U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2004
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 1-8601
CREDITRISKMONITOR.COM, INC.
(Name of small business issuer in its charter)
Nevada 36-2972588
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
704 Executive Boulevard, Suite A
Valley Cottage, New York 10989
(Address of Principal Executive offices) (Zip Code)
Issuer's telephone number: (845) 230-3000
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered under Section 12(g) of the Act:
Common Stock $.01 Par Value
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
State issuer's revenues for the most recent fiscal year. $3,346,572
The aggregate market value of the Registrant's common stock held by
non-affiliates as of March 7, 2005 was $1,010,749. The Company's common stock is
traded on the OTC Electronic Bulletin Board.
There were 7,679,462 shares of common stock $.01 par value outstanding as of
March 7, 2005.
Documents incorporated by reference: None
Transitional Small Business Format (check one): Yes |_|; No |X|
PART I
ITEM 1. BUSINESS
In addition to historical information, the following discussion of the
Company's business contains forward-looking statements. These forward-looking
statements involve risks, uncertainties and assumptions. The actual results may
differ materially from those anticipated in these forward-looking statements as
a result of many factors, including but not limited to, those discussed in the
sections in this Annual Report on Form 10-KSB entitled "The CreditRiskMonitor
Business", "The Company's Goals", "Marketing and Sales", "Management's
Discussion and Analysis of Financial Condition and Results of Operations", and
"Risks and Other Considerations". Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. CreditRiskMonitor.com, Inc. (the "Company"
or "CRM") undertakes no obligation to revise or publicly release the results of
any revision to these forward-looking statements. Readers should carefully
review the risk factors described in this document as well as in other documents
the Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-QSB to be filed by the Company in
fiscal year 2005.
The CreditRiskMonitor Business
CRM is an interactive Internet-based (see our website at www.crmz.com)
financial information and news service designed specifically for corporate
credit professionals and which competes directly with Dun & Bradstreet, Inc.
("D&B(TM)"). CRM's service analyzes business/commercial credit risk as
contrasted to the credit risk of individuals. For example, when an individual
purchases a television set, before the television leaves the store a payment is
made via cash, check or credit card. However, in a business-to-business
transaction, e.g., for $20,000 of widgets, the seller usually will ship before
the buyer pays - there is an extension of trade credit by the seller. The terms
of trade credit could be 2%-10 days, net 30 (a 2% deduction from the price if
payment is made within 10 days but, if not, payment in full must be made within
30 days). It is the extension of this credit that is referred to as trade credit
risk. CRM's service is usually purchased by the seller to review the risks of
extending trade credit to the purchaser. If the purchaser is unable to pay, the
seller can suffer substantial losses (e.g., assuming a 10% pre-tax margin it
will take $10 of sales to offset each $1 of bad debt). This decision to ship
prior to payment may be made under intense time pressure, with potentially
adverse results if the credit manager has inaccurate or stale information. CRM
believes that, with the downsizing of corporate America and the related
reductions in credit departmental budgets and personnel, corporate credit
professionals have to do more with less. Simultaneously, the Company further
believes that there has been an explosion in available information, resulting in
an overwhelming amount of data and limited time for research and analysis.
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CRM's credit risk analysis service is the result of management's
experience in the commercial credit industry and on-going research with respect
to corporate credit department information needs. This has enabled CRM to
satisfy the credit industry's requirements for a timely, technologically
advanced, low cost credit information service. CRM sells the following
commercial credit analysis services to corporate credit managers:
(1) An annual fixed price service with coverage of approximately 17,600
U.S. and Canadian public companies with full financial analysis and
up-to-date financial news coverage for purposes of credit
evaluation. This service is supplemented with the publishing of
trade receivable data and public filing information (i.e., suits,
liens, judgments and bankruptcy information) on over 5 million
public and private U.S. companies.
(2) An annual fixed price service with coverage of approximately 20,600
foreign public companies with full financial analysis for purposes
of credit analysis. This service, for the most part, includes the
extensive financial analysis provided in the domestic service
described in item (1) above.
(3) Individual credit reports on the approximately 38,200 companies
covered in items (1) and (2) above.
(4) Individual credit reports on approximately 20 million foreign public
and private companies. These reports are purchased by CRM through
affiliations with third-party suppliers and sold to CRM subscribers.
CRM's services provide corporate credit professionals with a one-stop
information service to continuously monitor the creditworthiness of all their
U.S. and foreign public company customers and many domestic and foreign private
company customers, in the shortest possible time and with minimum effort. This
timesaving is critical where immediate decisions must be made.
There is little hard data on CRM's market: The U.S. National Association
of Credit Management has about 30,000 members, but some industry observers
believe the number of U.S. credit managers or personnel performing this function
is substantially greater. In addition, there are numerous U.S. based companies
that do not have a specific credit function but still require credit
information. Because CRM's sales solicitation is by phone and Internet
demonstration of the product, an untapped global market also exists for U.S. and
foreign companies doing business with other U.S. or foreign corporations and
thus a world market exists for the various forms of CRM's services.
The viability and potential of CRM's business is made possible by its
Internet service delivery and the following characteristics:
o Low price. The annual subscription price of each of CRM's services
is low compared to the cost of most competitive products and low
compared to the subscriber's possible loss of
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not getting paid (see the Price Comparison chart on our website).
o Counter-cyclical. As economic growth slows, general corporate credit
risk usually increases and the credit manager's function rises in
importance and complexity. Since the cost of our services is low
compared to both the size of potential losses it is designed to
reduce and to the cost of competitive services, CRM's business and
revenues may have some counter-cyclicality as world economic growth
slows or declines. Additionally, products that allow credit managers
to perform their jobs more efficiently and cost effectively should
continue to gain market share in most business environments.
o Profit multiplier. Some of the Company's basic costs are being
reduced. On a broad generic basis, computer hardware, software,
telecommunications and financial data prices have been coming down
for all buyers, including CRM. In addition, CRM has automated a
significant amount of the processes used to create and deliver its
service; therefore, its production costs, apart from the development
cost of enhancing and upgrading the Company's website, are
relatively stable over a wide range of increasing revenue.
Offsetting these cost reductions is the cost of increasing the data
content of CRM's services if the Company chooses to increase content
and not raise prices to cover these additional costs.
o Self financing. CRM's business has no inventory, manufacturing or
warehouse facilities. Thus, it is a low capital intensive business
capable of generating high margins and sufficient positive cash flow
to grow the business with little need for external capital except
for working capital purposes. (See MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Financial Condition, Liquidity and Capital Resources.)
o Management. CRM has in-place an experienced management team with
proven talent in business credit evaluation systems and Internet
development.
The Company's Goals
o Lowest cost provider. CRM's analysis and preparation of data into a
usable form is nearly 100% computer driven and minimum incremental
personnel costs are required to broaden the number of companies
analyzed. CRM delivers all of its information to customers via the
Internet and there is a seamless interface between the preparation
and delivery of a company credit report to a subscriber. Since CRM
has automated a significant amount of the processes used to create
and deliver our service, CRM's production costs are relatively
stable over a wide range of increasing revenue. CRM's cost structure
is believed to be one of the lowest in its industry.
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o Continued cost reductions. The Company foresees declining costs in
some important expense areas, such as computer and communication
costs, which should increase net profits from its subscription
income stream. The Company believes that the advent of Internet
delivery of telephone calls will further reduce the cost per phone
call over the next several years, and computer costs per transaction
should also continue to decline. The Company further believes that
the base of its renewal business should grow larger each year and
the Company has lower sales expenses for renewals than for new
sales. All these naturally occurring cost reductions will be in
addition to the cost reductions achieved through servicing more
accounts over the Company's in-place fixed costs. Offsetting these
cost reductions will be CRM's need to add additional content unless
it is able to offset these additional content costs by increasing
the price of CRM's services.
o International penetration. Foreign companies doing business in the
U.S. have the same need as domestic companies for CRM's credit
analysis of U.S. companies. Internationally, the Internet provides
the same rapid and inexpensive selling and distribution of CRM's
service as has been achieved domestically.
Marketing and Sales
To gain market share for company credit information, CRM will continue to
use the Internet (at our website www.crmz.com) as the primary mechanism for
distributing its service. To inform potential subscribers about its service, CRM
uses a combination of telemarketing, trade show representation and speaking
engagements before credit associations.
Value Proposition
CRM's fundamental value proposition is that CRM creates and sells high
quality commercial credit reports at a cost significantly below that of
equivalent reports from the leading provider (price comparison as of March 10,
2005). Because D&B(TM) has the largest share of the commercial credit market,
their flagship product, the Business Information Report ("BIR"), is the standard
by which that market measures both quality and price. CRM's customers clearly
agree that the quality and freshness of its commercial credit reports on active
public companies is as high, if not higher, than that of the D&B(TM) BIRs on the
same companies. Moreover, the price of CRM's commercial credit reports is often
80% below D&B(TM)'s price for BIRs on the same companies.
The operational strategy CRM follows to deliver on its value proposition
is straightforward. CRM became (and remains) one of the industry's lowest cost
producers of high quality commercial credit information by continuously
collecting data from a wide variety of sources and employing sophisticated
proprietary computer algorithms to process that data into an extensive
integrated data base. CRM also employs human review of selected data at critical
points in its
4
process to further enhance the quality of its products and their relevance to
credit professionals.
CRM employs several different selling strategies to deliver this value to
different customer segments:
o For low-volume customers, CRM sells individual domestic and foreign
commercial credit reports for a flat price of $49.95 per report,
using credit card transactions across the Internet. Although D&B(TM)
also sells single reports on the Internet, they impose a complicated
pricing schedule, in which the price of a report depends on both the
customer's home country and the home country of the company about
which they are inquiring. This pricing schedule includes more than
20 different price points for the D&B(TM) BIR alone, ranging from
$80 to $570 per report. It is apparently designed to protect
D&B(TM)'s legacy revenue streams from the pre-Internet era, when
charging large cross-border premiums could be justified to some
extent by the increased production costs of producing and delivering
BIRs across internal D&B(TM) organizational boundaries. In contrast,
CRM was designed from the ground up to be a worldwide provider of
commercial credit reports over the Internet, and is not similarly
constrained by legacy systems.
o Customers who purchase dozens of credit reports (or more) per year
typically have contracts with D&B(TM), at least in the United
States. Traditionally, D&B(TM) sells such customers prepaid units
and/or reports ("units") on an annual basis, which they can then use
to buy D&B(TM) products throughout the year. The price of each unit
depends on the number of units being purchased upfront, with the
resulting price of a domestic U.S. BIR generally ranging between $40
and $60. If a customer has unused units at the end of the year,
D&B(TM) may allow it to only carry a percentage of them forward, as
long as the customer renews for another year for at least the same
number of units as the previous year. All other unused units may be
forfeited. For these customers, CRM's unlimited "all you can eat"
fixed price annual subscription (which also includes continuous
monitoring and email alerting of S&P rating changes, SEC filings,
and press releases) represents an opportunity to save money by
significantly reducing the customer's D&B(TM) usage. CRM does not
recommend to subscription customers that they drop their D&B(TM)
contracts altogether, since D&B(TM) has broader coverage of private
companies. However, CRM has found that most medium to large sized
companies generate a substantial portion of their revenues selling
to public companies, and CRM believes that its reports and
monitoring of public companies are superior to what is offered by
D&B(TM). The Best Practice that CRM recommends to its subscription
customers is to always search CRM's data base first (which does not
incur any incremental expense to them) and to save their expensive
D&B(TM) units for those situations where CRM has no information on
the business in question. CRM believes that customers who follow
this practice typically find that the reduction in their D&B(TM)
usage alone pays for the modest CRM
5
subscription fee many times over.
o It is expected that compliance with the Sarbanes-Oxley Act of 2002
will require companies to adopt a systematic process to continually
review the financial results of those companies that represent the
higher revenue generators for each company. These, for the most
part, will be their public company customers.
o The best estimate is that a small percentage of all credit-related
business transactions are supported by objective third party credit
information. This is not surprising, given the high cost of
commercial credit reports from the traditional vendors. CRM breaks
that model. By eliminating the incremental cost of a credit report,
CRM's unlimited annual subscription enables subscription customers
to employ objective credit information in many more transactions
than was economically feasible before. The inevitable result is
better credit decisions with no increase in costs.
Net Operating Loss Carryforwards
As of December 31, 1998, the Company had approximately $13.9 million of
net operating loss ("NOL") carryovers. At December 31, 2004, the Company had NOL
carryforwards aggregating approximately $6.4 million, including the balance
remaining of the 1998 carryovers, expiring in varying amounts over the following
twenty (20) years, which, to the extent available under the Internal Revenue
Code of 1986, as amended (the "Code"), may be used to minimize the Company's
liability for taxes on future taxable income of the Company, if any.
