10-K/A 1 accupoll10ka2063004.txt ACCUPOLL 10-K/A 063004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (AMENDMENT NO. 3) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2004 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 000-32849 --------- ACCUPOLL HOLDING CORP. ---------------------- (Exact name of registrant as specified in its charter) NEVADA 11-2751630 ------ ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 15101 RED HILL AVE. SUITE # 220, TUSTIN, CA 92780 ------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (949) 200-4000 -------------- Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par value per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. As of December 31, 2003: $101,215,926.00 (67,477,284 shares at $1.50/ share). Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 180,705,970 shares of common stock, $.001 par value per share, as of September 28, 2004. Documents incorporated by reference: None. TABLE OF CONTENTS PAGE ---- PART I Item 1. BUSINESS..........................................................1 Item 2. PROPERTIES.......................................................18 Item 3. LEGAL PROCEEDINGS................................................18 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............19 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES................19 Item 6. SELECTED FINANCIAL DATA..........................................20 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................22 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......30 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................30 Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.........................................30 Item 9A. CONTROLS AND PROCEDURES..........................................30 Item 9B. OTHER INFORMATION................................................30 PART III Item 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.........................31 Item 11. EXECUTIVE COMPENSATION...........................................33 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................................................35 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................37 Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES...........................37 PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................................38 SIGNATURES .................................................................42 PART I NOTE REGARDING FORWARD LOOKING INFORMATION Various statements in this Form 10-K/A and in future filings by us with the Securities and Exchange Commission, in our press releases and in oral statements made by or with the approval of authorized personnel constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as "anticipate," "could," "currently envision," "estimate," "expect," "intend," "may," "project," "seeks," "we believe," "will," and similar words or phrases and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by those forward-looking statements. Some of the factors that could affect our financial performance or cause actual results to differ from our estimates in, or underlying, such forward-looking statements are set forth under the heading of "Risk Factors." These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, many of which are beyond our control. Actual results could differ materially from these forward-looking statements as a result of the facts described in "Risk Factors." We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking information contained in this Form 10-K/A will, in fact, transpire. ITEM 1. BUSINESS THE COMPANY AccuPoll Holding Corp. ("AccuPoll", "we" or "us") seeks to become a leader in developing and marketing computerized voting machines and their associated products and services for use in federal, state, local and private elections. We have developed a direct recording electronic (DRE) voting system that provides a voter-verified paper audit trail that is both human and machine readable. Our system was qualified as meeting federal voting system standards on March 25, 2004 and we believe that it is currently the only electronic voting system providing these features that is so qualified. Key benefits of our voting system include: an intuitive touch screen interface, an audit capability that includes multiple copies of the electronic records and a voter-verified paper audit trail (VVPAT) that is both human and machine readable. Additional benefits include the ability to support multiple languages, to prevent overvotes, to provide under-vote warnings, the use of software based on open source products (e.g., Linux) and open standards (e.g., XML, Unicode, Java), and the use of non-proprietary hardware. As of September 22, 2004, our DRE voting system was certified by the states of Alabama, Arkansas, Kentucky, Mississippi, Ohio, South Dakota, Utah and West Virginia. Currently, we are in the process of applying for certification in additional states. Our objective is to protect citizens' right to vote by insuring access, accuracy, privacy and integrity in the voting process and in so doing to become the leading provider of polling place electronic voting solutions that are reliable, accurate, immediate, confidential, secure, easy-to-use and auditable. Our website address WWW.ACCUPOLL.COM. We are subject to the informational requirements of the Securities Exchange Act of 1934, and in accordance therewith file reports, proxy or information statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.20549, at prescribed rates. In addition, the Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's web site is 1 http://www.sec.gov. We are in the process of building a section of our website at WWW.ACCUPOLL.COM to make available our reports that we file with the Securities and Exchange Commission. Until this section of our website is operational, we voluntarily provide paper copies of our filings free of charge upon request. CORPORATE HISTORY We were incorporated in the State of Nevada on January 30, 1985 with the name "Kiwi Ventures, Ltd." On November 4, 1985, we changed our name to "Western International Pizza Corporation" and owned and operated 17 Godfather's pizza franchise restaurants in Arizona until we ceased those operations in approximately 1990. Our current operations began in August 2001 with the formation of AccuPoll, Inc., a Delaware corporation. On May 20, 2002, we entered into a share exchange with AccuPoll, Inc. Pursuant to the exchange, all of the outstanding common stock and warrants of AccuPoll, Inc. were exchanged for our shares. As a result of the exchange, the stockholders of AccuPoll, Inc. acquired 75,500,000 shares of our common stock, which represented approximately 98.7% of our issued and outstanding common stock immediately after the exchange. Following the exchange, we changed our name to "AccuPoll Holding Corp." RECENT ACQUISITIONS On June 30, 2004, we entered into an agreement to acquire 100% of the issued and outstanding capital stock of NTS Data Services, Inc. ("NTS"), a New York corporation with an address at 1342 Military Road, Niagara Falls, New York 14304 (the "Agreement"). According to the Agreement, upon closing, NTS would become a wholly-owned subsidiary of AccuPoll. The Agreement is subject to a number of terms and conditions, including but not limited to satisfactory completion of due diligence, completion of financing and other conditions as outlined in the Agreement. As of August 31, 2004 the transaction had not closed due to certain conditions of the transaction not being met. NTS provided such a letter to AccuPoll expressing interest not to move forward with the contemplated transaction. INDUSTRY BACKGROUND Elections, especially those in democratic countries, are held under the auspices of various government systems. Until the 