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As filed with the Securities and Exchange Commission on August 12, 1996.
File No. 0-26626
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A-1
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
UNDER 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
KNOWLEDGEBROKER, INC.
(Name of Small Business Issuer in its charter)
NEVADA 84-0856578
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13295 MIRA LOMA ROAD, RENO, NEVADA 89511
(Address of Principal Executive Offices)
Issuer's telephone number: (702) 852-5711
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
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ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
General
Overthrust Oil Royalty Corporation (the "Company") was originally
incorporated in Colorado on June 11, 1981. The Company was organized primarily
to acquire producing and non-producing overriding royalty interests and working
interests in oil and gas properties and to organize, sell and manage limited
partnerships formed for the purpose of acquiring such interests. The Company
became a public company in April 1982 through a registered public offering of
its common stock (the "Common Stock").
The Company had acquired working interests in active drilling or
exploration areas. The Company explored for, produced and sold oil and natural
gas. The Company's exploration and development efforts had been conducted for
the most part in drilling prospects originated by others in the industry. The
Company typically entered into arrangements with industry partners in which it
would retain less than 100% of the working interest in these prospects.
However, the Company was unable to establish consistent oil and gas production.
The Company had also acquired working and overriding royalty interests
under nonproducing leases or inactive exploration areas where the Company
believed it was likely that exploration activity would take place in the near
future. However, due to unfavorable market conditions, many of such leases were
canceled for nonpayment of delay rentals. Delay rentals are annual payments by
the lessee to a lessor under a oil and gas lease to defer its obligation to
drill a well during the primary term of such lease. If the lessee fails to
make timely payments of the delay rentals, the lease expires.
The Chapter 11 Filing
On January 21, 1986, the Company filed a voluntary petition of
bankruptcy pursuant to Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the District of Utah (the "Court"). Roger H. Nelson was
appointed as Trustee on March 12, 1987. On December 20, 1993, the Court
confirmed the Trustee's Plan of Reorganization for the Company (the "Plan of
Reorganization").
The Plan of Reorganization
Halter Capital Corporation, a Texas corporation ("HCC") acquired
2,219,905 shares, or approximately 90% of the issued and outstanding Common
Stock (this number reflects the one for 600 reverse split of the Common Stock
discussed below), pursuant to a letter agreement between the Trustee and HCC.
As consideration for such Common Stock, HCC paid to the Trustee $70,000 and
agreed that it would place a minimum of $1,000,000 in net assets in the
reorganized Company. It was the understanding of HCC and the Trustee that HCC
would fulfill its obligation to place such assets in the Company by causing the
Company to acquire a viable business enterprise. In the alternative, HCC could
place $1,000,000 of assets in the Company pending such an acquisition. The
$70,000 was used by the Trustee for the payment of certain administrative and
priority claims. All cash assets or receivables of the Company as of the
eleventh day following the date the Court entered the order confirming the Plan
of Reorganization (the "Effective Date") remained property of the reorganized
Company for use by the Trustee in payment of certain administrative and
priority claims. The remaining assets were six working interests in oil and gas
properties in Weld County, Colorado, and certain oil and gas leases and
overriding royalties owned by the Company. Effective May 1, 1994, the Company
transferred such assets to Hunter Resources, Inc.
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Terms of Transaction with Hunter Resources, Inc.
Due to the fact that the business purpose of the Company was to enter
into an acquisition or merger transaction with a business with significant
growth potential, whereby its shareholders would benefit by owning an interest
in a viable business enterprise, the Company needed to sell any properties it
may have owned. Based on the experience of management that any potential
acquisition or merger candidate would require that there be no illiquid assets
in the Company prior to the transaction, the Company sought a buyer for its few
remaining assets. The Company entered into a purchase and sale agreement with
Hunter Resources, Inc., a Pennsylvania corporation ("Hunter") whereby Hunter
acquired all of the Company's right, title and interest in the six working
interests in oil and gas properties in Weld County, Colorado, and certain oil
and gas leases and overriding royalties in consideration of $20,000. This
transaction was not subject to review or approval by the Court.
A one for 600 reverse split was effected with respect to the
44,398,100 shares of Common Stock outstanding as of the Effective Date. Certain
of the Company's creditors received a pro rata share of 129,494 post-reverse
split shares of Common Stock.
While awaiting an acquisition of a viable business enterprise, HCC
placed in the Company marketable securities having an aggregate market value of
$1,000,000 and satisfied its obligations under the Plan of Reorganization. On
February 15, 1995, the Court entered its final order discharging the Company.
In connection with the acquisition of KnowledgeBroker, Inc. ("KBI")
discussed below, HCC caused the Company to re-acquire the 2,219,905 shares of
Common Stock in exchange for the return of the marketable securities having an
aggregate market value of $1,000,000. After the completion of this transaction,
HCC had no continuing obligation to contribute assets as well as no equity
interest. The Company had no significant assets or business operations at that
time.
Reincorporation in Nevada
Simultaneously with the acquisition of KBI, the Company was
reincorporated as a Nevada corporation by means of a merger of the Company with
and into a newly-formed Nevada corporation, KBI Acquisition, Inc., on April 28,
1995. The reincorporation had the effect of a two for one reverse split in the
Company's Common Stock. The Company is now known as KnowledgeBroker, Inc.
Acquisition of KnowledgeBroker, Inc.
Prior to the acquisition of KBI, the business purpose of the Company
was to enter into an acquisition or merger transaction with a business with
significant growth potential, whereby its shareholders would benefit by owning
an interest in a viable business enterprise. Since the Company had no business
operations, its principal potential for profits came solely from operations it
would receive in an acquisition or merger transaction. Because the Company is
a publicly held corporation with a dispersed shareholder base, a transaction
with the Company would enable a privately held entity to become a publicly held
corporation.
The Company located such a candidate, KBI, a privately held company
that was incorporated in California on March 27, 1992. The Company entered into
a stock exchange agreement by and among the Company, KBI and certain
shareholders of KBI whereby the Company acquired approximately 90% of the
issued and outstanding common stock of KBI in exchange for an aggregate of
8,536,958 shares of Common Stock. On May 23, 1995, KBI was subsequently merged
with and into the Company. The former shareholders
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of KBI received 5.64 shares of the Company's common stock for each share of
common stock of KBI owned. After the consummation of the merger, the former
KBI shareholders owned 95.84% of the Company's common stock and the balance is
owned by the remaining shareholders.
RESTRICTIONS ON SHARES HELD BY FORMER SHAREHOLDERS OF KBI
All of the shares of the Company's common stock owned by the former
shareholders of KBI are "restricted securities" and under certain circumstances
may in the future be sold only in compliance with Rule 144 adopted under the
Securities Act of 1933, as amended. Rule 144 provides, among other things,
that persons holding restricted securities for a period of two years may each
sell in brokerage transactions every three months an amount equal to 1% of the
Company' outstanding shares or the weekly reported volume of trading during the
four calendar weeks preceding the filing of a notice of proposed sale,
whichever is greater. All of the shares held by former KBI shareholders are
not eligible for resale pursuant to Rule 144 until May 23, 1997. No prediction
can be made as to the effect, if any, that sales of such shares or the
availability of such shares for sale will have on the Company's market prices
prevailing from time to time. Nevertheless, the possibility that substantial
amounts of common stock may be sold in the public market may adversely affect
prevailing market prices for the Company's shares and could also impair the
Company's ability to raise capital through the sale of its equity securities.
DESCRIPTION OF THE COMPANY'S CURRENT BUSINESS
The following description will refer to the Company's business after
its acquisition of KBI and the subsequent merger of KBI with and into the
Company. Except where otherwise indicated, all references to share amounts of
Common Stock reflect the one for 600 reverse split effected pursuant to the
Plan of Reorganization and the effective reverse split resulting from the
reincorporation.
The Company is a supplier of knowledge distribution service and
technology and provides a full range of technical computer support products and
services to large corporate workplaces, small businesses and individual users.
The Company operates HelpNet 800/900 Service ("HelpNet 800/900"), a live,
24-hour multi-vendor technical computer support bureau. In addition, the
Company uses the problem resolution information it receives from the HelpNet
800/900 calls to develop and continuously update its own ASK.ME Pro proprietary
support products. These products include KnowledgeBases, high performance,
prepackaged "plug and play" problem resolution information formatted as an add
on for the leading expert support systems used by in-house support centers,
ASK.ME Pro, which are advanced problem resolution software programs for support
operations, ASK.ME HelpBases, which are Windows-based problem resolution
software programs for end users and support personnel, and HelpTrak, which is a
call tracking and problem management system.
HelpNet 800/900 Service
HelpNet 800/900 is a live, 24-hour multi-vendor technical computer
support bureau that solves PC and Macintosh software and hardware problems 365
days a year. The Company's trained experts are supported by the Company's own
ASK.ME Pro automated support system. This system contains proprietary,
problem-solving information which has been developed through handling over
500,000 support calls. The Company's experts help customers recover from error
conditions, answer questions about usage, diagnose problems and guide users
through solutions. 90% of all calls received by the Company are resolved in one
phone call, and 95% of such calls are resolved the same day. When more
information is needed, a specialist will call the customer back within two
hours. The Company tracks each call and provides detailed reports to help
customers manage their operations. HelpNet 800/900 is available to corporations
and businesses of all sizes and individual users on a contract, subscription or
single call basis. The Company is also exploring the possibility of making
HelpNet 800/900 available over the Internet in response to numerous customer
requests.
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Support Products
The Company develops and distributes the following support products.
o KnowledgeBases contain high performance, prepackaged "plug and play"
problem resolution information formatted to run with the expert
systems used by in-house support centers. The Company believes that
as sales for the expert systems increase, the demand for
KnowledgeBases will increase. KnowledgeBases contain immediate
solutions to thousands of common problems experienced by users of
popular word processing programs, databases, spreadsheets, operating
systems, graphics and communication packages. KnowledgeBases are
currently available for over 35 leading programs. Customers update and
improve the content of KnowledgeBases through a subscription service.
o ASK.ME Pro is a line of stand-alone Windows-based advanced problem
resolution software programs for support desks. ASK.ME Pro software
combines problem resolution information or "knowledge" with a
retrieval engine. Users begin a full text "intelligent search" by
entering a problem, or query, in their own words. Support desk staff
answer questions and solve problems prompted by the graphic, step by
step information that appears on the screen.
The HelpHunter feature adds another dimension to the search by giving
users focused access to all help and proprietary support files on the
system. Using up to ten words supplied in the original query,
HelpHunter searches these files for all related information. Other
ASK.ME Pro features include a built-in glossary with hundreds of
technical terms, book marks and options to send solutions by facsimile
and E-Mail.
