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, 2005
|_| 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 is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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. |_|
Indicate by a check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
State issuer's revenues for the most recent fiscal year. $3,841,833
The aggregate market value of the Registrant's common stock held by
non-affiliates as of March 6, 2006 was $2,662,331. 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 6, 2006.
Documents incorporated by reference: None
Transitional Small Business Disclosure 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 2006.
Overview
CRM was organized in Nevada in February 1977 and was engaged in the
development and sale of nutritional food products from 1982 until October 22,
1993, when it sold substantially all of its assets (the "Asset Sale"), as
previously reported. In September 1998, the Company acquired an option (the
"Option") to purchase the assets of the CreditRisk Monitor credit information
service ("CM Service") from Market Guide Inc. ("MGI"). The Company exercised the
Option on December 29, 1998 and completed the purchase of the CM Service assets
effective January 19, 1999. The assets included customer contracts, receivables,
equipment, software and intangibles. Following the closing of the CM Service
purchase, the Company commenced doing business under the name
"CreditRiskMonitor.com".
The CreditRiskMonitor Business
CRM (see our website at www.creditriskmonitor.com) is an Internet-based
financial information service, designed to save time for busy corporate credit
professionals, which competes directly with Dun & Bradstreet, Inc. ("D&BTM").
The service provides comprehensive commercial credit reports covering public
companies world-wide and includes detailed financial statements, analysis and
trend reports, credit scores, company background information, Standard & Poor's
("S&P") ratings, and peer analyses. Plus, it includes trade payment data and
public filings (i.e., suits, liens, judgments and bankruptcy information) on
millions of U.S. companies. The service also provides continuous news monitoring
that keeps customers up to date on events affecting the creditworthiness of
companies, including financial statement updates, SEC filings, S&P rating
changes, and credit-
1
relevant news stories and press releases. The focus of the Company's service is
on facilitating the extension of trade credit from one business to another.
The Company is not a "consumer reporting agency" as defined by the Fair
Credit Reporting Act, as it is not involved in the communication of information
bearing on consumer credit.
In a business-to-business transaction, for example the purchase and sale
of $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" which means a 2% deduction from the price is
available to the customer if payment is made within 10 days but, if not, payment
in full must be made within 30 days. It is the financial risk of extending this
credit that is referred to as "trade credit risk". The buyer may pay late,
causing the seller to incur increased borrowing costs; the seller may incur
extra costs in attempting to collect the $20,000; or the buyer may never pay the
full $20,000. If the buyer is unable to pay, the seller can suffer substantial
losses (e.g., assuming a 10% pre-tax margin it will take about $10 of sales to
offset each $1 of bad debt).
CRM's service is usually purchased by a seller to review the risks of
extending trade credit to its customers. It is notable that trade credit
decisions are often made under intense time pressure. CRM believes that, with
the downsizing of corporations and the related reductions in credit departmental
budgets and personnel, corporate credit professionals have to do more with less.
Simultaneously, the Company believes, there has been an explosive growth in the
volume of data about businesses. Credit professionals are often faced with an
overwhelming amount of available data concerning important customers, while the
time for research and analysis is severely limited.
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 profession'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 unlimited usage and coverage of
public companies, featuring multi-period spreads of financial reports
and financial ratio analysis, as well as up-to-date financial news
screened specifically for purposes of credit evaluation. Another feature
of the service is filtered notification and delivery of news via email,
concerning companies of interest to the customer. This service is
supplemented with trade receivable data contributed mainly by the
Company's customers as well as U.S. public-record filing information
(i.e., suits, liens, judgments and bankruptcy information) covering
millions of public and private U.S. companies. The annual service is
available covering over 40,000 public companies world-wide. Customers
may opt, for lower prices, for limited regional coverage: "Domestic
Service" for
2
coverage of just U.S., Canadian, and Caribbean companies, or "Foreign
Service" including only those companies in the CRM database located in
the rest of the world.
(2) Single credit reports and packages of 5 or 10 single reports on the over
40,000 companies covered in item (1) above. These reports are sold via
credit card and obtained via the Internet. Email alerts are not
available with this single-report service.
(1) 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.
There is little hard data on the size of 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 and other personnel
performing this function is substantially greater. In addition, there are
numerous U.S. based companies that do not have a full-time credit function but
still require credit information. Furthermore, a market exists outside of the
U.S. for information on U.S. and foreign companies. Finally, a small fraction of
the Company's customers use the information for purposes outside of the credit
function, including procurement and strategic planning/competitive analysis.
The viability and potential of CRM's business is made possible by the
following characteristics:
o Low price. The annual subscription price of CRM's services is low compared
to the subscriber's possible loss of not getting paid and low compared to
the cost of most competitive products (for example, see the Price
Comparison chart on our website).
o Non-cyclical. As economic growth slows, general corporate credit risk
usually increases and the credit manager's function rises in importance
and complexity. CRM's business and revenues may continue to grow as world
economic growth slows or declines. Additionally, products that allow
credit managers to perform their jobs more efficiently and cost
effectively, compared to competitive services, should gain market share in
most business environments and especially during a downturn. In a
contracting business environment, most companies face increasing price
competition which should accelerate their shift to lower cost technologies
and providers, such as CRM.
o Recurring revenue stream. The recurring annual revenue stream gives CRM
stability not found in a one-time sale product-based company.