1960's almost all elections were conducted with manually counted pre-printed paper ballots and lever-activated mechanical voting machines, commonly known as lever machines. Lever machines, which are cumbersome to use and consist of hundreds of moving parts, require significant maintenance and are expensive to warehouse and transport. This method of voting and recording of votes, in addition to being inefficient, was susceptible to inaccuracies, significant time delays, other mechanical difficulties, and in some instances manipulation. In 1964, the Votomatic punch card voting system was patented. While this system has not been actively manufactured since the mid 1980s, it remains the most widely used system in North America. In the early 1980's, optical scan voting systems were introduced and began to penetrate the election equipment market place on a relatively small scale. According to a study conducted by the California Institute of Technology and Massachusetts Institute of Technology, market penetration for optical scan voting systems grew to slightly over 25% of the installed voting machine base nationwide as of July 2001. In recent years, the election industry began to computerize in response to increased public acceptance and familiarity with using computers. The benefit of computers is that they offer the opportunity to count ballots accurately and quickly. Additionally, computer technology has created the potential for more convenient participation, accessibility for disabled voters to vote independently and the elimination of pre-printed paper ballots. Service and support have also become increasingly important components of the newer, technologically advanced voting systems. While the employment of technology is becoming more generally accepted, we believe that many voting systems currently being marketed lag in the application of state-of-the-art computer technology. To our knowledge, of the voting systems on the market produced and sold by the four largest voting system vendors (Diebold Election Systems, Sequoia Voting Systems, Election Systems + Software and Hart InterCivic), only Sequoia Voting Systems currently produces a DRE voting system with a voter-verified paper audit trail. Many 2 of our competitors continue to receive poor reviews from the academic, information-security and political communities for inadequate security, deficient software coding standards, inadequate change management practices, and lack of a voter verified paper audit trail. We believe that some of these systems continue to operate with non-certified software, and lack flexible functionality. DRE voting systems are computer-based systems first and voting appliances second. Because every computer system is susceptible to programming bugs and/or possible tampering, we believe that computerized voting systems must provide for an independent, voter verified record of each voter's intent. We believe that in order to provide a system that the voter can have confidence in, we must provide a voter with a voter-verified paper audit trail. Our DRE voting system provides for both a secure electronic recording of the voting process and an indelible voter-verified paper-audit trail that satisfies the federal voting system standards for record-keeping that is maintained independently from the electronic results. MARKET OPPORTUNITY The U.S. presidential election of November 2000 had a significant and disruptive impact on the nation. According to a report from California Institute of Technology and Massachusetts Institute of Technology, approximately 1.5 million votes were lost in 2000 because of difficulties in either using voting equipment or recording the results of those votes. The difficulties experienced with accuracy and verifiability, particularly with punch card systems, have generated opportunities for manufacturers of electronic voting systems. Following the 2000 election, the U.S. Congress enacted the Help America Vote Act of 2002, or HAVA. HAVA was signed into law by President Bush on October 29, 2002. HAVA expanded the federal government's role in elections through mandates, standards and funding. The U.S. Congress authorized a total of $3.9 billion to help states implement HAVA. In 2003, $650 million was disbursed to the states under HAVA. Of this $650 million, half of the funds were designated to replace punch card and lever voting machines and the balance could be used by the states to comply with HAVA's requirements and implement other improvements to the administration of elections. An additional $3 billion is authorized to help states fund HAVA's requirements for updating voting systems, allowing disabled voters to vote independently, providing provisional ballots, creating and maintaining statewide voter registration lists, training poll workers, and educating voters. These funds are distributed to states annually over a three-year period after individual states certify that they have developed a plan to use the funds to implement HAVA requirements. States are also obligated to provide a five percent match. Beginning in May 2004, the newly created Elections Assistance Commission began receiving state certifications, and as each state's certification is processed, funds will be disbursed. Beginning on January 1, 2006, HAVA requires that state voting systems: o Permit the voter to review the votes selected and change or correct votes before the ballot is cast; o Notify the voter if he or she casts more than one vote for a single office and provide an opportunity to correct the ballot; o Produce a permanent paper record with a manual audit capacity; o Provide disability access, including nonvisual access for the blind and visually impaired, in a manner that provides the same opportunity for access and participation (including privacy and independence) as for other voters; o Provide alternative language accessibility; and o Comply with error rate standards. Further, each state is required to adopt uniform and non-discriminatory standards for what constitutes a vote and how it will be counted. According to the National Association of Secretaries of State there are approximately 200,000 polling places in the United States, covering 7,000 jurisdictions, with 1.4 million polling place workers supervised by 22,000 election officials. According to surveys conducted by the National Association of Counties the typical polling place in the United States is currently configured to contain an average of seven voting stations. On election 3 day, the 100 million voters in the United States use over 1.4 million voting machines where approximately 60% of the voting sites are currently using antiquated punch, lever, or paper ballot technologies. These are the same machine types for which HAVA mandates replacement by 2006. We are targeting these polling places with our touch-screen electronic DRE voting product. OUR PRODUCTS The AccuPoll DRE voting system consists of one or more voting stations that offer voters an "ATM-like" interface, and that prepare and print voter verified paper records, also known as "Proof of Vote" or "voter verified paper audit trail," for machine or hand counting. Each in-precinct voting station is physically connected by means of a local area network to a voting administrative workstation. The entire in-precinct system is not connected to any network outside of the polling place during voting hours. The user-friendly touch screen interface provides the user easy to follow instructions. The system is compact, sturdy and has an estimated useful life of at least five years. Once a voter makes his or her choices, a Proof of Vote is printed on paper by the voting station. The voter can then examine the Proof of Vote for accuracy before depositing it into a ballot box. If the Proof of Vote does not accurately reflect the voter's intent, that voter can then notify a