,158,411 for 2005
and 2004, respectively, an increase of 15%. This increase is primarily
attributable to employment of additional personnel during 2005.
General and administrative expenses were $2,055,940 and $1,672,650 for
2005 and 2004, respectively, a 23% increase. This increase was driven primarily
from the increase of reserves for bad debt including the write off of $307,500
for one customer for non payment.
Interest expense was $1,178,454 and $1,540,417 for 2005 and 2004,
respectively, a 24% decrease. This decrease was primarily attributed to the
conversion of a bridge loan from directors.
17
The gain on forgiveness of debt in 2004 is attributable to certain
bridge note holders, including an officer and directors, agreeing to cancel
certain amounts payable to them pursuant to the terms of the Bridge Note C
agreements. The gain on settlement of payable in 2004 is attributable to lease
negotiations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources that are material to
investors.
Critical Accounting Policies
This Management's Discussion and Analysis of Financial Condition and
Results of Operations discuss the Company's Financial Statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States.
We commenced operations in the software development and professional
services business during 1990. The preparation of our financial statements
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an ongoing basis,
management evaluates its estimates and assumptions, including those related to
inventory, deferred income tax assets, revenue recognition and restructuring
initiatives. We anticipate that management will base its estimates and judgments
on historical experience of the operations we may acquire and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among
others, will affect its more significant judgments and estimates used in the
preparation of our Consolidated Financial Statements.
Deferred Income Tax Assets. In determining the carrying value of the
Company's net deferred income tax assets, the Company must assess the likelihood
of sufficient future taxable income in certain tax jurisdictions, based on
estimates and assumptions, to realize the benefit of these assets. If these
estimates and assumptions change in the future, the Company may record a
reduction in the valuation allowance, resulting in an income tax benefit in the
Company's Statements of Operations. Management evaluates the realizability of
the deferred income tax assets and assesses the valuation allowance quarterly.
Goodwill and Other Long-Lived Asset Valuations. In June 2001, the FASB
issued SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other
Intangible Assets", effective for fiscal years beginning after December 15, 2001
with early adoption permitted for companies with fiscal years beginning after
March 15, 2001. We adopted the new rules on accounting for goodwill and other
intangible assets during the fiscal year beginning July 1, 2002. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with the statements. Other intangible assets will continue to be amortized over
their useful lives.
Revenue Recognition. The Company's revenues are derived from the
licensing of software, maintenance of software, professional consulting services
and software hosting services. Revenue from the licensing of software is
recognized at the time the software is shipped to the customer. The company also
defers a portion of the software license fee equal to the cost of maintenance
18
for the warranty period on all license sales that are either to a new customer
or are a new product being sold to an existing customer. Customers who purchase
additional licenses for software which they already have and for which they are
paying maintenance, waive the warranty period. Revenue from maintenance of
software, professional consulting services and software hosting services is
recognized during the month the services are performed.
Stock-Based Compensation. The Company accounts for its employee
stock-based compensation plans using the intrinsic value method, as prescribed
by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, the Company records deferred compensation costs
related to its employee stock options when the current market price of the
underlying stock exceeds the exercise price of each stock option on the
measurement date (usually the date of grant). The Company records and measures
deferred compensation for stock options granted to non-employees, other than
members of the Company's Board of Directors, using the fair value based method.
Deferred compensation is expensed on a straight-line basis over the vesting
period of the related stock option. During 2005 and 2004, the Company did not
grant any stock options to employees or members of the Company's Board of
Directors with exercise prices below the market price on the measurement date.
An alternative method to the intrinsic value method of accounting for
stock-based compensation is the fair value based method prescribed by Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." If the Company used the fair value
based method, the Company would be required to record deferred compensation
based on the fair value of the stock option at the date of grant as computed
using an option-pricing model, such as the Black-Scholes option pricing model.
The deferred compensation calculated under the fair value based method would
then be amortized over the vesting period of the stock option.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R (revised 2004)
"Share-Based Payment." SFAS No. 123R requires employee stock-based compensation
to be measured based on the grant-date fair value of the awards and the cost to
be recognized over the period during which an employee is required to provide
service in exchange for the award. The Statement eliminates the alternative use
of Accounting Principles Board (APB) No. 25's intrinsic value method of
accounting for awards, which is the company's accounting policy for stock
options. See Note 1 to the Consolidated Financial Statements for the pro forma
impact of compensation expense from stock options on net earnings and earnings
per share. SFAS No. 123R is effective for the Company's fiscal year beginning
July 1, 2006. The company will adopt the provisions of SFAS No. 123R on a
prospective basis. The financial statement impact will be dependent on future
stock-based awards and any unvested stock options outstanding at the date of
adoption.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Correction - a replacement of APB No. 20 and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements." SFAS 154 changes the
requirements for the accounting for and reporting of a change in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions.
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47)
"Accounting for Conditional Asset Retirement Obligations, an Interpretation of
FASB Statement No. 143." This Interpretation clarifies that a conditional
retirement obligation refers to a legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and (or) method of settlement.
Accordingly, an entity is required to recognize a liability for the fair value
19
of a conditional asset retirement obligation if the fair value of the liability
can be reasonably estimated. The liability should be recognized when incurred,
generally upon acquisition, construction or development of the asset. FIN 47 is
effective no later than the end of fiscal years ending after December 15, 2005.
The Company is in the process of evaluating the impact of FIN 47 but does not
expect the adoption to have a material impact on the financial statements.
Interest Rate Risk
We currently have notes payable that accrue interest at a fixed rate.
We do not anticipate that a substantial amount of our future debt and the
associated interest expense will be subject to changes in the level of interest
rates. Increases in interest rates would result in incremental interest expense.
Inflation
We do not believe that inflation will negatively impact our business
plans.
BUSINESS OF PARK CITY GROUP, INC.
General
Park City Group develops and markets patented computer software and
profit optimization consulting services that are intended to help its retail
customers to reduce their inventory and labor costs; the two largest
controllable expenses in the retail industry.. The technology has its genesis in
the operations of Mrs. Fields Cookies co-founded by Randall K. Fields, CEO of
Park City Group, Inc. Industry leading customers such as The Home Depot,
Anheuser Busch Entertainment, Perdue, Monterey Mushrooms, Pacific Sunwear, Wawa
and Tesco Lotus benefit from the Company's software. Because the product
concepts originated in the environment of actual multi-unit retail chain
ownership, the products are strongly oriented to an operations' bottom line
results.
The Company was incorporated in the State of Delaware on December 8, 1964 as
Infotec, Inc. From June 20, 1999 to approximately June 12, 2001, it was known as
Amerinet Group.com, Inc. In 2001, the name was changed from Amerinet Group.com
to Fields Technologies, Inc. On June 13, 2001, the Company entered into a
"Reorganization Agreement" with Randall K. Fields and Riverview Financial
Corporation whereby it acquired substantially all of the outstanding stock of
Park City Group, Inc., a Delaware corporation, which became a 98.67% owned
subsidiary. Operations are conducted through this subsidiary which was
incorporated in the State of Delaware in May 1990. The Company develops and
licenses its software applications identified as "Fresh Market Manager", "Supply
Chain Profit Link", and "ActionManager(TM)". The Company also provides
implementation and profit optimization consulting services for its application
products.
On August 7, 2002, Fields Technologies, Inc., (OTCBB:FLDT) changed its
name from Fields Technologies, Inc., to Park City Group, Inc., and
reincorporated in Nevada. Therefore, both the parent-holding company (Nevada)
and its operating subsidiary (Delaware) are named Park City Group, Inc. Park
City Group, Inc. (Nevada) has no other business operations other than in
connection with its subsidiary. In this Registration Statement when the terms
"we", "Company" or "Park City Group" are used, it is referring to the Park City
Group, Inc., a Delaware corporation, as well as to Fields Technologies, Inc.,
the Delaware corporation, which was reincorporated in Nevada under the name of
the Park City Group, Inc. The stock trades under the symbol PKCY.
20
The principal executive offices are located at 333 Main Street, P.O.
Box 5000, Park City, Utah 84060. The telephone number is (435) 649-2221. The
website address is http://www.parkcitygroup.com.
Supermarket Segment
The Supermarket industry is under increased competitive pressure from
Value Retailers such as Wal-Mart, Costco, Target, and others. One of the
strategies that traditional supermarkets are implementing is to increase the
quantity and quality of their perishable offerings. Perishable departments, such
as bakery, meat and seafood, dairy, and deli have historically been loosely
managed but now have been forced to become a focus for profitability
improvement. The Company's software and consulting are designed to address this
specific business problem; increasing the profitability of perishable products.
Convenience Store Segment
For Convenience Stores, recent trends of contracting gasoline margins
and declining tobacco sales increases the need for improved cost controls and
better decision support. To magnify their issues, other industry segments such
as value retailers and grocery stores are now cutting into the convenience store
stronghold by offering gasoline. To offset declining gasoline profits, the
C-Store industry is pushing into Fresh Food as an avenue of increased sales and
profitability. Only the most progressive convenience store operations have
automated systems to help store managers, leaving the majority of the operators
without any technology to ease their administrative and operations burdens.
Supplier Segment
As stated above, Supermarkets and Convenience Stores are increasingly
dependent upon perishable departments for increased profitability. Suppliers are
increasingly being pressured by retailers to provide economic incentives or
assistance. Park City Group has developed Supply Chain Profit link to enable
suppliers to provide that assistance.
Specialty Retail Segment
Specialty Retailers are faced with a shrinking labor force and strong
competition for qualified managers and staff. Managers are time-constrained due
to increased labor and inventory demands, margins are increasingly tight, due to
higher labor and lease expenses, and customer satisfaction demands are higher
than ever before. Park City Group has developed a range of applications that
enable managers in specialty retail to improve their labor scheduling efficiency
and reduce their total paperwork and administrative workload.
Fresh Market Manager
Addressing the inventory issues that plague today's retailers, Fresh
Market Manager is a suite of software product applications designed to help
manage perishable food departments including bakery, deli, seafood, produce,
meat, home meal replacement, dairy, frozen food, and floral. Although the
supermarket and convenience store industries have invested substantial sums on
Point-of-Sale, scanning systems, etc., those systems are, almost without
exception, limited to proving price look-up functions rather than decision
support functions. These industries are a classic representation of "data rich"
and "information poor". Park City Group is capitalizing on that environment to
bring together information from disparate legacy applications and databases to
provide an end-to-end integrated merchandising, production planning, demand
forecasting and perpetual inventory system to address the industry's perishable
department needs.
21
Fresh Market Manager helps identify true cost of goods and provides
accurate and actionable profitability data on a corporate, regional,
store-by-store, and/or item-by-item basis. Fresh Market Manager also can produce
hour-by-hour forecasts, production plans, perpetual inventory, and
places/receives orders. Fresh Market Manager automates the majority of the
planning, forecasting, ordering, and administrative functions associated with
fresh merchandise or products.
ActionManager(TM)
The second most important cost element typically facing today's
retailers is labor. ActionManager addresses labor needs by providing a suite of
solutions that forecast labor demand, schedules staff resources, and provides
store managers with the necessary tools to keep labor costs under control while
improving customer service, satisfaction and sales. Daily availability of this
information can help a retailer to address issues more quickly.
ActionManager applications provide an automated method for managers to
plan, schedule, and administer many of the administrative tasks including new
hire paperwork and time and attendance. In addition to automating most
administrative processes, ActionManager provides the local manager with a
"dashboard" view of the business. ActionManager also has extensive reporting
capabilities for corporate, field, and store-level management to enable improved
decision support.
Supply Chain Profit Link
Supply Chain Profit Link (SCPL) allows suppliers an opportunity to work
with their retail partners on optimizing profits, while reducing stock outs and
minimizing shrink (or waste). SCPL is capable of providing daily or weekly
store-by-store item level information to a supplier to facilitate decision
support. SCPL allows suppliers opportunities to customize assortment plans,
promotions, and pricing strategies on a store-by-store level.
Professional Services
Park City Group's Professional Services offering include project
management, technical implementation, and end-user training. In addition, Park
City Group offers a variety of traditional consulting services configured to
meet specific customer needs. Beyond these traditional services, Park City Group
provides consulting, including merchandising and store operations, that is
focused on the primary objective of helping customers to improve their
profitability through the full use of the Company's products.
Sales and Marketing
Through a focused and dedicated sales effort designed to address the
requirements of each of its business segments, Park City Group believes its
sales force is positioned to understand its customers' businesses, trends in the
marketplace, competitive products and opportunities for new product development.
The Company's deep industry knowledge enables it to take a consultative approach
in working with its prospects and customers. Park City Group's sales personnel
focus on selling its technology solutions to major customers, both domestically
and internationally.
To date, Park City Group's primary marketing objectives have been to
increase awareness of Park City Group's technology solutions and generate sales
leads. To this end, Park City Group attends industry trade shows, conducts
direct marketing programs, publishes industry trade articles and white papers,
participates in interviews, and selectively advertises in industry publications.
22
Customers
Our customers include some of the most notable names in retailing,
including: Schnuck's, Tesco-Lotus, Circle K Midwest, Home Depot, Wawa, Sheetz,
Williams-Sonoma, and others.