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
3
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, the Company's business is characterized by low
capital-intensity, and yet it is a business capable of generating high
margins and sufficient positive cash flow to grow the business with little
need for external capital. (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 Growth in U.S. market share. Faced with a dominant U.S. competitor, D&B,
as well as other several larger competitors, the Company's primary goal is
to gain market share. The Company believes that many potential customers
are unaware of its service, while others are aware but have not evaluated
its services. The Company expects the market in the U.S. and Canada will
be its primary opportunity for revenue and profit growth.
o Lowest cost provider. CRM's sourcing, analysis and preparation of data
into a usable form is highly automated. CRM delivers all of its
information to customers via the Internet and there is continuous
automation between the sourcing of data and delivery of a company credit
report to a subscriber. Because of this automation, CRM's production costs
are relatively stable over a wide range of increasing revenue. Management
believes CRM's cost structure is one of the lowest in its industry.
o Continued cost reductions. The Company foresees declining unit 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 has lower sales expenses for customer renewals than for new sales,
and the Company expects that its renewal revenue will grow larger each
year. All these naturally occurring unit 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 unit cost
reductions will be CRM's need to add additional content, unless the
Company is able to offset these additional
4
content costs by increasing the price of its services.
o International penetration. Foreign companies doing business in the U.S.
may have the same need as domestic companies for CRM's credit analysis of
U.S. companies. Internationally, the Internet provides a mechanism for
rapid and inexpensive marketing and distribution of CRM's service.
Marketing and Sales
To gain market share for the Company's service, it will continue to use
the Internet (at our website www.creditriskmonitor.com) as the primary mechanism
for distributing its service. To inform potential subscribers about its service,
CRM uses a combination of telephone sales, direct mail, trade show
representation and speaking engagements before credit groups and associations.
Value Proposition
The Company's fundamental value proposition is that it creates and sells
high quality commercial credit reports that save busy credit managers time, at a
cost significantly below that of reports from the leading provider (price
comparison as of July 13, 2005). Because D&B 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. The Company's research shows that its customers overwhelmingly agree that
CreditRiskMonitor saves them time, helps them to make better credit decisions,
and represents a value for the price paid because they either reduce the amount
paid for financial credit information or increase their coverage at the same
cost.
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 data base
of valuable reports on companies. Highly automated operations add to reliability
and consistency, while limiting costs. The Company employs a small number of
analysts who selectively review data at critical points in its 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 Credit professionals need to save time, when analyzing their most
important customers, and the CRM service provides this critical benefit.
CRM believes that its reports and monitoring of public companies are
superior in this way to what is offered by D&B. The CRM service provides
financial information in greater depth and better analytical efficiency.
It also includes timely email alerts enabling credit professionals to
easily stay on top of
5
financial developments at their customers, without the clutter of
non-financial news prevalent at other news services, adding to the
professionals' efficiency. Finally, the S&P ratings and credit scores
offered by the service enable further efficiency by focusing attention on
only those companies showing financial weakness.
o The Company's customers typically have contracts with D&B. Traditionally,
D&B sells them prepaid units and/or reports ("units") on an annual basis,
which they can then use to buy D&B 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 may
allow it to carry a percentage of them forward, if 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 simple
unlimited usage fixed price annual subscription represents an opportunity
to save money by reducing the customer's D&B usage. 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 units for decisions concerning privately-held
businesses where CRM may have little or no information. According to the
Company's research, the great majority of customers report saving money as
a result of using the CRM service. In 2005, the Company became aware that
D&B had also begun selling its service on a fixed-price basis, in limited
circumstances. It is difficult to predict the extent to which the use of
this tactic will be expanded by D&B, or how effective it may be in
blocking the Company's selling efforts since it appears that D&B's fixed
price contract is significantly higher in price than the comparable
offering by the Company and to date there has been limited acceptance of
D&B's offering in the market.
o The Company estimates that only a small percentage of all credit-related
business transactions are currently supported by objective third party
credit information. This is not surprising, given the high cost of
commercial credit reports from D&B and other vendors. CRM breaks that
model by eliminating the incremental cost of a credit report. CRM's
unlimited usage annual subscription enables customers to employ up to
date, objective credit information in many more transactions than was
economically feasible before. Customers can make better credit decisions
with no increase in costs.
o It is expected that compliance with the Sarbanes-Oxley Act of 2002 will
require companies to adopt more systematic processes to review trade
credit and accounts receivable risks. In-depth and frequent review of
risks concentrated in the largest customer companies, many of which are
public companies covered by CRM, is a common practice that the Company
expects to become even more prevalent.
6
o For low-volume customers, CRM sells single commercial credit reports for a
flat price of $49.95 per report, using credit card transactions via the
Internet. Although D&B also sells single reports on the Internet, they
impose a complicated pricing schedule, in which the price of a specific
company 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 30 different price points for the D&B Business
Information Report alone, ranging from $80 to $570 for this flagship
report. This competitor's approach is apparently designed to protect its
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 reports across 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. Consequently, CRM's value advantage is even
more apparent when customers compare the costs of cross-border report
purchases.
Net Operating Loss Carryforwards
At December 31, 2005, the Company had net operating loss ("NOL")
carryforwards aggregating approximately $5.5 million, 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.
7
Employees
As of March 6, 2006, the Company had 35 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's principal office
is located in 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 $7,912 during the current 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.
On April 27, 2005, the Company executed an agreement (the "Stipulation of
Settlement") which settled all of the lawsuits between it and a competitor, as
previously reported, and the competitor simultaneously paid the Company $1.1
million. In addition, the competitor agreed in the Stipulation of Settlement to
assume certain potential liabilities against the Company and to defend the
Company in connection with the Decision Strategies litigation discussed below
and to indemnify the Company with respect to all liabilities in excess of
$25,000.
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 proceeding, for breach of its services
contract and seeking a declaration of the rights of the parties under the terms
of the contract. Also in July 2004, Decision Strategies commenced an action in
New York against the Company and the competitor for fees in excess of the
limitations provided in the services contract. The parties reached a settlement
in December 2005 whereby the Company paid to Decision Strategies the $25,000
maximum amount agreed to in the Stipulation of Settlement.