polling place official. The official will then void the electronic ballot and its corresponding Proof of Vote, and allow the voter to re-vote. Importantly, while the Proof of Vote is printed, the voter's electronic ballot is stored locally on the voting station and is also immediately transmitted to the polling place voting administrative workstation. Thus, when the polling place closes, multiple redundant copies of the electronic ballots are available in addition to the paper Proofs of Vote. At no time is the voter's identity associated with either the electronic ballot or the paper Proof of Vote. Accordingly, each ballot is securely stored in multiple locations and in forms that can be readily cross-audited against each of the other ballot representations. We have based our system software on open standards (JAVA language, Unicode, and XML for the ballot and behavior specifications). As a result, we have eliminated the need to deploy proprietary technologies that are expensive to acquire and maintain and which we believe often lack the flexibility to adapt quickly to meet changing voting system standards. Our solutions are scalable in the software and hardware design. Our hardware components are "off the shelf", and replacement parts, such as printers, are readily available, thereby reducing maintenance costs and unit downtime. We have designed our product with both the voter and election administrator in mind. To our knowledge, we have created the only voting system that has been qualified as meeting federal voting system standards and that offers a voter-verified paper audit trail that is both human and machine readable, and is readily accessible and easily employable by disabled voters. Examples of our system's disability accommodating functions include a special tactile keypad to facilitate ease of navigation for the blind, Braille text on the keypad, audio ballot support in the voter's selected language, recognition of non-human touch from users with prosthetic limbs, and wheelchair accessibility. The touch screen function is user-friendly and has been designed to minimize potential errors. Other notable features include the ability to: o support multiple languages, both on-screen and in audio (all languages supported by Java/Unicode); o alter visual schemes to better enable those with modest visual impairments, such as color blindness or tunnel vision; o notify electronically the voting administrator of equipment malfunction(s); o spoil an erroneous ballot before the voter deposits his or her Proof of Vote into the ballot box; the ability to provide full support for provisional ballots as required by HAVA; and o record write-in candidates. Elections officials also enjoy benefits from our system as it eliminates the need for costly pre-printed paper ballots. The election tabulation and reporting functions greatly enhance the reliability and accuracy of the voting process. Furthermore, the non-proprietary hardware ensures greater inter-operability and ease of repairs or upgrades. 4 We have entered into a contract for the manufacture of our current product which is comprised of a printer, touch screen, computer processing unit, smart card reader, integrated case, power supply and related control software. The contract requires us to acquire the product exclusively from this manufacturer unless the manufacturer is unable to produce and deliver on time our required quantity. We believe that other manufacturers would be available to manufacture the product should this manufacturer become unavailable. The manufacturer may change prices upon 60 days prior written notice to us. Unless sooner terminated, the agreement expires in December 2006. As of September 22, 2004, the manufacturer and its president own 766,000 shares of our common stock. For a discussion of risks with respect to this arrangement, please see "Risk Factors - Risks Relating to Our Business - We rely on a third-party manufacturer." BUSINESS STRENGTHS Our key business strengths are described below: OUR PRODUCT IS A FEDERALLY QUALIFIED VOTING SYSTEM WITH A VOTER VERIFIED PAPER AUDIT TRAIL THAT IS BOTH HUMAN AND MACHINE READABLE. On March 25, 2004, the AccuPoll voting system was qualified as being compliant with the 1990 federal voting system standards as to hardware, and the 2002 federal voting system standards as to software. We believe that our technology is currently unmatched in its capability to simultaneously produce multiple copies of electronic ballots (recorded on both the polling place voting administrative workstation and the local voting station), as well as generate an independent, voter-verified paper audit trail, which is completely auditable and can be optically scanned. We believe the ability of our system to provide a fully auditable paper record of the election is critical, as HAVA requires that any voting system purchased with federal funds produce a permanent paper record with a manual audit capacity that will be available as an official record for any recount. We have submitted an updated version of our DRE voting system to the Independent Test Authorities (ITAs) for full qualification testing under the 2002 federal voting system standards. We expect to complete full qualification testing under the 2002 federal voting standards before January 1, 2005. WE ARE WELL POSITIONED TO TAKE ADVANTAGE OF THE CURRENT MARKETPLACE AND ENVIRONMENT OF ELECTION REFORM. We believe that we have designed a technologically advanced electronic voting product that meets the current federal voting system standards and the requirements of HAVA, as well as addresses current voting systems' technology deficiencies. We believe that we are first to market in terms of designing a voting system that complies with both the requirements of HAVA and the federal voting system standards. Achieving voting system standards compliance can be a lengthy and arduous process, typically taking twelve or more months, thereby posing a significant barrier for competitors. In addition to being qualified under the federal standards, we have spent the past two years marketing our product to our target customer base and thus we believe we are well positioned to begin generating sales once the states begin disbursing their federal funds and we have received the appropriate state certifications. With the recent availability of $2.35 billion to the states, we believe that a number of significant purchasing decisions will be made prior to the end of 2004. As of June 17, 2004, approximately half of the federal funds have been distributed to the states. The remaining funds are expected to be distributed once the states complete the necessary requirements. However, the portion of funds used by a state for acquisition of new voting systems will depend upon each state's plan and we cannot assure you that states will use this funding to purchase our product or that states will make purchasing decisions this year. WE HAVE RELATIONSHIPS WITH WELL-KNOWN AND ESTABLISHED PARTNERS. AccuPoll has entered into teaming and reseller agreements with various established companies that offer election-related services. We have entered into a teaming agreement with Alternative Resources Corporation (ARC) whereby ARC will provide deployment and support services for our DRE voting system. In addition, we have entered into a multi-state reseller agreement with AmCad, LLC whereby AmCad will assist with the marketing and deployment of our DRE voting system. We are currently in negotiations with additional well-known, large and well capitalized marketing partners in other targeted states. However, we cannot assure you that any of these negotiations will lead to a definitive business relationship in the future. OUR EXPERIENCED MANAGEMENT TEAM HAS DEEP KNOWLEDGE OF INFORMATION TECHNOLOGY. Our senior management collectively has 80 years of experience in the