Section 382 of the Code provides limits on the amount of a company's NOL
carryforwards which can be applied against its earnings after an "ownership
change" occurs. Generally, such a limit is determined, with respect to the
amount of NOL carryforward to which the limit applies, by multiplying the
company's value at the time of the ownership change by the published long-term
tax exempt interest rate. The resulting amount is the maximum that can be offset
by NOL carryforwards in any one year if an ownership change has occurred.
An ownership change occurs if there has been an "owner shift" -- a more
than 50 percentage point increase in stock ownership involving "5-percent
shareholders" over the lowest percentage of stock of the loss corporation owned
by such shareholders at any time during the testing period (generally, the prior
3 years). For this purpose, in general, shareholders that are not 5-percent
shareholders are aggregated and treated as a single 5-percent shareholder.
See "Risks and Other Considerations - Disallowance of NOL Carryovers" for
a discussion of the risk that an "ownership change" may have occurred or could
occur which could cause the loss or limitation of the Company's available NOL
carryforwards, pursuant to Section 382.
6
Employees
As of March 7, 2005, the Company had 32 full-time employees. None of the
Company's employees are covered by a collective bargaining agreement. The
Company believes its relations with its employees to be satisfactory and has
suffered no interruption in operations.
The Company established a 401(k) Plan covering all employees effective
January 1, 2000 that provides for discretionary Company contributions. To date
the Company has not made any contributions. The Company has no other retirement,
pension, profit sharing or similar program in effect for its employees. The
Company adopted a stock option plan in 1998 that covers its employees.
ITEM 2. PROPERTY.
The Company does not own any real property. The Company relocated its
principal office in August 2004 to approximately 7,690 square feet of leased
space in an industrial warehouse complex located in Valley Cottage, New York.
The lease expires on July 31, 2009 and provides for a monthly cost of $7,682
during the first year and increases of 3% per annum in subsequent years, plus an
allocated portion of real estate taxes, insurance and common area maintenance.
ITEM 3. LEGAL PROCEEDINGS.
As previously reported, in November, 2001, the Company commenced an action
against Samuel Fensterstock and a competitor (collectively the "Defendants") in
the Supreme Court of the State of New York, Nassau County; on August 6, 2004, in
the Contempt Proceedings, the Court issued a Decision finding that Defendants
violated the Settlement Agreement and were in contempt of the July 2001 Order,
and awarded compensatory and punitive damages against the Defendants aggregating
$821,044, plus attorney fees and legal costs in an amount to be determined; on
August 24, 2004, the Court entered a Judgment providing for the enforcement of
its award and assigned a Referee to conduct a hearing concerning the amount of
attorneys' fees and costs to be awarded; on August 30, 2004, Defendants filed a
Notice of Appeal and posted a $900,000 bond to secure the compensatory and
punitive damages awarded in the Judgment; and on September 10, 2004 the
competitor and Samuel Fensterstock served separate Motions to Reargue. In
January 2005, the Court rejected the arguments contained in the Motions to
Reargue and adhered to its August 6, 2004 Decision. The issue of attorneys' fees
and costs is currently before the Referee.
In the Company's action against Decision Strategies LLC ("Decision
Strategies") in Nassau County, previously reported, the Court granted Decision
Strategies' motion to dismiss because Decision Strategies commenced an action in
New York County. The dispute will now be heard in New York County.
In the Competitor Action, previously reported, the parties are engaged in
discovery.
In each of the actions filed by the Company, against the
7
competitor and Mark McNamara and against the competitor and Ryan Kohler,
previously reported, the parties are engaged in discovery.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 2004, either through the
solicitation of proxies or otherwise.
8
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURHASES OF EQUITY SECURITIES.
The Company's Common Stock trades in the over-the-counter market "Bulletin
Board Service" under the symbol CRMZ. The following table sets forth the high
and low closing bid quotations reported on the over-the-counter market Bulletin
Board Service for each calendar quarter of 2003 and 2004. These quotations
reflect inter-dealer prices without retail mark-up, mark-down or commission and
do not necessarily represent actual transactions.
High Bid Low Bid
-------- -------
2003
First Quarter $ 0.400 $ 0.250
Second Quarter $ 0.400 $ 0.260
Third Quarter $ 0.330 $ 0.330
Fourth Quarter $ 0.400 $ 0.340
2004
First Quarter $ 0.800 $ 0.400
Second Quarter $ 0.510 $ 0.440
Third Quarter $ 0.510 $ 0.420
Fourth Quarter $ 0.420 $ 0.400
On March 7, 2005, there were approximately 328 registered holders of the
Company's Common Stock. This number does not reflect the number of individuals
or institutional investors holding stock in nominee name through banks,
brokerage firms, and others.
The Company has not paid any cash dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future.
The Company sold 1,853,333 shares of common stock at $0.45 per share for
total consideration of $834,000 in December 2003 pursuant to a self-administered
Confidential Private Offering Memorandum. The shares were sold only to
"accredited investors" as such term is defined under Regulation D of the
Securities Act of 1933, as amended.
The Company did not repurchase any of its common stock during the fourth
quarter of 2004.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Financial Condition, Liquidity and Capital Resources
In December 2003, the Company augmented its working capital by raising
$834,000 through the sale of approximately 1.85 million common shares at $0.45
per share in a private placement.
9
At December 31, 2004, the Company had cash and cash equivalents of
$877,000 compared to $1.14 million at December 31, 2003. The Company's working
capital deficit at December 31, 2004 was approximately $1.05 million compared to
a working capital deficit of approximately $709,000 at December 31, 2003, due
primarily to a decrease of $261,000 in cash and cash equivalents and a $107,000
increase in accrued expenses. Additionally, the working capital deficit at
December 31, 2004 is mainly derived from the $2.22 million in deferred revenue,
which should not require any future cash outlay other than the cost of
preparation and delivery of the applicable commercial credit reports. The
deferred revenue is taken into income over the subscription term, which
approximates twelve months. The Company has no bank lines of credit or other
currently available credit sources.
For the year ended December 31, 2004, the Company reported a $261,000
decrease in cash and cash equivalents compared to a $150,000 increase for the
prior fiscal year. The prior year's increase is inclusive of the $834,000 raised
in the private placement. Excluding the funds raised from the private placement,
the Company experienced a $684,000 decrease in cash and cash equivalents during
2003. Excluding costs of $269,000 and $591,000 in 2004 and 2003, respectively,
incurred in connection with the Contempt Proceeding, the Competitor Action and
the other litigation described in Part I, Item 3 (collectively, the
"Litigation") the Company had positive cash flow of $8,000 for the year ended
December 31, 2004 versus a cash flow deficit of $93,000 (also excluding payment
of Litigation expenses and before the funds raised in the 2003 private
placement) for fiscal 2003.
The Company believes that its legal fees are likely to continue to be
significant as a result of (i) a decision by Defendants to appeal the August 6,
2004 Decision, (ii) the proceedings before the Referee to determine legal fees
and court costs, (iii) the Competitor Action against the Company, (iv) the
ongoing litigation involving Decision Strategies, and (v) the ongoing
litigations against the competitor and the Company's former employees.
The Company further believes that the substantial award provided in the
August 6, 2004 Decision, if realized, should benefit its cash position. In
addition, the Defendants should no longer be able to engage in anti-competitive
activities which violate the Settlement Agreement, in which event the Company's
ability to retain and/or obtain customers should be improved. Additionally, the
Defendants have posted a bond that will secure the damages provided in the
August 6, 2004 Decision. There can be no assurance that any of the above results
will be achieved, or that any amounts awarded in excess of the bond posted by
Defendants will be collectible in whole or in part.
The parties currently are engaged in discovery in connection with the
Competitor Action. The Company believes that (a) the competitor's claims are
without merit, and (b) in any event, the Company's counterclaims should reduce
or eliminate the effect of any recovery the competitor may obtain. There can be
no assurance that any of the above results will be achieved.
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While the Company, as noted above, believes that the negative cash flow
impact of its legal costs may continue, the Company believes that it will have
sufficient resources to meet its working capital and capital expenditure needs,
including debt service, for at least the next 12 months and, if it is correct in
its assessment of the effect of the Litigation on the improvement of its cash
flow and gross revenues, for the longer term as well.
As described more fully in Notes 6 and 8 of the Notes to Consolidated
Financial Statements, at December 31, 2004 the Company had certain cash
obligations, which are due as follows:
Less than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
----- ------ --------- --------- -------
Promissory Note $ 620,787 $100,084 $233,763 $286,940 --
Capital lease obligations 71,422 26,518 44,904 -- --
Operating leases 541,991 128,457 248,900 164,634 --
---------- -------- -------- -------- --------
Total $1,234,200 $255,059 $527,567 $451,574 --
========== ======== ======== ======== ========
Off-Balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements.
Results of Operations
2004 vs. 2003
Year Ended December 31,
-----------------------
2004 2003
---- ----
% of Total % of Total
Amount Revenue Amount Revenue
------ ------- ------ -------
Operating revenues $ 3,346,572 100.00% $ 3,042,635 100.00%
----------- ----------- ----------- -----------
Operating expenses:
Data and product costs 1,042,912 31.16% 1,194,310 39.25%
Selling, general and
administrative 2,308,046* 68.97% 2,490,382* 81.85%
Depreciation and amortization 67,721 2.02% 88,254 2.90%
----------- ----------- ----------- -----------
Total operating expenses 3,418,679 102.15% 3,772,946 124.00%
----------- ----------- ----------- -----------
Loss from operations (72,107)* -2.15% (730,311)* -24.00%
Other income 7,729 0.23% 6,369 0.21%
Interest expense (74,271) -2.22% (81,023) -2.66%
----------- ----------- ----------- -----------
Loss before income taxes (138,649)* -4.14% (804,965)* -26.46%
Income taxes 381 0.01% 982 0.03%
----------- ----------- ----------- -----------
Net loss $ (139,030)* -4.15% $ (805,947)* -26.49%
=========== =========== =========== ===========
* Litigation expenses were $237,000 and $669,000 in 2004 and 2003,
respectively.
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Operating revenues increased 10% for the year ended December 31, 2004.
This increase was primarily due to an increase in the number of subscribers to
the Company's Internet subscription service offset in part by a decrease in the
number of subscribers to the Company's subscription service for third-party
international credit reports.
Data and product costs decreased 13% for fiscal 2004. This decrease was
primarily due to the lower cost of acquiring third-party international credit
reports, and lower salary and related employee benefits resulting from a
decrease in headcount, offset partially by the incurrence of certain
non-recurring capital expenditures in connection with its move to its new leased
facility and the Company's decision to co-locate its production servers at an
offsite location, both of which occurred in the third quarter of 2004.
Selling, general and administrative expenses decreased 7% for fiscal 2004.
This decrease was primarily due to a decrease in legal fees incurred in
connection with the Litigation, partially offset by an increase in rent expense
due to the four month incurrence of rental payments on both the Company's old
and new leased facilities as well as slightly higher salary and related employee
benefit costs due to an increase in the Company's sales force during the past 12
months.
Depreciation and amortization decreased 23% for fiscal 2004. This decrease
was due to a lower depreciable asset base during most of the year, as certain
items had been fully depreciated but were still in use, offset by depreciation
expense recorded for the assets either purchased or leased in connection with
the Company's move and the decision to co-locate its production servers.
Other income increased 21% for fiscal 2004. This increase was due to a
higher level of funds invested in interest bearing accounts during the year
compared to last year due to the funds raised in the 2003 private placement.
Interest expense decreased 8% for fiscal 2004, due to a lower outstanding
promissory note balance, partially offset by the interest expense on the capital
leases entered into during 2004.
The Company incurred net losses of $139,030 and $805,947 for the years
ended December 31, 2004 and 2003, respectively. The decrease in the net loss is
due principally to the decrease in Litigation expenses described above.
Excluding the Litigation expenses of $237,000 and $669,000 for the years ended
December 31, 2004 and 2003, respectively, the Company would have reported net
income (loss) of $98,000 and ($137,000) for fiscal 2004 and 2003, respectively.
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2003 vs. 2002
Year Ended December 31,
-----------------------
2003 2002
---- ----
% of Total % of Total
Amount Revenue Amount Revenue
------ ------- ------ -------
Operating revenues $ 3,042,635 100.00% $ 3,069,546 100.00%
----------- ----------- ----------- -----------
Operating expenses:
Data and product costs 1,194,310 39.25% 1,453,650 47.36%
Selling, general and
administrative 2,490,382* 81.85% 1,688,609* 55.01%
Depreciation and amortization 88,254 2.90% 104,308 3.40%
----------- ----------- ----------- -----------
Total operating expenses 3,772,946 124.00% 3,246,567 105.77%
----------- ----------- ----------- -----------
Loss from operations (730,311)* -24.00% (177,021)* -5.77%
Other income 6,369 0.21% 17,511 0.57%
Interest expense (81,023) -2.66% (92,186) -3.00%
----------- ----------- ----------- -----------
Loss before income taxes (804,965)* -26.46% (251,696)* -8.20%
Income taxes 982 0.03% 1,220 0.04%
----------- ----------- ----------- -----------
Net loss $ (805,947)* -26.49% $ (252,916)* -8.24%
=========== =========== =========== ===========
* Litigation expenses were $669,000 and $77,000 in 2003 and 2002,
respectively.