ASK.ME Pro also allows support staff to capture unresolved problems.
These problems, along with related detailed information, are saved in
a network compatible data file that can then be reviewed by other
members of the help desk staff, resolved, and fed back into the
KnowledgeBase for use by the entire support staff. The Company also
reviews and resolves problems and updates ASK.ME Pro on a regular
basis by subscription.
o ASK.ME HelpBases are Windows-based problem resolution software
support programs. ASK.ME HelpBases' on-screen support allows
individuals and support personnel to resolve many of their problems
without outside help. ASK.ME HelpBases have a built-in glossary,
advanced search features and HelpHunter, which allows the user to
search all help and proprietary support files directly. ASK.ME
HelpBases resolve questions with graphic, step-by-step information
which can be printed, bookmarked or sent by facsimile or E-Mail.
ASK.ME HelpBases have low memory requirements and are self-installing.
In addition, they are available for most leading software programs and
hardware and operating systems.
o HelpTrak is a function Windows-based call tracking and problem
management system. Designed for maximum throughput, HelpTrak records
and tracks customer information and problem solution statements for
every incoming call on one screen. HelpTrak can be fully customized
and has many administrative features. Archiving, dispatch and
standard reporting are built into each system. In addition,
information can be added, changed or deleted in several pop-up and
pull-down menus. New fields are immediately available without
reindexing. HelpTrak can also be easily linked to ASK.ME HelpBases and
other problem resolution tools.
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Marketing and Distribution
The Company markets HelpNet 800/900 to large corporate workplaces,
small businesses and individual users. The Company markets its support products
to corporations with customer support divisions, software and hardware OEMs and
end users across all business segments.
In addition, the Company has begun to distribute its support products
to the retail market. During 1995, the Company added over 30 Value Added
Resellers (VAR's) representing KBI's software product and services to the
market. These include companies such as IBM and AT&T. The Company uses sales
personnel and also makes various arrangements with outside parties to market
and distribute HelpNet 800/900 and its support products. The Company is also
currently exploring additional retail opportunities through the Internet and
other on-line services, although the Company has no commitments regarding such
opportunities at the present time.
Customers
For the fiscal year ended December 31, 1995, no single customer
accounted for greater than 10% of revenues. For the fiscal year ended December
31, 1994, AST Research, Inc. and ACER America Corporation accounted for
approximately 68% and 14%, respectively, of the Company's total sales. For the
three months ended March 31, 1996, MCI Telecommunications accounted for
approximately 40% of the Company's total sales. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Competition
The Company believes that its principal competitor with respect to its
KnowledgeBase support products is ServiceWare Corporation, in addition to
several less significant competitors. The Company believes that its
competition for HelpNet 800/900 is fragmented and consists of various small
competitors. With respect to its ASK.ME HelpBases, the Company believes its
most direct competition consists of various printed instructional manuals.
Certain of the Company's competitors may have greater financial
resources and more effective marketing and sales methods than the Company. The
Company believes it competes effectively by using the system of developing
proprietary, problem-solving information through handling over 500,000 HelpNet
800/900 support calls. In addition to improving the quality of such
information, the Company believes that this efficient process allows it to
price its products competitively and to anticipate new markets and distribution
channels for its products.
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Employees
As of March 31, 1996, the Company had a total of approximately 53
employees . None of the employees are represented by a labor union. The
Company believes that it has good relations with its employees .
Intellectual Property
The Company does not currently hold any patents, trademarks or
licenses.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The term the "Company," as used in this section, includes KBI prior to
its transaction with the Company. Overthrust Oil Royalty Corporation had no
operations during the year ended December 31, 1994 and through the date of the
transaction with KnowledgeBroker, Inc. The Company began operations in mid
1992.
The Company has experienced significant percentage and real growth in
revenues since its inception although the Company did experience a decline in
revenue and net income from 1994 to 1995. There can be no assurance that the
Company will continue to grow at the same rate and that the same level of net
income relative to revenues will continue to be generated in the future. The
Company's limited operating history makes the prediction of future operating
results difficult or impossible. Future operating results will depend on many
factors, including the demand for the Company's services and products,
competitive pressures including price competition, technological advancements
and the ability to contain and properly manage costs.
Management believes that the Company will continue to expand through
internal growth, the acquisition of related businesses and general growth in
the overall market in future years.
All significant costs incurred for product design and development from
the point that technological feasibility is determined up to the point that the
product is available to be sold, leased or otherwise marketed are capitalized
and are amortized over the estimated useful life of the technology. Costs for
product maintenance, including conversions to different operating systems and
customer support, are charged to expense as incurred.
RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION
The following table sets forth summary financial information as of
dates and for the periods indicated. The financial information as of and for
the years ended December 31, 1995 and 1994 were derived from the Company's
audited financial statements. Effective April 1, 1994, the Company terminated
its S corporation election. The resulting proforma summary financial
information adjusts actual results to present the Company as if it had been a C
corporation for the full year ended 1994. The financial information as of and
for the three months ended March 31, 1996 and 1995 is unaudited. The
following information should be read in conjunction with the Company's audited
financial statements and notes thereto presented elsewhere herein.
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<TABLE>
<CAPTION>
Pro forma (1) Pro forma (1) Three
For the For the Three months months ended
year ended year ended ended March 31, March 31,
Operating Data December 31, 1994 December 31, 1995 1995 1996
- -------------- ------------------ ----------------- ------------ ---------
(in thousands) (in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenues:
Support desk services $ 2,271 $ 940 $ 460 $ 369
Software sales 281 1,027 37 258
2,552 1,967 497 627
*1 Direct personnel cost of
support desk services
and software sales 806 576 134 166
Operating expenses:
Selling, general,
administrative, inclu.
deprec. & amort. 1,146 1,981 282 322
Net income (loss) 396 (70) 55 111
* 1 moved from here; text not shown.
Net income (loss)
per common share 0.09 (0.01) 0.01 0.01
</TABLE>
<TABLE>
<CAPTION>
At
Balance Sheet Data December 31, 1994 December 31, 1995 March 31, 1995 March 31, 1996
- ------------------ ----------------- ----------------- -------------- --------------
(in thousands) (in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C>
Accounts receivable, net $ 400 $ 375 $ 377 $ 513
Cash and cash equivalents 329 132 84 61
Total assets 962 1291 697 1,295
Current liabilities 594 738 247 568
Total liabilities 608 738 288 568
Shareholders' equity 354 553 432 1,295
</TABLE>
(1) Includes pro forma income tax effect of treating the Company as a
C corporation for 1994 and the effect of the merger of KBI and Overthrust and
resulting recapitalization effect on net income (loss) per common share.
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REVENUES
Total revenues decreased from $2,552,000 during 1994 to $1,967,000
during 1995. The components comprising revenues changed significantly with
software sales comprising 52% of total revenues in 1995 as compared to 11% of
total revenues in 1994.
During 1995, much of the Company's management time and attention
focused on its merger and shift to a public company status, with a resultant
negative impact on revenues. Software sales however continued to grow in
accordance with managements plans to continue to pursue the support product
portion of the business. Management was able to renew its focus on day to day
operations in the fourth quarter of 1995 and anticipates improved sales of
support services as well as continued growth in software sales in 1996.
Total revenues increased from approximately $497,000 for the three
months ended March 31, 1995 to approximately $627,000 for the three months
ended March 31, 1996, representing a 26% increase over 1995. This increase in
revenue reflects the Company's rising software sales, offset by the decrease in
support desk service revenues. The increase in software sales is the result of
management's aggressive expansion efforts in product sales. The decrease in
support desk services is largely the result of the loss of a significant client
in early 1995. This client accounted for approximately 66% of revenue during
the four months ended April 30, 1995, and at that time made the decision to
take the support desk function in-house.
The Company intends to continue to add clients, and diversify as
necessary to reduce the impact and importance of significant clients. This
process includes proposals to potential customers and increased marketing
efforts. Currently all of the Company's clients are serviced in the United
States. Support desk service contracts are typically entered into on a month
to month basis. The Company anticipates expanding in the near term into
international markets. The Company intends on entering into these markets
through acquisition to be financed through equity and cash, or through the use
of commissioned agents and/or joint ventures. Management believes that support
desk services will continue in the medium term as the more significant portion
of the business although management intends to continue its efforts to expand
the product sales portion of the business as well.
OPERATING EXPENSES
Total operating expenses increased from $1,146,000 during 1994 to
$1,981,000 during 1995. A significant portion of the increase results from
expenditures which are considered to be non-recurring type items which include
$366,000 incurred in connection with a litigation settlement. Additionally,
$223,000 of the provision for doubtful accounts relates primarily to allowances
on two receivable balances currently in dispute. The Company has reserved for
these receivable balances but is actively pursuing collection of these amounts.
Direct personnel cost of support desk services as a percentage of
support desk services revenue for the years ended 1995 and 1994 are 61% and
36%, respectively. The increase in cost as a percentage of revenues results
primarily from up front costs incurred in connection with one significant
account and the lag time in reducing personnel as revenues decreased.
Selling, general and administrative expenses during 1995 increased by
approximately 23% over 1994. This increase relates in part to an increase in
marketing, legal and professional expenses due to the Company's continuing
efforts to improve its infrastructure and thereby appropriately position itself
for future growth. Specifically, legal and professional fees increased from
$53,000 in 1994 to $97,000 in 1995, an increase of 83%. In addition,
commission expenses have increased over the prior year due to an improved sales
incentive program. Salaries and related expenses continue to be the major
component of operating expenses, representing approximately 46% and 64% of
total operating expenses during 1995 and 1994, respectively. The decline in
salaries as a percentage of operating expenses results from the larger
component of software sales which is not as personnel intensive as the support
desk service portion of the business.
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As a result of the repositioning of the Company's non-recurring
expenses, and other items discussed above, the Company incurred a loss before
income taxes of $583,000 in 1995 as compared to a profit of $599,000 before
income taxes in 1994. After adding back the litigation settlement and related
expenses and the provision for doubtful accounts (as described above), the
Company generated a small profit before income taxes during 1995. During 1994
and 1995, the Company generated combined revenues and net income (using
proforma net income for 1994) of $4,519,000 and $325,000, respectively.