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, 2005, 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 2004 and 2005. 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
-------- -------
2004
First Quarter $ 0.80 $ 0.40
Second Quarter $ 0.51 $ 0.44
Third Quarter $ 0.51 $ 0.42
Fourth Quarter $ 0.42 $ 0.40
2005
First Quarter $ 1.01 $ 0.70
Second Quarter $ 1.01 $ 0.90
Third Quarter $ 2.00 $ 1.80
Fourth Quarter $ 1.75 $ 1.65
On March 6, 2006, there were approximately 329 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 did not repurchase any of its common stock during the fourth
quarter of 2005.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Financial Condition, Liquidity and Capital Resources
At December 31, 2005, the Company had cash and cash equivalents of $2.03
million compared to $877,000 at December 31, 2004. The Company's working capital
deficit at December 31, 2005 was approximately $144,000 compared to a working
capital deficit of approximately $1.05 million at December 31, 2004, due
primarily to an increase of $1.16 million in cash and cash equivalents
reflecting receipt of the settlement proceeds of $1.1 million referred to below.
Additionally, the working capital deficit at December 31, 2005 is mainly derived
from $2.61 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 recognized as
9
income over the subscription term, which approximates twelve months. The Company
has no bank lines of credit or other currently available credit sources.
Excluding cash expenditures of $193,000 and $269,000 in fiscal 2005 and
2004, respectively, for legal expenses incurred in connection with the Contempt
Proceeding, the Competitor Action and the other litigation described in Part II,
Item 1 or previously reported (collectively, the "Litigation"), and before
giving effect to the settlement proceeds of $1.1 million, the Company had
positive cash flow of $251,000 and $8,000 for fiscal 2005 and 2004,
respectively.
On April 27, 2005, a Stipulation of Settlement was filed with the Supreme
Court of the State of New York, Nassau County, pursuant to which: (i) the
Company, the competitor and all other parties agreed to settle the Litigation
(other than the Decision Strategies litigation referred to above), and (ii) the
Company received payment of $1.1 million from the competitor.
After giving effect to the Stipulation of Settlement and the receipt of
the $1.1 million settlement proceeds, the Company believes that it will have
sufficient resources to meet its working capital and capital expenditure needs,
including debt service, for the foreseeable future.
As described more fully in Notes 6 and 8 of the Notes to Consolidated
Financial Statements, at December 31, 2005 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 $ 520,703 $110,893 $259,011 $150,799 --
Capital lease obligations 44,904 26,467 18,437 -- --
Operating leases 402,276 123,755 217,999 60,522 --
---------- -------- -------- -------- ---------
Total $ 967,883 $261,115 $495,447 $211,321 --
========== ======== ======== ======== =========
Off-Balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements.
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Results of Operations
2005 vs. 2004
Year Ended December 31,
-----------------------
2005 2004
---- ----
% of Total % of Total
Amount Revenue Amount Revenue
------ ------- ------ -------
Operating revenues $ 3,841,833 100.00% $ 3,346,572 100.00%
----------- ------- ----------- -------
Operating expenses:
Data and product costs 1,113,602 28.99% 1,042,912 31.16%
Selling, general and
administrative expenses 2,563,063 66.71% 2,071,355 61.90%
Litigation related legal
fees and expenses 116,140 3.02% 236,691 7.07%
Depreciation and amortization 66,302 1.73% 67,721 2.02%
----------- ------- ----------- -------
Total operating expenses 3,859,107 100.45% 3,418,679 102.15%
----------- ------- ----------- -------
Loss from operations (17,274) -0.45% (72,107) -2.15%
Other income 31,492 0.82% 7,729 0.23%
Gain on settlement of
litigation 1,100,000 28.63% -- 0.00%
Interest expense (66,091) -1.72% (74,271) -2.22%
----------- ------- ----------- -------
Income (loss) before income
taxes 1,048,127 27.28% (138,649) -4.14%
Provision for state and local
income taxes 2,058 0.05% 381 0.01%
----------- ------- ----------- -------
Net income (loss) $ 1,046,069 27.23% $ (139,030) -4.15%
=========== ======= =========== =======
Operating revenues increased 15% for fiscal 2005. 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 increased 7% for fiscal 2005. This increase was
primarily due to higher salary and related employee benefits as well as the cost
of leasing the co-location facility that commenced in the third quarter of 2004,
offset in part by the lower cost of acquiring additional third-party
international credit reports and by a reduction in consulting fees that were
incurred last year in connection with setting up the Company's data center due
to its move to a new facility.
Selling, general and administrative expenses increased 24% for fiscal
2005. This increase was primarily due to higher salary and related employee
benefit costs due to an increase in the Company's sales force during the past 12
months and an increase in marketing expenses, offset in part by the absence of
the non-recurring moving expenses incurred in 2004.
Litigation related legal fees and expenses were down 51% for fiscal 2005
as a result of the settlement of the Litigation which was reached during this
year's second quarter.
Depreciation and amortization decreased 2% for fiscal 2005, due to a lower
depreciable asset base as certain items have been fully depreciated but are
still in use.
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Other income increased 307% for fiscal 2005, primarily due to the
settlement proceeds received at the end of April 2005 that were invested in
interest bearing accounts as well as a higher interest rate received on funds
invested in interest bearing accounts during the current period compared to the
same period last year.
Interest expense decreased 11% for fiscal 2005, due to a lower outstanding
promissory note balance.
The Company reported net income of $1.05 million for fiscal 2005 compared
to a net loss of $139,030 for the year ended December 31, 2004.
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 expenses 2,071,355 61.90% 1,821,368 59.86%
Litigation related legal
fees and expenses 236,691 7.07% 669,014 21.99%
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 0.20%
Interest expense (74,271) -2.22% (81,023) -2.66%
----------- ------ ----------- ------
Loss before income taxes (138,649) -4.14% (804,965) -26.46%
Provision for state and local
income taxes 381 0.01% 982 0.03%
----------- ------ ----------- ------
Net loss $ (139,030) -4.15% $ (805,947) -26.49%
=========== ====== =========== ======
Operating revenues increased 10% for fiscal 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 increased 14% for fiscal
2004. This increase was primarily due to higher rent expense because of 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.