Operating revenues decreased 1% for the year ended December 31, 2003, due
to a decrease in subscription revenue from the Company's third-party
international credit reports offset in part by an increase in the number of
subscribers to the Company's Internet subscription service.
Data and product costs decreased 18% for fiscal 2003, primarily due to
lower salary and related employee benefits, resulting from a decrease in
headcount, and the lower cost of acquiring data for the Company's domestic
service, due to a change in data providers, offset in part by higher
professional fees paid to outside consultants.
Selling, general and administrative expenses increased 47% for fiscal
2003. This increase was primarily due to higher legal fees incurred in
connection with the Litigation ($669,000 in 2003 versus $77,000 in 2002) as well
as higher salary and related employee benefit costs, due to an increase in the
Company's sales force during the past 12 months.
Depreciation and amortization decreased 15% for fiscal 2003, due to a
lower depreciable asset base as certain items have been fully depreciated but
are still in use.
Other income decreased 64% for fiscal 2003, due to a decrease in funds
invested in interest bearing accounts as well as lower interest rates paid on
these investments during 2003 compared to last year.
Interest expense decreased 12% for fiscal 2003, due to a lower outstanding
promissory note balance.
The Company incurred net losses of $805,947 and $252,916 for the years
ended December 31, 2003 and 2002, respectively. The increase in the net loss is
due principally to the increase in Litigation
13
expenses described above.
Future Operations
The Company over time intends to expand its operations by expanding the
breadth and depth of its product and service offerings and the introduction of
new or complementary products. Gross margins attributable to new business areas
may be lower than those associated with the Company's existing business
activities.
As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, the Company's ability to accurately
forecast its revenues, gross profits and operating expenses as a percentage of
net sales is limited. The Company's current and future expense levels are based
largely on its investment plans and estimates of future revenues and to a large
extent are fixed. Sales and operating results generally depend on the Company's
ability to attract and retain customers and the volume of and timing of their
subscriptions for the Company's services, which are difficult to forecast. The
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall in
revenues in relation to the Company's planned expenditures would have an
immediate adverse effect on the Company's business, prospects, financial
condition and results of operations. Further, as a strategic response to changes
in the competitive environment, the Company may from time to time make certain
pricing, service, marketing or acquisition decisions that could have a material
adverse effect on its business, prospects, financial condition and results of
operations.
Achieving profitability depends on the Company's ability to generate and
sustain increased revenue levels. The Company believes that its success will
depend in large part on its ability to (i) extend its brand position, (ii)
provide its customers with outstanding value, and (iii) achieve sufficient sales
volume to realize economies of scale. Accordingly, the Company intends to
continue to invest in marketing and promotion, product development and
technology and operating infrastructure development. There can be no assurance
that the Company will be able to achieve these objectives within a meaningful
time frame.
Critical Accounting Policies, Estimates and Judgments
The Company's consolidated financial statements are prepared in accordance
with accounting principles that are generally accepted in the United States. The
preparation of these consolidated financial statements require management to
make estimates and judgments that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Management bases its estimates and
judgments on historical experience and other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates. Management continually evaluates its
14
estimates and judgments, the most critical of which are those related to:
Revenue recognition -- CRM's domestic and international service is sold on
a subscription basis pursuant to customer contracts that span varying
periods of time, but are generally for a period of one year. The Company
initially records amounts billed as accounts receivable and defers the
related revenue when persuasive evidence of an arrangement exists, fees
are fixed or determinable, and collection is reasonably assured. Revenues
are recognized ratably over the related subscription period. Revenue from
the Company's third-party international credit report service is
recognized as information is delivered and products and services are used
by customers.
Valuation of goodwill -- Goodwill is reviewed for impairment annually, or
more frequently if events or changes in circumstances warrant. If the
carrying value of this asset exceeds its estimated fair value, the Company
will record an impairment loss to write the asset down to its estimated
fair value.
Income taxes -- The Company provides for deferred income taxes resulting
from temporary differences between financial statement and income tax
reporting. Temporary differences are differences between the amounts of
assets and liabilities reported for financial statement purposes and their
tax bases. Deferred tax liabilities are recognized for temporary
differences that will be taxable in future years' tax returns. Deferred
tax assets are recognized for temporary differences that will be
deductible in future years' tax returns and for operating loss and tax
credit carryforwards. Deferred tax assets are reduced by a valuation
allowance if it is deemed more likely than not that some or all of the
deferred tax assets will not be realized.
Federal Tax Considerations
The Company has available net operating loss carryforwards ("NOLs"), which
may be used to reduce its Federal income tax liability. However, provisions
contained in the Internal Revenue Code of 1986, as amended (the "Code"), may
impose substantial limitations upon the Company's ability to utilize its NOLs.
For example, the Company may be subject to the so-called "alternative minimum
tax" which does not always permit full utilization of NOLs otherwise available.
Limitations imposed by Section 382 of the Code upon the availability of
NOLs would apply if certain changes were to occur in ownership of the Company.
Thus, the Company's utilization of its carryforwards in the future may be
deferred and/or reduced if the Company undertakes further equity financings or
if certain other changes occur in the ownership of the Common Stock. Finally, if
the Company becomes an investment company subject to the Investment Company Act
of 1940, it will no longer be entitled to a deduction for NOLs. See "Business -
Net Operating Loss Carryforwards".
15
Recently Issued Accounting Standards
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory
Costs--an amendment of ARB No. 43, Chapter 4," which clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage) by requiring these items to be recognized as
current-period charges. Further, SFAS No. 151 requires that allocation of fixed
production overhead to conversion costs be based on normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005, with earlier application
permitted. The adoption of SFAS No. 151 will have no impact on our results of
operations or our financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets--an amendment of APB Opinion No. 29," which addresses the measurement of
exchanges of nonmonetary assets and eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive assets and replaces
it with an exception for exchanges that do not have commercial substance. SFAS
No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005, with earlier application permitted. The adoption
of SFAS No. 153 will have no impact on our results of operations or our
financial position.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
replacing SFAS No. 123 and superseding APB Opinion No. 25. SFAS No. 123R
requires public companies to recognize compensation expense for the cost of
stock options and all other awards of equity instruments. This compensation cost
will be measured as the fair value of the award on the grant date estimated
using an option-pricing model. The Company is evaluating the various transition
provisions under SFAS No. 123R. For public entities that file as small business
issuers, this Statement is effective as of the beginning of the first interim or
annual reporting period that begins after December 15, 2005.
In December 2003, the FASB issued FASB Interpretation ("FIN") No. 46-R,
"Consolidation of Variable Interest Entities". FIN No. 46-R, which modifies
certain provisions and effective dates of FIN No. 46, sets forth criteria to be
used in determining whether an investment in a variable interest entity should
be consolidated. The Company holds no interest in variable interest entities.
Risks and Other Considerations
The risks and uncertainties described below are not the only ones facing
the Company. Additional risks and uncertainties not presently known to the
Company or currently deemed immaterial also may impair its business operations.
If any of the risks described below actually occur, the Company's business could
be impaired.
16
From time to time, information provided by the Company or statements made
by its employees, or information provided in its filings with the Securities and
Exchange Commission may contain forward-looking information. Any statements
contained herein or otherwise made that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the foregoing,
the words "believes", "expects", "anticipates", "plans" and similar expressions
are intended to identify forward-looking statements. The Company's actual future
operating results or short-term or long-term liquidity may differ materially
from those projections or statements made in such forward-looking information as
a result of various risks and uncertainties, including but not limited to the
following in addition to those set forth elsewhere herein or in other filings
made by the Company with the Commission.
Limited Operating History of CRM; Anticipated Losses and Negative Cash
Flow. The Company has been operating its business since January 1999, when it
acquired the assets of the CreditRisk Monitor credit information service.
Accordingly, CRM has a limited operating history on which to base an evaluation
of its business and prospects. The Company's prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development, particularly companies in new and
rapidly evolving markets such as online commerce. Such risks for the Company
include, but are not limited to, an evolving and unpredictable business model
and the management of growth. To address these risks, the Company among other
things, must maintain and increase its customer base, implement and successfully
execute its business and marketing strategy and its expansion into new product
markets, effectively integrate acquisitions and other business combinations,
continue to develop and upgrade its technology and transaction-processing
systems, improve its Web site, provide superior customer service, respond to
competitive developments and attract, retain and motivate qualified personnel.
There can be no assurance that the Company will be successful in addressing such
risks, and the failure to do so could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Since inception, CRM has incurred significant losses, and the Company may
continue to incur additional losses and negative cash flow at least for the
balance of 2005. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
Unpredictability of Future Revenues and Profits; Potential Fluctuations in
Quarterly Operating Results. As a result of the Company's limited operating
history and the emerging nature of the markets in which it competes, the
Company's ability to accurately forecast its revenues, gross profits and
operating expenses as a percentage of net sales is limited. The Company's
current and future expense levels are based largely on its investment plans and
estimates of future revenues and to a large extent are fixed. Sales and
operating results generally depend on the Company's ability to attract and
retain customers and the volume of and timing of their subscriptions for the
Company's services, which are difficult to
17
forecast. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues in relation to the Company's planned expenditures would
have an immediate adverse effect on the Company's business, prospects, financial
condition and results of operations. Further, as a strategic response to changes
in the competitive environment, the Company may from time to time make certain
pricing, service, marketing or acquisition decisions that could have a material
adverse effect on its business, prospects, financial condition and results of
operations.
Achieving profitability depends on the Company's ability to generate and
sustain substantially increased revenue levels. The Company believes that its
success will depend in large part on its ability to (i) extend its brand
position, (ii) provide its customers with outstanding value, and (iii) achieve
sufficient sales volume to realize economies of scale. Accordingly, the Company
intends to continue to invest in marketing and promotion, product development
and technology and operating infrastructure development. There can be no
assurance that the Company will be able to achieve these objectives within a
meaningful time frame.
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, some of which are
outside the Company's control. Factors that may adversely affect the Company's
quarterly operating results include, among others, (i) the Company's ability to
retain existing customers, attract new customers at a steady rate and maintain
customer satisfaction, (ii) the Company's ability to maintain gross margins in
its existing business and in future product lines and markets, (iii) the
development of new services and products by the Company and its competitors,
(iv) price competition, (v) the level of use of the Internet and online services
and increasing acceptance of the Internet and other online services for the
purchase of products such as those offered by the Company, (vi) the Company's
ability to upgrade and develop its systems and infrastructure, (vii) the
Company's ability to attract new personnel in a timely and effective manner,
(viii) the level of traffic on the Company's Web site, (ix) the Company's
ability to manage effectively its development of new business segments and
markets, (x) the Company's ability to successfully manage the integration of
operations and technology of acquisitions or other business combinations, (xi)
technical difficulties, system downtime or Internet brownouts, (xii) the amount
and timing of operating costs and capital expenditures relating to expansion of
the Company's business, operations and infrastructure, (xiii) governmental
regulation and taxation policies, (xiv) disruptions in service by common
carriers due to strikes or otherwise, (xv) risks of fire or other casualty,
(xvi) continued litigation costs or other unanticipated expenses, and (xvii)
general economic conditions and economic conditions specific to the Internet and
online commerce.
Due to the foregoing factors and the Company's limited forecasting
abilities, the Company believes that period-to-period comparisons of its
revenues and operating results are not necessarily
18
meaningful and should not be relied on as an indication of future performance.
Risks of Litigation. As reported under "Legal Proceedings", the Company is
a party to various legal proceedings, including particularly the Contempt
Proceeding and the Competitor Action. Litigation is often a lengthy and costly
process causing diversion of effort and resources by the Company and its
management with no guarantee of success. While enforcement of the August 6, 2004
Decision in the Contempt Proceeding should benefit the Company's cash position
and its business operations, the Decision is currently on appeal and there can
be no assurance of a favorable outcome, or that any material cash award in
excess of the bond will be collectible. While the Company believes that the
competitor's claims in the Competitor Action are without merit and that, in any
event, the Company's counterclaims should reduce or eliminate the effect of any
recovery the competitor may obtain, there also can be no assurance that these
results will be achieved. Failure by the Company to sustain and collect a
substantial award of damages in the Contempt Proceeding, or an unfavorable
result in the Competitor Action, or both, could have a material adverse effect
on the Company's business, cash and financial position, prospects and results of
operations. In any event, the Company's legal fees are likely to continue to be
significant in light of the litigation to which it is a party. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Financial Condition, Liquidity and Capital Resources."