Direct personnel cost of support desk services as a percentage of
support desk services revenue for the three months ended March 31, 1996 and
1995 are 45% and 29%, respectively. This increase in cost as a percentage of
revenues results primarily from up front costs incurred in connection with one
significant account added in 1996. These costs are expected to sustain a more
constant rate as the level of service demand which drives revenues also impacts
the number of personnel and related hours and compensation required to support
the service provided. Selling, general, and administrative expenses increased
by approximately 14% for the quarter March 31, 1996 over the quarter ended
March 31, 1995. Salaries and related expenses continue to be the major
component of direct costs and selling, general, and administrative costs
representing approximately 48% and 62% of total costs and expenses during the
three months ended March 31, 1996 and 1995, respectively.
PROVISION FOR INCOME TAXES
As previously discussed, the Company terminated its S Corporation
election effective April 1, 1994. Accordingly, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". The cumulative effective of adopting Statement No. 109 was
not material. The financial information presented earlier includes the effect
of accounting for income taxes under the provisions of Statement No. 109. The
income tax rate for each of the periods presented other than for the year ended
December 31, 1995 approximates 34% as there are no significant permanent
differences for financial income tax reporting and Federal income tax reporting
purposes. During 1995, the income tax rate was approximately 88% which results
primarily from compensation expense deductions for Federal income tax purposes
for the difference between the market value and exercise price of stock options
exercised during 1995. This amount is not charged to operations for financial
reporting purposes. For the quarter ended March 31, 1996, the Company utilized
the benefit of net operating losses previously generated.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily
through capital contributions and subsequently through cash generated from
operating activities exercise of stock options and warrants granted and the
issuance of common stock for cash. The Company used cash in operations during
1995 of $98,000. The Company generated net cash from operations of $292,000
during 1994.
During 1995, trade receivables, net of increases in the allowance for
doubtful accounts, did not change significantly. In addition, the Company
generated an income tax receivable of $168,000 resulting from the carryback of
net operating losses. This increase was offset by increases in accounts
payable and other current liabilities. Accounts payable and accrued expenses
increased significantly from December 31, 1994 to December 31, 1995 due
primarily to the timing of payment of outstanding invoices and the accrual of a
litigation settlement including legal expenses of $366,000, offset partially by
the payment of income taxes and a decrease in the cash overdraft position.
Days sales in accounts receivable at December 31, 1995 and 1994 amounted to 114
and 57, respectively. Through March 31, 1996, the Company had collected
approximately 52% of net accounts receivable outstanding at December 31, 1995.
The Company does not currently anticipate that it will experience significant
problems in collecting substantially all of the unreserved accounts receivable
outstanding at December 31, 1995. The Company does business with financially
stable credit worthy customers and believes that additional customers added in
the future will not significantly affect collectability of accounts receivable.
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During 1995 and 1994, the Company used $29,000 and $131,000,
respectively in its investing activities. The 1995 expenditures were for
property and equipment. During 1994, the Company used $81,000 for purchases of
property, equipment and software, and $50,000 for the purchase of marketable
securities. The Company expects to continue to purchase property, equipment
and software as it continues to grow. These additions will be funded by
operations, bank financing, collection of notes receivable, and/or sales of
common stock. The Company's principal commitments consist of its operating
facility lease and other office equipment leases.
The Company used and generated cash from financing activities of
$70,000 and $52,000, during 1995 and 1994, respectively. The cash generated in
1995 resulted from the sale of common stock amounting to $135,000 and the
increase in the line of credit of $30,000. The cash generated in 1994 resulted
from the increase in its cash overdraft. The Company used $7,000 and $23,000
for payments on long-term debt and shareholder loans during 1995 and 1994,
respectively. In addition, during 1995, the Company used $157,000 to reduce
its cash overdraft position and purchased treasury stock for $49,000 in 1994.
The Company expects to collect during 1996 the $788,995 in notes receivable
related to the options exercised at the end of 1995.
The Company used cash in its operations of $99,000 and $81,000 during
the three months ended March 31, 1996 and 1995, respectively. The use of cash
resulted from net income generated offset primarily by increases in trade
accounts receivable and payments of accounts payable and accrued liabilities
for the three months ended March 31, 1996, and payment of income taxes for the
three months ended March 31, 1995. Accounts receivable increased significantly
from December 31, 1995 to March 31, 1996, corresponding to increases in sales
to a significant customer. Accounts payable declined significantly from
December 31, 1995 to March 31, 1996 due primarily to payment of up front costs
incurred for a significant new customer. Days sales in accounts receivable at
March 31, 1996 and 1995 amounted to 74 and 68, respectively. The Company does
not currently anticipate that it will experience significant problems in
collecting substantially all of the accounts receivable outstanding at March
31, 1996. The Company believes that additional customers added in the future
will not significantly affect collections of accounts receivable.
The Company used cash for investing activities during the three months
ended March 31, 1996 and 1995 amounting to $16,222 and $5,753, respectively, to
acquire equipment and software. The Company's principal commitments consist of
its operating facility lease and other office equipment leases.
The Company generated cash from financial activities of $43,790 during
the quarter ended March 31, 1996 from the issuance of stock through stock
options and warrants exercised. The Company used cash of $156,977 during the
quarter ended March 31, 1995 to reduce the cash overdraft. The Company used
$30,000 and $960 for payments on long-term debt and lines of credit during the
three months ended March 31, 1996 and 1995, respectively.
The Company established a line of credit with a maximum facility of
$150,000. As of March 31, 1996 the full amount was available. The Company is
also in the process of raising capital through the issuance of common shares in
connection with the exercise of stock option previously granted by the Company.
ACCOUNTING STANDARDS NOT YET ADOPTED
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS 123"), was issued. This
statement requires the fair value of stock options and other stock-based
compensation issued to employees to either be included as compensation expense
in the income statement, or the pro forma effect on net income and earnings per
share of such compensation expense to be disclosed in the footnotes to the
Company's financial statements commencing with the Company's 1996 fiscal year.
The Company expects to adopt SFAS 123 on a disclosure basis only. As such,
implementation of SFAS 123 is not expected to impact the Company's balance
sheet or statement of operations.
GENERAL
At present, the Company's business is not seasonal. As the
Company continues to grow into retail,
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seasonality of business may begin to impact the Company.
During the year ended 1994, the Company purchased 187,032 shares of
its stock for $49,145. All of these shares were purchased from one shareholder
in connection with a single transaction. The Company does not expect to
continue to purchase large amounts of shares back into treasury.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's main operating facility is located in Irving, Texas.
The Irving facility covers approximately 3,400 square feet and the monthly rent
is $1,360. The lease commenced October 1, 1995 and is for a term of five
years. The Company's principal executive offices are located in Reno, Nevada
and it also has operations in San Jose and Irvine, California. ITEM 4.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31,
1995 with regard to the beneficial ownership of Common Stock by (I) each person
known to the Company to be the beneficial owner of 5% or more of its
outstanding Common Stock, (ii) by the officers, directors and key employees of
the Company individually, and (iii) by the officers and directors as a group.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES OWNED PERCENT
---- ---------------------- -------
<S> <C> <C>
Brad Stanley 7,149,562(1) 76(2)
13295 Mira Loma Road
Reno, Nevada 89511
James T. Alexander 1,487,396(1) 16(2)
31922 Paseo Cielo
San Juan Capistrano,
California 92675
Directors and executive
officers as a group (2 8,636,958 92(2)
persons)
</TABLE>
(1) This number includes an option to acquire 50,000 shares of Common
Stock which is exercisable within 60 days.
(2) This percentage assumes that the total number of shares of Common
Stock outstanding includes options to acquire an aggregate of 607,750 shares
of Common Stock which are exercisable within 60 days.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS
The following table sets forth certain information about the directors
and executive officers of the Company. All directors of the Company hold
office until the next annual meeting of shareholders or until their successors
have been elected and qualified. Executive officers of the Company are elected
by the Board of Directors to hold office until their respective successors are
elected and qualified.
12
<PAGE> 13
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Brad Stanley 45 President, Chief Financial Officer,
Secretary and Director
James T. Alexander 40 Executive Vice President, Assistant
Secretary and Director
</TABLE>
Set forth below is a description of the backgrounds of the executive
officers and directors of the Company.
Brad Stanley has served as the President, Chief Financial Officer,
Secretary and director of the Company since the transaction with KBI in April
1995. Prior to such transaction, Mr. Stanley had served as the President,
Chief Executive Officer and director of KBI since May 1992, and as Chairman of
the Board since October 1992. Mr. Stanley was also involved in the development
of the predecessor business of KBI before its incorporation. Prior to founding
KBI, Mr. Stanley was involved in building knowledge distribution technologies
while employed in several positions by GTE for over ten years, where he worked
closely with support desks and expert systems to continually refine support
technology. Mr. Stanley was selected to head the GTE TELOPS National Advanced
Technology Group. Before his involvement with the National Advanced Technology
Group, Mr. Stanley was employed by GTE in various other capacities, including
computer programming and systems analysis, where his responsibilities included
developing organizational structures, products and services for start-up and
other organizations.
James T. Alexander has served as the Executive Vice President,
Assistant Secretary and director of the Company since the transaction with KBI
in April 1995. Prior to such transaction, Mr. Alexander had served as the
Executive Vice President and director of KBI since May 1992. Prior to the
incorporation of KBI, Mr. Alexander was involved in the development of the
predecessor business of KBI. Mr. Alexander also served as West Coast Manager
of Sales for Softool Corporation from 1989 to 1990, as Southwest Regional Sales
Manager for Inference Corporation from 1986 to 1989 and as Account Manager for
Candle Corporation from 1982 to 1986.
The Company's Bylaws provide that directors may be receive
compensation for their services and reimbursement for their expenses as the
Board of Directors may establish by resolution.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation paid
by KBI to its President and Executive Vice President for the fiscal years ended
December 31, 1995, 1994 and 1993. No other officers or directors received
cash or non-cash compensation in excess of $100,000 for the fiscal years ended
December 31, 1995, 1994 and 1993.
13
<PAGE> 14
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
Awards Payouts
------ -------
ANNUAL COMPENSATION
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other
and Annual Restricted
Principal Compen- Stock Options/ LTIP All Other
Position Year Salary Bonus sation Awards SARs(#) Payouts Compensation
- --------------------------------------------------------------------------------
<S> <C> <C>
Brad Stanley 1995 118,750 (1)
---
President 1994 149,610 (2)
---
1993 99,829 (3)
---
James T. Alexander 1994 $120,110(4)
---
Executive Vice President 1993 37,449(5)
---
</TABLE>
(1) Includes an amount of $58,750 accrued but not paid as of
December 31, 1995.
(2) This amount includes 335,008 shares of common stock of KBI
which had a fair market value of $33,108 at the time of the issuance.
(3) This amount consists solely of 534,809 shares of common stock of
KBI which had a fair market value of $99,829 at the time of the issuance.