information technology industry in coding and development marketing. Our management team has held senior positions at leading information technology firms, such as MCI Systemhouse and EDS, and has considerable experience in the process of 5 large-scale systems deployment. BUSINESS STRATEGY We plan to leverage our business strengths in order to grow our operations. The key elements to our business strategy are described below: LEVERAGE THE MARKETING STRENGTH AND INFRASTRUCTURE OF OUR PARTNERS. We believe that the relationships that we are building with our marketing and reselling partners will help to position us in critical larger markets. We believe that we will gain enhanced credibility through associating with these partners. Additionally, we believe that we have the ability to leverage their resources and networks and in turn be better positioned to sell and deploy programs into these larger target markets. Our partners are well known, established companies that have considerable experience in providing technology solutions and service support in the election process. We will continue to maintain, and intend to expand, our strategic alliances with these and other established partners in the election services business. Currently we have chosen to develop partnering relationships on a state-by-state basis. EXPAND OUR TARGETED, INDEPENDENT MARKETING STRATEGY TO SMALL- AND MID-SIZED CUSTOMERS. We have begun a direct marketing approach to reach small- and mid-sized target markets. We initiated this marketing program by identifying specific regions and developing a presence by attending trade shows and conferences, which provides us with opportunities to meet, as well as educate, our customers. We also market our system by means of our website and have prepared a web-based virtual voting experience to further enhance the awareness and understanding of our product. We are building awareness of the AccuPoll product so as to be well positioned in our target markets as HAVA funding is disbursed to the states. We are working to obtain all appropriate federal and local certification with that timing in mind. We intend to grow our direct sales and marketing force, engage additional lobbyists in our target states, engage local sales/marketing agents, and build a robust sales support and delivery organization that will reinforce our sales and marketing activities. The ramp up in each of these areas is critical to support the upcoming procurement cycle that will begin following the May 2004 release of federal funds to the states. MAINTAIN PRODUCT LEADERSHIP. As the developer of the first voting system with a voter-verified paper audit trail that is both human- and machine-readable and that is also qualified as compliant with the federal voting system standards, we believe that our product has the potential to become a leader in the voting system market. We are firmly committed to ongoing research and development and standardized product testing to insure that our electronic voting system continues to be a leading platform in the market. We plan to design and test new generations of our product with the intent of enhancing functionality in anticipation of additional government requirements and market demands (e.g., instant runoff voting). SELECTIVELY EXPAND INTO RELATED PRODUCT OFFERINGS. When appropriate, we intend to acquire selectively related businesses that complement our core product line and expand the range of services that we can offer our customer base. As we find opportunities that broaden our offerings, we will consider making additional acquisitions. We believe it is important to complement our revenue stream by expanding into related products and services where we can leverage our knowledge and capabilities in electronic voting systems. EXPAND ADDRESSABLE MARKETS VIA ENTRY INTO FOREIGN VENUES. The standard election process is universal by nature, and as part of its core technology, the AccuPoll DRE voting system was designed and implemented as a flexible platform that can be adapted to meet the needs of various countries. We plan to expand our international sales effort in Europe, Canada, Asia/Pacific and Latin America. REGULATORY MATTERS We expect that our voting systems will be sold primarily to counties in the United States and other governmental jurisdictions. In the United States, our ability to sell our voting system products depends on the qualification of each product through independent testing for compliance with the federal voting system standards. In addition, most states require state-level certification before we may sell our products to local jurisdictions in those states. Moreover, local jurisdictions may require vendor qualification and acceptance level testing. Because we plan 6 to sell our products to government agencies, we will be subject to laws, regulations and other procedures that govern procurement and contract implementation by those agencies. As of September 22, 2004, our DRE voting system was certified by the states of Alabama, Arkansas, Kentucky, Mississippi, Ohio, South Dakota, Utah and West Virginia. Currently, we are in the process of applying for certification in additional states. Obtaining the necessary qualifications and certifications and complying with government procurement requirements can be time consuming, involve unexpected delays and may be costly. We are subject to a number of significant risks and uncertainties associated with government regulation and procurement that could materially and adversely affect our business. For a description of these risks and uncertainties, please see "Risk Factors - Risks Relating to Regulation." ENVIRONMENTAL PROTECTION Our compliance with federal, state and local laws or regulations, that govern the discharge of materials into the environment has not had a material adverse effect upon our capital expenditures, earnings or competitive position within our markets. COMPETITION The market for the manufacture and supply of computerized voting machines is highly competitive. We anticipate that competition will intensify in the future. As of June 30, 2004, we believe that our competitors, in alphabetical order, included: COMPANY NAME PRODUCT NAME ------------ ------------ Advanced Voting Solutions, Inc., a WINvote private company based in Frisco, Texas Avante International Technology, Inc., a VOTE-TRAKKER private company based in Princeton, New Jersey Diebold Elections Systems, Inc., (DESI) AccuVote-TS a subsidiary of Diebold, Inc. based in McKinney, Texas Election Systems + Software (ES+S), a IVotronic private company based in Omaha, Nebraska Guardian Voting Systems, a subsidiary of ELECTronic 1242 Danaher Controls based in Gurnee, Illinois Hart InterCivic, a private company based eSlate in Austin, Texas Sequoia Voting Systems, a subsidiary of AVC Edge De La Rue, plc, based in Oakland, California Unilect Corporation, a private company Patriot based in Dublin, California 7 We believe that the following are the primary competitive factors in our market: o accessibility; o auditability; o brand recognition and market penetration; o customer support and service; o ease of use; o government qualification and certification of products; o price; o reliability of services; and o security. We believe that we compete favorably with respect to these factors. However, many of our competitors have significantly greater market penetration, brand-name recognition, engineering and marketing capabilities and financial, technological and personnel resources than we do. As a result, they may be able to develop and expand their customer base more quickly, adapt more swiftly to new or emerging technologies and changes in customers' requirements, take advantage of acquisitions and other business opportunities more readily, and devote greater resources to the marketing and sale of services than we can. Our