Competition
The market for Park City Group's products and services is very
competitive. Park City Group believes the principal competitive factors include
product quality, reliability, performance, price, vendor and product reputation,
financial stability, features and functions, ease of use, quality of support and
degree of integration effort required with other systems. While our competitors
are often larger companies with larger sales forces and marketing budgets, we
believe that our deep industry knowledge and the breadth and depth of our
offerings give us a competitive advantage. Park City Group's ability to
continually improve its products, processes and services, as well as its ability
to develop new products, enables the Company to meet evolving customer
requirements. Park City Group competes with companies such as Workbrain, Radient
Systems, Kronos, Tomax, Capgemini, Electronic Data Systems, and others.
Product Development
The products sold by the Company are subject to rapid and continual
technological change. Products available from the Company, as well as from its
competitors, have increasingly offered a wider range of features and
capabilities. The Company believes that in order to compete effectively in its
selected markets, it must provide compatible systems incorporating new
technologies at competitive prices. In order to achieve this, the Company has
made a substantial ongoing commitment to research and development.
Park City Group's product development strategy is focused on creating
common technology elements that can be leveraged in applications across its core
markets. The Company's software architecture is based on open platforms and is
modular, thereby allowing it to be phased into a customer's operations. In order
to remain competitive, Park City Group is currently designing, coding and
testing a number of new products and developing expanded functionality of its
current products.
Patents and Proprietary Rights
The Company owns and controls 8 U.S. patents, 4 patents pending, 8 U.S.
trademarks and 37 U.S. copyrights relating to its software technology. The
Company has 14 international patents and patent applications pending. The
patents referred to above are continuously reviewed and renewed as their
expiration dates come due.
Company policy is to seek patent protection for all developments,
inventions and improvements that are patentable and have potential value to the
Company and to protect its trade secrets other confidential and proprietary
information. The Company intends to vigorously defend its intellectual property
rights to the extent its resources permit.
Future success may depend upon the strength of the Company's
intellectual property. Although management believes that the scope of
patents/patent applications are sufficiently broad to prevent competitors from
introducing devices of similar novelty and design to compete with the Company's
current products and that such patents and patent applications are or will be
valid and enforceable, there are no assurances that if such patents are
challenged, this belief will prove correct. The Company has, however,
23
successfully defended one of these patents in two separate instances and as
such, has some level of confidence in the Company's ability to maintain its
patents. In addition, patent applications filed in foreign countries and patents
granted in such countries are subject to laws, rules and procedures, which
differ from those in the U.S. Patent protection in such countries may be
different from patent protection provided by U.S. Laws and may not be as
favorable.
The Company is not aware of any patent infringement claims against it;
however, there are no assurances that litigation to enforce patents issued to
the Company, to protect proprietary information, or to defend against the
Company's alleged infringement of the rights of others will not occur. Should
any such litigation occur, the Company may incur significant litigation costs,
the Company's resources may be diverted from other planned activities, and
result in a materially adverse effect on the Company's operations and financial
condition.
The Company relies on a combination of patent, copyright, trademark,
and other laws to protect its proprietary rights. There are no assurances that
the Company's attempted compliance with patent, copyrights, trademark or other
laws will adequately protect its proprietary rights or that there will be
adequate remedies for any breach of our trade secrets. In addition, should the
Company fail to adequately comply with laws pertaining to its proprietary
protection, the Company may incur additional regulatory compliance costs.
Government Regulation and Approval
Like all businesses, the Company is subject to numerous federal, state
and local laws and regulations, including regulations relating to patent,
copyright, and trademark law matters.
Cost of Compliance with Environmental Laws
The Company currently has no costs associated with compliance with
environmental regulations, and does not anticipate any future costs associated
with environmental compliance; however, there can be no assurance that it will
not incur such costs in the future.
Research and Development
Total research and development expenditures were $1,019,411 and
$1,176,222 for the years ended June 30, 2005 and 2004, respectively; a 13%
decrease. We estimate that research and development activities will experience
limited growth as the Company continues to improve their new C-Store and Supply
Chain Profit Link products in the next fiscal year.
Reports to Security Holders
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934. Accordingly, it files annual, quarterly and
other reports and information with the Securities and Exchange Commission. You
may read and copy these reports and other information at the Securities and
Exchange Commission's public reference rooms in Washington, D.C. and Chicago,
Illinois. The Company's filings are also available to the public from commercial
document retrieval services and the Internet world wide website maintained by
the Securities and Exchange Commission at www.sec.gov.
24
Employees
As of June 30, 2006, the Company had 31 employees, including 10
software developers and programmers, 6 sales, marketing and account management
employees, 10 software service and support employees and 5 accounting and
administrative employees. During 2006 the Company hired 3 programmers and one
Business Analyst in India. The company is planning to expand their Indian
workforce to support their sales in Asia and to provide additional programming
resources. All of these employees work for the Company on a full time basis. The
employees are not represented by any labor union.
DESCRIPTION OF PROPERTY
The principal place of business operations is 333 Main Street, Park City, Utah.
The Company leases approximately 9,500 square feet at this location, consisting
primarily of office and storage areas.
LEGAL PROCEEDINGS
The Company has filed a lawsuit against Workbrain Corporation titled
Park City Group, Inc. vs. Workbrain Corporation Case No. 2:06 cv 289, which is
pending in the Federal District Court for the District of Utah. The Company
claims that Workbrain Corporation is infringing upon its patent #5,111,391. The
Company will vigorously pursue this matter.
MANAGEMENT
The following table sets forth the name, address, age and position of
each officer and director of the Company:
Name Age Position - Committee
---------------------------- ------------- -------------------------------------
Randall K. Fields 59 Chief Executive Officer
Chairman of the Board and Director
William Dunlavy 50 Chief Financial Officer/Secretary
Thomas W. Wilson 74 Director
Edward C. Dmytryk 60 Director
Randall K. Fields has been the Chief Executive Officer, and Chairman of
the Board of Directors since June, 2001. Mr. Fields founded Park City Group,
Inc., a software development company based in Park City, Utah, in 1990 and has
been its President, Chief Executive Officer, and Chairman of the Board since its
inception in 1990. Mr. Fields has been responsible for the strategic direction
of Park City Group, Inc. since its inception. Mr. Fields co-founded Mrs. Fields
Cookies with his then wife, Debbi Fields. He served as Chairman of the Board of
Mrs. Fields Cookies from 1978 to 1990. In the early 1970's Mr. Fields
established a financial and economic consulting firm called Fields Investment
Group. Mr. Fields received a Bachelor of Arts degree in 1968 and a Masters of
Arts degree in 1970 from Stanford University, where he was Phi Beta Kappa,
Danforth Fellow and National Science Foundation Fellow.
25
William Dunlavy has been appointed CFO and Secretary as of August,
2004. Mr. Dunlavy joined Fresh Market Manager LLC in 1999 as its Chief Operating
Officer and continued in the same capacity with the acquisition of Fresh Market
Manager LLC in 2001. He has been responsible for the design of the business
functionality in the Fresh Market Manager product in addition to his business
operations activities for Park City Group. He was formerly the Chief Operating
Officer at Mrs. Fields Cookies, Director of Operations at Golden Corral Family
Restaurants, head of Fresh Foods at Harris Teeter, Inc. and head of Fresh Foods
at Raley's and Bel Air Supermarkets. He has also served as a board member of the
International Deli, Dairy, Bakery Association.
Thomas W. Wilson, Jr. has been a director since August, 2001. From 1995
to 1999, Mr. Wilson was the Chairman of the Board Information Resources, Inc., a
Chicago, Illinois-based provider of point-of-sale information based business
solutions to the consumer packaged goods industry. From 1998 to 1999, Mr. Wilson
was the Interim Chief Executive Officer of Information Resources, Inc. From 1966
to 1990, Mr. Wilson was employed in various capacities with McKinsey & Co., a
management consulting company. In 1968, Mr. Wilson was elected a Partner of
McKinsey and Co., and in 1972 he was elected a Senior Partner. Mr. Wilson
received a Bachelor of Arts Degree from Dartmouth College and a Masters of
Business Administration Degree from the Wharton School of the University of
Pennsylvania.
Edward C. Dmytryk has been a director since June, 2000. In October
2002, Mr. Dmytryk took on additional responsibilities as acting Chief Financial
Officer and as such resigned from the Audit Committee. He served in this
capacity until June 2003. Later in 2003, Mr. Dmytryk became the Chief Executive
Officer of Safescript Pharmacies, Inc (SAFS) due to a request by the Safescript
Pharmacies, Inc. Board of Directors to restructure the company during a
liquidity crisis and a SEC investigation. He restructured the company and helped
arranged the sale of assets to a group of interested investors. He remains the
CEO due to the complications of the sale and the damage caused by hurricane
Katrina in New Orleans where 3 operating pharmacies were located. Currently, Mr.
Dmytryk is the CEO of RxPert, Inc., a Pharmacy company located in Ponte Vedra,
Florida. Mr. Dmytryk graduated Summa Cum Laude from the Citadel, the Military
College of South Carolina in 1968 with a Bachelor of Science Degree and was an
Instructor Pilot in the United States Air Force.
Our Executive Officers are elected by the Board on an annual basis and
serve at the discretion of the Board.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who
beneficially own more than 10% of a registered class of the Company's equity
securities, to file reports of beneficial ownership and changes in beneficial
ownership of the Company's securities with the SEC on Forms 3 (Initial Statement
of Beneficial Ownership), 4 (Statement of Changes of Beneficial Ownership of
Securities) and 5 (Annual Statement of Beneficial Ownership of Securities).
Directors, executive officers and beneficial owners of more than 10% of the
Company's Common Stock are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms that they file. The Company believes
that, during the year ended December 31, 2004, the Reporting Persons met all
applicable Section 16(a) filing requirements
26
Code of Ethics
The company adopted their code of ethics by unanimous board of
directors vote in our October 2005 Board Meeting and is included by reference
herein in Item 27, Exhibits.
Committees of the Board of Directors
Our board of directors has an audit committee, a compensation committee
and a nominating and corporate governance committee, each of which has the
composition and responsibilities described below:
Audit Committee. The audit committee provides assistance to the board
of directors in fulfilling its legal and fiduciary obligations in matters
involving our accounting, auditing, financial reporting, internal control and
legal compliance functions by approving the services performed by our
independent accountants and reviewing their reports regarding our accounting
practices and systems of internal accounting controls. The audit committee also
oversees the audit efforts of our independent accountants and takes those
actions as it deems necessary to satisfy itself that the accountants are
independent of management. The audit committee currently consists of Edward C.
Dmytryk (Chairman) and Thomas W. Wilson Jr., each of whom is a non-management
member of our board of directors. Edward C. Dmytryk is also our audit committee
financial expert as currently defined under Securities and Exchange Commission
rules. We believe that the composition of our audit committee meets the criteria
for independence under, and the functioning of our audit committee complies with
the applicable requirements of, the Sarbanes-Oxley Act of 2002, the current
rules of the Over-the-Counter Bulletin Board Stock Market and Securities and
Exchange Commission rules and regulations. We intend to comply with future audit
committee requirements as they become applicable to us.
Compensation Committee. The compensation committee determines our
general compensation policies and the compensation provided to our directors and
officers. The compensation committee also reviews and determines bonuses for our
officers and other employees. In addition, the compensation committee reviews
and determines equity-based compensation for our directors, officers, employees
and consultants and administers our stock option plans and employee stock
purchase plan. The current member of the compensation committee is Thomas W.
Wilson Jr. (Chairman), and Edward C. Dmytryk, each of whom is a non-management
member of our board of directors. We believe that the composition of our
compensation committee meets the criteria for independence under, and the
functioning of our compensation committee complies with the applicable
requirements of, the Sarbanes-Oxley Act of 2002, the current rules of the
Over-the-Counter Bulletin Board Stock Market and Securities and Exchange
Commission rules and regulations. We intend to comply with future compensation
committee requirements as they become applicable to us.
Nominating and Corporate Governance Committee. The nominating and
corporate governance committee is responsible for making recommendations to the
board of directors regarding candidates for directorships and the size and
composition of the board. In addition, the nominating and corporate governance
committee is responsible for overseeing our corporate governance guidelines and
reporting and making recommendations to the board concerning corporate
governance matters. The current members of the nominating and governance
committee are Randall K Fields (Chairman), and Edward C. Dmytryk. We believe
that the composition of our nominating and governance committee meets the
criteria for independence under, and the functioning of our nominating and
corporate governance committee complies with the applicable requirements of, the
Sarbanes-Oxley Act of 2002, the current rules of the Over-the-Counter Bulletin
Board Stock Market and Securities and Exchange Commission rules and regulations.
We intend to comply with future nominating and corporate governance committee
requirements as they become applicable to us.
27
MANAGEMENT COMPENSATION
The following table sets forth the aggregate cash compensation paid by
the Company for services rendered during the last three years to the Company's
Chief Executive Officer and to the Company's most highly compensated executive
officers other than the CEO, whose annual salary and bonus exceeded $100,000:
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation Awards
----------------------------------------------- --------------------------------------------
Restricted Securities LTIP
Year/ Other Annual Stock Awards Underlying Payouts
Name and Principal Position Period Salary ($) Bonus ($) Compensation ($) ($) Options/SARs (#) ($)
------------------------------ -------- -------------- ------------- ------------------ -------------- ------------------ ----------
Randall K. Fields 2006 279,167* - 71,126 (1) 45,833 - -
Chairman and CEO 2005 317,500* - 61,037 (1) 50,000 - -
2004 317,500* 4,377 46,760 (1) 50,000 - -
James Horton 2006 243,750** - - - -
President and COO 2005 270,833** - - - 416,823 -
William Dunlavy 2006 197,625 - - 22,500 -
CFO 2005 198,958 - - - 338,601 -
2004 100,000 4,377 - 50,000 - -
Shaun Broadhead 2006 116,167 - - 30,833 - -
Director of 2005 100,000 - - 50,000 - -
Research & Development 2004 100,000 4,377 - 50,000 - -
Carolyn Doll 2006 116,167 - - 30,833 - -
Vice President of 2005 100,000 - - 50,000 - -
Marketing 2004 100,000 4,377 - 50,000
Aaron Prevo 2006 121,244*** - - 25,000 - -
Vice-President of 2005 29,583*** - - - 65,588 -
Professional Services
Williams Ruby 2006 68,115**** - - - - -
Vice-President
* A significant part of Mr. Fields salary is paid to a management company
wholly owned by Mr. Fields.