(4) This amount consists solely of 111,550 shares of common stock of
KBI which had a fair market value of $21,719 at the time of the issuance.
(5) This amount includes 53,710 shares of common stock of KBI which
had a fair market value of $20,549 at the time of the issuance.
The Company has entered into an employment letter with Mr. Stanley
which provides for an annual salary commencing on April 28, 1995 of $125,000
for the first year, $140,000 for the second year, $150,000 for the third year
and thereafter as may be agreed by the Company and Mr. Stanley. The employment
letter also provides that Mr. Stanley will be entitled to receive a cash bonus
in accordance with a specified formula and to receive options to purchase
shares of Common Stock as the Board of Directors may determine from time to
time. The employment letter also provides that the Company will furnish Mr.
Stanley with an automobile and pay all gas and maintenance on such automobile.
The employment letter may be terminated at any time for any reason by the
Company or Mr. Stanley by giving 14 days advance notice. The employment letter
will terminate upon Mr. Stanley's death or disability, or if the Company
terminates Mr. Stanley for just cause.
14
<PAGE> 15
1995 STOCK COMPENSATION PLAN
As a performance incentive and in order to encourage ownership of
Common Stock, the Company has adopted its 1995 Stock Compensation Plan (the
"Plan"). 900,000 shares of Common Stock have been reserved for issuance under
the Plan pursuant to the exercise of options or the grant of restricted stock
awards. As of August 7, 1995, the Company had granted options to acquire an
aggregate of 607,750 shares of Common Stock, none of which had been exercised.
Unless extended or earlier terminated, the Plan will terminate on the day prior
to the tenth anniversary of its effective date. The Plan is intended to
qualify for favorable treatment under Section 16 of the Securities Exchange Act
of 1934, as amended, pursuant to Rule 16b-3 promulgated thereunder ("Rule
16b-3").
The Plan provides for the grant of "incentive stock options," as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), nonqualified stock options and restricted stock awards (collectively
referred to as "Awards"). The Plan will be administered by a committee of the
Board of Directors (the "Committee"), which will consist of two or more
directors of the Company who are deemed "disinterested" within the meaning of
Rule 16b-3. The Committee has, subject to the terms of the Plan, the sole
authority to grant Awards under the Plan (other than to members of the
Committee), to construe and interpret the Plan and to make all other
determinations and take any and all actions necessary or advisable for the
administration of the Plan. All of the Company's employees, the members of the
Committee and advisors are eligible to receive Awards under the Plan, but only
employees of the Company are eligible to receive incentive stock options.
Options will be exercisable during the period specified in each option
agreement and will be exercisable in accordance with a vesting schedule to be
designated by the Committee. Restricted stock awards will give the recipient
the right to receive a specified number of shares of Common Stock contingent
upon remaining a Company employee for a specified period, as determined by the
Committee. Notwithstanding the provisions of any option agreement or restricted
stock agreement, options will become immediately exercisable and all
restrictions will immediately lapse with respect to any award of restricted
stock in the event of a change or threatened change in control of the Company
and in the event of certain mergers and reorganizations of the Company. No
option will remain exercisable later than ten years after the date of grant.
In addition, options may be subject to early termination within a designated
period following the optionee's cessation of service with the Company.
The aggregate fair market value of Common Stock with respect to which
incentive stock options are exercisable for the first time by any individual
during any calendar year may not exceed $100,000. The exercise price for
incentive stock options granted under the Plan may be no less than the fair
market value of the Common Stock on the date of grant (or 110% in the case of
incentive stock options granted to employees owning more than 10% of the Common
Stock). The exercise price for nonqualified stock options granted under the
Plan will be in the discretion of the Committee.
The exercise price for any option may be paid (I) in cash, (ii) by
certified or cashier's check, (iii) if permitted by the Committee, in shares of
Common Stock valued at the then fair market value thereof, (iv) if permitted by
the Committee, by cash or certified or cashier's check for the par value of the
shares plus a promissory note for the balance of the purchase price, which note
must provide for full personal liability of the maker and will contain such
terms and provisions as the Committee may approve, including without limitation
the right to repay the note partially or wholly with Common Stock, (v) by
delivery of a copy of irrevocable instructions from the participant to a broker
or dealer, reasonably acceptable to the Company, to sell certain of the shares
purchased upon exercise of the option or to pledge them as collateral for a
loan and
15
<PAGE> 16
promptly deliver to the Company the amount of sale or loan proceeds necessary
to pay such purchase price or (vi) in any other form of valid consideration, as
permitted by the Committee in its discretion.
The Plan provides that, immediately and automatically upon his initial
election or appointment to the Board of Directors, each non-employee director
will receive a nonqualified stock option to purchase 5,000 shares of Common
Stock. In addition, each non-employee director will receive a nonqualified
stock option to purchase 1,000 shares of Common Stock on the date of each
annual meeting of stockholders of the Company subsequent to his initial
election as a director by the stockholders of the Company. Each such option
(I) entitles the non-employee director to purchase shares of Common Stock at an
exercise price equal to the fair market value of the Common Stock on the date
of grant, (ii) is immediately exercisable and (iii) will have a term of ten
years. Except for such automatic grants, non-employee directors will not be
eligible to receive Awards under the Plan.
Summary of Certain Federal Income Tax Consequences Relating to
Incentive Stock Options
No taxable income is realized by a participant and no tax deduction is
available to the Company upon either the grant or exercise of an incentive
stock option. If a participant holds the shares acquired upon the exercise of
an incentive stock option for more than one year after the issuance of the
shares upon exercise of the incentive stock option and more than two years
after the date of the grant of the incentive stock option (the "holding
period"), the difference between the exercise price and the amount realized
upon the sale of the shares will be treated as a long-term capital gain or loss
and no deduction will be available to the Company. If the shares are
transferred before the expiration of the holding period, the participant will
realize ordinary income and the Company will be entitled to a deduction on the
portion of the gain, if any, equal to the difference between the incentive
stock option exercise price and the fair market value of the shares on the date
of exercise or, if less, the difference between the amount realized on the
disposition and the adjusted basis of the stock; provided however, that the
deduction will not be allowed if such amount exceeds the annual one million
dollar limitation on the deduction that an employer may claim for compensation
of certain executives pursuant to Section 162(m) of the Code (the "Deduction
Limitation") and does not satisfy an exception to the Deduction Limitation.
Any further gain or loss from an arm's-length sale or exchange will be taxable
as a long- term or short-term capital gain or loss depending upon the holding
period before disposition. Certain special rules apply if an incentive stock
option is exercised by tendering stock.
The difference between the incentive stock option exercise price and
the fair market value, at the time of exercise, of the Common Stock acquired
upon the exercise of an incentive stock option may give rise to alternative
minimum taxable income subject to an alternative minimum tax. Special rules
also may apply in certain cases where there are subsequent sales of shares in
disqualifying dispositions and to determine the basis of the stock for purposes
of computing alternative minimum taxable income on subsequent sale of the
shares.
Summary of Certain Federal Income Tax Consequences Relating to
Nonqualified Stock Options
No taxable income generally is realized by a participant upon the grant
of a nonqualified stock option, and no deduction generally is then available to
the Company. Upon exercise of a nonqualified stock option, the excess of the
fair market value of the shares on the date of exercise over the exercise price
will be taxable to the participant as ordinary income. Such amount will also
be deductible by the Company unless such amount exceeds the Deduction
Limitation and does not satisfy an exception to the Deduction Limitation. The
tax basis of shares acquired by the participant will be the fair market value
on the date of exercise. When a participant disposes of shares acquired upon
exercise of a nonqualified stock option, any amount realized in excess of the
fair market value of the shares on the date of exercise generally will be
treated as a capital gain
16
<PAGE> 17
and will be long-term or short-term, depending on the holding period of the
shares. The holding period commences upon exercise of the nonqualified stock
option. If the amount received is less than such fair market value, the loss
will be treated as a long-term or short-term capital loss, depending on the
holding period of the shares. The exercise of a nonqualified stock option will
not trigger the alternative minimum tax consequences applicable to incentive
stock options.
Summary of Certain Federal Income Tax Consequences Relating to Restricted Stock
Unless a participant otherwise elects to be taxed upon receipt of
shares of restricted stock under the Plan, he must include in his taxable
income the difference between the fair market value of the shares and the
amount paid, if any, for the shares, as of the first date the participant's
interest in the shares is no longer subject to a substantial risk of forfeiture
or such shares become transferable. A participant's rights in restricted stock
awarded under the Plan are subject to a substantial risk of forfeiture if the
rights to full enjoyment of the shares are conditioned, directly or indirectly,
upon the future performance of substantial services by the participant. Where
shares of restricted stock received under the Plan are subject to a substantial
risk of forfeiture, the participant can elect to report the difference between
the fair market value of the shares on the date of receipt and the amount paid,
if any, for the stock as ordinary income in the year of receipt. To be
effective, the election must be filed with the Internal Revenue Service within
30 days after the date the shares are transferred to the participant. The
Company is entitled to a Federal income tax deduction equal in amount to the
amount includable as compensation in the gross income of the participant unless
such amount exceeds the Deduction Limitation and does not satisfy an exception
to the Deduction Limitation. The amount of taxable gain arising from a
participant's sale of shares of restricted stock acquired pursuant to the Plan
is equal to the excess of the amount realized on such sale over the sum of the
amount paid, if any, for the stock and the compensation element included by the
participant in taxable income. For stock held for more than one year, the
participant will realize long-term capital gain or loss upon disposition.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 8. LEGAL PROCEEDINGS
The Company may from time to time be a party to various legal actions
arising in the ordinary course of its business. The Company is not currently
involved in any such actions that it believes will have a material adverse
effect on its results of operations or financial position.
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has been traded on the OTC Bulletin Board of the
National Association of Securities Dealers, Inc. under the trading symbol
"KBIZ" since May 26, 1995. In the period from May 26, 1995 to March 31, 1996,
the approximate high and low bid quotations were $5.12 and $2.00,
respectively. Such quotations represent prices between dealers, do not include
retail markups, markdowns or commissions and may not represent actual
transactions. The quotations are based upon information reported by the
National Association of Securities Dealers, Inc.
The following table sets forth the range of representative high and low closing
bid prices for the Common Stock for the periods indicated.