12
Litigation related legal fees and expenses were down 65% for fiscal 2004
as a result of the conclusion of the 6 week trial in December 2003.
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.
Future Operations
The Company intends to expand its operations by expanding the breadth and
depth of its product and service offerings and introducing new and 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 evolving
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. To a large
extent these costs do not vary with revenue. Sales and operating results
generally depend on the Company's ability to attract and retain customers and
the volume of and timing of customer 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 greater profitability depends on the Company's ability to
generate and sustain increased revenue levels. The Company believes
13
that its success will depend in large part on its ability to (i) increase its
brand awareness, (ii) provide its customers with outstanding value, thus
encouraging customer renewals, 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 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
14
the deferred tax assets will not be realized. The Company considers that
the cumulative losses incurred in recent years creates a rebuttable
presumption that a full valuation allowance continues to be required for
its deferred tax assets.
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".
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 had 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 all
stock options and all other awards of equity instruments, including those
granted to employees. This compensation cost will be measured as the fair value
of the award on the grant date estimated using an option-pricing model to be
determined. The Company is evaluating the various transition provisions under
SFAS No. 123R. It is likely that the adoption of SFAS No. 123R will require the
Company to record additional employee compensation expense in its historical
financial statements in subsequent fiscal years. SFAS No. 123R is effective for
the Company as of the beginning of the quarter ending March 31, 2006.
No other new accounting pronouncement issued or effective during
15
the fiscal year has had or is expected to have a material impact on the
consolidated financial statements.
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.
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 operating losses, and the
Company may continue to incur additional losses and negative cash flow. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
16
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 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,
17
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, (xvii) interest rate risks and
inflationary pressures, and (xviii) 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 meaningful and should not be
relied on as an indication of future performance.
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&BTM which currently has the dominant position in
the industry and the financial resources to invest much more than the Company
can while withstanding substantial price competition, and (ii) a number of
indirect competitors that specialize in online commerce or information or who
derive a substantial portion of the revenues from online commerce, advertising
or information, and who may offer competing 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.
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.
18
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, 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 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
19
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 maintain
and grow is revenues. The Company's ability to generate revenue 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 effectively through an in-house sales force, independent
sales representatives, through arrangements with an outside sales force, or
through strategic partners.
Risks of New Business Areas. The Company intends to expand its operations
by continuing to promote new and complementary products 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
20
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 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 website and proprietary technology and
systems obsolete. The Company's success will depend, in part, on its ability to
license leading 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 website 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 website, 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
21
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
24 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 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
22
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 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
23
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, 2005, the Company had
approximately $5.5 million of net operating loss ("NOL") 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 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 names "CreditRiskMonitor.com" and "crmz.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
24
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 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, such litigation can be a
lengthy and costly process causing diversion of effort and resources by the
Company and its management with no
25
guarantee of success.
ITEM 7. FINANCIAL STATEMENTS.
The information required by Item 7, and an index thereto, appears at pages
F-1 to F-18 (inclusive) of this Report on Form 10-KSB.
26
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 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.
27
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.
=======================================================================================================
Principal Occupation/Position Officer or
Name Age Held with Company Director
Since
-------------------------------------------------------------------------------------------------------
Jerome S. Flum 65 Chairman of the 1983
Board/President/
Chief Executive Officer
-------------------------------------------------------------------------------------------------------
William Danner 49 Senior Vice President/Chief 2005
Operating Officer
-------------------------------------------------------------------------------------------------------
Lawrence Fensterstock 55 Senior Vice President/Chief 1999
Financial Officer/
Secretary
-------------------------------------------------------------------------------------------------------
Jeffrey S. Geisenheimer 40 Director 2005
-------------------------------------------------------------------------------------------------------
Richard J. James 66 Director 1992
-------------------------------------------------------------------------------------------------------
Andrew J. Melnick 64 Director 2005
=======================================================================================================
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. Mr.
Flum served as a L/Corporal in the USMCR.
William B. Danner was appointed Chief Operating Officer in October 2005, 6
months after joining the Company as Chief Marketing Officer. Mr. Danner brings
to the Company over 20 years of financial services and information services
marketing experience. His most recent experience includes brand strategy and
business development consulting for financial services clients at his own firm,
Danner
28
Marketing, from 2004 through April 2005. Previously, he was a consultant at
Citigate Albert Frank, a marketing communications company, based in New York
City (acquired as part of Incepta Group by Huntsworth in April 2005), from 2002
through 2003. From 1997 to 2001, Mr. Danner was Vice President of Market
Development at MetLife. From 1991 to 1997, he held several marketing positions
at D&B and ultimately served as Vice President, Strategic Planning at D&B.
Before D&B, he held a series of progressively responsible marketing positions
during nearly 10 years at GE Capital and GE Information Services. Mr. Danner
earned both his MBA and BA degrees at Harvard.
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 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.
Jeffrey S. Geisenheimer is Chief Financial Officer of Instant Information,
Inc., a financial information services company providing professional,
collaborative solutions to the financial industry. In this capacity he is
responsible for the daily financial and operating activities of the company.
Prior to joining Instant Information in 2005, Mr. Geisenheimer was Chief
Financial Officer, from 2003 to 2005, of Moneyline Telerate, Inc., which was
acquired by Reuters in June 2005. Before that he served as Chief Financial
Officer, from 1999 to 2003, of Multex.com, Inc., which was acquired by Reuters
in March 2003, and as Chief Financial Officer, from 1996 to 1999, of Market
Guide, Inc., which was acquired by Multex in September 1999. Mr. Geisenheimer
received a Bachelor of Business Administration degree in Banking and Finance and
a Master of Business Administration degree in Accounting from Hofstra
University.