Competition. The online commerce market, particularly over the Web, is
new, rapidly evolving and intensely competitive. The Company's current or
potential competitors include (i) companies now selling or who will be selling
credit analysis data, such as D&B(TM) which currently has the dominant position
in the industry and the financial resources to withstand substantial price
competition, and (ii) a number of indirect competitors that specialize in online
commerce or information or derive a substantial portion of the revenues from
online commerce or information, who may offer products, and many of which
possess significant brand awareness, sales volume and customer bases. The
Company believes that the principal competitive factors in its market are brand
recognition, selection, personalized services, convenience, price,
accessibility, customer service, quality of search tools, quality of editorial
and other site content and reliability and speed of delivery. Many of the
Company's competitors have longer operating histories, larger customer bases,
greater brand recognition and significantly greater financial, marketing and
other resources than the Company. Certain of the Company's competitors may be
able to secure data from vendors on more favorable terms, devote greater
resources to marketing and promotional campaigns, adopt more aggressive pricing
and devote substantially more resources to Web site and systems development than
the Company. Increased competition may result in reduced operating margins, loss
of market share and a diminished brand franchise. There can be no assurance that
the Company will be able to compete successfully against current and future
competitors.
19
The Company expects that the competition in the Internet and online
commerce markets will intensify in the future. For example, as various Internet
market segments obtain large, loyal customer bases, participants in those
segments may seek to leverage their market power to the detriment of
participants in other market segments. In addition, new technologies and the
expansion of existing technologies may increase the competitive pressures on the
Company. Competitive pressures created by any one of the Company's competitors,
or by the Company's competitors collectively, could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
Need for Additional Financing; Risks of Default. The Company's future
liquidity and capital funding requirements will depend on numerous factors,
including whether or when the Company will increase its customer base and
revenues, whether and when its litigation costs will cease or be substantially
reduced, and the costs and timing of expansion of sales, control of information
costs and other expenses and competition. There can be no assurance that
additional capital, if needed, will be available on terms acceptable to the
Company, or at all. Furthermore, any additional equity financing may be dilutive
to stockholders and may cause a loss or material limitation of the Company's NOL
carryovers, and debt financing may be unavailable in light of the first priority
liens which have been granted to secure the Company's note to the seller of the
assets of its credit information service and, if available, will likely include
restrictive covenants, including financial maintenance covenants restricting the
Company's ability to incur additional indebtedness and to pay dividends. The
failure of the Company to raise capital on acceptable terms when needed could
have a material adverse effect on the Company.
There can be no assurance that the Company will be able to meet its debt
service obligations. In the event the Company's cash flow is inadequate to meet
its obligations, the Company could face substantial liquidity problems. If the
Company is unable to generate sufficient cash flow or otherwise obtain funds
necessary to make required payments, or if the Company otherwise fails to comply
with the various covenants in its indebtedness, it would be in default under the
terms thereof, which would permit the holders of such indebtedness to accelerate
the maturity of such indebtedness and to foreclose on its collateral, which
could cause defaults under other indebtedness of the Company. Any such default
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
System Development and Operation Risks. Any system interruptions that
result in the unavailability of the Company's Web site would reduce the
attractiveness of the Company's service offerings. The Company has experienced
periodic system interruptions, which it believes will continue to occur from
time to time. The Company will be required to add additional software and
hardware and further develop and upgrade its existing technology and network
infrastructure to accommodate increased traffic on its Web site
20
resulting from increased sales volume. Any inability to do so may cause
unanticipated system disruptions, slower response times, degradation in levels
of customer service, impaired quality, or delays in reporting accurate financial
information. There can be no assurance that the Company will be able to
accurately project the rate or timing of increases, if any, in the use of its
Web site or in a timely manner to effectively upgrade and expand its systems or
to integrate smoothly any newly developed or purchased modules with its existing
systems. Any inability to do so could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
The Company's web servers were located to a secure offsite location during
2004. Its back office computer and communications hardware is located at a
single leased facility in Valley Cottage, New York. The Company's systems and
operations are vulnerable to damage or interruption from fire, flood, power
loss, telecommunications failure, break-ins, earthquake and similar events. The
Company does not currently have redundant systems or a formal disaster recovery
plan and does not have sufficient business interruption insurance to compensate
it for losses that may occur. Despite the implementation of network security
measures by the Company, its servers are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of critical data or the inability to accept and
fulfill customer orders. The occurrence of any of the foregoing events could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Management of Potential Growth. To manage the expected growth of its
operations and personnel, the Company will be required to improve existing and
implement new operational and financial systems, procedures and controls, as
well as to expand, train and manage its growing employee base. There can be no
assurance that the Company's current and planned personnel, systems, procedures
and controls will be adequate to support the Company's future operations, that
management will be able to hire, train, retain, motivate and manage required
personnel or that Company management will be able to successfully identify,
manage and exploit existing and potential market opportunities. If the Company
is unable to manage growth effectively, such inability could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
Limited Personnel. The Company currently has limited personnel and other
resources to undertake the extensive marketing activities necessary to market
CRM. The Company's ability to generate revenue from its CRM business will be
dependent upon, among other things, its ability to manage an effective sales
organization. The Company will need to continue to develop and expand a sales
force and a marketing group with technical expertise to coordinate marketing
efforts. In addition, there can be no assurance that the Company will be able to
market its products or services effectively through an in-house sales force,
independent sales representatives, through arrangements with
21
an outside sales force, or through strategic partners.
Risks of New Business Areas. The Company over time intends to expand its
operations by continuing to promote new or complementary products or formats and
by expanding the breadth and depth of its product or service offerings.
Expansion of the Company's operations in this manner will require significant
additional expense and development, operations and editorial resources and could
strain the Company's management, financial and operational resources. There can
be no assurance that the Company will be able to expand its operations in a
cost-effective or timely manner. Furthermore, any new business launched by the
Company that is not favorably received by customers could damage the Company's
reputation or the CRM brand. The lack of market acceptance of such efforts or
the Company's inability to generate satisfactory revenues from such expanded
services or products to offset their cost could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations. Gross margins attributable to new business areas may be lower than
those associated with the Company's existing business activities.
Risks of Business Combinations and Strategic Alliances. The Company may
choose to expand its operations or market presence by entering into business
combinations, investments, joint venture or other strategic alliances with third
parties. Any such transaction will be accompanied by risks commonly encountered
in such transactions, which include, among others, the difficulty of
assimilating the operations, technology and personnel of the combined companies,
the potential disruption of the Company's ongoing business, the possible
inability to retain key technical and managerial personnel, the potential
inability of management to maximize the financial and strategic position of the
Company through the successful integration of acquired businesses, additional
expenses associated with amortization of purchased intangible assets, additional
operating losses and expenses associated with the activities and expansion of
acquired businesses, the maintenance of uniform standards, controls and policies
and the possible impairment of relationships with existing employees and
customers. There can be no assurance that the Company will be successful in
overcoming these risks or any other problems encountered in connection with such
business combinations, investments, joint ventures or other strategic alliances,
or that such transactions will not have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Rapid Technological Change. To remain competitive, the Company must
continue to enhance and improve the responsiveness, functionality and features
of its data analysis services. The Internet and the online commerce industry are
characterized by rapid technological change, changes in user and customer
requirements and preferences, frequent new products and service introductions
embodying new technologies and the emergence of new industry standards and
practices that could render the Company's existing Web site and proprietary
technology and systems obsolete. The Company's success will depend, in part, on
its ability to license leading
22
technologies useful in its business, enhance its existing services, develop new
services and technology that address the increasingly sophisticated and varied
needs of its prospective customers and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
The development of a Web site and other proprietary technology entails
significant technical, financial and business risks. There can be no assurance
that the Company will successfully implement new technologies or adapt its Web
site, proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards. If the Company is unable, for
technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, such inability
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
Dependence on Key Personnel. The Company's performance is substantially
dependent on the continued services and on the performance of its senior
management and other key personnel. The Company does not have long-term
employment agreements with any of its key personnel and maintains no "key
person" life insurance policies. The loss of the services of its executive
officers or other key employees could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Reliance on Certain Suppliers. The Company purchases its data and/or
credit reports from a limited number of vendors under agreements having terms of
17 months or less. The Company has no longer-term contracts or arrangements with
any vendor of data that guarantee the availability of data, the continuation of
particular payment terms or the extension of credit. Nevertheless, the Company
believes that it would be able to obtain the necessary data from other sources,
at competitive prices, should it become necessary or advisable to do so. There
can be no assurance, however, that the Company's vendors will continue to supply
data to the Company on current terms or that the Company will be able to
establish new or extend current vendor relationships to ensure acquisition of
information in a timely and efficient manner and on acceptable commercial terms.
If the Company were unable to maintain or develop relationships with vendors
that would allow it to obtain sufficient quantities of reliable information on
acceptable commercial terms, such inability could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations.
Risk of Expansion and Implementation of Growth Strategy. The Company's
growth and expansion have placed, and may continue to place, a strain on the
Company's management, administrative, operational, financial and technical
resources and increased demands on its systems and controls. Demands on the
Company's network resources and technical staff and resources have grown rapidly
with the Company's expanding customer bases. A failure to effectively provide
customer and technical support services will adversely affect the Company's
ability to attract and maintain its customer base. The Company expects to
experience continued strain on its operational systems as it develops, operates
and maintains its network. Expected
23
increases in the Company's Internet client base will produce increased demands
on sales, marketing and administrative resources, its engineering and technical
resources, and its customer and technical support resources. The Company
believes that it will need, both in the short-term and the long-term, to hire
additional sales and marketing and technical personnel as well as qualified
administrative and management personnel in the accounting and finance areas to
manage its financial control systems. In addition, the Company will need to hire
or to train managerial and support personnel. Although the Company has hired
additional personnel and upgraded certain of its systems, there can be no
assurance that the Company's administrative, operating and financial control
systems, infrastructure, personnel and facilities will be adequate to support
the Company's future operations or maintain and effectively adapt to future
growth.
There can be no assurance that the Company will be able to build its
infrastructure, add services, expand its customer bases or implement the other
features of its business strategy at the rate or to the extent presently
planned, or that its business strategy will be successful. The Company's ability
to continue to grow may be affected by various factors, many of which are not
within the Company's control, including U.S. and foreign regulation of the
Internet industry, competition and technological developments. The inability to
continue to upgrade the networking systems or the operating and financial
control systems, the inability to recruit and hire necessary personnel or the
emergence of unexpected expansion difficulties could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
Risks of Network Failure. The success of the Company is largely dependent
on its ability to deliver high quality, uninterrupted access to its product over
the Internet. Any system or network failure that causes interruptions in the
Company's Internet operations could have a material adverse effect on the
business, financial condition or results of operations of the Company. The
Company's operations are dependent on its ability to successfully expand its
network and integrate new and emerging technologies and equipment into its
network, which are likely to increase the risk of system failure and cause
unforeseen strain upon the network. The Company's operations also are dependent
on the Company's protection of its hardware and other equipment from damage from
natural disasters such as fires, floods, hurricanes, and earthquakes, or other
sources of power loss, telecommunications failures or similar occurrences.
Significant or prolonged system failures could damage the reputation of
the Company and result in the loss of customers. Such damage or losses could
have a material adverse effect on the Company's ability to obtain new
subscribers and customers, and on the Company's business, prospects, financial
condition and results of operations.
Security Risks. Despite the implementation of network security measures by
the Company, such as limiting physical and network access
24
to its routers, its Internet access systems and information services are
vulnerable to computer viruses, break-ins and similar disruptive problems caused
by its customers or other Internet users. Such problems caused by third parties
could lead to interruption, delays or cessation in service to the Company's
Internet customers. Furthermore, such inappropriate use of the Internet by third
parties could also potentially jeopardize the security of confidential
information stored in the computer systems of the Company's customers and other
parties connected to the Internet, which may deter potential subscribers.
Persistent security problems continue to plague public and private data
networks. Recent break-ins, "worms" and "viruses" reported in the press and
otherwise have reached computers connected to the Internet at major corporations
and Internet access providers and have involve the theft of information,
including incidents in which hackers bypassed firewalls by posing as trusted
computers. Alleviating problems caused by computer viruses, worms, break-ins or
other problems caused by third parties may require significant expenditures of
capital and resources by the Company, which could have a material adverse effect
on the Company. Until more comprehensive security technologies are developed,
the security and privacy concerns of existing and potential customers may
inhibit the growth of the Internet service industry in general and the Company's
customer base and revenues in particular. Moreover, if the Company experiences a
breach of network security or privacy, there can be no assurance that the
Company's customers will not assert or threaten claims against the Company based
on or arising out of such breach, or that any such claims will not be upheld,
which could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
Disallowance of NOL Carryovers. As of December 31, 1998, the Company had
approximately $13.9 million of net operating loss ("NOL") carryovers. As of
December 31, 2004, the Company had approximately $6.4 million of NOL carryovers,
including the balance remaining of the 1998 carryovers, expiring in varying
amounts over the following twenty (20) years, which it believes may be available
to shelter future taxable income, if any. While the Company's view is predicated
upon the advice of counsel, the Company does not intend to seek a ruling from
the Internal Revenue Service ("IRS") as to the availability of its NOLs and
neither the Company's views nor counsel's advice is binding on the IRS.