17
<PAGE> 18
HIGH LOW
---- ---
FISCAL 1995
Third Quarter $3.50 $3.12
----- -----
Fourth Quarter $5.00 $3.12
----- -----
FISCAL 1996
First Quarter $5.12 $2.25
----- -----
As of March 31, 1996, the Company had 537 holders of record of its
Common Stock. The Company's transfer agent is Securities Transfer
Corporation.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
SHARES ISSUED PURSUANT TO THE PLAN OF REORGANIZATION
The references to share amounts of Common Stock issued pursuant to the
Plan of Reorganization reflect the one for 600 reverse split effected pursuant
to the Plan of Reorganization but they do not reflect the effective reverse
split resulting from the reincorporation.
On December 20, 1993, the Company issued to its creditors an aggregate
of 129,494 shares of Common Stock pursuant to the Plan of Reorganization. The
Company relied on Rule 148 under the Securities Act of 1933, as amended (the
"Securities Act") and was thus exempt from the registration requirements of the
Securities Act. No underwriters were used in connection with the foregoing
transaction.
On December 20, 1993, the Company issued to HCC 2,219,905 shares of
Common Stock pursuant to a letter agreement between the Trustee and HCC. See
"Description of the Business -- Background -- The Plan of Reorganization." The
Company relied on Section 4(2) of the Securities Act in that such transaction
did not involve a public offering and was thus exempt from the registration
requirements of the Securities Act. No underwriters were used in connection
with the foregoing transaction.
OTHER ISSUANCES
On April 28, 1995, the Company acquired an aggregate of 1,513,821
shares of common stock of KBI in exchange for an aggregate of 8,536,958 shares
of Common Stock issued to two shareholders of KBI pursuant to a stock exchange
agreement by and among the Company, KBI and two shareholders of KBI. On May
23, 1995, the Company issued an aggregate of 39,757 shares of Common Stock to
the remaining 10 shareholders of KBI pursuant to a merger agreement whereby KBI
was merged with and into the Company.
On April 28, 1995, the Company issued 98,439 shares of Common Stock to
Halter Capital Corporation as compensation for certain consulting services.
The Company relied on Section 4(2) of the Securities Act in that such
transactions did not involve a public offering and were thus exempt from the
registration requirements of the Securities Act. No underwriters were used in
connection with the foregoing transactions.
On July 24, 1995, the Company issued an 9,500 units to one individual
residing in New York at a
18
<PAGE> 19
subscription price of $2.25 per unit. Each unit consisted of (I) one share of
Common Stock, (ii) nine class A warrants which enable the holder to purchase
one share of Common Stock for each such warrant at a price of $2.00 per share
for a period of three months after July 24, 1995, unless extended, and (iii)
ten class B warrants which enable the holder to purchase one share of Common
Stock for each such warrant at a price of $3.00 per share for a period of
three months after July 24, 1995, unless extended. As of March 31, 1996,
such individual exercised 85,500 class A warrants for 58,500 common shares
for an aggregate exercise price of $90,500. The Company relied on Section
3(b) of the Securities Act and Rule 504 promulgated thereunder and was thus
exempt from the registration requirements of the Securities Act. No
underwriters were used in connection with the foregoing transaction.
ITEM 11. DESCRIPTION OF SECURITIES
GENERAL
The Company's Articles of Incorporation authorize the issuance of
25,000,000 shares of Common Stock, par value $.01 per share and 5,000,000
shares of preferred stock, par value $.01 per share (the "Preferred Stock").
COMMON STOCK
Each share of Common Stock is fully paid and non-assessable, and the
holders thereof are entitled to one vote per share at all meetings of
stockholders. All shares of Common Stock are equal to each other with regard
to liquidation rights and dividend rights. The Articles of Incorporation of the
Company deny preemptive rights to purchase any additional shares of Common
Stock and do not provide for cumulative voting in the election of directors.
In the event of liquidation, dissolution or winding up of the Company, holders
of the Common Stock will be entitled to receive on a pro rata basis all the
assets of the Company remaining after satisfaction of all liabilities, subject
to the rights of holders of any Preferred Stock.
The present policy of the Company is to retain earnings to provide
funds for the operation and expansion of its business. The Company has not
paid cash dividends on the Common Stock and does not anticipate that it will do
so in the foreseeable future.
PREFERRED STOCK
The Articles of Incorporation provide that Preferred Stock may be
issued in one or more series as may be determined from time to time by the
Board of Directors. All shares of any one series of Preferred Stock will be
identical except as to the date of issue and dates from which dividends on
shares of the series issued on different dates will cumulate, if cumulative.
The Articles of Incorporation grant the Board of Directors the power to
authorize the issuance of one or more series of Preferred Stock, and to fix by
resolution or resolutions providing for the issue of each such series the
voting powers (but no greater than one vote per share), designations,
preferences, and relative, participating, optional, redemption, conversion,
exchange or other special rights, qualifications, limitations or restrictions
of such series, and the number of shares in each series, to the full extent now
or hereafter permitted by law.
It is not contemplated that any shares of Preferred Stock will be
issued by the Company in the foreseeable future, and the Company was organized
with this class of securities authorized to provide
19
<PAGE> 20
flexibility for financing of Company activities in the future. Since no
Preferred Stock has been issued, and the issuance of the same is not
contemplated, it is not possible to know whether such Preferred Stock, if ever
issued, would have preference over the Common Stock shareholders in the
distribution of any assets in the event of a liquidation.
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and the Nevada General
Corporation Law (the "NGCL") contain certain provisions that may make the
acquisition of control of the Company by means of a tender offer, open market
purchase, proxy fight or otherwise more difficult.
Business Combinations
The NGCL contains provisions restricting the ability of a corporation
to engage in business combinations with an interested stockholder. In general,
except under certain circumstances, business combinations with interested
stockholders are not permitted for a period of five years following the date
such stockholder became an interested stockholder. The NGCL defines an
interested stockholder, generally, as a person who owns 10% or more of the
outstanding shares of the corporation's voting stock.
In addition, the NGCL generally disallows the exercise of voting rights
with respect to "control shares" of an "issuing corporation" held by an
"acquiring person," unless such voting rights are conferred by a majority vote
of the disinterested stockholders. "Control shares" are the voting shares of
an issuing corporation acquired in connection with the acquisition of a
"controlling interest." "Controlling interest" is defined in terms of
threshold levels of voting share ownership, which thresholds, whenever each may
be crossed, trigger application of the voting bar with respect to the shares
newly acquired.
The NGCL also permits directors to resist a change or potential change
in control of the corporation if the directors determine that the change or
potential change is opposed to or not in the best interest of the corporation.
Authorized and Unissued Preferred Stock
The Company has 5,000,000 authorized and unissued shares of Preferred
Stock. The existence of authorized and unissued Preferred Stock may enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a merger, tender offer, proxy contest
or otherwise. For example, if in the due exercise of its fiduciary obligations,
the Board of Directors were to determine that a takeover proposal is not in the
Company's best interests, the Board of Directors could cause shares of
Preferred Stock to be issued without stockholder approval in one or more
private offerings or other transactions that might dilute the voting or other
rights of the proposed acquirer or insurgent stockholder or stockholder group
or create a substantial voting block in institutional or other hands that might
undertake to support the position of the incumbent Board of Directors. In this
regard, the Articles of Incorporation grant the Board of Directors broad power
to establish the designations, powers, preferences and rights of each series of
Preferred Stock. See " -- Preferred Stock."
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation and Bylaws provide that the
Company will indemnify its directors and officers to the fullest extent
provided by Nevada law. In addition, the Articles of Incorporation contain a
provision limiting a director's and officer's liability for monetary damages to
the fullest extent
20
<PAGE> 21
permitted by Nevada law.
Furthermore, Section 78.751 of the NGCL contains provisions relating to
indemnification of officers and directors. Section 78.751(1) provides that a
corporation may indemnify any person who was or is a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, except for an action by or in right of the
corporation by reason of the fact that he was a director, officer, employee or
agent of the corporation. In order to indemnify, it must be shown that he acted
in good faith and in a manner he reasonably believed to be in the best interest
of the corporation. Generally, no indemnification may be made where the person
has been determined to be negligent or guilty of misconduct in the performance
of his duty to the corporation.
Section 78.751(2) of the NGCL further allows the corporation to
indemnify any person who was or is a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, including amounts paid in
settlement and attorneys' fees if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation. Indemnification may not be made for any claim, issue or matter to
which a court of competent jurisdiction has adjudged an officer or director
liable to the corporation, unless and only to the extent that a court of
competent jurisdiction determines that in view of the circumstances of the
case, the person is fairly and reasonably entitled to indemnify for such
expenses.
To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding discussed in the preceding paragraphs, Section
78.751(3) of the NGCL provides that he must be indemnified by the corporation
against expenses, including attorney's fees, actually and reasonably incurred
by him in connection with the defense.
Except when indemnification is required by a court of competent
jurisdiction, Section 78.751(4) of the NGCL states that the corporation shall
only indemnify upon a determination of (I) the stockholders, (ii) majority vote
of the board that were not parties to the action; (iii) if ordered by a
majority vote of a quorum of directors who were not parties to the action, suit
or proceeding, by independent legal counsel in a written opinion; or (iv) by
independent legal counsel in a written opinion if no quorum of directors who
were not parties to the action may be obtained.
Unless ordered by a court of competent jurisdiction, indemnification
may not be made to or on behalf of any officer or director if a final
adjudication establishes that his acts or omissions involved intentional
misconduct, fraud or a knowing violation of the law and were material to the
cause of action.
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 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.
21
<PAGE> 22
ITEM 13. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements (Audited)
F-1 Independent Auditors' Report
F-2 Balance Sheets as of December 31, 1995 and 1994
F-3 Statements of Operations for the Years Ended December 31,
1995 and 1994
F-4 Statements of Shareholders' Equity for the Years
Ended December 31, 1995 and 1994
F-5 Statements of Cash Flows for the Years Ended December 31,
1995 and 1994
F-6 Notes to Financial Statements
Interim Financial Statements (Unaudited)
F-12 Balance Sheets as of March 31, 1996 and December 31, 1995
F-14 Statements of Operations for the Three Months Ended March
31, 1996 and 1995
F-15 Statements of Shareholders' Equity for the Three
Months Ended March 31, 1996 and 1995
F-16 Statements of Cash Flows for the Three Months Ended March
31, 1996 and 1995
F-17 Notes to Financial Statements
</TABLE>
22
<PAGE> 23
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) The financial statements filed as part of this Registration Statement
as Item 13 are listed in the Index to Financial Statements contained
therein.