Richard J. James is a Consultant for Sigma Breakthrough Technologies,
Inc., working with leading international and domestic Fortune 500 companies to
improve their new product development and operational processes, since 2005.
Prior to this, Mr. James served as the Technical Manager for Polaroid
Corporation's Consumer Hardware Division, supporting manufacturing plants in
Scotland, China and the United States, from 1980 until 2002. 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
29
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. Mr. James served as a
1st Lieutenant in the U.S. Army.
Andrew J. Melnick retired from Goldman, Sachs & Co. at the end of 2004. He
joined Goldman Sachs in 2002 as Co-Director of its Global Investment Research
Division and a member of its Management Committee. Prior to joining Goldman
Sachs, he was Senior Vice President and Director of the Global Securities and
Economics Research Group of Merrill Lynch, since 1989. During his 13 years at
Merrill Lynch, Mr. Melnick expanded the Firm's Research Group from primarily a
domestic effort to one with research offices in 26 countries around the world.
During that period Merrill Lynch was ranked as the top research department in
nearly all regions of the world including six straight times as the number one
equity research department in the United States. Previous employment: President
of Woolcott & Co. a boutique research and investment banking firm; Director of
Research and a Partner of L.F. Rothschild Unterberg Towbin; and Senior Analyst
at Drexel Burnham Lambert. He is a Chartered Financial Analyst (C.F.A.). Mr.
Melnick served as a 1st Lieutenant in the U.S. Army.
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 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 - Jeffrey
Geisenheimer, Richard James and Andrew Melnick, all of whom are audit committee
financial experts and are independent, as such terms are
30
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 2005, 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, except that a Form 3 for William Danner and a Form 5 for
Andrew Melnick, with respect to one transaction for Mr. Danner and four
transactions for Mr. Melnick, were filed late.
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).
31
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.
====================================================================================
SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------
Annual Long-Term
Compensation(3)(4) Compensation(5)
------------------------------------------------------------------------------------
Number of Securities
Name and Principal Position Year Salary(2) Underlying Options
------------------------------------------------------------------------------------
Jerome S. Flum, Chairman, 2005 $145,667 --
President and Chief Executive 2004 $130,400(3) --
Officer 2003 $115,200(1)(3) 5,000
------------------------------------------------------------------------------------
William B. Danner, Senior Vice 2005 $ 97,708 150,000
President 2004 N/A --
2003 N/A --
------------------------------------------------------------------------------------
Lawrence Fensterstock, Senior 2005 $144,833 --
Vice President 2004 $138,417 --
2003 $140,000 5,000
====================================================================================
(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,
although during this period he agreed to defer a portion of his annual
salary. Effective July 1, 2003, Mr. Flum elected to discontinue any future
deferral. The cumulative amount deferred of $238,750 (including $12,500
deferred in 2003) 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 issuance, 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. Also during 2003 Mr. Flum elected to
receive a portion of his salary in the form of other non-cash
compensation.
(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).
32
(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.
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 2005, non-qualified options to purchase
shares of the Company's Common Stock were granted to the following non-employee
directors -- 30,000 options at a purchase price of $1.00 per share to Andrew
Melnick, 3,000 options at a purchase price of $1.00 per share to Richard James
and 30,000 options at a purchase price of $1.65 per share to Jeffrey
Geisenheimer.
33
Compensation Pursuant to Stock Option Plans
The following table sets forth all stock options granted to the Company's
executive officers during the last fiscal year.
=============================================================================
OPTION/SAR GRANTS IN LAST FISCAL YEAR(1)
-----------------------------------------------------------------------------
Individual Grants
-----------------------------------------------------------------------------
Percent of
Number of Total
Securities Options Exercise
Underlying Granted to or Base
Options Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
-----------------------------------------------------------------------------
William Danner 100,000 29.37% $1.00 5/09/2015
50,000 14.68% $1.25 10/06/2015
=============================================================================
(1) No stock appreciation rights were granted to the executive officers in
fiscal 2005.
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.
================================================================================
MINIMUM ANNUAL
---------------------------------------------
Pre-Tax Operating Options Cumulative
Level Gross Sales Margin Vested Options 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.
34
===========================================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
-----------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at Fiscal Year-End In-the-Money Options at
Acquired (#) Fiscal Year-End ($)(1)
on Value --------------------------------------------------------------
Exercise Realized Un- Un-
Name (#) ($) Exercisable exercisable Exercisable exercisable
-----------------------------------------------------------------------------------------------------------
Jerome S.
Flum -0- -0- 15,000 5,000 $9,750- $3,250
-----------------------------------------------------------------------------------------------------------
William B.
Danner -0- -0- -0- 150,000 -0- $85,000
-----------------------------------------------------------------------------------------------------------
Lawrence
Fensterstock -0- -0- -0- 170,000 -0- $260,485
===========================================================================================================
(1) Represents the amount by which the closing price on December 31, 2005
($1.65) exceeded the exercise prices of unexercised options.
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 6, 2006 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:
35
================================================================================
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%
--------------------------------------------------------------------------------
William B. Danner 1,500 -----*
--------------------------------------------------------------------------------
Jeffrey S. Geisenheimer 52,000 -----*
--------------------------------------------------------------------------------
Richard J. James 37,000 -----*
--------------------------------------------------------------------------------
Andrew J. Melnick 10,000 -----*
================================================================================
All directors and officers 5,475,853 (3)(4)(5) 71.17%
(as a group (5 persons))
================================================================================
* less than 1%
(1) Does not give effect to (a) options to purchase 640,500 shares of Common
Stock granted to 12 officers and employees pursuant to the 1998 Long Term
Incentive Plan of the Company, and (b) options to purchase an aggregate of
79,000 shares granted to the non-employee directors 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.