** Mr. Horton joined the company in September 2004 and resigned March 2006.
*** Mr. Prevo joined the company in April 2005 and resigned June 2006.
**** Mr. Ruby joined the company in December 2005
28
(1) These amounts include premiums paid on Life Insurance policies of $52,958,
$46,622 and $27,614 for 2006, 2005 and 2004, respectively, Company car
related expenses of $15,347, $13,003 and $14,880 for 2006, 2005 and 2004,
respectively; and medical premiums of $2,821 and $1,412 for 2006 and 2005,
respectively.
Stock Options and Warrants Granted in the Last Fiscal Year
The following table sets forth information on grants of options to
purchase shares of our common stock in fiscal year 2006 to our officers and
directors.
Individual Grants
--------------------------------------------------------------------------------
Number of Securities % of Total Options and
Underlying Options and Warrants Granted to Exercise
Warrants Employees in Fiscal Price Expiration
Name Granted Year ($/Sh)(1) Date
------------------------------------ ------------------------ ------------------------ ------------- ----------------
William Dunlavy 4,000,000 100% $.065 06/30/2011
(1) The exercise price was equal to 100% of the fair market value on the date of
grant.
Aggregated Option and Warrant Exercises in Last Fiscal Year and Fiscal Year-end
Option and Warrant Values
Securities Underlying Value of Unexercised
Shares Acquired on Value Unexercised Options and Warrant In-the-Money Options at
June 30, 2006 at June 30, 2006 June 30, 2006
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
Aaron Prevo - N/A 65,588 - N/A -
Carolyn Doll - N/A 200,000 - 6,000.00 -
James Horton - N/A 6,428,571 - N/A -
Riverview Financial(1) - N/A 8,761,614 - 175,232.28 -
Shaun Broadhead - N/A 350,000 - 10,500.00 -
William Dunlavy - N/A 500,000 - 15,000.00 -
William Dunlavy - N/A 338,601 - N/A -
William Dunlavy - N/A 4,000,000 - N/A -
(1) Riverview Financial is an affiliate of Mr. Fields.
Employment Agreement
Park City Group has an employment agreement with its chief executive
officer, Randall K. Fields, dated effective January 1, 2001, and revised
effective July 1, 2003. The compensation for Mr. Fields, under the terms of the
revision, provides for a portion of the compensation to be provided pursuant to
an employment agreement and the balance to be provided pursuant to the terms of
a services agreement between the Company and Fields Management, Inc., an
executive management services provider, a company wholly owned by Mr. Fields.
The term of the two agreements is five years ending June 30, 2008, with
automatic one-year renewals. The combined agreements provide for:
o An annual base compensation of $350,000;
o Use of a company vehicle;
o Employee benefits that are generally provided to Park City
Group, Inc. employees; and
29
o A bonus to be determined annually by the Compensation
Committee of the Board of Directors.
Effective October 1, 2002, Mr. Fields agreed to have a portion of his
base compensation payable in stock.
Park City Group has an employment agreement with its Executive Vice
President and chief financial officer, William Dunlavy, dated effective
September 1, 2004. This agreement provides Mr. Dunlavy with the following
compensation:
An annual base compensation of $225,000;
o Participation in the Management Bonus Plan which provides that
the bonus will be 30% of salary if company revenue and net
income meets the budget. If the Company meets 95% of its
budgeted amounts, the bonus is 20%, if the Company meets 90%
of its budgeted amounts, the bonus is 10% with no bonus if the
results are less than 90% of the budget. Likewise, if the
budget is exceeded to a level of 110% the bonus is 40% and 45%
if the budget is exceed to a level of 120% or more.
o Employee benefits that are generally provided to Park City
Group, Inc. employees;
o Stock options equal to 3 to 1 for each share of stock
purchased at a cost of $.07 or the current market price, which
ever is higher, through September 30, 2005 with an exercise
price of $.07 or the current market price, which ever is
higher; and
o Stock options equal to 2 to 1 for each share of stock
purchased at a cost of $.07 or the current market price, which
ever is higher, $.07 or the current market price, which ever
is higher, there after.
Director Compensation
The continuing outside directors, Edward C. Dmytryk and Thomas W.
Wilson, Jr. receive the following compensation:
Annual cash compensation of $10,000 payable at the rate of $2,500 per
quarter. The Company has the right to pay this amount in the form of
shares of Company Stock.
Annual options to purchase $20,000 of the Company restricted common
stock at the market value of the shares on the date of the grant, which
is to be the first day the stock market is open in January of each
year.
401(k) Retirement Plan.
The Company offers an employee benefit plan under Benefit Plan Section
401(k) of the Internal Revenue Code. Employees who have attained the age of 21
are immediately eligible to participate. The Company, at its discretion, matches
50% of the first 4% of each employee's contributions. No matching contribution
has been made after September 30, 2002.
30
Indemnification for Securities Act Liabilities
Nevada law authorizes, and the Company's Bylaws and Indemnity
Agreements provide for, indemnification of the Company's directors and officers
against claims, liabilities, amounts paid in settlement and expenses in a
variety of circumstances. Indemnification for liabilities arising under the Act
may be permitted for directors, officers and controlling persons of the Company
pursuant to the foregoing or otherwise. However, the Company has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
Stock Options and Warrants
The Company has stock option plans that enable it to issue to officers,
directors, consultants and employees nonqualified and incentive options to
purchase common stock. At June 30, 2006, a total of 3,997,689 of such options
were outstanding with exercise prices ranging from $0.03 to $0.14 per share.
At June 30, 2006 a total of 44,841,935 warrants to purchase shares of
common stock were outstanding. Of those warrants, 25,322,453 were issued in
connection with certain debt financings; 6,428,571 were issued in connection
with an equity investment by an officer; 9,090,911 were issued as a commission
for placement of equity securities; and 4,000,000 were issued to an officer in
satisfaction of employment agreement obligations. These warrants have exercise
prices ranging from $0.04 to $0.07 per share and expire between August 16, 2007
and June 30, 2011.
Compensation Committee Interlocks and Insider Participation
No executive officers of the Company serve on the Compensation
Committee (or in a like capacity) for the Company or any other entity.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information regarding shares of our
common stock beneficially owned as of June 26, 2006 by: (i) each of our officers
and directors; (ii) all officers and directors as a group; and (iii) each person
known by us to beneficially own five percent or more of the outstanding shares
of our common stock.
Common Stock Common Stock
Options Purchase Warrant Total Stock and
Exercisable Exercisable Stock Based
Name Common Stock Within 60 Days Within 60 days Holdings (1) % Ownership (1)
-------------------------- --------------- ------------------ ------------------ ------------------ ------------------
Randall K. Fields (1) 24,360.278 - - 24,360,278 5.46%
Riverview Financial, Corp. 183,495,362 - 8,761,614 192,256,976 43.05%
William Dunlavy 1,777,076 838,601 4,000,000 6,615,677 1.48%
Shaun Broadhead 2,950,783 350,000 - 3,300,783 *
Carolyn Doll 2,950,783 200,000 - 3,150,783 *
James Horton 2,281,798 - 6,428,571 8,710,369 1.95%
Edward C. Dmytryk 1,398,627 875,000 - 2,273,627 *
Thomas W. Wilson 10,010,210 875,000 3,792,362 14,677,572 3.29%
31
* Less than 1%
(1) Includes 183,495,362 shares and 8,761,614 warrants beneficially owned by
Riverview Financial Corp., an affiliate of Mr. Fields.
(2) For purposes of this table "beneficial ownership" is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, pursuant
to which a person or group of persons is deemed to have "beneficial
ownership" of any common shares that such person or group has the right to
acquire within 60 days after August 1, 2006. For purposes of computing the
percentage of outstanding common shares held by each person or group of
persons named above, any shares that such person or group has the right to
acquire within 60 days after August 1, 2006, are deemed outstanding but are
not deemed to be outstanding for purposes of computing the percentage
ownership of any other person or group. As of August 1, 2006, there were
446,561,686 shares of our common stock issued and outstanding. There were
also outstanding options, and warrants entitling the holders to purchase
26,121,148 shares of our common stock owned by officers and/or directors of
Park City Group.
(3) These are the officers and directors of Park City Group.
DESCRIPTION OF SECURITIES
We are authorized to issue up to 500,000,000 shares of common stock,
$.01 par value and 30,000,000 shares of preferred stock, $.01 Par value. As of
June 30, 2006, there were 446,561,686 shares of our common stock issued and
outstanding and no shares of preferred stock issued or outstanding. We
anticipate that we will take action to effect a 1-for-50 reverse stock split in
the near future. At that time the reverse split will occur. The following is a
summary of the material rights and privileges of our common stock and preferred
stock.
Common Stock
Subject to the rights of the holders of any preferred stock that may be
outstanding, each holder of common stock on the applicable record date is
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefore, and in the event of liquidation, to
share pro rata in any distribution of our assets after payment, or providing for
the payment, of liabilities and the liquidation preference of any outstanding
preferred stock. Each holder of common stock is entitled to one vote for each
share held of record on the applicable record date on all matters presented to a
vote of stockholders, including the election of directors. Holders of common
stock have no cumulative voting rights or preemptive rights to purchase or
subscribe for any stock or other securities. Except as disclosed herein, there
are no conversion rights or redemption or sinking fund provisions with respect
to the common stock. All outstanding shares of common stock are, and the shares
of common stock offered hereby will be, when issued, fully paid and
nonassessable.
Preferred Stock
Our Board of Directors is empowered, without approval of the
stockholders, to cause shares of preferred stock to be issued in one or more
series, with the numbers of shares of each series to be determined by the Board.
The Board of Directors is also authorized to fix and determine variations in the
designations, preferences, and special rights (including, without limitation,
special voting rights, preferential rights to receive dividends or assets upon
liquidation, rights of conversion into common stock or other securities,
redemption provisions and sinking fund provisions) between the preferred stock
or any series thereof and the common stock. The shares of preferred stock or any
series thereof may have full or limited voting powers or be without voting
powers.
32
Although we have no present intent to issue shares of preferred stock,
the issuance of shares of preferred stock, or the issuance of rights to purchase
such shares, could be used to discourage an unsolicited acquisition proposal.
For instance, the issuance of a series of preferred stock might impede a
business combination by including class voting rights that would enable the
holders to block such a transaction, or such issuance might facilitate a
business combination by including voting rights that would provide a required
percentage vote of the stockholders. In addition, under certain circumstances,
the issuance of preferred stock could adversely affect the voting power of the
holders of the common stock. Although the Board of Directors is required to make
any determination to issue such stock based on its judgment as to the best
interests of our stockholders, the Board of Directors could act in a manner that
would discourage an acquisition attempt or other transaction that some or a
majority of the stockholders might believe to be in their best interests or in
which stockholders might receive a premium for their stock over the then market
price of such stock.
Transfer Agent
Our transfer agent is Liberty Transfer Co telephone (631) 385-1616.
Warrants
We are registering 40,841,935 shares of common stock underlying
warrants as part of this Prospectus. The warrants vary in exercise price from
$0.04 to $0.07 and have terms expiring from August 16, 2007 to June 21, 2011.
The number of shares and price at which the warrants are exercisable is subject
to adjustment in certain events, such as mergers, reorganizations or stock
splits, to prevent dilution. If one of these events occurs, the number of shares
into which the warrants may be converted and the exercise price will be adjusted
as needed to ensure that the warrant holder continues to have the right to
receive a comparable number of shares or cash consideration as the holder would
have received had the holder already exercised its warrant prior to the event.
The warrants have no price protection features, and may not be redeemed by the
Company.
COMMISSION'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
We are a Nevada corporation. Our Certificate of Incorporation will
provide to the fullest extent permitted under Section 78.138 of the Nevada
Revised Statutes, that our directors or officers shall not be personally liable
to us or our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders' rights
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Our Bylaws also provide that the Board of Directors may also authorize
us to indemnify our employees or agents, and to advance the reasonable expenses
of such persons, to the same extent, following the same determinations, and upon
the same conditions as are required for the indemnification of, and advancement
of, expenses to our directors and officers. As of the date of this Registration
Statement, the Board of Directors has not extended indemnification rights to
persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had a note payable to Riverview Financial Corporation
(Riverview), in the principal amount of $3,296,406 at June 30, 2005 with accrued
interest of $841,995. The chief executive of Riverview is also the chief
executive of the Company. In June 2004, the Company issued 2,480,000 shares of
common stock to Riverview to subordinate to the extended Whale Investments note.
In March 2006 the note payable and accrued interest of $294,334 were converted
to 66,234,658 shares of common stock. The remaining $981,149 of accrued interest
was paid with cash proceeds from the note payable funding from US Bank.