competitor's products may offer different features than our products that might make their products more attractive to some voting administrators. To the extent that we do not compete successfully with respect to any of the primary competitive factors in our market, our business may be materially harmed. RESEARCH AND DEVELOPMENT We expect that the pace of technological advances in the computer voting machine industry will rapidly increase. Our ability to compete successfully is heavily dependent upon our ability to ensure a continuing and timely flow of competitive products and technology to the marketplace. Our internal product development efforts are focused on designing and developing computerized voting machines that adhere to industry standards and incorporate the technologies and features that we believe are most desired by our customers. Expenditures for research activities relating to product development and improvement were approximately $176,000 for the period August 9, 2001 (inception) through June 30, 2004. We believe that continued strategic investment in product development is essential for us to become competitive in the markets we serve. Without significant additional financing, we will be unable to continue development of our products. INTELLECTUAL PROPERTY We rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. The products that we design require a large amount of engineering design and manufacturing expertise. The majority of these technological capabilities, however, are not protected by patents or licenses. We rely on the expertise of our employees and our learned experiences in both design and manufacture of these products. We have taken steps to protect both our intellectual property and brand name in the marketplace. We have applied to the United States Patent and Trademark Office for a systems and method patent with respect to our electronic voting system that produces an official voter verifiable paper ballot. We have also filed trademark applications with the United States Patent and Trademark Office to protect the Accupoll brand name and logo. We are subject to a number of significant risks and uncertainties associated with our intellectual property that could materially and adversely affect our business. For a description of these risks and uncertainties, please see "Risk Factors - Risks Relating to our Technology." OUR EMPLOYEES AND CONSULTANTS As of June 30, 2004, we had 19 and 10, respectively, full-time employees and consultants. Our employees are not represented by a collective bargaining organization. We believe our relationship with our employees is good. 8 RISK FACTORS BEFORE DECIDING TO INVEST IN US OR TO MAINTAIN OR INCREASE YOUR INVESTMENT, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN ADDITION TO OTHER INFORMATION CONTAINED IN THIS REPORT. EACH OF THE FOLLOWING RISKS COULD CAUSE OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS TO BE MATERIALLY HARMED. THESE RISKS COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK TO DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. RISKS RELATING TO OUR BUSINESS WE HAVE INCURRED SIGNIFICANT LOSSES TO DATE AND MAY NEVER BE PROFITABLE. We began our current operations on August 9, 2001 and have incurred significant operating losses during each fiscal period since that date. We had no revenues during the period from commencement of our voting system operations through June 30, 2004. Revenues from our wholly owned subsidiary Z Prompt were $1.7 million from November 1, 2003 through June 30, 2004. At June 30, 2004, we had an accumulated deficit of approximately $21.2 million from our operations. We expect that we will incur significant operating losses and negative cash flows from operations for the foreseeable future. If our losses continue and we are unable to commercialize, manufacture and market our products successfully, we may never generate sufficient revenues to achieve profitability or positive cash flows from operations. OUR AUDITORS HAVE INCLUDED A GOING CONCERN PARAGRAPH IN THEIR AUDIT REPORT ON OUR FINANCIAL STATEMENTS FOR OUR FISCAL YEAR ENDED JUNE 30, 2004. We have prepared our consolidated financial statements for the year ended June 30, 2004 on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities and other commitments in the normal course of business. However, the report from our independent auditors with respect to our consolidated financial statements for the year ended June 30, 2004 states that our losses from operations, negative working capital and lack of operational history, among other factors, raise "substantial doubt" about our ability to continue as a going concern. OUR SUBSIDIARY, Z PROMPT, INC. HAS FILED A PETITION FOR RELIEF UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE AND WE MAY LOSE OUR ENTIRE INTEREST IN IT. On March 23, 2004, our wholly-owned subsidiary, Z prompt, Inc., filed a petition for relief under Chapter 11 of the United States Bankruptcy Code. Z prompt continues to conduct business activities as a debtor-in-possession. We cannot predict the outcome of this proceeding and it involves numerous risks and uncertainties, such as: o The appointment of a trustee; o The ability of creditors to obtain relief from the automatic stay; o The continued willingness of customers to do business with Z prompt; o The ability of Z prompt to obtain financing on acceptable terms; o The outcome of any adversary proceedings that have been or may be commenced by or against Z prompt; o The possible conversion of the case to liquidation under Chapter 7 of the Bankruptcy Code or dismissal of the case; o The ability to obtain confirmation of a plan of reorganization on terms acceptable to us; and 9 o The ability of Z prompt to successfully execute any confirmed plan of reorganization. In addition, Z prompt will incur legal and other fees and expenses in connection with the bankruptcy proceedings and we may be unable to fund these costs. Z prompt has been our only source of consolidated revenues since November 1, 2003, the date on which the acquisition was recognized for accounting purposes. If Z prompt is unable to reorganize successfully, we could lose our entire interest in it. WE WILL NEED SIGNIFICANT ADDITIONAL FINANCING TO CONTINUE OPERATIONS. We require substantial additional financing in order to be able to continue operations. In the past, our capital requirements have been met through sales of our common stock and convertible notes. We cannot assure you that we will be able to raise new capital or that sources of capital will be available to us on terms that we find acceptable. If we are unable to obtain additional financing on acceptable terms, we will be unable to continue operations. Moreover, if we raise additional capital through borrowing or other debt financing, we would incur substantial interest expense. Sales of additional equity securities or securities convertible into equity securities will result in dilution to our present stockholders. WE HAVE GENERATED NO REVENUES FROM OUR VOTING SYSTEM PRODUCT, AND AN UNPROVEN BUSINESS STRATEGY AND HAVE ONLY A LIMITED OPERATING HISTORY FOR YOU TO REVIEW IN EVALUATING OUR BUSINESS AND PROSPECTS. At June 30, 2004, we had generated no revenues from the sale of our voting system products. Our limited operating history makes it difficult to evaluate our prospects. We cannot assure you that we will be able to achieve significant sales of our products or maintain product sales. WE EXPECT THAT OUR OPERATING RESULTS MAY FLUCTUATE SUBSTANTIALLY, WHICH MAY MATERIALLY AFFECT OUR BUSINESS AND THE MARKET PRICE OF OUR COMMON STOCK. You should not rely on our period-to-period financial results as an indication of our future performance. We expect that our operating results will fluctuate substantially as a result of a number of factors, many of which will be beyond our control such as the following: o When our products are qualified as compliant with federal voting system standards and certified by the states; o When public agencies schedule procurements of electronic voting systems and the timing associated with the procurements; o Delays in the development and introduction of our products; o Delays in the manufacture and delivery of our products; o The adoption of new or amended federal voting system standards, state certification requirements, or other legal mandates applicable to our products; o The hiring, retention and utilization of our personnel; o The financial impacts associated with future business acquisitions, if any; o The receipt of additional financing; o General economic conditions; and o The occurrence of other events or circumstances described in these risk factors. 