(5) At the time of his resignation as a Director effective December 22, 2005,
Mr. Charm owned 36,000 shares of Common Stock, and had options to purchase
9,500 shares that are not currently exercisable.
The Company's equity compensation plan approved by stockholders is the
1998 Long-Term Incentive Plan.
36
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, 2005.
=========================================================================================================
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
approved by stockholders 737,500 $0.9461 690,500
---------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by stockholders -- -- --
---------------------------------------------------------------------------------------------------------
Total 737,500 $0.9461 690,500
=========================================================================================================
37
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There were no such reportable relationships or related transactions in
2005.
ITEM 13. EXHIBITS.
(a) Exhibits
2 - Copy of the Asset Purchase Agreement dated December 29,
1998. (1)
3(i) - Copy of the Company's Amended and Restated Articles of
Incorporation dated as of May 7, 1999. (3)
3(ii)* - Copy of the Company's By-Laws as amended April 27, 1987 and
May 11, 1999.
10-C - Copy of Company's 1998 Long-Term Incentive Plan. (2)
14 - CreditRiskMonitor.com, Inc. Code of Ethics for Principal
Executive Officer and Senior Financial Officers. (4)
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 Report on Form 8-K dated January 19,
1999 (File No. 1-10825) and incorporated herein by reference thereto.
(2) Filed as an Exhibit to Registrant's Annual Report on Form 10-KSB for the
fiscal year ending December 31, 1998 (File No. 0-10825) and incorporated
herein by reference thereto.
(3) 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.
(4) 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.
38
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 audits of the Company's annual financial statements
for the 2005/2004 fiscal years and the reviews of the financial statements
included in the Company's Form 10-QSB for 2005 and the third quarter of 2004 was
$31,500 in each year. The engagement of J.H. Cohn LLP for the 2005 and 2004
fiscal years and the scope of audit-related services, including the audits 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.
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
Neither J.H. Cohn LLP nor BDO Seidman, LLP provided any other assurance or
related services in the 2005 or 2004 fiscal years except 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 each of the 2005 and 2004 fiscal years were $6,000 for tax
preparation services.
All Other Fees
Neither J.H. Cohn LLP nor BDO Seidman, LLP provided any products or
services in the 2005 or 2004 fiscal years other than as described above.
39
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, 2006 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, 2006 By: /s/ Jerome S. Flum
Jerome S. Flum
Chairman of the Board and
Chief Executive Officer
Date: March 31, 2006 By: /s/ Lawrence Fensterstock
Lawrence Fensterstock
Chief Financial Officer
Date: March 31, 2006 By: /s/ Jeffrey S. Geisenheimer
Jeffrey S. Geisenheimer
Director
Date: March 31, 2006 By: /s/ Richard J. James
Richard J. James
Director
Date: March 31, 2006 By: /s/ Andrew J. Melnick
Andrew J. Melnick
Director
40
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 2005 and 2004 F-3
Consolidated Statements of Operations - Years Ended
December 31, 2005 and 2004 F-4
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 2005 and 2004 F-5
Consolidated Statements of Cash Flows - Years Ended
December 31, 2005 and 2004 F-6
Notes to Consolidated Financial Statements F-7
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 sheets of
CreditRiskMonitor.com, Inc. and Subsidiary as of December 31, 2005 and 2004, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express and
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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. and Subsidiary as of December 31, 2005 and 2004, and
their consolidated results of operations and cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States.
/s/ J.H. Cohn LLP
Jericho, New York
March 10, 2006
F-2
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
2005 2004
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 2,034,786 $ 877,025
Accounts receivable, net of allowance of $43,677 658,603 637,221
Other current assets 191,137 172,019
------------ ------------
Total current assets 2,884,526 1,686,265
Property and equipment, net 153,689 162,085
Goodwill 1,954,460 1,954,460
Prepaid and other assets 33,854 20,042
------------ ------------
Total assets $ 5,026,529 $ 3,822,852
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Deferred revenue $ 2,607,569 $ 2,221,233
Accounts payable 125,590 170,949
Accrued expenses 157,676 218,990
Current portion of long-term debt 110,893 100,084
Current portion of capitalized lease obligations 26,467 26,518
------------ ------------
Total current liabilities 3,028,195 2,737,774
------------ ------------
Long-term debt, net of current portion:
Promissory note 409,810 520,703
Capitalized lease obligations 18,437 44,904
------------ ------------
428,247 565,607
Other liabilities 95,812 91,265
------------ ------------
Total liabilities 3,552,254 3,394,646
------------ ------------
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 shares 76,794 76,794
Additional paid-in capital 28,122,383 28,122,383
Accumulated deficit (26,724,902) (27,770,971)
------------ ------------
Total stockholders' equity 1,474,275 428,206
------------ ------------
Total liabilities and stockholders' equity $ 5,026,529 $ 3,822,852
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2005 and 2004
2005 2004
---- ----
Operating revenues $ 3,841,833 $ 3,346,572
----------- -----------
Operating expenses:
Data and product costs 1,113,602 1,042,912
Selling, general and administrative expenses 2,563,063 2,071,355
Litigation related legal fees and expenses 116,140 236,691
Depreciation and amortization 66,302 67,721
----------- -----------
Total operating expenses 3,859,107 3,418,679
----------- -----------
Loss from operations (17,274) (72,107)
Other income 31,492 7,729
Gain on settlement of litigation 1,100,000 --
Interest expense (66,091) (74,271)
----------- -----------
Income (loss) before income taxes 1,048,127 (138,649)
Provision for state and local income taxes 2,058 381
----------- -----------
Net income (loss) $ 1,046,069 $ (139,030)
=========== ===========
Net income (loss) per share-
basic and diluted $ 0.14 $ (0.02)
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2005 and 2004
Common Stock Additional Total
------------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
Balance January 1,
2004 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
Net income -- -- -- 1,046,069 1,046,069
--------- --------- ------------ ------------ ------------
Balance December 31,
2005 7,679,462 $ 76,794 $ 28,122,383 $(26,724,902) $ 1,474,275