Moreover, counsel's advice is in turn predicated on the accuracy of certain
factual assumptions, including assumptions as to the value of its respective
preferred and common equity interests as of certain relevant dates, which are in
turn based upon the opinion of the independent directors of the Company. Since
these factual determinations are important to the tax conclusions, a ruling on
this issue would not be available from the IRS, since it does not issue rulings
on factual issues. There can be no assurance that such assumptions would be
sustained if challenged by the IRS. If a successful challenge were maintained,
then the sale of shares of common stock in its 1999 private placement, together
with other "owner-shifts" within the prior three years, could have resulted in
an "ownership change", in which event the NOL carryovers would be lost in their
entirety. In addition, the issuance of shares of common stock in the 2003
private placement, and future issuances
25
by the Company of its equity securities, could result in an "ownership change"
which, depending upon the timing thereof, would in turn cause a limitation on
the amount of NOL carryovers which can be used in any one year. Any inability to
utilize these NOLs or any material limitation on their availability would
adversely effect the Company's after-tax cash flow and, accordingly, its
financial condition and results of operations.
Risks Associated with Domain Names. The Company currently utilizes its
domain name "CreditRiskMonitor.com" in its business. The acquisition and
maintenance of domain names generally is regulated by governmental agencies and
their designees. For example, in the United States, the National Science
Foundation has appointed Network Solutions, Inc. as the exclusive registrar for
the ".com", ".net" and ".org" generic top-level domains. The regulation of
domain names in the United States and in foreign countries is subject to change.
Governing bodies may establish additional top-level domains, appoint additional
domain name registrars or modify the requirements for holding domain names. As a
result, there can be no assurance that the Company will be able to acquire or
maintain relevant domain names in the United States and all other countries in
which it may conduct business. Furthermore, the relationship between regulations
governing domain names and laws protecting trademarks and similar proprietary
rights is unclear. The Company, therefore, may be unable to prevent third
parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of its trademarks and other proprietary rights. Any
such inability could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
Governmental Regulation and Legal Uncertainties. The Company is not
currently subject to direct regulation by any domestic or foreign governmental
agency, other than regulations applicable to businesses generally and laws or
regulations directly applicable to access to online commerce. However, due to
the increasing popularity and use of the Internet and other online services, it
is possible that a number of laws and regulations may be adopted with respect to
the Internet or other online services covering issues such as user privacy,
pricing, content, copyrights, distribution and characteristics and quality of
products and services. Furthermore, the growth and development of the market for
online commerce may prompt calls for more stringent consumer protection laws
that may impose additional burdens on those companies conducting business
online. The adoption of any additional laws or regulations may decrease the
growth of the Internet or other online services, which could, in turn, decrease
the demand for the Company's products and services and increase the Company's
cost of doing business, or otherwise have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Moreover, the applicability to the Internet and other online services of
existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is uncertain and
may take years to resolve. Any such new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do no
currently apply to the Company's business, or the application of
26
existing laws and regulations to the Internet and other online services could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Proprietary Rights. The Company relies and expects to continue to rely on
a combination of copyright, trademark and trade secret laws and contractual
restrictions to establish and protect its technology. The Company does not
currently have any issued patents or registered copyrights.
The Company has a policy to require employees and consultants to execute
confidentiality and technology ownership agreements upon the commencement of
their relationships with the Company. There can be no assurance that the steps
taken by the Company will be adequate to prevent misappropriation of its
technology or other proprietary rights, or that the Company's competitors will
not independently develop technologies that are substantially equivalent or
superior to the Company's technology. There can be no assurance that the
Company's trademark applications will result in any trademark registrations, or
that, if registered, any registered trademark will be held valid and enforceable
if challenged.
In addition, to the extent the Company becomes involved in litigation to
enforce or defend its intellectual property rights, as it has in its outstanding
litigation against a competitor and former employee, such litigation is now and
in future can be a lengthy and costly process causing diversion of effort and
resources by the Company and its management with no guarantee of success.
ITEM 7. FINANCIAL STATEMENTS.
The information required by Item 7, and an index thereto, appears at pages
F-1 to F-20 (inclusive) of this Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective September 27, 2004, upon the recommendation of the Company's
audit committee, the Company engaged J.H. Cohn LLP as its independent registered
public accounting firm to audit its financial statements for the year ended
December 31, 2004. J.H. Cohn LLP replaced BDO Seidman, LLP who were dismissed by
the Company on September 27, 2004.
During the years ended December 31, 2003 and 2002 there were no
disagreements with BDO Seidman, LLP on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
ITEM 8A. CONTROLS AND PROCEDURES.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the
27
Securities Exchange Act of 1934, as amended) as of the end of the period covered
by this report. Based on that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer have concluded that, as of the end of such period,
the Company's disclosure controls and procedures are effective.
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended) during its fiscal fourth
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting. Management is
aware that there is a lack of segregation of duties due to the small number of
employees dealing with general administrative and financial matters. However,
management has decided that considering the employees involved and the control
procedures in place, risks associated with such lack of segregation are
insignificant and the potential benefit of adding employees to clearly segregate
duties do not justify the expenses associated with such increase.
ITEM 8B. OTHER INFORMATION.
None.
28
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors and Executive Officers
The following table sets forth certain information with respect to the
directors and executive officers of the Company and the period such persons held
their respective positions with the Company.
================================================================================
Officer or
Principal Occupation/Position Director
Name Age Held with Company Since
--------------------------------------------------------------------------------
Jerome S. Flum 64 Chairman of the 1983
Board/President/
Chief Executive Officer
--------------------------------------------------------------------------------
Lawrence Fensterstock 54 Senior Vice President/Chief 1999
Financial Officer/
Secretary
--------------------------------------------------------------------------------
Richard J. James 65 Director 1992
--------------------------------------------------------------------------------
Leslie Charm 61 Director 1994
================================================================================
Jerome S. Flum was appointed President and Chief Executive Officer of the
Company and Chairman of the Board of Directors in June 1985. From 1968 to 1985,
Mr. Flum was in the investment business as an institutional security analyst,
research and sales partner at an investment firm and then as a general partner
of a private investment pool. Before entering the investment business Mr. Flum
practiced law, helped manage a U.S. congressional campaign and served as a legal
and legislative aide to a U.S. congressman. Mr. Flum has been a guest lecturer
at the Massachusetts Institute of Technology/Sloan School of Management Lab for
Financial Engineering. Mr. Flum received a BS degree in Business Administration
from Babson College and a JD degree from Georgetown University Law School.
Lawrence Fensterstock became an employee and was elected to his current
offices in January 1999. He joined Information Clearinghouse Incorporated
("ICI") in 1993 and was closely involved in the formation of its credit
reporting service. In addition to being responsible for the publication of the
various facets of the credit reporting service, he was chief operating and
financial officer of ICI. Upon leaving ICI, in 1996, he joined Market Guide to
assist in the formation of its credit information services division. From August
1989 through October 1992, he was vice president-controller, treasurer and
corporate secretary for a private entity formed to acquire Litton Industries'
office products operations in a leveraged buyout. There, he spent 2-1/2 years
acting as de facto chief financial officer. Mr. Fensterstock is a certified
public accountant
29
who began his career in 1973 with Arthur Andersen LLP. He has an MBA degree from
The University of Chicago Business School and a BA degree from Queens College.
Richard James is retired after serving as the Technical Manager for
Polaroid Corporation's Consumer Hardware Division Corporation from 1980 until
2002, encompassing manufacturing plants in Scotland, China and the United
States. In this role he was responsible for increasing the business performance
of Polaroid's instant consumer cameras through improved manufacturing processes
and product redesigns. From 1968 through 1979, Mr. James was President of James
Associates, a group of businesses involving accounting and tax preparation,
small business consulting, real estate sales and rentals, and retail jewelry
sales. Mr. James is a founding Board member and VP Finance of the Boston Chapter
of the Society of Concurrent Product Development. Mr. James holds a BS in
Chemical Engineering from Northeastern University and has completed extensive
managerial and technical subjects.
Leslie Charm has been, since 1972, a partner in the firm of Youngman &
Charm, a firm specializing in assisting companies that are experiencing
operating and/or financial problems and also advises entrepreneurs in the
growing of companies. From 1989 to the present, he has been a director of Moto
Photo, Inc., a publicly-held international franchisor of imaging centers which
filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code
in November 2002. Mr. Charm was appointed a director of International
Electronics, Inc., a publicly-held company, in February 2005. Mr. Charm is an
adjunct professor in entrepreneurial finance at Babson College and is a graduate
of the Harvard Business School.
The Company's By-Laws provide that (a) directors shall be elected to hold
office until the next annual meeting of stockholders and that each director,
including a director elected to fill a vacancy, shall hold office until the
expiration of the term for which the director was elected and until a successor
has been elected, and (b) officers shall hold office until their successors are
chosen by the Board of Directors, except that the Board may remove any officer
at any time.
The Audit Committee
The Audit Committee shall assist the Board of Directors in fulfilling its
responsibility to the shareholders, potential shareholders and investment
community relating to corporate accounting, reporting practices of the Company
and the quality and integrity of the Company's financial reporting. To fulfill
its purposes, the Committee's duties shall include to:
o Appoint, evaluate, compensate, oversee the work of, and if
appropriate terminate, the independent auditor, who shall report
directly to the Committee.
o Approve in advance all audit engagement fees and terms of engagement
as well as all audit and non-audit services to be
30
provided by the independent auditor.
o Engage independent counsel and other advisors, as it deems necessary
to carry out its duties.
The Audit Committee currently consists of its outside directors - Richard
James and Leslie Charm, both of whom are audit committee financial experts and
are independent, as such terms are defined by the SEC.
Compliance with Section 16(a) of the of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission ("SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Such persons are required by SEC regulation to furnish the Company with copies
of all Section 16(a) reports they file.
To the Company's knowledge, based solely on its review of the copies of
such reports received by it with respect to fiscal 2004, or written
representations from certain reporting persons, the Company believes that all
filing requirements applicable to its directors, officers and persons who own
more than 10% of a registered class of the Company's equity securities have been
timely complied with.
Code of Ethics
CRM's Board of Directors has adopted a Code of Ethics for its Principal
Executive Officer and Senior Financial Officers. This Code applies to the
Company's Chief Executive Officer and Chief Financial Officer (who also is the
Company's principal accounting officer).
ITEM 10. EXECUTIVE COMPENSATION.
The following table shows all cash compensation paid or to be paid by the
Company during the fiscal years indicated to the chief executive officer and all
other executive officers of the Company as of the end of the Company's last
fiscal year.
31
==================================================================================================================
SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------------------------------------
Annual Compensation(4) Long-Term
Compensation(5)
------------------------------------------------------------------------------------------------------------------
Other
Annual
Compen- Number of Securities All Other
Name and Principal Position Year Salary(2) sation(3) Underlying Options Compensation
------------------------------------------------------------------------------------------------------------------
Jerome S. Flum, Chairman, 2004 $130,400(3) $ -- -- None
President and Chief Executive 2003 $115,200(1)(3) $ -- 5,000 None
Officer 2002 $120,905(1)(3) $ -- -- None
------------------------------------------------------------------------------------------------------------------
Lawrence Fensterstock, Senior 2004 $138,417 $ -- -- None
Vice President 2003 $140,000 $ -- 5,000 None
2002 $150,000 $ -- -- None
==================================================================================================================
(1) Beginning January 20, 1999 and continuing through June 30, 2003, Mr. Flum
was being compensated by the Company at the rate of $150,000 per annum, of which
$12,500 and $25,000 was deferred in 2003 and 2002, respectively. In addition,
during 2003 and 2002, Mr. Flum elected to receive a portion of his salary in the
form of other non-cash compensation. Effective July 1, 2003, Mr. Flum elected to
discontinue any future deferral. The cumulative amount deferred of $238,750 is
non-interest bearing and was initially payable at the earlier of (a) the
attainment by the Company of sustainable cash flow breakeven and (b) the
repayment in full of the revised promissory note issued in connection with the
Company's acquisition of the assets of CRM from Market Guide Inc. In July 2004,
the Company's Board of Directors agreed to issue 200,000 shares of the Company's
common stock with a fair value of $90,000 as partial payment of this liability
as well as paying, in cash, the balance to the Chief Executive Officer,
representing the tax "gross-up" on this stock award, thereby reducing the
cumulative deferred amount by approximately $150,000 to $88,890. The full amount
of his compensation, including the deferred portion, is reflected in the
Company's financial statements.
(2) Amounts shown prior to salary reductions under the Company's Health Plan and
compensation deferred under the Company's 401(k) Plan.
(3) The aggregate amount of other annual compensation for each named individual
did not equal or exceed the threshold for reporting herein (i.e., the lesser of
either $50,000 or 10% of the total of such individual's annual salary and
bonus).
(4) No Bonus was paid during the past three fiscal years.
(5) There were no Restrictive Stock Awards or Long-Term Incentive Plan payouts
during the past three fiscal years.