Riverview has loaned the Company $345,000 under a note payable bearing
interest at 18%. Payments are made monthly for interest only, with the principal
due in December 2005. Riverview was issued 857,143 shares of common stock as an
inducement to make the loan. The note was extended in June 2004 to December
2005. The loan was retired with cash proceeds form the note payable funding from
US Bank in March 2006.
The Company's CEO has made loans to the Company through Riverview
Financial Corp. a wholly owned entity, to cover short term cash needs pursuant
to a line of credit promissory note payable. Repayments are made as funds are
available, with an extended due date of June 15, 2006 and interest is at 12%. In
December 2005, the line of credit the company has with Riverview was cancelled
and reissued in the amount of $800,000. The reissued line of credit carries an
interest rate of 12% with a fee for draws on the line. All other terms remained
the same. There was no balance due under the line of credit at June 30, 2006.
In December 2002 the Company obtained a $2,000,000 note payable funding
from Whale Investment, Ltd. The note bears interest at 18%, payable monthly, and
is due in December 2005, as extended. Whale Investment, Ltd. is controlled by an
individual who was already a shareholder of the Company at the time of the loan.
The extended note is due December 2005 and the Company paid to Whale Investments
$40,000 in cash and 1,000,000 in common stock valued at $80,000 as consideration
for the extension. The loan was retired with cash generated from operations in
August 2005.
FINANCIAL STATEMENTS
See the Condensed Consolidated Financial Statements beginning on page
F-1, "Index to Consolidated Financial Statements."
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees, and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market, or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
34
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, or Regulation S, rather than under this
prospectus. The selling stockholders shall have the sole and absolute discretion
not to accept any purchase offer or make any sale of shares if they deem the
purchase price to be unsatisfactory at any particular time.
The selling stockholders or their respective pledgees, donees,
transferees, or other successors in interest, may also sell the shares directly
to market makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions, or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers, or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders, but excluding brokerage commissions or underwriter
discounts.
The selling stockholders, alternatively, may sell all or any part of
the shares offered in this prospectus through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholders defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
35
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions.
We have agreed to indemnify the selling stockholders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
selling stockholders or their respective pledgees, donees, transferees, or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
SELLING SECURITY HOLDERS
The Selling Stockholders include (i) 100 accredited investors who
purchased 90,909,106 shares of our commons stock in a private placement
transaction that closed in June 2006; (ii) 66,234,658 shares of our common stock
owned by Riverview Financial Corporation, an affiliate of Randall K. Fields, our
Chief Executive Officer; (iii) 31,751,024 shares of our common stock underlying
warrants owned by various warrant holders; and (iv) 9,090,911 shares of our
common stock underlying warrants issued to Taglich Brothers, Inc., the placement
agent of our June 2006 private offering transaction.
This prospectus is part of a registration statement filed by us with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Securities Act"), covering the resale of such shares of our common
stock from time to time by the selling stockholders.
The securities are being offered by the named selling security holders
below. There is no Preferred Stock issued at this time and the table below
assumes the exercise of all warrants to purchase common stock owned by the
selling stockholders. These factors include, but are not limited to, the other
rights associated with the terms of the warrant agreements, whether there is a
specific exemption to registration under federal and state securities laws for
the exercise, and the specific exercise price of the securities held by each
selling security holder and its relation to the market price.
The selling stockholders may from time to time offer and sell, pursuant
to this prospectus, up to an aggregate of 197,985,699 shares of our common stock
underlying the shares of Preferred Stock now owned by them. The selling security
holders may, from time to time, offer and sell any or all of the shares that are
registered under this prospectus, although they are not obligated to do so.
We do not know when or in what amounts the selling stockholders may
offer the shares described in this prospectus for sale. The selling security
holders may decide not to sell any of the shares that this prospectus covers.
Because the selling security holders may offer all or some of the shares
pursuant to this prospectus, and because there are currently no agreements,
arrangements, or understandings with respect to the sale of any of the shares
that the selling stockholders will hold after completion of the offering, we
cannot estimate the number of the shares that the selling stockholders will hold
after completion of the offering. For purposes of the following tables, we have
assumed that, after completion of the offering, the selling security holders
will sell all of the securities that this Prospectus covers.
36
Number of Shares Percentage of
of Common Stock Number of Shares Shares of Common
Owned Before Number of Shares Owned After Stock Owned After
Name Offering (1) to Be Offered (2) Offering Offering
----------------------------------------------------------- ---------------- ------------------- ---------------- ------------------
Riverview Financial Corp. 192,122,565 74,996,272 192,122,565 38.8%
Hilson Partnership, LP 10,909,091 10,909,091 10,909,091 2.4%
Taglich Brothers, Inc. 9,090,911 9,090,911 9,090,911 1.8%
E.H. Arnold 7,272,728 7,272,728 7,272,728 1.6%
Anthony Meyer 6,773,913 6,773,913 6,773,913 1.4%
James Horton 8,710,369 6,428,571 8,710,369 1.8%
Michael N. Taglich 3,938,458 3,938,458 3,938,458 *
Thomas Wilson 14,427,572 3,792,362 14,427,572 2.9%
Nite Capital LP 3,636,364 3,636,364 3,636,364 *
Shadow Capitol LLC; Attn: B. Kent Garlinghouse 3,636,364 3,636,364 3,636,364 *
Robert F. Taglich 3,636,364 3,636,364 3,636,364 *
John Bertsch Trust; John Bertsch Trustee 2,800,000 2,800,000 2,800,000 *
Bernard Brennan 13,504,156 2,798,512 13,504,156 2.7%
Paul Higbee 2,798,512 2,798,512 2,798,512 *
Guerino Deluca & Francis Deluca JT/WROS 1,818,182 1,818,182 1,818,182 *
Gary Arnold and Patricia Arnold Ten Com 1,818,182 1,818,182 1,818,182 *
Polaris Partners, LP. 1,818,182 1,818,182 1,818,182 *
Ashok Kumar Narang 1,818,182 1,818,182 1,818,182 *
Sep FBO Ed Brody Pershing LLC as Custodian 1,363,637 1,363,637 1,363,637 *
Michael E. and Naoma T. Carr 1,350,000 1,350,000 1,350,000 *
Dennis Fortin 1,000,000 1,000,000 1,000,000 *
Sara Bower Penn Ttee. Sara Bower Penn Living Trust DTD
4/30/02 1,000,000 1,000,000 1,000,000 *
Philip Baroni & Rachel Baroni Trust DTD 8/1/95 909,091 909,091 909,091 *
Robert Louis Fisher & Carroll Fisher JT Ten Wros 909,091 909,091 909,091 *
Roger W. Lunstra 909,091 909,091 909,091 *
Robert W. Allen & Susan M. Allen JT/Wros 909,091 909,091 909,091 *
William C. Steele Ttee. William C. Steele Living Trust
UAD 5/11/98 909,091 909,091 909,091 *
Robert Edmondson 909,091 909,091 909,091 *
Paul R. Winter 909,091 909,091 909,091 *
David A. Random 909,091 909,091 909,091 *
Eugene Szczepanski 909,091 909,091 909,091 *
Norper Investments 909,091 909,091 909,091 *
Leo Jones 909,091 909,091 909,091 *
Robert L. Debruyn Trust UAD 10/5/94 Robert L. Debruyn &
Tracey H. Debruyn Ttee. 909,091 909,091 909,091 *
Tracey H. Debruyn Trust UAD 10/5/94 Tracey H. Debruyn &
Robert Debruyn Ttee. 909,091 909,091 909,091 *
Richard Buchakjian 909,091 909,091 909,091 *
IRA FBO David Random Pershing LLC as Custodian 909,091 909,091 909,091 *
Ira Fbo Starr F. Schlobohm Pershing LLC as Custodian
Rollover Account 909,091 909,091 909,091 *
James R. Foutch 909,091 909,091 909,091 *
37
Number of Shares Percentage of
of Common Stock Number of Shares Shares of Common
Owned Before Number of Shares Owned After Stock Owned After
Name Offering (1) to Be Offered (2) Offering Offering
----------------------------------------------------------- ---------------- ------------------- ---------------- ------------------
Howard Smith 909,091 909,091 909,091 *
Michael P. Hagerty 909,091 909,091 909,091 *
Allen R. Rowland 909,091 909,091 909,091 *
Andrew K. Light 909,091 909,091 909,091 *
Matthew A. Keefer 909,090 909,090 909,090 *
Shirley J. Lewis & Guy W. Lewis Co-Ttee. The Shirley J.
Lewis Rev. Trust U A DTD 6/26/01 900,000 900,000 900,000 *
Andrew M. Schatz & Barbara F. Wolf JTWROS 800,000 800,000 800,000 *
Thomas J. Bean 800,000 800,000 800,000 *
Spahr-Derebery Family Trust & A/D 10/11/90 Gregory E.
Spahr & M. Jennifer Derebery Ttee. 727,273 727,273 727,273 *
IRA FBO Kenneth W. Cleveland Pershing LLC as Custodian
Rollover Account 727,273 727,273 727,273 *
Douglas Friedrich & Melanie Friedrich JT/WROS 600,000 600,000 600,000 *
Lawrence D. Feldhacker 600,000 600,000 600,000 *
Glenn R. Hubbard 545,455 545,455 545,455 *
Stephen Hughes 545,455 545,455 545,455 *
Robert D. Vanroijen Jr. Trust U A DTD 12/14/82 Robert D.
Vanroijen Ttee. 500,000 500,000 500,000 *
P. Kenneth Nitz 454,546 454,546 454,546 *
Paul G. Detkin 454,546 454,546 454,546 *
Lucille Solomon 454,546 454,546 454,546 *
Maurice Solomon 454,546 454,546 454,546 *
Wafgal Limited 454,546 454,546 454,546 *
Steven A. Boggs 400,000 400,000 400,000 *
Louis and Judith Miller Family Trust; Lois & Judith
Miller Ttees. 400,000 400,000 400,000 *
StevenJ. Dennis 400,000 400,000 400,000 *
Randall s. Knox 400,000 400,000 400,000 *
Richard S. Benson 400,000 400,000 400,000 *
Corbert L. Clark, Jr. 400,000 400,000 400,000 *
Mark L. Rochester 400,000 400,000 400,000 *
A.F. Lehmkuhl 400,000 400,000 400,000 *
Patricia Tschohl Tod DTD 05/04/06 400,000 400,000 400,000 *
Frank M. Elliott 400,000 400,000 400,000 *
Nutie Dowdle 400,000 400,000 400,000 *
Larry S. Kaplan Marla B. Kaplan JT/WROS 400,000 400,000 400,000 *
Bart and Wendy Baker JTWROS 400,000 400,000 400,000 *
Gary L. Gray 400,000 400,000 400,000 *
Keith Liggett 400,000 400,000 400,000 *
Thomas A. Prendergast 400,000 400,000 400,000 *
Robert W. Main Ttee. Under the Robert W. Main Trust DTD
9/7/05 400,000 400,000 400,000 *
Phillip L. Burnett & Allyson Burnett JTWROS 400,000 400,000 400,000 *
Terry Peets 397,540 397,540 397,540 *
William Spielberger 363,637 363,637 363,637 *
38
Number of Shares Percentage of
of Common Stock Number of Shares Shares of Common
Owned Before Number of Shares Owned After Stock Owned After
Name Offering (1) to Be Offered (2) Offering Offering
----------------------------------------------------------- ---------------- ------------------- ---------------- ------------------
Edward J. Cook & Eleanor A. Cook JTWROS 363,637 363,637 363,637 *
W.C. Smith, Jr. 363,637 363,637 363,637 *
Jeffrey G. Hipp & Mary Ann Hipp JT/WROS 363,636 363,636 363,636 *
Terry J. Kuras 300,000 300,000 300,000 *
Stephen D. Kasle 300,000 300,000 300,000 *
Charles E. Klabunde Trust Charles E. Klabunde Ttee. U/A
Dated 4/9/03 275,000 275,000 275,000 *
David Frank Rios & Margaret Jo Rios Ttee DTD 6/22/99 200,000 200,000 200,000 *
Marvin J. Loutsenhizer 200,000 200,000 200,000 *
Joseph D Chamberlain 200,000 200,000 200,000 *
Dr. Thomas Heirigs & Sheryl Heirigs JT/WROS 200,000 200,000 200,000 *
Robert H. Mapp 200,000 200,000 200,000 *
D & M Partnership C/O Dean Weinberg 200,000 200,000 200,000 *
John Pratt 200,000 200,000 200,000 *
Carolyn L. Foutch 200,000 200,000 200,000 *
Kenneth M. Cleveland 200,000 200,000 200,000 *
Fabian Calvo 200,000 200,000 200,000 *
Janepapin Holdings, Inc.; Attn: Peter Inouye 200,000 200,000 200,000 *
IRA Fbo Thomas Heirigs Pershing LLC as Custodian 200,000 200,000 200,000 *
Joel E. Hipp & Patricia N. Hipp JTRWROS 200,000 200,000 200,000 *
Michael A. Stiegel 200,000 200,000 200,000 *
Mark P. Wood & Lynn T. Wood JTWROS 200,000 200,000 200,000 *
Donald V. Moline 200,000 200,000 200,000 *
William Chaney Tod DTD 4/20/04 200,000 200,000 200,000 *
Robert Lonze 200,000 200,000 200,000 *
C. Mark Casey 200,000 200,000 200,000 *
Joseph Martha 200,000 200,000 200,000 *
Angus Bruce Lauralee Bruce 182,000 182,000 182,000 *
Samuel E. Leonard Trust UAD 2/5/90 Samuel E. Leonard Ttee.