========= ========= ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005 and 2004
2005 2004
---- ----
Cash flows from operating activities:
Net income (loss) $ 1,046,069 $ (139,030)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 66,302 67,721
Deferred rent 4,547 (2,920)
Changes in operating assets and liabilities:
Accounts receivable, net (21,382) (132,630)
Other current assets (19,118) (69,417)
Prepaid and other assets (13,812) (1,162)
Deferred revenue 386,336 188,755
Accounts payable (45,359) (37,116)
Accrued expenses (61,314) 46,712
----------- -----------
Net cash provided by (used in) operating activities 1,342,269 (79,087)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (57,906) (73,150)
----------- -----------
Net cash used in investing activities (57,906) (73,150)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options -- 7
Payments on promissory note (100,084) (90,328)
Payments on capital lease obligations (26,518) (18,864)
----------- -----------
Net cash used in financing activities (126,602) (109,185)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,157,761 (261,422)
Cash and cash equivalents at beginning of year 877,025 1,138,447
----------- -----------
Cash and cash equivalents at end of year $ 2,034,786 $ 877,025
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 77,936 $ 58,451
=========== ===========
Income taxes $ 2,058 $ 381
=========== ===========
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-6
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED 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. This service is sold
predominantly to corporations located in the United States. 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. Assets under
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
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets", goodwill and
F-7
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
other indefinite-lived intangible assets are no longer amortized, but are
reviewed for impairment at least annually and if a triggering event were to
occur in an interim period. Goodwill impairment is determined using a two-step
process. The first step of the impairment test is used to identify potential
impairment by comparing the fair value of a reporting unit to the book value,
including goodwill. If the fair value of a reporting unit exceeds its book
value, goodwill of the reporting unit is not considered impaired and the second
step of the impairment test is not required. If the book value of a reporting
unit exceeds its fair value, the second step of the impairment test is performed
to measure the amount of impairment loss, if any. The second step of the
impairment test compares the implied fair value of the reporting unit's goodwill
with the book value of that goodwill. If the book value of the reporting unit's
goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess. The implied fair value of goodwill
is determined in the same manner as the amount of goodwill recognized in a
business combination. The Company completed its annual goodwill impairment tests
for 2005 and 2004 during the fourth quarter of each year and determined there
was no impairment of existing goodwill.
Long-Lived Assets
The Company reviews its long-lived amortizable 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,
2005, 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
F-8
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 income (loss)
per share for each of the two years in the period ended December 31, 2005
reflect the net income (loss) for the year divided by the weighted average of
common shares outstanding during the year and the weighted average of common
shares outstanding adjusted for the effects of potentially dilutive securities
(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,
2005 and 2004.
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, 2005 and 2004, there were no items that
gave rise to other comprehensive income or loss and the net loss equaled
comprehensive loss.
F-9
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Stock-Based Compensation
At December 31, 2005 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 income (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 income (loss)
and net income (loss) per share had compensation cost for the Company's stock
plan been determined using the Black-Scholes option valuation model, which is a
fair value-based method consistent with SFAS No. 123 and the assumptions shown
in Note 4, for the years ended December 31:
2005 2004
---- ----
Net income (loss)
As reported $ 1,046,069 $(139,030)
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) (25,674) 4,187
----------- ---------
Pro forma $ 1,020,395 $(134,843)
=========== =========
Net income (loss) per share - basic and diluted
As reported $ 0.14 $ (0.02)
Pro forma $ 0.13 $ (0.02)
Recently Issued Accounting Standards
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
F-10
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 had 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 all
stock options and all other awards of equity instruments, including those
granted to employees. This compensation cost will be measured as the fair value
of the award on the grant date estimated using an option-pricing model to be
determined. The Company is evaluating the various transition provisions under
SFAS No. 123R. It is likely that the adoption of SFAS No. 123R will require the
Company to record additional employee compensation expense in its historical
financial statements in subsequent fiscal years. SFAS 123R is effective for the
Company as of the beginning of the quarter ending March 31, 2006.
No other new accounting pronouncement issued or effective during the fiscal year
has had or is expected to have a material impact on the consolidated financial
statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
financial statement presentation.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk principally consist of cash, cash equivalents and accounts
receivable. The Company maintains its cash and cash equivalents in bank deposit
and other accounts, the balances of which, at times, may exceed Federally
insured limits. Exposure to credit risk is reduced by placing such deposits in
high credit quality financial institutions.
The Company closely monitors the extension of credit to its customers. The
Company's accounts receivable balance is net of an allowance for doubtful
accounts. The Company does not require collateral or other security to support
credit sales, but provides an allowance for doubtful accounts based on
historical experience and specifically identified risks. Accounts receivable are
charged off against the allowance for doubtful accounts when management
determines that recovery is unlikely and the Company ceases collection efforts.
The Company does not believe that significant credit risk existed at December
31, 2005 and 2004.
F-11
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2005, the Company had Federal NOL carryforwards of
approximately $5,510,000, which expire through 2025.