10 Fluctuations in our operating results could affect the market price of our stock and could cause the price to decline. As a result, we may be unable to finance future growth through sales of our equity securities. IF WE ARE UNABLE TO EXPAND OUR SALES, MARKETING, DISTRIBUTION AND SERVICE CAPABILITIES OR ENTER INTO AGREEMENTS WITH THIRD PARTIES TO DO SO, WE WILL BE UNABLE TO SUCCESSFULLY MARKET AND SELL OUR PRODUCTS. We currently have limited sales, marketing or distribution capabilities and limited service capabilities. If we are unable to expand these capabilities either by developing our own sales, marketing, distribution or service organization or by entering into agreements with others at a competitive cost, we will be unable to market and successfully sell our products. We plan to enter into strategic relationships with other companies to provide services relating to our products, including product roll-out support, election worker education, help desk, and break/fix support. We cannot assure you that we will be able to develop and maintain successful relationships on terms acceptable to us. The failure to do so could materially and adversely affect the marketing and sale of our products. WE RELY ON A THIRD PARTY MANUFACTURER. TO THE EXTENT THAT THIS MANUFACTURER EXPERIENCES FINANCIAL OR OPERATIONAL DIFFICULTIES, OUR BUSINESS COULD BE INTERRUPTED. We currently rely, and expect to continue to rely, on a third party to manufacture our product. Our agreement requires us to acquire the product exclusively from this manufacturer unless the manufacturer is unable to produce and deliver on time our required quantity. To the extent that this manufacturer experiences financial or operational difficulties, our business could be interrupted. These difficulties could inhibit our ability to provide products in sufficient quantities with acceptable quality and at an acceptable cost to our customers. Any disruption in supply of our product from this manufacturer would cause us to delay delivery to our customers that could lead to a loss of sales and revenues. WE FACE SUBSTANTIAL COMPETITION AND POTENTIAL COMPETITION FROM OTHERS WHO HAVE SIGNIFICANTLY GREATER FINANCIAL RESOURCES AND OTHER RESOURCES THAN US. We expect significant competition from existing competitors and potential competitors. We may not have the financial resources, technical expertise, sales and marketing abilities or support capabilities to compete successfully. Many of our existing competitors have greater market penetration, brand-name recognition, market presence, engineering and marketing capabilities, and financial, technological and personnel resources than we do. As a result, many of our competitors have several significant advantages over us as we seek to market and sell our products. OUR FUTURE SUCCESS DEPENDS UPON RETAINING KEY PERSONNEL AND ATTRACTING NEW EMPLOYEES. Our future performance depends significantly upon the continued contributions of both Mr. Dennis Vadura, our chief executive officer, and Mr. Frank J. Wiebe, our president. The loss of the services of Mr. Vadura or Mr. Wiebe or any of our senior management or key personnel could materially and adversely affect our business. We may not be able to retain these employees and searching for their replacements could divert attention from senior management and delay our ability to implement our business strategy. All of our senior management and key employees can terminate his or her relationship with us at any time. If we are successful in implementing and developing our business, among other things, we expect that we will need to increase our workforce. Accordingly, our future success will likely depend on our ability to attract, hire, train and retain highly skilled management, technical, sales, marketing and customer support personnel. Competition for qualified employees is intense and our financial resources are limited. Consequently, we may not be successful in attracting, hiring, training and retaining the people we need, which would impede our ability to implement our business strategy. 11 WE HAVE ENGAGED IN TRANSACTIONS WITH A COMPANY OWNED BY TWO INDIVIDUALS WHO ARE ALSO OUR DIRECTORS, OFFICERS AND SHAREHOLDERS. In April 2002, we entered into a master services agreement with a company, Web Tools International, Inc., that is owned and operated by Messrs. Dennis Vadura and Frank Wiebe. Each of these individuals is a director, officer and shareholder with respect to both us and Web Tools International. The agreement terminated on March 31, 2004. The financial results of Web Tools International were consolidated with our results from January 1, 2004 through March 31, 2004. As of June 30, 2004 we owed Web Tools International $1.5 million. WE WILL NEED TO CONTINUE TO IMPROVE AND DEVELOP PRODUCTS IN ORDER TO BE SUCCESSFUL. We expect that the pace of technological advances in the computer voting machine industry will rapidly increase. Our ability to compete successfully is heavily dependent upon our ability to ensure a continuing and timely flow of competitive products and technology to the marketplace. We cannot assure you that we will be successful in the timely development of new and improved technologies. WE ARE SUBJECT TO CURRENT LITIGATION. We are defendants in two separate lawsuits. In addition, we may be subject to litigation in the future. For a description of this litigation, please see "ITEM 3 - LEGAL PROCEEDINGS." WE MAY ACQUIRE OTHER BUSINESSES AND OUR BUSINESS COULD BE MATERIALLY AND ADVERSELY AFFECTED AS A RESULT OF ANY OF THESE ACQUISITIONS. We are looking for strategic opportunities to grow our product offerings through acquisitions or strategic investments. In this regard, during the year ended June 30, 2004, we entered into an agreement to purchase all of the outstanding shares of Z prompt, Inc. that was recognized for accounting purposes during our fiscal quarter ended December 31, 2003. In the future, we may acquire or make strategic investments in other complementary businesses. We have limited experience in acquiring or investing in other businesses and we may not be successful in completing, financing, or integrating an acquired business into our existing operations. Any such acquisitions could involve the dilutive issuance of equity securities and the incurrence of debt. In addition, the acquisition of Z prompt, Inc. and future acquisitions may involve numerous additional risks, such as: o unanticipated costs associated with the acquisition or investment; o diversion of management time and resources; o problems in assimilating and integrating the new business operations; o potential loss of key customers or personnel of an acquired company; o increased legal and compliance costs; and o unanticipated liabilities of an acquired company. Even when an acquired company has already developed and marketed products, we can not assure you that the products will continue to be successful, that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to the acquired company or its products and that could materially and