32
Directors' Fees
Commencing September 1994, non-employee directors receive $450 for each
Board of Directors' meeting attended, up to a maximum payment of $1,800 per
Director per calendar year. During 2003, non-qualified options to purchase 3,500
shares of Common Stock at a purchase price of $1.00 per share, were granted to
each of the two non-employee directors.
Compensation Pursuant to Stock Option Plans
No stock options were granted to the Company's executive officers during
the last fiscal year.
======================================================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
----------------------------------------------------------------------------------------------------------------------
Shares Number of Securities Underlying Value of Unexercised
Acquired on Value Unexercised Options at Fiscal In-the-Money Options at Fiscal
Name Exercise (#) Realized ($) Year-End (#) Year-End ($)(1)
----------------------------------------------------------------------------------------------------------------------
Exercisable Un-exercisable Exercisable Un-exercisable
----------------------------------------------------------------------------------------------------------------------
Jerome S. Flum -0- -0- 15,000 5,000 -0- $-0-
----------------------------------------------------------------------------------------------------------------------
Lawrence -0- -0- -0- 170,000 -0- $67,485
Fensterstock
======================================================================================================================
(1) Represents the amount by which the closing price on December 31, 2004
($0.45) exceeded the exercise prices of unexercised options.
All of the options granted may be exercised after three years in
installments upon the Company attaining certain specified gross revenue and
pre-tax profit margin objectives as set forth in the table below, unless such
objectives are modified in the sole discretion of the Board of Directors. In
order to achieve the vesting of the applicable percentage of options at each
level, both the minimum sales amount and the pre-tax operating margin tests for
that level must be met.
33
================================================================================================
MINIMUM ANNUAL
---------------------------------------------------------
Pre-Tax Operating Options Cumulative Options
Level Gross Sales Margin Vested Vested
------------------------------------------------------------------------------------------------
1 $ 3 Million 20% 6.7% 6.7%
------------------------------------------------------------------------------------------------
2 $ 4 Million 23% 6.7% 13.4%
------------------------------------------------------------------------------------------------
3 $ 5 Million 27% 10.0% 23.4%
------------------------------------------------------------------------------------------------
4 $ 6 Million 36% 10.0% 33.4%
------------------------------------------------------------------------------------------------
5 $7.5 Million 39% 13.3% 46.7%
------------------------------------------------------------------------------------------------
6 $ 9 Million 42% 13.3% 60.0%
------------------------------------------------------------------------------------------------
7 $ 11 Million 45% 16.6% 76.6%
------------------------------------------------------------------------------------------------
8 $ 14 Million 48% 16.6% 93.2%
------------------------------------------------------------------------------------------------
9 $ 17 Million 48% 6.8% 100.0%
================================================================================================
Notwithstanding that the objectives may not have been met in whole or in
part, each of the foregoing performance-based options will vest in full on a
date which is two years prior to the expiration date of the option or, in the
event of a change in control, will vest in full at the time of such change in
control.
No stock options were exercised by the Company's executive officers in the
last fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth as of March 7, 2005 information regarding
the beneficial ownership of the Company's voting securities (i) by each person
who is known to the Company to be the owner of more than five percent of the
Company's voting securities, (ii) by each of the Company's directors and
executive officers, and (iii) by all directors and executive officers of the
Company as a group. Except as indicated in the following notes, the owners have
sole voting and investment power with respect to the shares:
34
===========================================================================================
Percentage of
Number of Shares Outstanding
Name of Common Stock(1) Common Stock
-------------------------------------------------------------------------------------------
Flum Partners(2) 4,897,128 63.64%
-------------------------------------------------------------------------------------------
Jerome S. Flum 5,375,353 (3)(4) 69.86%
-------------------------------------------------------------------------------------------
Richard J. James 37,000 --*
-------------------------------------------------------------------------------------------
Leslie Charm 36,000 --*
-------------------------------------------------------------------------------------------
All directors and officers 5,448,353 (3)(4) 70.81%
(as a group (4 persons))
===========================================================================================
* less than 1%
(1) Does not give effect to (a) options to purchase 525,500 shares of Common
Stock granted to 11 officers and employees pursuant to the 1998 Long Term
Incentive Plan of the Company, (b) options to purchase an aggregate of 6,500
shares granted to each of the non-employee directors pursuant to the 1998 Long
Term Incentive Plan of the Company, and (c) options to purchase 3,000 shares of
Common Stock granted to a consultant pursuant to the 1998 Long Term Incentive
Plan of the Company. All of the foregoing options are not exercisable within
sixty days. Includes 2,000 shares of Common Stock issued to Flum Partners in
consideration of loans to the Company. Includes options to purchase 15,000
shares of Common Stock granted to Mr. Flum, which are immediately exercisable
(2) The sole general partner of Flum Partners is Jerome S. Flum, Chairman of the
Board, President and Chief Executive Officer of the Company.
(3) Includes 4,897,128 shares owned by Flum Partners, of which Mr. Flum is the
sole general partner, which are also deemed to be beneficially owned by Mr. Flum
because of his power, as sole general partner of Flum Partners, to direct the
voting of such shares held by the partnership. Mr. Flum disclaims beneficial
ownership of the shares owned by Flum Partners. The 5,375,353 shares of Common
Stock, or 69.86% of the outstanding shares of Common Stock, may also be deemed
to be owned, beneficially and collectively, by Flum Partners and Mr. Flum, as a
"group", within the meaning of Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended (the "Act").
(4) Includes 2,000 shares of common stock owned by a grandchild of Mr. Flum, the
beneficial ownership of which is disclaimed by Mr. Flum.
The Company's equity compensation plan approved by stockholders is the
1998 Long-Term Incentive Plan.
The following table summarizes information about the Company's common
stock that may be issued upon the exercise of options, warrants and rights under
all equity compensation plans of the Company as of December 31, 2004.
35
==============================================================================================================
Number of
securities
remaining
available for
Number of future
securities Weighted issuance under
to be issued average equity
upon exercise price compensation
exercise of of plans
outstanding outstanding (excluding
options, options, securities
warrants and warrants reflected in
Plan category rights and rights first column)
--------------------------------------------------------------------------------------------------------------
Equity compensation plans 546,500 $0.8600 881,500
approved by stockholders
--------------------------------------------------------------------------------------------------------------
Equity compensation plans -- -- --
not approved by stockholders
--------------------------------------------------------------------------------------------------------------
Total 556,500 $0.8895 881,500
==============================================================================================================
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There were no such reportable relationships or related transactions in
2004.
ITEM 13. EXHIBITS.
(a) Exhibits
2 - Copy of the Asset Purchase Agreement dated December 29, 1998. (2)
3(i) - Copy of the Company's Amended and Restated Articles of
Incorporation dated as of May 7, 1999. (4)
3(ii) - Copy of the Company's By-Laws as amended April 27, 1987. (1)
10-C - Copy of Company's 1998 Long-Term Incentive Plan. (3)
14 - CreditRiskMonitor.com, Inc. Code of Ethics for Principal
Executive Officer and Senior Financial Officers. (5)
31.1* - Certification of Chief Executive Officer.
31.2* - Certification of Chief Financial Officer.
32.1* - Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2* - Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(1) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ending December 31, 1988 (File No.0-10825) and incorporated
herein by reference thereto.
(2) Filed as an Exhibit to Registrant's Report on Form 8-K dated January 19,
1999 (File No. 1-10825) and incorporated herein by reference thereto.
(3) Filed as an Exhibit to Registrant's Annual Report on Form 10-KSB
36
for the fiscal year ending December 31, 1998 (File No. 0-10825) and
incorporated herein by reference thereto.
(4) Filed as an Exhibit to Registrant's Annual Report on Form 10-KSB for the
fiscal year ending December 31, 1999 (File No. 1-10825) and incorporated
herein by reference thereto.
(5) Filed as an Exhibit to Registrant's Annual Report on Form 10-KSB for the
fiscal year ending December 31, 2003 (File No. 1-10825) and incorporated
herein by reference thereto.
* Filed herewith.
DOCUMENTS AVAILABLE UPON REQUEST
All exhibits indicated above are available upon request and payment of a
reasonable fee approximating the Company's cost of providing and mailing the
exhibits by writing to:
Office of the Secretary, CreditRiskMonitor.com, Inc., 704 Executive
Boulevard, Suite A, Valley Cottage, NY 10989.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
J.H. Cohn LLP's aggregate fees billed or billable for professional
services rendered for the audit of the Company's annual financial statements for
the 2004 fiscal year and the review of the financial statements included in the
Company's Form 10-QSB for 2004's third quarter were $31,500. The engagement of
J.H. Cohn LLP for the 2004 fiscal year and the scope of audit-related services,
including the audit and reviews described above, were all pre-approved by the
audit committee. Prior to its dismissal in September 2004, BDO Seidman, LLP's
aggregate fees billed for professional services rendered in 2004 (for the review
of the financial statements included in the Company's Forms 10-QSB for the first
2 quarters of fiscal 2004 and the Company's Registration Statement on Form S-8)
were $11,675. The engagement of BDO Seidman, LLP for the reviews described above
were all pre-approved by the audit committee.
BDO Seidman, LLP's aggregate fees billed for professional services
rendered for the audit of the Company's annual financial statements for the 2003
fiscal year and the review of the financial statements included in the Company's
Forms 10-QSB for the 2003 fiscal year were $31,500. The engagement of BDO
Seidman, LLP for the 2003 fiscal year and the scope of audit-related services,
including the audit and reviews described above, were all pre-approved by the
audit committee.
The policy of the audit committee is to pre-approve the engagement of the
Company's independent auditors and the furnishing of all audit and non-audit
services.
Audit-Related Fees
J.H. Cohn LLP and/or BDO Seidman, LLP did not provide any other assurance
or related services in the 2004 or 2003 fiscal years except
37
as described under the caption "Audit Fees".
Tax Fees
J.H. Cohn LLP's aggregate fees billed or billable for all tax related
services for the 2004 fiscal year are $6,000 for tax preparation services.
BDO Seidman, LLP's aggregate fees for all tax related services for the
2003 fiscal year were $6,000 for tax preparation services.
All Other Fees
J.H. Cohn LLP and/or BDO Seidman, LLP did not provide any products or
services in the 2004 or 2003 fiscal years other than as described above.
38
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CREDITRISKMONITOR.COM, INC.
(REGISTRANT)
Date: March 31, 2005 By: /s/ Jerome S. Flum
Jerome S. Flum
Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date: March 31, 2005 By: /s/ Jerome S. Flum
Jerome S. Flum
Chairman of the Board and
Chief Executive Officer
Date: March 31, 2005 By: /s/ Lawrence Fensterstock
Lawrence Fensterstock
Chief Financial Officer
Date: March 31, 2005 By: /s/ Richard J. James
Richard J. James
Director
Date: March 31, 2005 By: /s/ Leslie Charm
Leslie Charm
Director
39
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 2004 and 2003 F-4
Consolidated Statements of Operations - Years Ended
December 31, 2004 and 2003 F-5
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 2004 and 2003 F-6
Consolidated Statements of Cash Flows - Years Ended
December 31, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-8
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of CreditRiskMonitor.com, Inc.:
We have audited the accompanying consolidated balance sheet of
CreditRiskMonitor.com, Inc. and Subsidiary as of December 31, 2004, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express and opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of
CreditRiskMonitor.com, Inc. and Subsidiary as of December 31, 2004, and their
results of operations and cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.