181,819 181,819 181,819 *
Jerry Schmitz & Norma Schmitz JT/WROS 181,819 181,819 181,819 *
---------------------
(1) The Selling Stockholders have no obligations to sell all or any of their
shares.
(2) Assumes all shares offered are sold.
EXPERTS
The balance sheet of Park City Group as of June 30, 2005, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended June 30, 2005, have been audited by HJ& Associates,
LLC, independent registered public accountants, as set forth in their report
thereon. The statement of operations, stockholders' equity, and cash flows for
the year ended June 30, 2004 have been audited by Tanner LC.
39
LEGAL MATTERS
The validity of the common stock to be sold by the selling stockholders
under this prospectus will be passed upon for us by Cohne, Rappaport & Segal.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On August 16, 2005 we filed a Form 8-K to announce the dismissal of our
previous independent registered public accounting firm and the appointment of HJ
& Associates, LLC as our new independent registered public accounting firm.
There were no disagreements with the former accountant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form SB-2 under
the Securities Act for the common stock offered by this prospectus. This
prospectus, which is a part of the registration statement, does not contain all
of the information in the registration statement and the exhibits filed with it,
portions of which have been omitted as permitted by SEC rules and regulations.
For further information concerning us and the securities offered by this
prospectus, please refer to the registration statement and to the exhibits filed
with it.
The registration statement, including all exhibits, may be inspected
without charge at the SEC's Public Reference Room at the public reference
facility of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may
obtain information on the operation of the SEC's public reference facility by
calling the SEC at 1-800-SEC-0330. The registration statement, including all
exhibits and schedules and amendments, has been filed with the SEC through the
Electronic Data Gathering, Analysis and Retrieval system, and is publicly
available through the SEC's Website located at http://www.sec.gov.
40
PARK CITY GROUP, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheet as of June 30, 2005
and March 31, 2006 (unaudited) F-4
Consolidated Statement of Operations for the years ended
June 30, 2005 and 2004 and the three and nine months
ended March 31, 2006 (unaudited) and 2005 (unaudited) F-6
Consolidated Statement of Stockholders' Deficit for the
years ended June 30, 2005 and 2004 and the nine months
ended March 31, 2006 (unaudited) F-7
Consolidated Statement of Cash Flows for the years ended
June 30, 2005 and 2004 and the nine months ended
March 31, 2006 (unaudited) and 2005 (unaudited) F-8
Notes to Consolidated Financial Statements F-9
F-1
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of
Park City Group, Inc and Subsidiaries
Park City, Utah
We have audited the accompanying consolidated balance sheet of Park City Group,
Inc. and Subsidiaries as of June 30, 2005, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Park
City Group, Inc. and Subsidiaries as of June 30, 2005, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ HJ & Associates, LLC
HJ & Associates, LLC
Salt Lake City, Utah
October 12, 2005
F-2
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Park City Group, Inc.
We have audited the accompanying consolidated statement of operations,
stockholders' deficit and cash flows of Park City Group, Inc. and Subsidiaries
for the year ended June 30, 2004. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of their operations and their cash
flows of Park City Group, Inc. and subsidiaries for the year ended June 30,
2004, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Tanner LC
Tanner LC
Salt Lake City, Utah
August 12, 2004
F-3
PARK CITY GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheet
--------------------------------------------------------------------------------------------------------------------------------
March 31, 2006
Assets (unaudited) June 30, 2005
--------------------------------------------
Current Assets:
Cash $ 40,925 $ 209,670
Receivables, net of allowance $49,304, $56,000 at March 31, 2006
and June 30, 2005 913,719 356,339
Prepaid expenses and other current assets 102,595 37,060
--------------------------------------------
Total current assets 1,057,239 603,069
--------------------------------------------
Property and equipment, net 98,918 109,512
--------------------------------------------
Other assets:
Deposits and other assets 27,826 25,000
Capitalized software costs 132,940 332,349
--------------------------------------------
Total other assets 160,766 357,349
--------------------------------------------
Total assets $ 1,316,923 $ 1,069,930
============================================
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 363,576 $ 628,398
Accrued liabilities 310,003 316,706
Deferred revenue 1,007,967 883,425
Current portion of capital lease obligations 19,289 23,159
Lines of credit 100,000 -
Related party line of credit 206,842 619,743
Related party accrued interest - 848,258
Current portion of related party notes payable - 2,277,649
--------------------------------------------
Total current liabilities $ 2,007,677 $ 5,597,338
============================================
--------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements F-4
PARK CITY GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheet
continued
--------------------------------------------------------------------------------------------------------------------------------
March 31, 2006
(unaudited) June 30, 2005
--------------------------------------------
Long-term liabilities
Long-term notes payable, net of discount of $106,700 at March 31, 2006 $ 1,833,300 $ -
Related party note payable - 3,173,414
Capital lease obligations, less current portion 8,295 2,127
--------------------------------------------
Total long-term liabilities 1,841,595 3,175,541
--------------------------------------------
Total Liabilities 3,849,272 8,772,879
--------------------------------------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.01 par value, 30,000,000 shares authorized, none issued - -
Common stock, $0.01 par value, 500,000.000 shares authorized: 354,522,470 and
282,555,885 issued and outstanding at March 31, 2006 and June 30, 2005 3,545,227 2,825,561
Additional paid-in capital 13,064,366 10,037,693
Accumulated deficit (19,141,942) (20,566,203)
--------------------------------------------
Total stockholder's deficit (2,532,349) (7,702,949)
--------------------------------------------
Total liabilities and stockholders' deficit $ 1,316,923 $ 1,069,930
============================================
--------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements F-5
PARK CITY GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended Year Ended
March 31, March 31, June 30,
2006 2005 2006 2005 2005 2004
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------------------------
Revenues:
Software licenses $ 573,900 $ 149,760 $ 3,434,927 $ 453,615 $ 479,615 $ 3,245,557
Maintenance and support 535,311 531,682 1,750,068 1,793,215 2,416,675 2,274,338
ASP 48,525 28,950 147,675 61,100 - -
Consulting and other 211,952 95,473 849,539 428,674 735,522 509,928
----------------------------------------------------------------------------------------------
1,369,688 805,865 6,182,209 2,736,604 3,631,812 6,029,823
Cost of revenues 396,976 394,192 1,219,048 1,046,117 1,448,726 1,366,501
----------------------------------------------------------------------------------------------
Gross margin 972,712 411,673 4,963,161 1,690,487 2,183,086 4,663,322
----------------------------------------------------------------------------------------------
Operating expenses:
Research and development 225,180 256,309 684,776 763,159 1,019,411 1,176,222
Sales and marketing 395,055 310,081 988,688 985,804 1,337,318 1,158,411
General and administrative 418,777 377,748 1,048,370 1,356,678 2,055,940 1,672,650
----------------------------------------------------------------------------------------------
Total operating expenses 1,039,012 944,138 2,721,834 3,105,641 4,412,669 4,007,283
----------------------------------------------------------------------------------------------
(Loss) income from operations (66,300) (532,465) 2,241,327 (1,415,154) (2,229,583) 656,039
Other income (expense):
Gain on forgiveness of debt - - - - - 119,201
Gain on settlement of payable - - - - - 89,934
Interest expense (319,491) (300,517) (817,066) (863,049) (1,178,454) (1,540,417)
----------------------------------------------------------------------------------------------
(Loss) income before income taxes (385,791) (832,982) 1,424,261 (2,278,203) (3,408,037) (675,243)
(Provision) benefit for income taxes - - - - - -
----------------------------------------------------------------------------------------------
Net (loss) income $ (385,791) $ (832,982) $ 1,424,261 $ (2,278,203) $ (3,408,037) $ (675,243)
==============================================================================================
Weighted average shares, basic 286,477,000 277,374,000 284,201,000 272,281,000 274,430,000 235,563,000
Weighted average shares, diluted 286,477,000 277,374,000 292,496,000 272,281,000 274,430,000 235,563,000
Basic (loss) income per share $ (0.00) $ (0.00) $ 0.01 $ (0.01) $ (0.01) $ (0.00)
==============================================================================================
Diluted (loss) income per share $ (0.00) $ (0.00) $ 0.00 $ (0.01) $ (0.01) $ (0.00)
----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements F-6
PARK CITY GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Deficit
Years Ended June 30, 2005 and 2004
-----------------------------------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-in Treasury Accumulated
Shares Amount Capital Stock Deficit Total
------------------------------------------------------------------------------------------------------
Balance, July 1, 2003 213,740,591 $ 2,138,407 $ 6,445,196 $ (30,000) $ (16,482,923) $ (7,929,320)
Common stock issued for:
Compensation 5,553,642 55,536 241,409 - - 296,945
Services 3,278,343 32,783 190,254 - - 223,037
Settlement 3,021,079 30,211 128,132 - - 158,343
Debt refinancing 8,410,251 84,103 430,583 - - 514,686
Debt conversions 26,745,586 267,456 1,687,552 - - 1,955,008
Exercise of options 7,966,667 79,667 239,000 - - 318,667
Cancel of treasury stock - (1,000) (29,000) 30,000 - -
Net loss - - - - (675,243) (675,243)
------------------------------------------------------------------------------------------------------
Balance, June 30, 2004 268,716,159 2,687,163 9,333,126 - (17,158,166) (5,137,877)
Common stock issued for:
Compensation 8,690,869 86,909 385,346 - - 472,255
Services 716,000 7,160 32,600 - - 39,760
Settlement 2,065,000 20,650 144,550 - - 165,200
Debt refinancing 225,000 2,250 13,500 - - 15,750
Equity investment 2,142,857 21,429 128,571 - - 150,000
Net loss - - - - (3,408,037) (3,408,037)
------------------------------------------------------------------------------------------------------
Balance, June 30, 2005 282,555,885 $ 2,825,561 $ 10,037,693 $ - $ (20,566,203) $ (7,702,949)
Common stock issued for:
Compensation (unaudited) 2,578,356 25,783 114,057 - - 139,840
Debt refinancing (unaudited) 225,000 2,250 13,500 - - 15,750
Debt conversion (unaudited) 66,234,658 662,347 2,811,259 - - 117,143
Exercise of options (unaudited) 2,928,571 29,286 87,857 - - 3,473,606
Net income (unaudited) - - - - 1,424,261 1,424,261
------------------------------------------------------------------------------------------------------
Balance, March 31, 2006
(unaudited) 354,522,470 $ 3,545,227 $ 13,064,366 $ - $ (19,141,942) $ (2,532,349)
======================================================================================================
-----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements F-7
PARK CITY GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
----------------------------------------------------------------------------------------------------------------------
Nine Months Ended Years Ended
March 31, June 30,
------------------------------------ --------------------------------
2006 2005 2005 2004
(unaudited) (unaudited)
------------------------------------ --------------------------------
Cash flows from operating activities:
Net income (loss) $ 1,424,261 $ (2,278,203) $ (3,408,037) $ (675,243)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 255,152 254,268 337,851 326,103
Bad debt expense (6,696) 104,417 358,158 -
Stock issued for services and expenses 139,849 508,694 677,215 678,326
Stock issued for interest 294,334 - - -
Amortization of discounts on debt 215,093 131,106 177,506 389,870
Gain of settlement of payable - - - (89,934)
Gain on forgiveness of debt - - - (119,201)
(Increase) decrease in:
Trade receivables (550,681) (48,010) 428,661 (197,756)
Prepaids and other assets (68,361) 74,511 169,109 (64,852)
(Decrease) increase in:
Accounts payable (264,823) 152,183 301,227 (41,184)
Accrued liabilities (6,705) (219,456) (108,377) 104,777
Deferred revenue 124,542 144,529 (228,490) (106,155)
Related party payable 97,000 - - (175,000)
Accrued interest, related party (848,258) 361,009 500,859 32,513
------------------------------------ --------------------------------
Net cash provided by (used in)
operating activities 804,707 (814,952) (794,318) 62,264
------------------------------------ --------------------------------
Cash flows from investing activities:
Purchase of property and equipment (20,445) (32,137) (35,345) (56,742)
Proceeds from disposal of property - 3,400 3,400 -
------------------------------------ --------------------------------
Net cash used in
investing activities (20,445) (28,737) (31,945) (56,742)
------------------------------------ --------------------------------
Cash flows from financing activities:
Net (decrease) increase in lines of credit (409,901) 544,815 619,743 69,467
Proceeds from issuance of stock - 150,000 150,000 238,667
Payment to extend note (9,000) (9,000) (9,000) (40,000)
Proceeds from debt 1,833,300 - - -
Payments on notes payable and capital leases (2,367,406) (33,007) (37,627) (30,144)
------------------------------------ --------------------------------
Net cash (used in) provided by
financing activities (953,007) 652,808 723,116 237,990
------------------------------------ --------------------------------
Net decrease in cash (168,745) (190,881) (103,147) 243,512
Cash at beginning of period 209,670 312,817 312,817 69,305
------------------------------------ --------------------------------
Cash at end of period $ 40,925 $ 121,936 $ 209,670 $ 312,817
==================================== ================================
------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements F-8
PARK CITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies, Organization and Principles
of Consolidation
Business Activity
Park City Group, Inc. and Subsidiaries (the "Company") designs, develops,
markets and supports proprietary software products. These products are designed
to be used in retail businesses having multiple locations to assist in the
management of business operations on a daily basis and communicate results of
operations in a timely manner. The principal markets for the Company's products
are retail companies, financial services, branded food manufacturers and display
manufacturing companies which have operations in North America and, to a lesser
extent, in Europe and Asia.