adversely affect us. 12 RISKS RELATING TO OUR TECHNOLOGY SHOULD OUR PRODUCTS FAIL TO PERFORM PROPERLY, OUR REPUTATION COULD BE DAMAGED, WE COULD LOSE SALES AND CUSTOMERS AND WE COULD POTENTIALLY INCUR SIGNIFICANT LIABILITIES. Our products incorporate a number of intricate computer software programs and hardware components that must work seamlessly in order for our product to function correctly. While we expect our products to perform to federal voting system standards, we cannot assure you that our product will function properly at all times. If our system's software programs or hardware components experience failure or malfunction or are alleged to have failed or malfunctioned, we are likely to receive significant adverse publicity - particularly if the failure is alleged to have had an effect on the outcome of an election. As a result, our reputation could be damaged, we could lose sales and customers and we could potentially incur liabilities. SHOULD WE FAIL TO SECURE OR PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE TO USE OUR TECHNOLOGIES. We have applied to the United States Patent and Trademark Office for a patent with respect to our electronic voting system that produces an official voter verifiable paper ballot and for trademark registration with respect to the AccuPoll name and logo. We cannot assure you that a patent will be issued or our trademarks will be registered. If issued, we cannot assure you that we will be able to defend or enforce the patent, trademark or other intellectual property rights that we may have in our products, name or logo. Although we may initiate litigation to stop infringement, intellectual property litigation is often expensive and could consume our limited financial resources. Additionally, third parties may be better able to sustain the costs of litigation. If we are unable to defend or enforce our rights, other parties may be able to use our technologies without paying any compensation to us. Furthermore, we cannot assure you that our competitors will not design around any issued patents, or improve upon our technology, or that we will be able to detect infringements. If we are unable to establish, defend or enforce rights to our technology, our business may be materially damaged. SHOULD WE SUE TECHNOLOGIES THAT CONFLICT WITH THE RIGHTS OF THIRD PARTIES, OUR BUSINESS COULD BE MATERIALLY AND ADVERSELY AFFECTED. Our competitors and others may have or acquire patent or other intellectual property rights that they could attempt to enforce against us. If they do so, the following could occur: o We could be sued and required to defend ourselves in time-consuming and costly litigation (even if it is ultimately determined that the claim is without merit); o We may be adjudged liable for substantial damages for past infringement, including possible treble damages if it is found that we have willfully infringed; o We may be prohibited from selling or licensing our product without a license which may not be available on commercially acceptable terms, if at all, or that may require us to pay substantial royalties; o We may have to redesign our products so that they do not infringe and such redesign may not be possible or may be costly and time-consuming. If any of the foregoing occurs, our business is likely to be materially and adversely affected. 13 RISKS RELATING TO REGULATION EACH OF OUR VOTING SYSTEM PRODUCTS MUST MEET QUALIFICATION AND CERTIFICATION STANDARDS BEFORE WE WILL BE ABLE TO SELL THEM. In the United States, our ability to sell our voting system products depends on the qualification of each product through independent testing for compliance with the federal voting system standards. In addition, most states require state-level certification before we may sell our products to local jurisdictions in those states. Moreover, local jurisdictions may require acceptance level testing. At June 30, 2003, none of our products had been qualified or certified. In March 2004, our DRE voting system was qualified as complying with the 1990 federal voting system standards, as to hardware, and 2002 federal voting system standards, as to software, and has been subsequently certified by the states of Alabama, Arkansas, Kentucky, Mississippi, Ohio, South Dakota, Utah and West Virginia. We are seeking full qualification of our voting system under the 2002 federal voting system standards but cannot assure you that we will obtain that qualification. We cannot assure you that our products will be certified by additional states. If we are unable to obtain certification in additional states, we may not be able to generate sufficient revenues to achieve profitability. STATE ELECTION OFFICIALS MAY DECERTIFY OUR PRODUCTS. If certified in a state, our products will be subject to ongoing review by the state which may withdraw certification. For example, the California Secretary of State recently issued an order withdrawing certification of certain of our competitors' products. We cannot assure you that a state will not withdraw certification of our products on the basis that the product is defective, obsolete or otherwise unacceptable for use. If certification is withdrawn, we will not be able to continue to sell the product in the state and are likely to receive significant adverse publicity. As a result, our reputation could be materially damaged, causing us to lose sales and customers in other jurisdictions. WE EXPECT FEDERAL VOTING SYSTEM STANDARDS, STATE CERTIFICATION AND OTHER LEGAL REQUIREMENTS PERTAINING TO OUR PRODUCTS TO CHANGE. The market for computerized voting machines and related equipment for use in federal, state, local and other elections, is changing as new technical standards are considered. We expect that federal voting system standards, state certification and other legal requirements will change. We may not be able to anticipate new standards or changes to existing standards and we cannot assure you that our products will comply, or can be modified to comply with, any new or changed standards or requirements that may be adopted. If our products do not comply and cannot be modified to comply with new or changed standards or requirements, we may not be able to sell some or all of our products. WE MAY NOT BE ABLE TO OBTAIN FEDERAL AND STATE CERTIFICATION OF PRODUCTS IN A TIMELY MANNER, WHICH COULD DELAY THE MARKETING AND SALES OF OUR PRODUCTS. Independent testing authorities test and certify our products. There are a limited number of testing authorities able to test and certify our products in accordance with federal voting system standards. These companies also conduct testing and certification for our competitors. Any delays or disruptions in the services provided by our independent testing authorities is likely to affect our ability to market and sell our products and could materially and adversely impact our sales and our ability to achieve profitability. IF OUR PRODUCTS ARE NOT ACCEPTED BY FEDERAL, STATE, LOCAL AND FOREIGN GOVERNMENTS AND VOTERS AS REPLACEMENTS FOR CURRENT VOTING SYSTEMS, WE WILL NOT BE SUCCESSFUL. Our success depends on the acceptance of our products as replacements for current voting systems both in the United States and abroad. Even if our products satisfy applicable qualification and certification requirements, local governments may elect not to purchase them for a number of reasons, including, but not limited to, voter acceptance of our technology. In recent years, there has been significant public controversy regarding the reliability, benefits and costs of various alternative voting systems, including electronic voting systems. We have expended a 14 significant amount of our time and financial resources demonstrating our product capabilities to various state and local government officials. If our products do not achieve significant market acceptance among state and local governments, we