(b) The following documents are filed as exhibits to this Registration
Statement:
2.1 Plan of Reorganization dated October 1, 1993.*
2.2 Stock Exchange Agreement dated March 28, 1995 by and between
Overthrust Oil Royalty Corporation and KnowledgeBroker,
Inc.*
2.3 Agreement and Plan of Merger dated April 28, 1995 by and
between Overthrust Oil Royalty Corporation and KBI
Acquisition, Inc.*
2.4 Agreement and Plan of Merger dated May 23, 1995 by and
between KBI Acquisition, Inc. and KnowledgeBroker, Inc.*
3 (I) Articles of Incorporation of the Company, as amended to
date.*
3 (ii) Bylaws of the Company.*
4.1 Specimen Common Stock Certificate.*
4.2 Specimen Class A Purchase Warrant.*
4.3 Specimen Class B Purchase Warrant.*
10.1 Leases for Properties.**
10.2 Agreement dated December 15, 1994 by and between
KnowledgeBroker, Inc. and Software Affiliates of America,
Inc.*
10.3 Employment Letter dated April 28, 1995 by and between the
Company and Brad Stanley.**
10.4 1995 Stock Compensation Plan (included in Exhibit 2.2).*
* These exhibits were previously filed by the Company with the
Commission as Exhibits to its Registration Statement No. 0-26626 on Form 10-SB
and are respectively incorporated herein by specific reference thereto.
** To be filed by amendment.
23
<PAGE> 24
SIGNATURES
In accordance with Section 12 of the Securities Act of 1934, the
Company caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
KNOWLEDGEBROKER, INC.
By: /s/ Brad Stanley
-----------------------------------
Brad Stanley, President
Date:
---------------------------------
<PAGE> 25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
KnowledgeBroker, Inc.
We have audited the accompanying balance sheets of KnowledgeBroker, Inc. as of
December 31, 1995 and 1994, and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of KnowledgeBroker, Inc. as of
December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
HENDRIX SUTTON & ASSOCIATES
A Limited Liability Partnership
Arlington, Texas
March 26, 1996
F-1
<PAGE> 26
KNOWLEDGEBROKER, INC.
BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
---------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 131,653 $ 328,761
Marketable securities available for sale 50,000 50,000
Trade accounts receivable, net of allowance
for doubtful accounts of $243,010 and $20,000 374,595 400,442
Note receivable in connection with exercised stock options 9,950 -
Prepaid expenses and other 77,341 19,994
Income tax receivable 168,046 -
Deferred income taxes 216,433 4,995
----------- ---------
Total current assets 1,028,018 804,192
----------- ---------
PROPERTY AND EQUIPMENT 231,360 201,981
Less accumulated depreciation and amortization (92,149) (5),304
----------- ---------
Property and equipment, net 139,211 151,677
----------- ---------
OTHER ASSETS
Deferred income taxes 119,413 -
Other 4,065 6,570
----------- ---------
Total other assets 123,478 6,570
----------- ---------
TOTAL ASSETS $ 1,290,707 $ 962,439
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ - $ 7,333
Note payable - line of credit 30,000 -
Cash overdraft - 156,977
Accounts payable 213,186 19,128
Accrued shareholder bonuses and salaries 58,750 121,907
Other accrued expenses 383,323 92,994
Income taxes payable - 164,275
Shareholder loans - 31,714
Deferred income 52,628 -
----------- ---------
Total current liabilities 737,887 594,328
LONG-TERM LIABILITIES - Deferred income taxes - 14,146
----------- ---------
Total liabilities 737,887 608,474
----------- ---------
COMMITMENTS AND CONTINGENCIES (Note K)
SHAREHOLDERS' EQUITY
Preferred stock; $0.01 par value, 5,000,000 shares authorized - -
Common stock; $0.01 par value; 25,000,000 shares
authorized; 9,267,947 and 4,797,193 shares issued 92,680 47,971
Additional paid-in capital 1,166,900 153,904
Retained earnings 82,235 152,090
----------- ---------
1,341,815 353,965
Less notes receivable in connection with exercised stock options (788,995) -
----------- ---------
Total shareholders' equity 552,820 353,965
----------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,290,707 $ 962,439
=========== =========
</TABLE>
F-2
<PAGE> 27
KNOWLEDGEBROKER, INC.
STATEMENTS OF OPERATIONS
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Revenues
Support desk services $ 939,930 $2,271,005
Software sales 1,026,572 281,319
----------- ----------
Total revenues 1,966,502 2,552,324
Direct personnel cost of support desk services
and software sales 575,623 806,236
----------- ----------
Revenues, net of direct costs 1,390,879 1,746,088
----------- ----------
Expenses
Selling, general and administrative 1,349,501 1,096,291
Litigation settlement and related legal expenses 365,785 -
Provision for doubtful accounts 223,010 20,000
Depreciation and amortization 42,533 30,135
----------- ----------
Total expenses 1,980,829 1,146,426
----------- ----------
Operating profit (loss) (589,950) 599,662
Other income (expense)
Interest and other income 8,330 5,783
Interest expense (1,278) (6,093)
----------- ----------
Income (loss) before income taxes (582,898) 599,352
Income tax expense (benefit) (513,043) 173,426
----------- ----------
Net income (loss) $ (69,855) $ 425,926
=========== ==========
Weighted average number of common
shares outstanding 8,339,389 4,529,157
=========== ==========
Net income (loss) per common share $ (0.01) $ 0.09
=========== ==========
Proforma income data (unaudited) (Note B)
Net income (loss) as reported $ (69,855) $ 425,926
Proforma adjustment to income tax expense - (30,459)
----------- ----------
Proforma net income (loss) $ (69,855) $ 395,467
=========== ==========
Proforma net income (loss) per common share $ (0.01) $ 0.09
=========== ==========
</TABLE>
F-3
<PAGE> 28
KNOWLEDGEBROKER, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock Additional
------------------- Paid-In Treasury Retained Notes
Shares Amount Capital Stock Earnings Receivable Total
-------- -------- -------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994 660,821 $225,367 $ - $ (1,153) $(273,836) $ - $ (49,622)
Effect of reincorporation and reverse
split (Note A) 3,112,287 (187,636) 186,483 1,153 - - -
Issuance of common stock for
compensation and expense
reimbursement including effect
of reincorporation and reverse split 2,091,987 20,919 5,887 - - - 26,806
Treasury stock purchase retired
during the year including effect
of reincorporation and reverse split (1,067,902) (10,679) (38,466) - - - (49,145)
Net income for the year - - - - 425,926 - 425,926
--------- -------- ---------- ------ -------- --------- --------
Balances at December 31, 1994 4,797,193 47,971 153,904 - 152,090 - 353,965
Issuance of common stock for
compensation and expense
reimbursement 3,886,565 38,867 93,040 - - - 131,907
Issuance of common stock to
HCC in exchange for
consulting services 98,439 984 124,016 - - - 125,000
Costs related to stock exchange
agreement with Overthrust - - (50,578) - - - (50,578)
Issuance of common stock and warrants
for cash, net of issuance costs of $6,290 54,500 545 64,540 - - - 65,085
Issuance of common stock for cash
and notes receivable, net of
issuance costs of $76,210 431,250 4,313 781,978 - - (788,995) (2,704)
Net loss for the year - - - - (69,855) - (69,855)
--------- -------- ---------- ------ -------- --------- --------
Balances at December 31, 1995 9,267,947 $ 92,680 $1,166,900 $ - $ 82,235 $(788,995) $552,820
========= ======== ========== ====== ======== ========= ========
</TABLE>
F-4
<PAGE> 29
KNOWLEDGEBROKER, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (69,855) $ 425,926
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities
Depreciation and amortization 42,533 30,135
Provision for doubtful accounts 223,010 20,000
Deferred income taxes (benefit) (344,997) 9,151
Common stock issued for compensation and expense reimbursement 131,907 26,806
Common stock issued for consulting fees 62,500 -
Changes in assets and liabilities
Trade accounts receivable (197,163) (296,632)
Prepaid expenses and other (55,530) (18,594)
Income tax receivable (168,046) -
Accounts payable and accrued liabilities 389,516 54,317
Income taxes payable (164,275) 164,275
Deferred income 52,628 (122,968)
--------- ---------
Net cash provided (used) by operating activities (97,772) 292,416
--------- ---------
Cash flows from investing activities
Purchase of property and equipment (29,379) (80,548)
Purchase of marketable securities - (50,000)
--------- ---------
Net cash used by investing activities (29,379) (130,548)
--------- ---------
Cash flows from financing activities
Principal repayments on long-term debt (7,333) (10,314)
Increase (decrease) in cash overdraft (156,977) 123,981
Payment on shareholder loans - (12,918)
Purchase of treasury stock - (49,145)
Net increase in borrowings under line of credit 30,000 -
Issuance of common stock for cash 134,931 -
Merger and fund raising costs charged to capital (70,578) -
--------- ---------
Net cash provided by financing activities (69,957) 51,604
--------- ---------
Increase (decrease) in cash (197,108) 213,472
Cash and cash equivalents at beginning of year 328,761 115,289
--------- ---------
Cash and cash equivalents at end of year $ 131,653 $ 328,761
========= =========
Supplemental disclosure of interest and
income taxes paid during the year
Interest $ 1,278 $ 6,093
========= =========
Income taxes $ 173,000 $ -
========= =========
</TABLE>
F-5
<PAGE> 30
KNOWLEDGEBROKER, INC.
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1995 and 1994
NOTE A - GENERAL
KnowledgeBroker, Inc. (a California Corporation) ("KBI" or "Company") was
incorporated on March 27, 1992. The Company provides integrated information
system "help desk" functions for Fortune 1000 companies throughout the United
States and develops, sells and maintains informational databases to provide
on-line computer hardware and software applications support.
On April 28, 1995, the Company and certain shareholders of the Company entered
into a stock exchange agreement with Overthrust Oil Royalty Corporation
("Overthrust") (a non-reporting public company which had no operations) whereby
Overthrust acquired 100% of the issued and outstanding common stock of the
Company in exchange for an aggregate of approximately 95.84% of its common
stock. In connection with this transaction, Overthrust was simultaneously
reincorporated in Nevada by means of a merger with and into a newly-formed
Nevada corporation, KBI Acquisition, Inc. The reincorporation had the effect
of a one for two reverse split of the common stock. On May 23, 1995, the
Company was merged with and into KBI Acquisition, Inc. and the name of KBI
Acquisition, Inc. was changed to KnowledgeBroker, Inc. The capital structure
and related weighted average common and common equivalent shares outstanding
for all periods presented reflects that of Overthrust.