Principles of Consolidation
The financial statements presented herein reflect the consolidated financial
position of Park City Group, Inc. and Subsidiaries. All inter-company
transactions and balances have been eliminated in consolidation.
Unaudited Interim Financial Statements
The accompanying unaudited interim financial statements as of March 31, 2006 and
for the three and nine months ended March 31, 2006, and 2005 have been prepared
on substantially the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation on the financial information set forth herein. The results
for the three and nine months ended March 31, 2006 are not necessarily
indicative of future results.
Use of Estimates and Reclassifications
The preparation of consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that materially affect the amounts reported in the consolidated
financial statements. Actual results could differ from these estimates. The
methods, estimates and judgments the Company uses in applying its most critical
accounting policies have a significant impact on the results it reports in its
financial statements. The U.S. Securities and Exchange Commission has defined
the most critical accounting policies as the ones that are most important to the
portrayal of the Company's financial condition and results, and require the
Company to make its most difficult and subjective judgments, often as a result
of the need to make estimates of matters that are inherently uncertain. Based on
this definition, the Company's most critical accounting policies include:
revenue recognition, allowance for doubtful accounts, capitalization of software
development costs and impairment of long-lived assets.
Cash and Cash Equivalents
The Company considers all short-term instruments with an original maturity of
three months or less to be cash equivalents.
Concentration of Credit Risk and Significant Customers
The Company maintains cash in bank deposit accounts, which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on cash
and cash equivalents.
F-9
PARK CITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which when realized have been within the range of
management's expectations. The Company does not require collateral from its
customers.
The Company's accounts receivable are derived from sales of products and
services primarily to customers operating multi-location retail and grocery
stores. At June 30, 2005, net accounts receivable includes amounts due from
customers totaling $356,339.
During the year ended June 30, 2005, the Company received approximately $486
thousand of its revenue from new customers and approximately $3.1 million in
revenue from existing customers for continued support and additional license
sales.
During 2005, the Company had sales to major customers that exceeded 10 percent
of revenues are as follows:
Customer A $489,045
Customer B $374,249
The Company did not have any major customers that exceeded 10 percent of
revenues during 2004.
The Company also has an account receivable from a major customer as of June 30,
2005 as follows:
Customer C $122,753
Allowance for Doubtful Accounts Receivable
The Company offers credit terms on the sale of the Company's products to a
significant majority of the Company's customers and require no collateral from
these customers. The Company performs ongoing credit evaluations of the
Company's customers' financial condition and maintains an allowance for doubtful
accounts receivable based upon the Company's historical experience and a
specific review of accounts receivable at the end of each period. As of June 30,
2005, the allowance for doubtful accounts was $56,000.
Depreciation and Amortization
Depreciation and amortization of property and equipment is computed using the
straight line method based on the following estimated useful lives:
Years
Furniture and fixtures 7
Computer equipment 3
Equipment under capital leases 3
Leasehold improvements see below
Leasehold improvements are amortized over the shorter of the remaining lease
term or the estimated useful life of the improvements.
F-10
PARK CITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Warranties
The Company offers a limited warranty against software defects for a general
period of ninety days. Customers who are not completely satisfied with their
software purchase may attempt to be reimbursed for their purchases outside the
warranty period. The Company accrues amounts for such warranty settlements that
are probable and can be reasonably estimated.
Revenue Recognition
Revenue from the sale of software licenses is recognized upon delivery of the
software unless specific delivery terms provide otherwise. If not recognized
upon delivery, revenue is recognized upon meeting specified conditions, such as,
meeting customer acceptance criteria. In no event is revenue recognized if
significant Company obligations remain. Customer payments are typically received
in part upon signing of license agreements, with the remaining payments received
in installments pursuant to the agreements. Until revenue recognition
requirements are met, the cash payments received are treated as deferred
revenue.
Maintenance and support services that are sold with the initial license fee are
recorded as deferred revenue and recognized ratably over the initial service
period. Revenues from maintenance and other support services provided after the
initial period are generally paid in advance and are recorded as deferred
revenue and recognized on a straight-line basis over the term of the agreements.
Consulting service revenues are recognized in the period that the service is
provided or in the period such services are accepted by the customer if
acceptance is required by agreement.
ASP Services are sold, on a contractual bases, for one or more years. These fees
are collected in advance of the services being performed and the revenue is
recognized ratably over the respective months, as services are provided.
Software Development Costs
The Company accounts for software development costs in accordance with Statement
of Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed. Research and development
costs have been charged to operations as incurred. From inception through
January 2001, the Company viewed the software as an evolving product. Therefore,
all costs incurred for research and development of the Company's software
products through January 2001 were expensed as incurred. During January 2001,
technological feasibility of a major revision to the Company's Fresh Market
Manager and the Company's ActionManager 4x development platform was established.
Development costs for Fresh Market Manager software incurred from January 2001
through September 2002, totaling $1,063,515, were capitalized. These costs are
being amortized on a straight-line basis over four years, beginning in September
2002 when the product was available for general release to customers. During
2005 and 2004, $265,876 of the capitalized development costs were amortized into
expense each year.
Research and Development Costs
Research and development costs include personnel costs, engineering, consulting,
and contract labor and are expensed as incurred for software that has not
achieved technological feasibility.
Income Taxes
The Company accounts for income taxes under the provision of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. This method
F-11
PARK CITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between tax bases and financial
reporting bases of other assets and liabilities.
Earnings Per Share
The computation of basic (loss) earnings per common share is based on the
weighted average number of shares outstanding during each year. The computation
of diluted earnings per common share is based on the weighted average number of
shares outstanding during the year, plus the common stock equivalents that would
arise from the exercise of stock options and warrants outstanding, using the
treasury stock method and the average market price per share during the year.
Options and warrants to purchase 52,638,012 shares of common stock at prices
ranging from $0.03 to $0.14 per share were outstanding at June 30, 2005, but
were not included in the diluted loss per share calculation because the effect
would have been anti-dilutive.The shares used in the computation of the
Company's basic and diluted earnings per common share are reconciled as follows:
Three months ended Nine months ended Year ended June 30,
March 31, (unaudited) March 31, (unaudited) -------------------
2006 2005 2006 2005 2006 2005
---- ---- ---- ---- ---- ----
Weighted average 286,477,000 277,374,000 284,201,000 272,281,000 274,430,000 235,563,000
Dilutive effect of options
and warrants - - 8,295,000 - - -
------------- ------------- ------------ ------------- ------------- ------------
Weighted average shares
outstanding assuming
dilution 286,477,000 277,374,000 292,496,000 272,281,000 274,430,000 235,563,000
=========== =========== =========== =========== =========== ===========
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123) which established financial accounting and reporting standards for
stock-based compensation. The new standard defines a fair value method of
accounting for an employee stock option or similar equity instrument. This
statement gives entities the choice between adopting the fair value method or
continuing to use the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 with footnote disclosures of the pro forma effects if the
fair value method had been adopted. The Company has opted for the latter
approach.
Had compensation expense for the Company's option plan been determined based on
fair value at the grant dates, as prescribed in SFAS No. 123 as amended by SFAS
No. 148, the Company's net loss would have been as follows:
Year Ended Year Ended
June 30, June 30,
2005 2004
------------ -----------
Net loss
As reported $(3,408,037) $(672,243)
Pro forma (4,038,715) (724,743)
Loss per common share-basic and diluted-as reported $(0.01) $(0.00)
Loss per common share-basic and diluted-pro forma $(0.01) $(0.00)
F-12
PARK CITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
The weighted-average grant-date fair value of options granted during year ended
June 30, 2005 was $0.06 per share. The fair value for the options granted in
2005 were estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions:
Risk-free interest rate 1.63% - 3.73%
Expected life (in years) 2 - 10
Expected volatility 404.47%
Expected dividend yield 0.00%
The following table summarizes information about fixed stock options and
warrants outstanding at June 30, 2005:
Options and Warrants
Options and Warrants Outstanding Exercisable at
at June 30, 2005 June 30, 2005
Weighted
average Weighted Weighted
Number remaining average Number average
Range of Outstanding at contractual exercise Exercisable at exercise
exercise prices June 30, 2005 life(years) price June 30, 2005 price
--------------- ------------- -- ----------- --------------- ------------- ------------
$0.03 - $0.05 36,995,572 2.62 $ 0.04 36,796,822 $ 0.04
$0.07 - $0.08 15,142,440 2.67 0.07 15,142,440 0.07
$0.14 500,000 1.36 0.14 500,000 0.14
---------- ----------
52,638,012 2.62 0.05 52,439,262 0.05
========== ==========
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, receivables, payables,
accruals and notes payable. The carrying amount of cash, receivables, payables
and accruals approximates fair value due to the short-term nature of these
items. The notes payable also approximate fair value based on evaluations of
market interest rates.
2. Liquidity
As shown in the consolidated financial statements, the Company incurred losses
for the years ended June 30, 2005 and 2004 and had current liabilities in excess
of current assets at June 30, 2005. The Company generated cash from operations
for the year ending June 30, 2004, however the Company used cash in operations
for the year ending June 30, 2005.
F-13
PARK CITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
The Company believes that cash flow from sales, as well as the ability and
commitment of its majority shareholder to contribute funds necessary to continue
to operate, will allow the Company to fund its currently anticipated working
capital, capital spending and debt service requirements during the year ended
June 30, 2006. Currently the Company has experienced a high level of sales as
mentioned in Footnote 16. The IMI sale combined with maintenance and booked
consulting contracts represents a cash flow in excess of $7,500,000. The company
has retired the senior debt from these proceeds as indicated in Footnote 16, and
believes that the remaining cash will allow the Company to meet all of their
cash needs for Fiscal Year 2006. The financial statements do not reflect any
adjustments should the Company's operations not be achieved.
3. Receivables
Trade accounts receivable consist of the following at June 30, 2005:
Trade accounts receivable $412,339
Allowance for doubtful accounts (56,000)
--------
$356,339
========
4. Property and Equipment
Property and equipment are stated at cost and consist of the following at June
30, 2005:
Computer equipment $ 1,408,546
Furniture and equipment 207,251
Leasehold improvements 85,795
----------
1,701,592
Less accumulated depreciation
and amortization (1,592,080)
-----------
$ 109,512
===========
5. Capitalized Sofware Costs
Capitalized software costs consists of the following at June 30, 2005
Capitalized software costs $ 1,063,516
Less accumulated amortization (731,167)
-----------
$ 332,349
===========
Estimated aggregate amortization expenses for each of the next five years is as
follows:
Year ending June 30:
2006 $ 265,879
2007 66,470
F-14
PARK CITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
6. Accrued Liabilities
Accrued liabilities consist of the following at June 30, 2005:
Other payroll liabilities $ 156,300
Accrued vacation 112,722
Other accrued liabilities 32,684
Accrued board compensation 15,000
-----------
$ 316,706
===========
7. Related party line of credit
In May 2003 the Company arranged an unsecured, revolving line of credit with its
CEO. Advances bear interest at 12%, and are repaid as funds availability
permits. The line of credit originally expired June 15, 2005. In June 2005 the
expiration date on this revolving line of credit was extended to June 15, 2007.
The limit on this line of credit is $650,000, and the balance at June 30, 2005
was $619,743.
8. Related party notes payable and capital lease
The Company had the following long-term notes payable at June 30, 2005:
Note payable to Riverview Financial Corp. (Riverview)
bearing interest at 12% compounding, due July 31, 2007,
unsecured, net of discount of $122,992 $3,173,414
Unsecured note payable to Whale Investments Ltd
(WIL). WIL is controlled by a shareholder of the
Company. The note bears interest of 18%, payable
monthly, and is due December 31, 2005, net of a
discount of $54,976 1,945,024
Unsecured note payable to Riverview bearing interest
of 18% due December 31, 2005, net of discount of
$12,375 332,625
Capital lease obligation on computer equipment, due in
monthly installments of $2,124 decreasing through
February 2007, imputed interest rates of 10.9% 25,286
----------
5,476,349
Less current portion (2,300,808)
----------
$3,175,541
==========
F-15
PARK CITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Maturities of long-term debt at June 30, 2005 are as follows:
Year Amount
2006 $2,300,808
2007 2,127
2008 3,173,414
----------
$5,476,349
==========
Riverview is a stockholder and creditor of the Company. Riverview is wholly
owned by the Company's CEO.
Capital Leases: Amortization expense related to capitalized leases is included
in depreciation expense and was $25,926 and $23,066 for the years ended June 30,
2005 and 2004, respectively. Accumulated depreciation was $54,301 at June 30,
2005. This amortized depreciation expenses relates to $98,121 of equipment
purchased under capital lease agreements of which $47,666 is still under capital
lease at June 30, 2005.
9. Deferred Revenue
Deferred revenue consisted of the following at June 30, 2005:
License Sales $ 17,817
Consulting Services 18,950
Maintenance and Support 846,658
----------
$ 883,425
==========
10. Income Taxes
The Company provides for deferred income taxes on temporary differences that
represent tax effects of transactions reported for tax purposes in periods
different than for book purposes.