/s/ J.H. Cohn LLP
Jericho, New York
March 2, 2005
F-2
Report of Independent Registered Public Accounting Firm
To the Directors and Shareholders of
CreditRiskMonitor.com, Inc.:
We have audited the accompanying consolidated balance sheet of
CreditRiskMonitor.com, Inc. and subsidiary as of December 31, 2003, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
CreditRiskMonitor.com, Inc. at December 31, 2003 and the consolidated results of
its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ BDO SEIDMAN, LLP
New York, New York
February 20, 2004
F-3
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
2004 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 877,025 $ 1,138,447
Accounts receivable, net of allowance of $43,677 637,221 504,591
Other current assets 172,019 102,602
------------ ------------
Total current assets 1,686,265 1,745,640
Property and equipment, net 162,085 80,000
Goodwill, net 1,954,460 1,954,460
Prepaid and other assets 20,042 18,880
------------ ------------
Total assets $ 3,822,852 $ 3,798,980
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Deferred revenue $ 2,221,233 $ 2,032,478
Accounts payable 170,949 208,065
Accrued expenses 218,990 112,418
Current portion of long-term debt 100,084 90,328
Current portion of capitalized lease obligations 26,518 10,873
------------ ------------
Total current liabilities 2,737,774 2,454,162
------------ ------------
Long-term debt, net of current portion:
Promissory note 520,703 620,787
Capitalized lease obligations 44,904 2,757
------------ ------------
565,607 623,544
Deferred rent payable 2,375 5,295
Accrued compensation 88,890 238,750
------------ ------------
Total liabilities 3,394,646 3,321,751
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued -- --
Common stock, $.01 par value; authorized 25,000,000
shares; issued and outstanding 7,679,462 and
7,407,462 shares, respectively 76,794 74,074
Additional paid-in capital 28,122,383 28,035,096
Accumulated deficit (27,770,971) (27,631,941)
------------ ------------
Total stockholders' equity 428,206 477,229
------------ ------------
Total liabilities and stockholders' equity $ 3,822,852 $ 3,798,980
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2004 and 2003
2004 2003
---- ----
Operating revenues $ 3,346,572 $ 3,042,635
----------- -----------
Operating expenses:
Data and product costs 1,042,912 1,194,310
Selling, general and administrative expenses 2,308,046 2,490,382
Depreciation and amortization 67,721 88,254
----------- -----------
Total operating expenses 3,418,679 3,772,946
----------- -----------
Loss from operations (72,107) (730,311)
Other income 7,729 6,369
Interest expense (74,271) (81,023)
----------- -----------
Loss before income taxes (138,649) (804,965)
Provision for state and local income taxes 381 982
----------- -----------
Net loss $ (139,030) $ (805,947)
=========== ===========
Net loss per share-
basic and diluted $ (0.02) $ (0.14)
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2004 and 2003
Common Stock Additional Total
--------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
Balance January 1,
2003 5,419,129 $ 54,191 $ 27,201,171 $(26,825,994) $ 429,368
Net loss -- -- -- (805,947) (805,947)
Proceeds from private
offering 1,853,333 18,533 815,466 -- 833,999
Issuance of shares
for compensation 60,000 600 19,200 -- 19,800
Proceeds from exercise
of stock option 75,000 750 (741) -- 9
------------ ------------ ------------ ------------ ------------
Balance December 31,
2003 7,407,462 74,074 28,035,096 (27,631,941) 477,229
Net loss -- -- -- (139,030) (139,030)
Issuance of shares
to pay portion
of accrued
compensation 200,000 2,000 88,000 -- 90,000
Proceeds from exercise
of stock options 72,000 720 (713) -- 7
------------ ------------ ------------ ------------ ------------
Balance December 31,
2004 7,679,462 $ 76,794 $ 28,122,383 $(27,770,971) $ 428,206
============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004 and 2003
2004 2003
---- ----
Cash flows from operating activities:
Net loss $ (139,030) $ (805,947)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 67,721 88,254
Accrued compensation -- 12,500
Stock issued in lieu of compensation -- 19,800
Deferred rent (2,920) (3,052)
Changes in operating assets and liabilities:
Accounts receivable, net (132,630) (140,818)
Other current assets (69,417) 28,759
Prepaid and other assets (1,162) 2,549
Deferred revenue 188,755 97,746
Accounts payable (37,116) 95,595
Accrued expenses 46,712 18,993
----------- -----------
Net cash used in operating activities (79,087) (585,621)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (73,150) (6,563)
----------- -----------
Net cash used in investing activities (73,150) (6,563)
----------- -----------
Cash flows from financing activities:
Proceeds from private placement -- 833,999
Proceeds from exercise of stock options 7 9
Payments on promissory notes (90,328) (81,523)
Payments on capital lease obligations (18,864) (10,281)
----------- -----------
Net cash provided by (used in) financing activities (109,185) 742,204
----------- -----------
Net increase (decrease) in cash and cash equivalents (261,422) 150,020
Cash and cash equivalents at beginning of year 1,138,447 988,427
----------- -----------
Cash and cash equivalents at end of year $ 877,025 $ 1,138,447
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 58,451 $ 74,858
=========== ===========
Income taxes $ 381 $ 982
=========== ===========
Supplemental schedule of noncash investing and financing activities:
Acquisition of computer and telephone equipment
under capital leases $ 76,656 $ --
=========== ===========
Issuance of shares to pay portion of accrued
compensation $ 90,000 $ --
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
CreditRiskMonitor.com, Inc. (also referred to as the "Company" or "CRM")
provides a totally interactive business-to-business Internet-based service
designed specifically for corporate credit professionals. In addition, the
Company is a re-distributor of international credit reports in the United
States.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Barbito Corp. All significant intercompany balances
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments with maturities of
three months or less when acquired to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful life of the asset. Capital leases
are recorded at the lower of the fair market value of the asset or the present
value of future minimum lease payments. Assets under capital leases are
amortized on the straight-line method over their primary term. Estimated useful
lives are generally as follows: fixtures, equipment and software--3 to 6 years;
capitalized leases--3 to 5 years; and leasehold improvements--lower of life or
term of lease.
Goodwill
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" effective January 1, 2002. SFAS No.
142 requires that purchased goodwill and
F-8
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
certain indefinite-lived intangibles no longer be amortized, but instead be
tested for impairment at least annually. There was no impairment of goodwill in
2004 and 2003. The Company has no other intangible assets.
Prior to the adoption of SFAS No. 142, the Company amortized goodwill on a
straight-line basis over 20 years.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable in accordance with SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". Recoverability of assets held and used is
measured by a comparison of the carrying amount of an asset to undiscounted
pre-tax future net cash flows expected to be generated by that asset. An
impairment loss is recognized for the amount by which the carrying amount of the
assets exceeds the fair value of the assets. As of December 31, 2004, management
believes no impairment of long-lived assets has occurred.
Income Taxes
The Company provides for deferred income taxes resulting from temporary
differences between financial statement and income tax reporting. Temporary
differences are differences between the amounts of assets and liabilities
reported for financial statement purposes and their tax bases. Deferred tax
liabilities are recognized for temporary differences that will be taxable in
future years' tax returns. Deferred tax assets are recognized for temporary
differences that will be deductible in future years' tax returns and for
operating loss and tax credit carryforwards. Deferred tax assets are reduced by
a valuation allowance if it is deemed more likely than not that some or all of
the deferred tax assets will not be realized.
Revenue Recognition
CRM's domestic and international service is sold on a subscription basis
pursuant to customer contracts that span varying periods of time, but are
generally for a period of one year. The Company initially records amounts billed
as accounts receivable and defers the related revenue when persuasive evidence
of an arrangement exists, fees are fixed or determinable, and collection is
reasonably assured. Revenues are recognized ratably over the related
subscription period. Revenue from the Company's third-party international credit
report service is recognized as information is delivered and products and
services are used by customers.
F-9
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
Income (Loss) Per Share
Income (loss) per share is computed under the provisions of SFAS No. 128,
"Earnings Per Share". Amounts reported as basic and diluted net loss per share
for each of the two years in the period ended December 31, 2004 reflect the net
loss for the year divided by the weighted average of common shares outstanding
during the period (see Note 9).
Fair Value of Financial Instruments
The Company follows the provisions of SFAS No. 107, "Disclosure about Fair Value
of Financial Instruments". This pronouncement requires that the Company
calculate the fair value of financial instruments and include this additional
information in the notes to the financial statements when the fair value is
different than the book value of those financial instruments. The Company
believes the recorded value of cash and cash equivalents, accounts receivable,
and accounts payable and other liabilities approximates fair value because of
the short maturity of these financial instruments. The Company's promissory note
was originally discounted, as appropriate, to bear an interest rate that
represents the cost of borrowings with third-party lenders. Management believes
that the carrying value of the note approximates its fair value at December 31,
2004 and 2003.
Comprehensive Income
The Company adheres to the provisions of SFAS No. 130, "Reporting Comprehensive
Income". This pronouncement establishes standards for reporting and display of
comprehensive income or loss and its components (revenues, expenses, gains, and
losses). The statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
classified by their nature. Furthermore, the Company is required to display the
accumulated balances of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. For the years ended December 31, 2004 and 2003, there were no items that
gave rise to other comprehensive income or loss and the net loss equaled
comprehensive loss.
Segment Information
The Company follows the provisions of SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". This pronouncement establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. The pronouncement also establishes
standards for related disclosure about products and services, geographic areas
and major customers. The Company currently believes it operates in one segment.
F-10
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
Stock-Based Compensation
At December 31, 2004 the Company has a stock-based employee compensation plan
which is described more fully in Note 4. The Company accounts for this plan
using the intrinsic value method in accordance with the provisions of APB No.
25, "Accounting for Stock Issued to Employees" and related Interpretations. No
stock-based employee compensation cost for employee stock options is reflected
in net loss, as all options granted under this plan had an exercise price equal
to or greater than the market value of the underlying common stock on the date
of grant.
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation--Transition
and Disclosure," the following table presents the effect on net loss and net
loss per share had compensation cost for the Company's stock plan been
determined using a fair value based method consistent with SFAS No. 123 for the
years ended December 31:
2004 2003
---- ----
Net loss
As reported $(139,030) $(805,947)
Plus: Stock-based employee compensation
expense in reported net loss, net of
related tax benefits or effects -- 19,800
Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related
tax benefits or effects (see Note 4) 4,187 (30,493)
--------- ---------
Pro forma $(134,843) $(816,640)
========= =========
Net loss per share - basic and diluted
As reported $ (0.02) $ (0.14)
Pro forma $ (0.02) $ (0.15)
In 2003, the Company issued 60,000 shares of common stock to employees in lieu
of compensation. The pro forma amounts presented above may not be representative
of the future effects on reported net loss and net loss per share, since the pro
forma compensation expense is allocated over the periods in which options become
exercisable, and new option awards may be granted each year.
Recently Issued Accounting Standards
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs--an amendment
of ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts
of idle facility expense, freight, handling costs and wasted material (spoilage)
by requiring these items to be recognized as current-period charges. Further,
SFAS No. 151 requires that allocation of fixed production overhead to conversion
costs be
F-11
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
based on normal capacity of the production facilities. SFAS No. 151 is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005,
with earlier application permitted. The adoption of SFAS No. 151 will have no
impact on our results of operations or our financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets--an amendment of APB Opinion No. 29," which addresses the measurement of
exchanges of nonmonetary assets and eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive assets and replaces
it with an exception for exchanges that do not have commercial substance. SFAS
No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005, with earlier application permitted. The adoption
of SFAS No. 153 will have no impact on our results of operations or our
financial position.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
replacing SFAS No. 123 and superseding APB Opinion No. 25. SFAS No. 123R
requires public companies to recognize compensation expense for the cost of
stock options and all other awards of equity instruments. This compensation cost
will be measured as the fair value of the award on the grant date estimated
using an option-pricing model. The Company is evaluating the various transition
provisions under SFAS No. 123R. For public entities that file as small business
issuers, this Statement is effective as of the beginning of the first interim or
annual reporting period that begins after December 15, 2005.
In December 2003, the FASB issued FASB Interpretation ("FIN") No. 46-R,
"Consolidation of Variable Interest Entities". FIN No. 46-R, which modifies
certain provisions and effective dates of FIN No. 46, sets forth criteria to be
used in determining whether an investment in a variable interest entity should
be consolidated. The Company holds no interest in variable interest entities.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
financial statement presentation.
NOTE 3 - INCOME TAXES
The Company has generated net operating loss ("NOL") carryforwards for income
tax purposes, which are available for carryforward against future taxable
income. At December 31, 2004, the Company had Federal NOL carryforwards of
approximately $6,432,000, which expire through 2024.
The actual tax expense for 2004 and 2003 differs from the "expected" tax expense
for those years (computed by applying the applicable United
F-12
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
States federal corporate tax rate to income (loss) before income taxes) as
follows:
2004 2003
---- ----
Computed "expected" benefit $ (55,460) $(321,986)
Expiration of net operating loss carryforward 453,528 605,987
Decrease in valuation allowance (397,687) (283,019)
--------- ---------
Income tax expense $ 381 $ 982
========= =========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at December 31, 2004 and 2003 are as follows:
2004 2003
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 2,574,145 $ 2,843,514
Other 120,752 180,114
----------- -----------
Total gross deferred tax assets 2,694,897 3,023,628
----------- -----------
Deferred tax liabilities:
Goodwill amortization (229,332) (167,991)
Fixed assets (7,615) --
----------- -----------
Total gross deferred tax liabilities (236,947) (167,991)
----------- -----------
Valuation allowance (2,457,950) (2,855,637)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
No deferred tax benefit has been recorded and a full valuation allowance has
been charged against the related deferred tax assets because the Company does
not consider it more likely than not that the deferred tax assets will be
realized.
The net change in the total valuation allowance for the years ended December 31,
2004 and 2003 was a decrease of $397,687 and $283,019, respectively.
NOTE 4 - COMMON STOCK, STOCK OPTIONS, AND STOCK APPRECIATION RIGHTS
Common Stock
In December 2003, the Company sold approximately 1.85 million shares of common
stock at $0.45 per share raising $833,999 in a private placement.
At December 31, 2004, 546,500 shares of the Company's authorized common stock
were reserved for issuance upon exercise of outstanding options under its stock
option plan. An additional 10,000 shares of the Company's common stock were
reserved for issuance under warrants
F-13
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
granted in connection with the Company's January 1999 private placement. The
warrants are exercisable at $2.50 per share beginning in January 2002 and expire
in 2005.