For accounting purposes, the merger between KBI and the public company is
regarded as an acquisition by the public company of substantially all of the
outstanding stock of KBI and is accounted for as a recapitalization of KBI with
KBI as the acquirer (a reverse acquisition). Accordingly, the historical
financial statements included herein are those of KBI.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Revenue recognition
The Company recognizes revenue related to "help desk" support functions in
accordance with its "standard take or pay" contract with its client
companies whereby each client company contracts on a "per support call"
basis with a specified minimum per month. These contracts are billed
monthly for the duration of the contract. Customer payments made in
advance are recorded as deferred revenue until earned.
The Company recognizes revenue related to software sales, royalties, and
licensing at the point of shipment/billing to the customer other than for
software sales for which the Company extends a limited evaluation period.
For these sales, the Company records revenue after the evaluation period
has expired, based on a historical "actual" acceptance rate.
2. Product development costs and expenses
The Company follows the guidelines of Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed", whereby all costs and expenses
related to research and development, prior to the determination of
technological feasibility, as defined, are charged to expense. All
significant costs incurred for product design and development from the
point that technological feasibility is determined up to the point that
the product is available to be sold, leased or otherwise marketed are
capitalized and are amortized on a straight basis over the estimated
useful life of the technology. To date, product design and development
costs after establishing technological feasibility have not been
significant to the Company's financial statements and have been expensed.
Costs for product maintenance, including conversions to different
operating systems and customer support are charged to expense as incurred.
F-6
<PAGE> 31
KNOWLEDGEBROKER, INC.
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1995 and 1994
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
3. Financial instruments and concentrations of credit risk
In the normal course of business, the Company extends unsecured credit
to virtually all of its customers. Management has provided an
allowance for doubtful accounts which reflects its opinion of amounts
which will eventually become uncollectible. In the event of complete
non-performance of accounts receivable, the maximum exposure to the
Company is the recorded amount on the books. Cash and cash
equivalents are at risk to the extent it exceeds Federal Deposit
Insurance Corporation insured amounts (approximately $59,630 at
December 31, 1995). To minimize risk, the Company places its cash and
cash equivalents with high credit quality financial institutions.
4. Cash and cash equivalents
The Company considers all cash on hand and in banks, certificates of
deposits and other highly-liquid investments with original maturities
of three months or less to be cash and cash equivalents.
5. Marketable securities available for sale
Marketable securities consist of preferred stock issued by a large
financial institution. The equity securities are classified as
"available for sale" and are stated at amortized cost which
approximates fair market value. Significant unrealized gains and
losses resulting from changes in fair market value are reflected as a
separate component of shareholders' equity and charged or credited to
the statement of operations when realized.
6. Property and equipment
Property and equipment other than software costs are recorded at the
lower of cost or estimated fair market value (which is less than
founders' cost) at the date of acquisition. Depreciation expense is
computed using the straight-line method over the estimated useful
lives (generally 5 to 7 years) of the related assets. Software
purchased for internal use is recorded at cost and is amortized on a
straight-line basis over a five year period.
7. Income taxes
Prior to April 1, 1994, the Company, with the consent of its
shareholders, elected under Section 1372(a) of the Internal Revenue
Code, to be treated as an "S corporation". The Company, therefore,
was previously not subject to Federal income taxes at the corporate
level and all income, deductions and credits were taxable to the
shareholders. Effective April 1, 1994, the Company terminated its S
corporation election. Accordingly, the Company commenced providing
for income taxes in utilizing the asset and liability approach to
financial accounting and reporting for income taxes. Deferred income
tax assets and liabilities are computed for differences between the
financial statement and tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities. The unaudited proforma income
tax data included in the accompanying statements of operations has
been calculated as if the Company were providing for income taxes in
accordance with the asset and liability approach for each of the years
presented.
F-7
<PAGE> 32
KNOWLEDGEBROKER, INC.
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1995 and 1994
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
8. Use of estimates and assumptions
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported amounts of revenues and expenses.
Actual results could vary from the estimates that were used.
9. Net income (loss) per common share
Net income (loss) per common share is based on the weighted average
number of common shares outstanding during each respective year.
Common stock equivalents that would have had an anti-dilutive effect
were excluded from the calculation.
10. Accounting Standards Not Yet Adopted
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS 123"), was issued.
This statement requires the fair value of stock options and other
stock-based compensation issued to employees to either be included as
compensation expense in the income statement, or the pro forma effect
on net income and earnings per share of such compensation expense to
be disclosed in the footnotes to the Company's financial statements
commencing with the Company's 1996 fiscal year. The Company expects
to adopt SFAS 123 on a disclosure basis only. As such, implementation
of SFAS 123 is not expected to impact the Company's balance sheet or
statement of operations.
11. Reclassifications
Certain prior year amounts have been reclassified to conform to the
1995 presentation.
NOTE C - PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
1995 1994
---------- -------
<S> <C> <C>
Furniture and fixtures $ 31,301 $ 25,005
Computer equipment 117,339 98,950
Office equipment 13,771 12,054
Automobiles 15,302 15,302
Software costs 53,647 50,670
-------- --------
$231,360 $201,981
======== ========
</TABLE>
NOTE D - NOTE PAYABLE
The Company has a line of credit note payable to a bank with a maximum facility
of $150,000. The note payable bears interest due monthly at the bank's prime
lending rate plus one percent (9.75% at December 31, 1995) and matures in
November, 1996. The note payable is collateralized by the marketable
securities and all equipment, accounts receivable, and intangibles of the
Company.
F-8
<PAGE> 33
KNOWLEDGEBROKER, INC.
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1995 and 1994
NOTE E - MERGER COSTS AND PREPAID EXPENSES
During February 1995, the Company entered into a consulting agreement with
Halter Capital Corporation ("HCC"), whereby HCC would provide expertise
relating to publicly-held companies, securities, and general corporate law, in
exchange for 98,439 shares of the Company's common stock. The portion of the
consulting agreement related to merger and fund raising expenses, $62,500 and
$20,000 for other merger and fund rasing expenses has been charged to
additional paid-in capital. The balance of the value assigned to the
consulting agreement, $62,500, is being amortized on a straight-line basis over
eighteen months, the period of the agreement.
NOTE F - LITIGATION SETTLEMENT AND OTHER ACCRUED EXPENSES
Other accrued expenses at December 31, 1995 include $365,785 in connection with
the settlement of litigation and related legal expenses which was finalized in
February 1996. The settlement requires the Company to pay $100,000 in cash and
issue common stock with a value of $249,998.
NOTE G - STOCK OPTIONS AND WARRANTS
As a performance incentive and in order to encourage ownership of common stock,
the Company has adopted its 1995 Stock Compensation Plan (the "Plan").
Accordingly, 900,000 shares of common stock have been reserved for issuance
under the Plan pursuant to the exercise of options or the grant of restricted
stock awards. As of December 31, 1995, the Company had granted options to
acquire an aggregate of 607,750 shares of common stock. Unless extended or
earlier terminated, the Plan will terminate on the day prior to the tenth
anniversary of its effective date.
The Plan provides for the grant of "incentive stock options, " as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
nonqualified stock options and restricted stock awards (collectively referred
to as "Awards"). Options are exercisable during the period specified in each
option agreement and will be exercisable in accordance with a vesting schedule
to be designated by the Committee. The options granted have an exercise price
of $2.00.
Following is a summary of option activity under the Plan:
<TABLE>
<CAPTION>
Option Price
------------------------
Shares Per Share Total
-------- --------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1994 - $ - $ -
Granted 435,500 2 871,000
Exercised (431,250) 2 (862,500)
Canceled (4,250) 2 (8,500)
-------- ---------
Outstanding at December 31, 1995 - $ -
======== =========
</TABLE>
On July 24, 1995, the Company issued 9,500 units to one individual at a
subscription price of $2.25 per unit. Each unit consisted of (i) one share of
Common Stock, (ii) nine class A warrants which enable the holder to purchase
one share of Common Stock for each such warrant at a price of $2.00 per share
for a period of three months after July 24, 1995 unless extended, and (iii) ten
class B warrants which enable the holder to purchase one share of Common Stock
for each such warrant at a price of $3.00 per share for a period of three
months after its issuance unless extended. By corporate resolution, the
warrant exercise prices for class A and B warrants were reduced to $2.00 and
$1.00, respectively. As of December 31, 1995, such individual had exercised
45,000 class A warrants for an aggregate price of $50,000. Subsequent to
December 31, 1995, the individual also exercised an additional 40,500 class A
warrants for an aggregate price of $40,500 and had an aggregate of 95,000 class
B warrants still available to be exercised.
F-9
<PAGE> 34
KNOWLEDGEBROKER, INC.
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1995 and 1994
NOTE H - INCOME TAXES
Deferred income tax assets and liabilities at December 31, 1995 and 1994
consist of the following:
<TABLE>
<CAPTION>
1995 1994
-------- ---------
<S> <C> <C>
Current deferred tax asset $238,692 $ 4,995
Current deferred tax liability (22,259) -
-------- ---------
Net current deferred tax asset $216,433 $ 4,995
======== =========
Non-current deferred tax asset $143,100 $ -
Non-current deferred tax liability (23,687) (14,146)
-------- ---------
Net non-current deferred tax asset $119,413 $ (14,146)
======== =========
</TABLE>
The current deferred tax asset results primarily from the deduction of
allowances for doubtful accounts for financial reporting purposes to be
deducted for Federal income tax purposes once written off and revenue deferred
for financial reporting purposes. The non-current deferred tax asset results
from the benefit of net operating loss carryforwards. The non-current deferred
tax liability results from the use of statutory accelerated tax depreciation
and amortization methods for Federal income tax reporting purposes.
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Federal:
Current $(148,650) $144,279
Deferred (303,826) 8,859
--------- --------
(452,476) 153,138
--------- --------
State:
Current (19,396) 19,996
Deferred (41,171) 292
--------- --------
(60,567) 20,288
--------- --------
Total income tax expense (benefit) $(513,043) $173,426
========= ========
</TABLE>
The Company's income tax expense (benefit), differed from the statutory Federal
rate of 34% in 1995 and 1994 as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Statutory rate applied to income (loss)
before income tax expense (benefit) $(198,185) $203,780
Change in income taxes resulting from:
Items deductible only for Federal income
tax purposes (283,736) -
State income taxes (60,567) 20,288
Portion of income taxes payable by share-
holders prior to C corporation status - 50,945
Other 29,445 303
--------- --------
Total income tax expense (benefit) $(513,043) $173,426
========= ========
</TABLE>
Net operating loss carryforwards totaling approximately $387,000 which expire
in 2010 are available to offset the Company's future income tax liability.
F-10
<PAGE> 35
KNOWLEDGEBROKER, INC.