The provisions for income taxes differ from the amount computed at statutory
rates as follows:
Year Ended Year Ended
June 30, 2005 June 30, 2004
Income tax benefit at statutory rates $ 1,329,000 $ 263,000
Change in valuation allowance (1,298,000) (251,000)
Other (31,000) (12,000)
----------- ---------
$ - $ -
=========== =========
F-16
PARK CITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
The deferred income tax asset (liability) as of June 30, 2005 and 2004 is as
follows:
June 30, 2005 June 30, 2004
Short Term
Allowance for bad debts $22,000 $ 2,000
Accrued vacation 44,000 38,000
Deferred revenue 345,000 434,000
Valuation allowance (411,000) (474,000)
Deferred tax asset $ - $ -
Long Term
Depreciation $ 52,000 $ 46,000
Net Operating loss carry
forward 4,250,000 2,895,000
Valuation allowance (4,302,000) (2,941,000)
Deferred tax asset $ - $ -
As of June 30, 2005, the Company had available net operating losses (NOL) for
federal and state tax purposes of approximately $10,899,000. The NOL carry
forward is limited to use against future taxable income due to changes in
ownership and control. If a substantial change in the Company's ownership should
occur, there would be an annual limitation of the amount of the NOL carry
forward which could be utilized. The following schedule summarizes the net
operating losses available to the Company with the corresponding expiration
periods:
Expiration
Period of Loss Amount Year
-------------- ------ ----
2001 1,040,000 2021
2002 2,470,000 2022
2003 3,254,000 2023
2004 660,000 2024
2005 3,475,000 2025
-----------
$10,899,000
===========
11. Supplemental Disclosure of Cash Flow Information
Interest paid during the years ended June 30, 2005 and 2004 was $460,085 and
$481,783, respectively. No income taxes were paid during the years ended June
30, 2005 or 2004.
F-17
PARK CITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Non-Cash Transactions Disclosure
Year ended June 30,
2005 2004
---- ----
Common stock issued for debt refinancing $ 15,750 $ 514,686
Common stock issued for debt conversion $ - $ 1,955,008
Property and equipment purchased by capital lease $ 35,345 $ -
F-18
PARK CITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
12. Commitments and Contingencies
Operating Leases. In September 1998, the Company entered into a lease agreement
for office space. Under the terms of the lease agreement, the Company was
required to pay $16,723 per month with a 4% annual increase in the base rent
through December 2000. The lease agreement was renewed in February 2001, and
under the terms of the new agreement, the Company must pay $18,482 per month
with a 4% annual increase in base rent until December 31, 2003. Total rent
expense under this agreement for each of the years ended June 30, 2005 and 2004
was $114,000 and $208,486, respectively. The Company is currently negotiating a
new office space lease agreement, and is currently paying $9,500 on a
month-to-month basis in its existing location until a new office space lease
agreement is finalized.
13. Employee Benefit Plan
The Company offers an employee benefit plan under Benefit Plan Section 401(k) of
the Internal Revenue Code. Employees who have attained the age of 21 are
eligible to participate. The Company, at its discretion, matches 50% of the
first 4% of each employee's contributions. The company currently does not match
employee contributions. There were no expenses for the years ended June 30, 2005
and 2004.
14. Stock Compensation Plans
Stock in Lieu of Cash Compensation. Beginning October 1, 2002, officers and
management of the Company received a portion of their compensation in common
stock of the Company. The number of shares was calculated based on the fair
value of the shares at the end of each payroll period, with a floor price of
$.05 per share. During the year ended June 30, 2005 3,210,447 shares were issued
with a fair value of $169,842.
Beginning October 1, 2003, employees received 10% of their compensation in
common stock of the Company. The 10% was deferred from employees salary and paid
quarterly in stock based on the after tax portion of the deferred compensation.
The plan was suspended in September 2004 and then reinstated for the period
March through May 2005. During the year ended June 30, 2005, 2,922,380 shares
were issued with a fair value of $121,581.
Officers and Directors Stock Compensation. In February 2004 to be effective
January 2004, the Board of Directors approved the following compensation for
directors who are not employed by the Company.
F-18
PARK CITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
o Annual cash compensation of $10,000 payable at the rate of
$2,500 per quarter. The Company has the right to pay this
amount in the form of shares of common stock of the Company.
o Annual options to purchase $20,000 of the Company restricted
common stock at the market value of the shares on the date of
the grant, which is to be the first day the stock market is
open in January of each year.
o Reimbursement of all travel expenses related to performance of
Directors duties on behalf of the Company.
As of June 30, 2005 there were outstanding to directors fully vested options
outstanding to purchase 2,750,000 common shares at $0.04 - $0.14 per share, and
expiring at various dates through December 2007.
In December 2001, the Board of Directors approved a plan to incentivize members
of the Board of Directors, including those employed by the Company, to purchase
shares of stock of the Company. Therefore, for any common stock purchased at
fair market value by a member of the Board of Directors, the Company matches
with an option to purchase additional shares equivalent to those purchased, at
the same price of the original purchased shares and expiring two years from the
date of grant. Under this plan the Company has issued options to purchase
5,666,667 shares of common stock at prices of $.11 - $.24, all of which were
exercised or expired as of March 2004.
Officers, Key Employees, Consultants and Directors Stock Compensation
In January 2000, the Company entered into a non-qualified stock option & stock
incentive plan. Officers, key employees, consultants and directors of the
Company are eligible to participate. The maximum aggregate number of shares
which may be granted under this plan was originally 1,000,000 and was
subsequently amended to 2,000,000 on March 8, 2000. The plan is administered by
a Committee. The exercise price for each share of common stock purchasable under
any incentive stock option granted under this plan shall be not less than 100%
of the fair market value of the common stock, as determined by the stock
exchange on which the common stock trades on the date of grant. If the incentive
stock option is granted to a shareholder who possesses more than 10% of the
Company's voting power, then the exercise price shall be not less than 110% of
the fair market value on the date of grant. Each option shall be exercisable in
whole or in installments as determined by the Committee at the time of the grant
of such options. All incentive stock options expire after 10 years. If the
incentive stock option is held by a shareholder who possesses more than 10% of
the Company's voting power, then the incentive stock option expires after five
years. If the option holder is terminated, then the incentive stock options
granted to such holder expire no later than three months after the date of
termination. For options holders granted incentive stock options exercisable for
the first time during any fiscal year and in excess of $100,000 (determined by
the fair market value of the shares of common stock as of the grant date), the
excess shares of common stock shall not be deemed to be purchased pursuant to
incentive stock options.
F-19
PARK CITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
A schedule of the options and warrants at June 30, 2005 is as follows:
Number of
---------
Options Warrants Price per Share
------- -------- ---------------
Outstanding at July 1, 2003 18,458,334 62,794,536 $0.04-1.44
Granted 2,223,000 - $0.03-0.05
Exercised (5,666,667) (2,300,000) $0.04
Reclassify (11,666,667) 11,666,667 $0.07
Called - - -
Cancelled - - -
Expired (39,000) (300,000) $0.05-1.44
----------- ------------ -----------
Outstanding at June 30, 2004 3,309,000 71,861,203 $0.03-0.75
Granted 4,299,012 6,428,571 $0.04-0.07
Exercised - - -
Called - - -
Cancelled (1,051,000) (525,000) $0.03-0.08
Expired (1,110,500) (30,573,274) $0.05
----------- ------------ -----------
Outstanding at June 30, 2005 5,446,512 47,191,500 $0.03-0.14
=========== ============ ===========
15. Related Party Transactions
The Company has a note payable to Riverview Financial Corporation (Riverview),
in the principal amount of $3,296,403 at June 30, 2005 with accrued interest of
$841,995. The chief executive of Riverview is also the chief executive of the
Company. In April 2004, $1,100,000 of accrued interest on the Riverview note
payable was converted into 15,714,286 shares of common stock. In June 2004, the
Company issued 2,484,000 shares of common stock valued at $173,885 to extend the
Riverview note payable to July 2007.
Riverview has loaned the Company $345,000 under a note payable bearing interest
at 18%. In December 2004 Riverview was paid $9,000 and issued 225,000 shares to
extend the note to December 2005.
The Company recognized $697,192 and $923,046 of interest expense from related
party loans during 2005 and 2004, respectively.
The Company has payables to employees of $182,146 at June 30, 2005 for
un-reimbursed business expenses, including $118,407 due to officers of the
company.
16. Subsequent Events
In August 2005 the Company entered into a Software License Agreement with Cannon
Equipment Company. In consideration for a $3,000,000 license fee, the Company
granted Cannon a perpetual, non-exclusive, non-transferable license to the
Company's Supply Chain Profit Link Software. In addition the Company entered
into a Consulting Services Agreement with Cannon whereby the Company will
provide certain consulting services to Cannon on an hourly basis. The Consulting
F-20
PARK CITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Services Agreement calls for a $500,000 retainer to be paid by Cannon to the
Company to be offset against services rendered under the Consulting Agreement.
The Company and Cannon also entered into a Right of First Offer Agreement. The
Company will provide Cannon a right of first offer to purchase shares of the
Company's common stock offered by the Company prior to December 31, 2005 and a
thirty-day exclusive right to negotiate the purchase of shares offered after
December 31, 2005. The term of this agreement is one year.
In August 2005 the Company retired its note payable to Whale Investments in the
amount of $2,000,000 plus accrued interest of $30,000.
In September of 2005 the Company authorized to pay Senior Management 3 options
for every share purchased at $.07 for one year. Starting October of 2006 Senior
Management will get 2 options for every share purchased from the Company at
market price or $.07 which ever is higher.
On March 31, 2006, the Company refinanced $1,940,000 of related party note
payable, line of credit and accrued interest with a note payable from a bank of
$1,940,000. The note payable to a bank bears interest at 6.7%, with monthly
interest-only payments, due March 31, 2008, secured by a certificate of deposit
issued by the same bank and held in Riverview's name, with discount of $106,700
at March 31, 2006. The Company also obtained an $200,000 unsecured line of
credit from the same bank on February 15, 2006, with interest at prime + 1%
(8.75% at March 31, 2006), due February 15, 2007; the balance at March 31, 2006
was $100,000.
17. Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R (revised 2004) "Share-Based
Payment." SFAS No. 123R requires employee stock-based compensation to be
measured based on the grant-date fair value of the awards and the cost to be
recognized over the period during which an employee is required to provide
service in exchange for the award. The Statement eliminates the alternative use
of Accounting Principles Board (APB) No. 25's intrinsic value method of
accounting for awards, which is the company's accounting policy for stock
options. See Note 1 to the Consolidated Financial Statements for the pro forma
impact of compensation expense from stock options on net earnings and earnings
per share. SFAS No. 123R is effective for the Company's fiscal year beginning
July 1, 2006. The company will adopt the provisions of SFAS No. 123R on a
prospective basis. The financial statement impact will be dependent on future
stock-based awards and any unvested stock options outstanding at the date of
adoption.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Correction - a replacement of APB No. 20 and SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements." SFAS 154 changes the requirements for
the accounting for and reporting of a change in accounting principle. It also
applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions.
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47) "Accounting
for Conditional Asset Retirement Obligations, an Interpretation of FASB
Statement No. 143." This Interpretation clarifies that a conditional retirement
obligation refers to a legal obligation to perform an asset retirement activity
in which the timing and (or) method of settlement are conditional on a future
event that may or may not be within the control of the entity. The obligation to
perform the asset retirement activity is unconditional even though uncertainty
F-21
PARK CITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
exists about the timing and (or) method of settlement. Accordingly, an entity is
required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be reasonably
estimated. The liability should be recognized when incurred, generally upon
acquisition, construction or development of the asset. FIN 47 is effective no
later than the end of the fiscal years ending after December 15, 2005. The
Company is in the process of evaluating the impact of FIN 47 but does not expect
the adoption to have a material impact on the financial statements.
On July 13, 2006, the Financial Accounting Standards Board issued Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement 109 (" FIN 48")", which sets forth a specific recognition threshold
and measurement method for the financial statement recognition and measurement
of a tax position taken or expected to be taken on a tax return. The effective
date of FIN 48 is for fiscal years beginning after December 15, 2006. The
Company has not completed an assessment of the impact of FIN 48 on its financial
statements.