The actual tax expense for 2005 and 2004 differs from the "expected" tax expense
or benefit for those years (computed by applying the applicable United States
federal corporate tax rate to income (loss) before income taxes) as follows:
2005 2004
---- ----
Computed "expected" benefit $ 419,251 $ (55,460)
Utilization of net operating loss carryforward 324,084 --
Expiration of net operating loss carryforward -- 453,528
Decrease in valuation allowance (741,277) (397,687)
--------- ---------
State and local income tax expense $ 2,058 $ 381
========= =========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at December 31, 2005 and 2004 are as follows:
2005 2004
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 1,888,975 $ 2,574,145
Other 125,542 120,752
----------- -----------
Total deferred tax assets 2,014,517 2,694,897
Valuation allowance (1,716,673) (2,457,950)
----------- -----------
Net deferred tax assets 297,844 236,947
----------- -----------
Deferred tax liabilities:
Goodwill amortization (290,674) (229,332)
Fixed assets (7,170) (7,615)
----------- -----------
Total deferred tax liabilities (297,844) (236,947)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
The Company considers that the cumulative losses incurred in recent years,
excluding the effects of a non-recurring gain, creates a rebuttable presumption
that a full valuation allowance continues to be required for its deferred tax
assets. Therefore, 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
F-12
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004 was a decrease of $741,277 and $397,687,
respectively.
NOTE 4 - COMMON STOCK, STOCK OPTIONS, AND STOCK APPRECIATION RIGHTS
Common Stock
At December 31, 2005, 737,500 shares of the Company's authorized common stock
were reserved for issuance upon exercise of outstanding options under its stock
option plan.
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, 2005, the Company does not have any preferred stock
outstanding.
Stock Options and Stock Appreciation Rights
At December 31, 2005, 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, 2005, there were
options outstanding for 737,500 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.
All of the options granted may be exercised 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
F-13
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2005 and 2004, nor are there any
stock appreciation rights outstanding at December 31, 2005 and 2004.
Transactions with respect to the Company's stock option plans for the years
ended December 31, 2005 and 2004 are as follows:
Weighted
Average
Number Exercise
of Shares Price
--------- ------
Outstanding at January 1, 2004 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
Granted 340,500 1.1079
Forfeited (149,500) 1.0000
--------
Outstanding at December 31, 2005 737,500 $ 0.9461
========
As of December 31, 2005, there were 690,500 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, 2005:
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 - $ 0.9900 150,000 2.65 $0.0001 --
$ 1.0000 - $ 1.2000 461,500 8.14 $1.0000 15,000 $1.0000
$ 1.2100 - $ 1.6500 102,000 9.55 $1.3750 3,000 $1.5000
$ 1.6600 - $ 4.0000 24,000 0.50 $4.0000 24,000 $4.0000
------- ------
737,500 5.65 $0.9461 42,000 $2.7500
======= ======
The weighted average fair value at date of grant for options granted during 2005
and 2004 was $0.52 and $0.36 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:
F-14
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31,
------------------------
Assumption 2005 2004
---------- ---- ----
Risk-free interest rate 4.28% 4.42%
Dividend yield 0.00% 0.00%
Volatility factor 2.64 0.88
Weighted-average expected life of the option (years) 9 9
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:
2005 2004
---- ----
Computer equipment and software $ 232,528 $ 178,982
Furniture and fixtures 54,549 50,189
Leasehold improvements 35,855 35,855
Capitalized lease 90,043 119,073
--------- ---------
412,975 384,099
Less accumulated depreciation and amortization (259,286) (222,014)
--------- ---------
$ 153,689 $ 162,085
========= =========
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 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. 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 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
F-15
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2005 are as
follows:
Year Ending
December 31, Amount
------------ ------
2006 $110,893
2007 122,870
2008 136,141
2009 150,799
--------
520,703
Less current portion 110,893
--------
$409,810
========
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. 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 (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 issuance, 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 leases certain equipment
under an operating lease that expires in 2008. Rental expenses under operating
leases were $159,610 and $171,442 for the years ended December 31, 2005 and
2004, respectively.
In connection with the Company's relocation in 2004 it entered into two 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
F-16
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
equipment for $1 at the end of the lease.
Future minimum lease payments for the capital lease and noncancelable operating
leases at December 31, 2005 are as follows:
Capital Lease Operating
Obligations Leases
----------- ------
2006 $ 30,043 $123,755
2007 19,167 113,889
2008 -- 104,110
2009 -- 60,522
------------ --------
Total minimum lease payments 49,210 $402,276
========
Less amounts representing interest 4,306
------------
44,904
Less current portion of capitalized lease obligations 26,467
------------
Long-term capitalized lease obligations $ 18,437
============
NOTE 9 - NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per share:
2005 2004
---- ----
Net income (loss) $ 1,046,069 $ (139,030)
=========== ===========
Basic average common shares outstanding 7,679,462 7,513,509
=========== ===========
Net income (loss) per share - basic and diluted $ 0.14 $ (0.02)
=========== ===========
The computation of diluted net income (loss) per share excludes the effects of
the assumed exercise of all options since their inclusion would be
anti-dilutive. For fiscal 2005, 737,500 options were excluded as their exercise
prices were above market value. For fiscal 2004, 546,500 options were excluded
because the Company had an operating loss.
NOTE 10 - LEGAL PROCEEDINGS
On April 27, 2005, the Company executed an agreement (the "Stipulation of
Settlement") which settled all of the lawsuits between it and a competitor, as
previously reported, and the competitor simultaneously paid the Company $1.1
million. In addition, the competitor agreed in the Stipulation of Settlement to
assume certain potential liabilities against the Company and to defend the
Company in connection with the Decision Strategies litigation discussed below
and to indemnify the Company with respect to all liabilities in excess of
$25,000.
F-17
CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 proceeding that was settled, for breach of its
services contract and seeking a declaration of the rights of the parties under
the terms of the contract. Also in July 2004, Decision Strategies commenced an
action in New York against the Company and the competitor for fees in excess of
the limitations provided in the services contract. The parties reached a
settlement in December 2005 whereby the Company paid to Decision Strategies the
$25,000 maximum amount agreed to in the Stipulation of Settlement.
F-18