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1995 and 1994
NOTE I - COMMON STOCK AND RELATED PARTY TRANSACTIONS
Shareholder loans arise in the normal course of business, are non-interest
bearing, and are due on demand. Amounts due to shareholders include amounts
due for compensation, contribution of assets at fair market value (which is
less than founders' cost), and expenses reimbursable to the shareholders.
Issuances of shares for compensation during 1995 and 1994 (prior to becoming a
public company) were valued at the net book value of the Company at the
respective dates of issuance, which management believes during that period was
the most appropriate indicator of the fair value of the shares.
At December 31, 1995, notes receivable in connection with stock issued pursuant
to stock options exercised amounted to $798,945. Of that amount, $9,950 is
presented as a current note receivable as the note was collected prior to the
date of this report (March 26, 1996) with the balance $788,995 being presented
as a reduction of shareholders' equity. The notes receivable bear interest at
8.75% and are due at various dates in 1996. Security on a portion of these
notes ($199,000) includes assets other than the stock itself.
NOTE J - ECONOMIC DEPENDENCE
During 1995, no one customer accounted for greater than 10% of total revenues.
The Company has one customer which accounted for approximately 68% of total
revenues during 1994.
NOTE K - COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities and certain office equipment under
long-term operating lease agreements expiring through 1998. The office lease
commenced on October 1, 1995 and expires on September 30, 1999 and requires
monthly rental payments ranging from approximately $1,400 to $1,900 over the
life of the lease. Rent expense for the years ended December 31, 1995 and 1994
amounted to $25,152 and $20,006, respectively. Future minimum lease payments
at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
-------------------------- --------
<S> <C>
1996 $ 16,745
1997 18,469
1998 20,194
1999 39,367
--------
Total $ 94,775
========
</TABLE>
During 1995, the Company received several notices from the Internal Revenue
Service ("IRS") questioning the status of workers treated by the Company as
contractors. If the IRS determines that the workers in question are employees
and applies this ruling to other similar workers, the amount due for income and
other taxes could be significant to the financial statements of the Company.
Management intends to vigorously defend the working status of their workers,
but is unable to determine the outcome of the IRS notice or the related
financial exposure if any.
In the course of conducting its business, the Company is involved in various
lawsuits and related proceedings, the outcome of which is not anticipated to be
material to the Company's financial position.
F-11
<PAGE> 36
KNOWLEDGEBROKER, INC.
BALANCE SHEETS
March 31, 1996 and December 31, 1995
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 60,687 $ 131,653
Marketable securities available for sale 50,000 50,000
Trade accounts receivable, net of allowance for doubtful accounts 513,389 374,595
Note receivable in connection with exercised stock option - 9,950
Prepaid expenses and other 75,796 77,341
Income tax receivable 168,046 168,046
Deferred income taxes 159,324 216,433
---------- ----------
Total current assets 1,027,242 1,028,018
---------- ----------
PROPERTY AND EQUIPMENT 247,582 231,360
Less accumulated depreciation and amortization (103,273) (92,149)
---------- ----------
Property and equipment, net 144,309 139,211
---------- ----------
OTHER ASSETS
Deferred income taxes 119,413 119,413
Other 4,065 4,065
---------- ----------
Total other assets 123,478 123,478
---------- ----------
TOTAL ASSETS $1,295,029 $1,290,707
========== ==========
</TABLE>
F-12
<PAGE> 37
KNOWLEDGEBROKER, INC.
BALANCE SHEETS - CONTINUED
March 31, 1996 and December 31, 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Note payable - line of credit $ - $ 30,000
Accounts payable 78,290 213,186
Accrued shareholder bonuses and salaries 58,750 58,750
Other accrued expenses 377,842 383,323
Deferred income 52,628 52,628
---------- -----------
Total liabilities 567,510 737,887
---------- -----------
SHAREHOLDERS' EQUITY
Preferred stock; $0.01 par value; 5,000,000 shares authorized - -
Common stock; $0.01 par value; 25,000,000 shares
authorized; 9,308,447 and 9,267,947 shares issued 93,085 92,680
Additional paid-in capital 1,206,995 1,166,900
Retained earnings 193,094 82,235
---------- -----------
1,493,174 1,341,815
Less notes receivable in connection with exercised stock options (765,655) (788,995)
---------- -----------
Total shareholders' equity 727,519 552,820
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,295,029 $ 1,290,707
========== ===========
</TABLE>
F-13
<PAGE> 38
KNOWLEDGEBROKER, INC.
STATEMENTS OF OPERATIONS
Three months ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three months Three months
Ended March 31, Ended March 31,
1996 1995
----------- -----------
<S> <C> <C>
Revenues
Support desk services $ 369,519 $ 460,111
Software sales 257,674 36,847
----------- -----------
Total revenues 627,193 496,958
----------- -----------
Direct personnel cost of support desk services
and software sales 165,727 133,511
----------- -----------
Revenues, net of direct costs 461,466 363,447
----------- -----------
Expenses
Selling, general and administrative 311,197 273,000
Depreciation and amortization 11,125 9,808
----------- -----------
Total expenses 322,322 282,808
----------- -----------
Operating profit 139,144 80,639
Other income (expense)
Interest and other income 29,706 2,272
Interest expense (882) -
----------- -----------
Income before income taxes 167,968 82,911
Income taxes (57,109) (28,189)
----------- -----------
Net income $ 110,859 $ 54,722
=========== ===========
Weighted average number of common shares outstanding 9,301,771 6,179,054
=========== ===========
Net income per common share $.01 $.01
==== ====
</TABLE>
F-14
<PAGE> 39
KNOWLEDGEBROKER, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Three months ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-in Retained Notes
Shares Amount Capital Earnings Receivable Total
--------- ------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at December
31, 1994 4,797,193 $47,971 $ 153,904 $152,090 - $ 353,965
Issuance of common
stock for compen-
sation and expense
reimbursement 3,886,565 38,867 93,040 - - 131,907
Net income for
three months - - - 54,722 - 54,722
--------- ------- ----------- -------- --------- ---------
Balances at March
31, 1995 8,683,758 $86,838 $ 246,944 $206,812 $ - $ 540,594
========= ======= =========== ======== ========= =========
Balances at December
31, 1995 9,267,947 92,680 1,166,900 82,235 (788,995) 552,820
Warrants exercised 40,500 405 40,095 - - 40,500
Cash received on
notes receivable - - - - 23,340 23,340
Net income for three
months - - - 110,859 - 110,859
--------- ------- ----------- -------- --------- ---------
Balances at March
31, 1996 9,308,447 $93,085 $ 1,206,995 $193,094 $(765,655) $ 727,519
========= ======= =========== ======== ========= =========
</TABLE>
F-15
<PAGE> 40
KNOWLEDGEBROKER, INC.
STATEMENTS OF CASH FLOWS
Three months ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three months Three months
Ended March 31, Ended March 31,
1996 1995
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 110,859 $ 54,722
Adjustments to reconcile net income
to net cash provided (used) by operating activities
Deferred income taxes (benefit) 57,109 (9,151)
Depreciation and amortization 11,124 9,808
Common stock issued for compensation and
expense reimbursement - (10,000)
Changes in assets and liabilities
Trade accounts receivable (138,794) 21,909
Prepaid expenses and other 1,545 (917)
Accounts payable and accrued liabilities (140,377) (11,679)
Income taxes payable - (144,811)
Deferred income - 9,151
----------- ------------
Net cash used by operating activities (98,534) (80,968)
----------- ------------
Cash flows from investing activities
Purchase of property and equipment (16,222) (5,753)
Purchase of marketable securities - -
----------- ------------
Net cash used in investing activities (16,222) (5,753)
----------- ------------
Cash flows from financing activities
Net change in borrowings under line of credit (30,000) -
Principal repayments on long-term debt - (960)
Collections on notes receivable in connection with
exercised stock options 33,290 -
Issuance of common stock upon exercise of warrants 40,500 -
Decrease in cash overdraft - (156,977)
----------- ------------
Net cash provided (used) by financing activities 43,790 (157,937)
----------- ------------
Decrease in cash (70,966) (244,658)
Cash and cash equivalents at beginning of period 131,653 328,761
----------- ------------
Cash and cash equivalents at end of period $ 60,687 $ 84,103
=========== ============
Supplemental disclosures:
Cash paid for interest $ 882 $ -
=========== ============
</TABLE>
F-16
<PAGE> 41
KNOWLEDGEBROKER, INC.
NOTES TO FINANCIAL STATEMENTS
Three months ended March 31, 1996 and 1995
(Unaudited)
NOTE A - GENERAL
KnowledgeBroker, Inc. (a California Corporation) ("KBI" or "Company") was
incorporated on March 27, 1992. The Company provides integrated information
system "help desk" functions for Fortune 1000 companies throughout the United
States and develops, sells and maintains informational databases to provide
on-line computer hardware and software applications support.
The interim financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information present not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes for the years ended December 31, 1995 and 1994.
In the opinion of management, the unaudited interim financial information of
the Company contains all adjustments, consisting only of those of a normal
recurring nature, necessary to present fairly the Company's financial position
and the results of its operations and cash flows for the periods presented.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for a full year.
F-17
<PAGE> 42
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit Description Page
------- ----------- ------------
<S> <C> <C>
2.1 Plan of Reorganization dated October 1, 1993.*
2.2 Stock Exchange Agreement dated March 28, 1995 by and between
Overthrust Oil Royalty Corporation and KnowledgeBroker,
Inc.*
2.3 Agreement and Plan of Merger dated April 28, 1995 by and
between Overthrust Oil Royalty Corporation and KBI
Acquisition, Inc.*
2.4 Agreement and Plan of Merger dated May 23, 1995 by and
between KBI Acquisition, Inc. and KnowledgeBroker, Inc.*
3 (I) Articles of Incorporation of the Company, as amended to
date.*
3 (ii) Bylaws of the Company.*
4.1 Specimen Common Stock Certificate.*
4.2 Specimen Class A Purchase Warrant.*
4.3 Specimen Class B Purchase Warrant.*
10.1 Leases for Properties.**
10.2 Agreement dated December 15, 1994 by and between
KnowledgeBroker, Inc. and Software Affiliates of America,
Inc.*
10.3 Employment Letter dated April 28, 1995 by and between the
Company and Brad Stanley.**
10.4 1995 Stock Compensation Plan (included in Exhibit 2.2).*
</TABLE>
* These exhibits were previously filed by the Company with the
Commission as Exhibits to its Registration Statement No. 0-26626 on Form 10-SB
and are respectively incorporated herein by specific reference thereto.
** To be filed by amendment.