18. Stock-Based Compensation in 2006 (unaudited)
At March 31, 2006 and 2005, the Company has outstanding stock options to certain
of its employees. The Company accounts for these options under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net loss, as all options granted had an exercise price
equal to or greater than the market value of the underlying common stock on the
date of grant. Had compensation cost for the Company's stock option plans been
determined based on fair value consistent with the provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net income (loss) and
earnings (loss) per share would have been the pro forma amounts indicated below
for the three and nine months ended March 31, 2006 and 2005:
Three Months Ended Nine Months Ended
March 31, March 31,
2006 2005 2006 2005
---- ---- ---- ----
Net Loss available to common shareholders, as
reported $ (385,791) $ (832,982) $1,424,261 $ (2,278,203)
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects - - - -
Deduct: Total stock-based employee compensation
expense determined under the fair value based
method for all awards, net of related tax effects. - - (14,325) (14,325)
----------- ----------- ---------- --------------
Net (loss) income - pro forma $ (385,791) $ (832,982) $1,409,936 $ (2,292,528)
=========== =========== ========== ==============
(Loss) income per share:
Basic - as reported $ (0.00) $ (0.00) $ 0.01 $ (0.01)
========== ========== ======== ==========
Diluted - as reported $ (0.00) $ (0.00) $ 0.00 $ (0.01)
========== ========== ======== ==========
Basic - pro forma $ (0.00) $ (0.00) $ 0.01 $ (0.01)
========== ========== ======== ==========
Diluted - pro forma $ (0.00) $ (0.00) $ 0.00 $ (0.01)
========== ========== ======== ==========
F-22
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Our Articles of Incorporation, as amended and restated, provide to the
fullest extent permitted by the General Corporation Law of the State of Nevada,
that our directors or officers shall not be personally liable to us or our
shareholders for damages for breach of such director's or officer's fiduciary
duty. The effect of this provision of our Articles of Incorporation, as amended
and restated, is to eliminate our rights and our shareholders lights (through
shareholders' derivative suits on behalf of our company) to recover damages
against a director or officer for breach of the fiduciary duty of care as a
director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Our By Laws also provide that the Board of Directors may also authorize
us to indemnify our employees or agents, and to advance the reasonable expenses
of such persons, to the same extent, following the same determinations, and upon
the same conditions as are required for the indemnification of, and advancement
of, expenses to our directors and officers. As of the date of this Registration
Statement, the Board of Directors has not extended indemnification rights to
persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers, or persons
controlling us pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended, and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution
We estimate that our expenses in connection with this registration
statement will be as follows:
Securities and Exchange Commission registration fee $ 1,500
Legal fees and expenses 35,000
Accounting fees and expenses 15,000
Miscellaneous 3,500
----------
Total $ 55,000
==========
Item 26. Recent Sales of Unregistered Securities
The Company issued shares of common stock in the following described
transactions during the last three full fiscal years.
o In August 2002, 12,566,667 shares were issued to the CEO of
the Company, two members of the Board of Directors and an
investor per antidilution agreements. This anidilution
decreased the effective price of their original investment to
$0.087
o In November 2002, 12,814,285 shares were issued to the CEO of
the Company, two members of the Board of Directors and an
investor per antidilution agreements. This antidilution
decreased the effective price of their original investment to
$0.0609
o In December 2002, as consideration for extension of payment on
the Note Payable to Riverview Financial Corporation
("Riverview"), the majority shareholder of the Company, the
Company issued 7,000,000 shares of common stock at $0.05 per
share to Riverview. The CEO of the Company is also majority
owner and CEO of Riverview.
II-1
o In December 2002 the Company obtained a $2,000,000 note
payable funding from a related party, a $250,000 advance from
Riverview and a credit facility of $200,000 from Riverview.
The Company issued 3,809,524 shares of common stock at $0.04
per share as a fee for the financing, and issued 857,143
shares of common stock at $0.02 per share to Riverview in
connection with the financing.
o In May 2003 349,901 shares of common stock were issued for
consulting services valued at $24,493.
o In June 2003 the Company issued 4,575,033 shares of common
stock to officers and members of management in lieu of cash
compensation of $228,752. These shares included 750,006 to the
CEO and 450,000 to a director in his capacity of Acting CFO.
o In June 2003 the Company issued 1,575,000 shares at $0.057 per
share in settlement of a claim arising from the Reorganization
with Amerinet Group.com, Inc. ("Amerinet") in June 2001.
o In September 2003 the Company issued 525,000 shares at $0.073
per share in settlement of a lawsuit with Debra Elenson
arising from the Reorganization with Amerinet.
o In September 2003 100,000 shares of common stock were issued
for consulting services valued at $7,300.
o In October 2003 the Company issued 1,738,680 shares of common
stock to certain directors, an officer and others in
connection with the extension of the Bridge Loan notes
payable. The 10% fee was valued at $86,933.
o In October 2003 100,000 shares of common stock were issued for
consulting services valued at $7,300.
o In October 2003 1,250,000 shares of common stock were issued
for legal fees of $37,523.
o In November 2003 1,000,000 shares of common stock were issued
for legal fees of $94,763.
o In November 2003 100,000 shares of common stock were issued
for consulting services valued at $7,300.
o In November 2003 1,000,130 shares of common stock were issued
to employees in lieu of cash compensation of $30,004.
II-2
o In November 2003 1,738,680 shares of common stock were issued
to certain directors, an officer and others in connection with
the extension of the Bridge Loan notes payable. The 10% fee
was valued at $86,933.
o In December 2003 100,000 shares of common stock were issued
for consulting services valued at $7,300.
o In December 2003 15,714,286 shares of common stock were issued
to Riverview Financial Corporation ("Riverview") for
conversion of $1,100,000 of outstanding accrued interest. A
new note was signed for the remaining accrued interest and
original principal balance.
o In January 2004 168,000 shares of common stock were issued for
consulting services valued at $6,720.
o In January 2004 100,000 shares of common stock were issued for
consulting services valued at $7,300.
o In January 2004 the Company issued 1,896,079 shares at $0.04
per share in settlement of a lawsuit with Leonard Tucker
arising from the Reorganization with Amerinet.
o In February 2004 the Company issued 562,503 shares of common
stock to the CEO in lieu of cash compensation of $29,167.
o In February 2004 100,000 shares of common stock were issued
for consulting services valued at $7,300.
o In February 2004 414,672 shares of common stock were issued to
employees in lieu of cash compensation of $25,175.
o In February 2004 1,448,891 shares of common stock were issued
to certain directors, an officer and others in connection with
the extension of the Bridge Loan notes payable. The 10% fee
was valued at $86,933.
o In February 2004 66,000 shares of common stock were issued for
consulting services valued at $3,960.
o In March 2004 116,000 shares of common stock were issued for
consulting services valued at $15,240.
o In March 2004 168,420 shares of common stock were issued to
board members in lieu of cash compensation of $16,000.
o In March 2004 86,923 shares of common stock were issued for
consulting services valued at $10,600.
o In March 2004 the Company issued 7,966,667 shares of common
stock at $0.04 to certain directors and an officer as exercise
of options. These shares included 2,000,000 to the CEO.
II-3
o In March 2004 the Company issued 1,529,917 for conversion of
two notes payable of $76,496 and $30,598 respectively.
o In March 2004 the Company issued 2,608,807 shares of common
stock to officers and members of management in lieu of cash
compensation of $120,833. These shares included 71,759 to the
CEO and 634,262 to the CFO.
o In April 2004 225,000 shares of common stock were issued for
legal fees of $19,091.
o In April 2004 66,000 shares of common stock were issued for
consulting services valued at $7,920.
o In April 2004 14,354,247 shares of common stock ($0.07 per
share) were issued to certain directors, an officer and others
in connection with the conversion of the Bridge Loan notes
payable into stock. In May 2004, 4,852,864 shares were
surrendered pursuant to the conversion agreements, which had
previously been issued October 2003, November 2003 and
February 2004 for extension of the Bridge Loan notes payable.
o In May 2004 358,694 shares of common stock were issued to
employees in lieu of cash compensation of $29,266.
o In May 2004 66,000 shares of common stock were issued for
consulting services valued at $5,940.
o In June 2004 66,000 shares of common stock were issued for
consulting services valued at $5,280.
o In June 2004 the Company issued 608,850 shares of common stock
to officers and members of management in lieu of cash
compensation of $62,500. These shares included 121,770 to the
CEO and 121,770 to the CFO.
o In June 2004 2,480,000 shares of common stock ($0.07 per
share) were issued to the CEO for extension of the Riverview
Note Payable.
o In July 2004 the Company issued 1,000,000 shares of common
stock ($0.07 per share) as consideration for extension of
payment on the Note Payable to Whale Investments.
o In August 2004 536,267 shares of common stock were issued to
employees in lieu of cash compensation of $28,150.
o In September 2004 2,438,985 shares of common stock were issued
to board members in lieu of cash compensation of $170,167.
o In November 2004 330,000 shares of common stock were issued
for consulting services valued at $19,800.
o In December 2004 225,000 shares of common stock ($0.07 per
share) were issued as consideration of extension of payment on
the Note Payable to Riverview Financial
II-4
o In December 2004 2,142,857 shares of common stock ($0.07 per
share) were issued to an officer as part of a private purchase
agreement.
o In December 2004 130,952 shares of common stock were issued to
board members in lieu of cash compensation of $9,167.
o In January 2005 2,065,000 shares of common stock ($0.08 per
share) were issued to settle lawsuit with Calvo family
interests.
o In February 2005 1,446,680 shares of common stock were issued
to management in lieu of cash compensation of $93,750.
o In February 2005 320,000 shares of common stock were issued
for consulting services valued at $16,000.
o In June 2005 2,386,113 shares were issued to employees in lieu
of cash compensation of $93,430.
o In June 2005 1,763,779 shares were issued to management in
lieu of cash compensation $76,092.
o In July 2005 66,000 shares were issued for consulting services
valued at $3,960.
o In July 2005 155,750 shares were issued per anti-dilution
agreement with the CEO. This dilution reduces the effective
price per share of the CEO's cash investments to $0.0609.
o In August 2005 134,411 shares were issued to an employee in
lieu of cash compensation of $5,376.
o In November 2005, 733,338 shares of common stock were issued
to management in lieu of cash compensation of $30,017.
o In November 2005, 525,000 shares of common stock were issued
to board member is lieu of cash compensation of $22,500.
o In January 2006, 225,000 shares of common stock ($0.07 per
share) were issued as a fee for extension of a note payable.
o In February 2006, 2,928,571 shares of common stock ($0.04 per
share) were issued due to exercise of warrants.
o In March 2006, 125,001 shares of common stock were issued to
board members in lieu of cash compensation of $7,500.
o In March 2006, 904,856 shares of common stock were issued to
management in lieu of cash compensation of $58,333.
II-5
o In March 2006, 66,234,658 shares of common stock ($0.0542 per
share) were issued for conversion of a note payable and
accrued interest of $3,473,606.
o In April 2006, 83,334 shares of common stock were issued to
board members in lieu of cash compensation of $5,000.
o In April 2006, 194,442 shares of common stock were issued to
management in lieu of cash compensation.
o In April 2006, 500,000 shares of common stock ($0.05 per
share) were issued to a member of management for the vested
portion of a signing bonus.
o In June 2006, 90,909,106 shares of common stock ($0.055) were
issued in connection with a Placement Agreement.
All of the above offerings and sales were deemed to be exempt under
Rule 506 of Regulation D and/or Section 4(s) of the Securities Act of 1933, as
amended. No advertising or general solicitation was employed in offering the
securities.
Item 27. Exhibits.
The following exhibits are filed as part of this registration
statement. Exhibit numbers correspond to the exhibit requirements of Regulation
S-B.
Exhibit Number Description
2.1 Reorganization Agreement by and Among Amerinet.com, Inc.,
Randall K. Fields and Riverview Financial Corp. (1)
2.2 First Amendment to Reorganization Agreement (1)
2.3 Second Amendment to Reorganization Agreement (1)
3.1 Article Of Incorporation(2)
3.2 Certificate Of Amendment(3)
3.3 Bylaws(2)
5.1 Opinion of Counsel
10.1 Warrant To Purchase Common Stock (4)
10.2 Form Of Securities Purchase Agreement (5)
10.3 Placement Agent Agreement (5)
10.4 Form Of Warrant, Dated June 14, 2006 (5)
10.5 Employment Agreement With William Dunlavy(6)
10.6 Software License Agreement(7)
10.7 Consulting Services Agreement(7)
10.8 Right Of First Offer Agreement(7)
10.9 Warrant To Purchase Common Stock (8)
10.10 Employment Agreement Randall K. Fields (9)
23.1 Consent of HJ & Associates, LLC
23.2 Consent of Tanner LC
23.3 Consent of Counsel
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(1) Incorporated by reference from our Form 8-K dated June 13, 2001.
(2) Incorporated by reference from our Form DEF 14C dated June 5, 2002.
(3) Incorporated by reference from our Form 10-QSB for the year ended
Sept 30, 2005.
(4) Incorporated by reference from our Form 8-K dated November 27, 2002.
(5) Incorporated by reference from our Form 8-K dated June 14, 2006.
(6) Incorporated by reference from our Form 10-KSB dated June 30, 2005.
(7) Incorporated by reference from our Form 8-K dated August 05, 2005.
(8) Incorporated by reference from our Form 8-K dated August 16, 2002.
(9) Incorporated by reference from our Form 10-QSB dated November 14, 2003.
Item 28. Undertakings.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events that,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of the
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of a prospectus filed with the Commission pursuant to Rule
424(b) under the Securities Act if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer
under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned undertakes that in a primary offering of securities
of the undersigned small business issuer pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned small business issuer
will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned small business issuer relating to the offering required to be filed
pursuant to Rule 424;
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(ii) Any free writing prospectus relating to the offering
prepared by, or on behalf of, the undersigned small business issuer or used or
referred to by the undersigned small business issuer;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about the undersigned
small business issuer or its securities provided by, or on behalf of, the
undersigned small business issuer; and
(iv) Any other communication that is an offer in the offering
made by the undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer, or controlling person of the registrant in the successful
defense of any action, suit, or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in Park City, State of
Utah on August 2, 2006.
PARK CITY GROUP, INC.
By: /s/ Randall K. Fields
-----------------------------------
Randall K. Fields
Chief Executive Officer
By: /s/ William Dunlavy
-----------------------------------
William Dunlavy
Chief Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
---------------------------- ------------------------------------ -------------
/s/ Randall K. Fields CEO and Director August 2, 2006
----------------------------
Randall K. Fields
/s/ Thomas W. Wilson Director and Compensation August 2, 2006
---------------------------- Committee Chair
Thomas W. Wilson
/s/ Edward C. Dmytryk Director and Audit Committee Chair August 2, 2006
----------------------------
Edward C. Dmytryk
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