Preferred Stock
The Company's Articles of Incorporation provide that the Board of Directors has
the authority, without further action by the holders of the outstanding common
stock, to issue up to five million shares of preferred stock from time to time
in one or more series. The Board of Directors shall fix the consideration to be
paid, but not less than par value thereof, and to fix the terms of any such
series, including dividend rights, dividend rates, conversion or exchange
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), the redemption price and the liquidation preference of such series.
As of December 31, 2004, the Company does not have any preferred stock
outstanding.
Stock Options and Stock Appreciation Rights
At December 31, 2004, the Company has one stock option plan: the 1998 Long-Term
Incentive Plan.
The 1998 Long-Term Incentive Plan authorizes the grant of incentive stock
options, non-qualified stock options, stock appreciation rights (SARs),
restricted stock, bonus stock, and performance shares to employees, consultants,
and non-employee directors of the Company. The exercise price of each option
shall not be less than the fair market value of the common stock at the date of
grant. The total number of the Company's shares that may be awarded under this
plan is 1,500,000 shares of common stock. At December 31, 2004, there were
options outstanding for 546,500 shares of common stock under this plan.
Options expire on the date determined, but not more than ten years from the date
of grant. The plan terminates ten years from the date of stockholder approval.
The exercising of the options granted may be accelerated after three years in
installments upon the Company attaining certain specified gross revenue and
pre-tax margin objectives, unless such objectives are modified in the sole
discretion by the Board of Directors. No modifications to these criteria have
been made.
Notwithstanding that the objectives may not be met in whole or in part, these
options will vest in full on a date that is two years prior to the expiration
date of the option or, in the event of a change in control (as defined), will
vest in full at time of such change in control.
There have been no transactions with respect to the Company's stock appreciation
rights during the years ended December 31, 2004 and 2003, nor are there any
stock appreciation rights outstanding at
F-14
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
December 31, 2004 and 2003.
Transactions with respect to the Company's stock option plans for the years
ended December 31, 2004 and 2003 are as follows:
Weighted
Average
Number Exercise
of Shares Price
--------- -----
Outstanding at January 1, 2003 655,250 $ 0.6285
Granted 27,000 1.0000
Forfeited (138,250) 0.5546
Exercised (75,000) 0.0001
---------
Outstanding at December 31, 2003 469,000 $ 0.7721
Granted 181,500 1.0000
Forfeited (32,000) 2.3001
Exercised (72,000) 0.0001
---------
Outstanding at December 31, 2004 546,500 $ 0.8600
=========
As of December 31, 2004, there were 881,500 shares of common stock reserved for
the granting of additional options.
The following table summarizes information about the Company's stock options
outstanding at December 31, 2004:
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Prices Outstanding (in years) Price Exercisable Price
--------------- ----------- ---------- ----- ----------- -----
$ 0.0001 - $ 0.5000 150,000 3.67 $0.0001 --
$ 1.0000 - $ 1.7500 372,500 8.04 $1.0040 18,000 $1.0833
$ 2.1875 - $ 4.5000 24,000 4.98 $4.0000 --
------- -----
546,500 6.70 $0.8600 18,000 $1.0833
======= ======
The weighted average fair value at date of grant for options granted during 2004
and 2003 was $0.36 and $0.28 per option, respectively. The fair value of options
at date of grant was estimated using the Black-Scholes model with the following
weighted average assumptions:
Years ended December 31,
------------------------
Assumption 2004 2003
---------- ---- ----
Risk-free interest rate 4.42% 4.18%
Dividend yield 0.00% 0.00%
Volatility factor 0.88 1.10
Weighted-average expected life of the option (years) 9 9
F-15
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
2004 2003
---- ----
Computer equipment and software $ 178,982 $ 446,553
Furniture and fixtures 50,189 54,322
Leasehold improvements 35,855 --
Capitalized lease 119,073 42,416
--------- ---------
384,099 543,291
Less accumulated depreciation and amortization (222,014) (463,291)
--------- ---------
$ 162,085 $ 80,000
========= =========
NOTE 6 - PROMISSORY NOTE
In December 2002, the Company entered into a Note Modification Agreement with
Market Guide Inc. ("MGI"), which modified the Consolidated Secured Promissory
Note that had been executed in July 2001. The prior promissory note consolidated
the two notes issued by CRM in January 1999, as part of the purchase of the
assets of MGI's CreditRisk Monitor credit information service. Pursuant to the
December 2002 Agreement, CRM issued a new Secured Promissory Note effective
January 1, 2003 with a face value of $812,672. The new note bears interest at
the rate of 9.5% per annum from January 1, 2003 and is payable in 84 equal
monthly installments of principal and interest of $13,282 each, commencing
January 31, 2003. In accordance with the terms of Emerging Issues Task Force
("EITF") Issue No. 96-19, "Debtor's Accounting for a Modification or Exchange of
Debt Instruments", this transaction is not considered to result in a
substantially different debt instrument and as such no gain or loss was
recognized on this transaction. Accordingly, the Company was required to
discount the new note by approximately $20,000 to yield an effective interest
rate of 10.30% based on the carrying value of the old debt instrument.
The new note is secured by the assets originally purchased from MGI
F-16
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
and substantially all other assets of the Company and does not contain any
covenants.
If the Company is unable to generate sufficient cash flow or otherwise obtain
funds necessary to make the required payments on this note, it would be in
default under the terms thereof, which would permit the holders of the note to
accelerate the maturity of such indebtedness. Such a default could have a
material adverse effect on Company's business, prospects, financial condition
and results of operations.
The principal maturities on this note subsequent to December 31, 2004 are as
follows:
Year Ending
December 31, Amount
------------ ------
2005 $ 100,084
2006 110,893
2007 122,870
2008 136,141
2009 150,799
---------
620,787
Less current portion 100,084
---------
$ 520,703
=========
NOTE 7 - ACCRUED COMPENSATION
Beginning January 20, 1999 and continuing through June 30, 2003, the Company's
President and Chief Executive Officer agreed to defer a portion of his annual
salary. Accordingly, $12,500 was deferred in 2003. Effective July 1, 2003, the
President and Chief Executive Officer elected to discontinue any future
deferral. The cumulative amount deferred of $238,750 is non-interest bearing and
was initially payable at the earlier of (a) the attainment by the Company of
sustainable cash flow breakeven and (b) the repayment in full of the revised
promissory note issued in connection with the Company's acquisition of the
assets of CRM from Market Guide Inc. (see Note 6). In July 2004, the Company's
Board of Directors agreed to issue 200,000 shares of the Company's common stock
with a fair value of $90,000 as partial payment of this liability as well as
paying, in cash, the balance to the Chief Executive Officer, representing the
tax "gross-up" on this stock award, thereby reducing the cumulative deferred
amount by approximately $150,000 to $88,890. The full amount of his
compensation, including the deferred amount, is reflected in the Company's
financial statements.
NOTE 8 - LEASE COMMITMENTS
The Company's operations are conducted from a leased facility, which is under an
operating lease that expires in 2009. The Company also
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CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
leases certain equipment under an operating lease that expires in 2008. Rental
expenses under operating leases were $171,442 and $112,429 for the years ended
December 31, 2004 and 2003, respectively.
During 2002, the Company acquired certain computer equipment pursuant to a
capital lease that expires in 2005. This lease has an implicit interest rate of
approximately 18% and allows the Company to acquire the equipment for $1 at the
end of the lease. In connection with the Company's relocation in 2004 it entered
into 2 capital leases for telephone equipment and computer equipment. Both of
these leases are for 36 months, have an implicit interest rate of approximately
10.8% and provide for the Company to acquire the equipment for $1 at the end of
the lease.
Future minimum lease payments for the capital lease and noncancelable operating
leases at December 31, 2004 are as follows:
Capital Lease Operating
Obligations Leases
----------- ------
2005 $ 32,947 $128,457
2006 30,043 131,258
2007 19,167 117,642
2008 -- 104,112
2009 -- 60,522
-------- --------
Total minimum lease payments 82,157 $541,991
========
Less amounts representing interest 10,735
--------
71,422
Less current portion of capitalized lease obligations 26,518
--------
Long-term capitalized lease obligations $ 44,904
========
NOTE 9 - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
2004 2003
---- ----
Net loss $ (139,030) $ (805,947)
=========== ===========
Basic average common shares outstanding 7,513,509 5,608,439
=========== ===========
Net loss per share - basic and diluted $ (0.02) $ (0.14)
=========== ===========
Potential common shares of 556,500 and 479,000 related to the Company's
outstanding stock options and warrants were excluded from the computation of
diluted loss per share for the years ended December 31, 2004 and 2003,
respectively, as inclusion of these shares would have been anti-dilutive.
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CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
NOTE 10 - LEGAL PROCEEDINGS
As previously reported: (a) on April 20, 2001, the Company filed an action in
the Supreme Court of the State of New York, Nassau County, against Samuel
Fensterstock and a competitor (collectively, the "Defendants"), seeking
injunctive relief, declaratory relief and monetary damages; (b) thereafter, the
parties entered into a Settlement Agreement that was so ordered by the Court in
July 2001 pursuant to which the Defendants were restricted from engaging in
certain activities; and (c) on November 27, 2001, the Company commenced an
action against the Defendants (the "Contempt Proceedings") in the Supreme Court
of the State of New York, Nassau County; (d) on August 6, 2004, in the Contempt
Proceedings, the Court issued a Decision finding that Defendants violated the
Settlement Agreement and were in contempt of the July 2001 Order, and awarded
compensatory and punitive damages against the Defendants aggregating $821,044,
plus attorney fees and legal costs in an amount to be determined; (e) on August
24, 2004, the Court entered a Judgment providing for the enforcement of its
award and assigned a Referee to conduct a hearing concerning the amount of
attorneys' fees and costs to be awarded; (f) on August 30, 2004, Defendants
filed a Notice of Appeal and posted a $900,000 bond to secure the compensatory
and punitive damages awarded in the Judgment; and (g) on September 10, 2004, the
competitor and Samuel Fensterstock served separate Motions to Reargue.
The issue of attorneys' fees and costs is currently before the Referee. In
January 2005, the Court rejected the arguments contained in Defendants' Motions
to Reargue and adhered to its August 6, 2004 Decision. The Defendants each filed
Notices of Appeal of the Court's rejection of the arguments contained in the
Motions to Reargue. In February 2005, the Defendants presented separate
applications to the Appellate Division requesting that the Appellate Division
dispense with requiring Defendants to file a complete copy of the trial
transcript from the Contempt Proceeding. The Company opposed Defendants
applications and Defendants' applications are currently before the Appellate
Division. The Company is treating the award of $821,044 plus attorney fees and
legal costs as a gain contingency that will not be recorded until realized.
As previously reported: (a) in February 2003, the competitor from the above
action commenced an action (the "Competitor Action") in the same Court, against
the Company, its President and a senior manager, seeking compensatory damages,
exemplary damages and injunctive relief; (b) the Company denied the allegations
in the Competitor Action and counterclaimed against the competitor, its
President and Samuel Fensterstock; and (c) the parties currently are engaged in
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CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
discovery in connection with the Competitor Action. The Company cannot predict
the outcome of the Competitor Action; however, it is possible that an
unfavorable outcome could have a material adverse effect on the Company's
financial condition, liquidity and results of operations.
As previously reported: (a) in January 2004, the Company filed a second action
in the same Court by order to show cause against the competitor and Mark
McNamara, a former Company employee, seeking injunctive relief, declaratory
relief and monetary damages arising from the competitor's and McNamara's
misappropriation of CRM's proprietary information; (b) by Order dated April 2,
2004 the Court denied the Company's request for immediate injunctive relief; and
(c) the issues of declaratory relief and money damages are pending before the
Court and the parties are currently engaged in discovery.
As previously reported: (a) in March 2004, the Company filed a third action in
the same Court against the competitor and Ryan Kohler, a former Company
employee; (b) the action seeks declaratory relief and compensatory damages
arising from the competitor's and Kohler's misappropriation of CRM's proprietary
information; and (c) the parties are currently engaged in discovery.
As previously reported: (a) in July 2004, the Company commenced an action in
Nassau County against Decision Strategies LLC ("Decision Strategies"), the
court-appointed forensic computer expert in the Enforcement Proceedings, for
breach of its services contract and seeking a declaration of the rights of the
parties under the terms of the contract; (b) also in July 2004, Decision
Strategies commenced an action in New York for fees in excess of the limitations
provided in the services contract; and (c) Decision Strategies moved to dismiss
Company's Nassau County action because Decision Strategies commenced an action
in New York County.
The Court granted Decision Strategies' motion to dismiss because Decision
Strategies commenced an action in New York County and a Preliminary Conference
is scheduled for April 13, 2005. Although this action is subject to the
uncertainties inherent in litigation, based on the information presently
available to the Company, management does not believe that the ultimate
resolution of this action will have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
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