may not be able to generate sufficient revenues to achieve profitability. In addition, if foreign governments do not accept our products, the long-term growth of our business will be limited. WE WILL BE SUBJECT TO LAWS, REGULATIONS AND OTHER PROCEDURES WITH RESPECT TO GOVERNMENT PROCUREMENT. Because we plan to sell our products to government agencies, we will be subject to laws, regulations and other procedures that govern procurement and contract implementation by those agencies. These agencies are likely to impose vendor qualification requirements, such as requirements with respect to financial condition, insurance and history. We have limited experience with government procurement and cannot assure you that we will be able to meet existing or future procurement laws, regulations and procedures or that we will be able to qualify as a vendor. Some procurement processes could involve an extensive period of product evaluation, including evaluation by the public. Compliance with government procurement and qualification requirements could significantly delay sales of our products. Delays could also occur due to protests of bid specifications or challenges to contract awards. If we fail to comply with an agency's procurement or vendor qualification requirements or procedures, we will be unable to market and sell our products to that agency. Government agencies may also impose contractual terms and conditions, such as warranty, termination and indemnification provisions, that are unfavorable to us. OUR COSTS WILL INCREASE AS A RESULT OF NEW AND AMENDED SECURITIES REGULATIONS. New and amended regulations adopted by the Securities and Exchange Commission will increase our accounting, legal and compliance costs as these changes become effective. Additionally, we expect increased accounting, legal and compliance costs because for periods beginning after June 30, 2003, we will no longer be subject to the less extensive disclosure requirements applicable to a "small business issuer" as defined by the Securities and Exchange Commission. RISKS RELATING TO OUR SECURITIES SOME HOLDERS OF OUR SECURITIES MAY HAVE THE RIGHT TO RESCIND THEIR PURCHASES. We have offered and sold a substantial number of shares of common stock and warrants and options to purchase common stock without registration under the Securities Act of 1933, as amended, or qualification under state securities laws. If any offer or sale were not exempt from, or otherwise not subject to, federal and state registration and qualification requirements, the purchaser would have a number of remedies, including the right to rescind the purchase. The Securities Act of 1933, as amended, requires that any claim for rescission be brought within one year of the violation. We have sold approximately 11,878,000 shares of common stock and warrants and options to purchase shares of common stock in the United States within one year of June 30, 2004. The time periods within which claims for rescission must be brought under state securities laws vary and may be two years or more from the date of the violation. We have sold approximately 14,170,000 shares of common stock and warrants and options to purchase shares of common stock in the United States within two years of June 30, 2004. Further, we cannot assure you that courts will not apply equitable or other doctrines to extend the period within which purchasers may bring their claims. The number of warrants and options described above does not include warrants and options to purchase a total of 3,600,000 shares of common stock issued within two years of June 30, 2004 to our chief executive officer, Dennis Vadura and our president, Frank Wiebe or a warrant to purchase 12,400,000 shares of common stock for which the holder has agreed in writing that it will not assert any right to rescission that it may have. However, we cannot assure you that this agreement is enforceable. Should federal or state securities regulators deem it necessary to bring administrative or legal actions against us based upon a failure to register or qualify, the defense of any enforcement action is likely to be costly, distracting to our management and if unsuccessful could result in the imposition of significant penalties. The filing of a claim for rescission or enforcement action against us or our officers or directors could materially and adversely impact our stock price, generate significant adverse publicity that materially affects our sales and materially impairs our ability to raise capital through future sales of our securities. We may also incur significant expenses should we 15 determine that it is advisable to register shares issuable upon exercise of outstanding warrants or options or upon conversion of outstanding notes. WE HAVE NOT FILED OR SENT INFORMATION STATEMENTS IN CONNECTION WITH STOCKHOLDER ACTIONS BY WRITTEN CONSENT. In 2002, we effected a 1 for 5 reverse split of our issued and outstanding shares of common stock and filed amendments to Article IV of our articles of incorporation to provide for a class of preferred stock. Each of these actions required the approval of our stockholders that we believe was given by written consent. In connection with these written consents, we did not file with the Securities and Exchange Commission written information statements containing the information specified in its proxy rules. Also, we did not send information statements in advance of the action as required by the proxy rules of the Securities and Exchange Commission. Accordingly, it is possible that a stockholder could challenge the validity of these actions and the Securities and Exchange Commission could take enforcement action against us. The defense of any challenge or enforcement action is likely to be costly, distracting to our management and could in the case of an enforcement action result in the imposition of significant penalties. The filing of a stockholder challenge or an enforcement action could materially and adversely impact our stock price, generate significant adverse publicity that materially affects our sales, and materially impair our ability to raise capital through future sales of our securities. SOME OF THE HOLDERS OF OUR COMMON STOCK MAY BE SUBJECT TO DILUTION. As of June 30, 2004, we had outstanding warrants and options to purchase 81,369,913 shares of common stock and notes convertible into 48,256,000 shares of common stock. The exercise price of the warrants and options ranges from $.01 to $1.55 per share and the notes are currently convertible at prices ranging from $.0625 to $.1224 per share. The number of shares of common stock issuable upon conversion of certain of the notes may be greater in the future because the conversion price is the lower of the specified price or 50% of the average three lowest closing prices for our common stock for the twenty days immediately preceding the conversion date. The exercise or conversion prices of these securities are generally substantially lower than our stock price. Therefore, holders of our common stock and potential investors are subject to substantial dilution if these securities are exercised or converted. The terms on which we could obtain additional capital may be adversely affected during the time that the warrants and options may be exercised or the notes converted. FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE OUR STOCK PRICE TO FALL. Sales of a substantial number of shares of our common stock in the public market could cause the market price of our common stock to decline. As of June 30, 2004, we had 154,347,064 shares of common stock outstanding, of which approximately 55 million are freely tradable without restriction or further registration under the Securities Act of 1933, as amended. As of June 30, 2004, our affiliates held approximately 80 million shares of our common stock, which are transferable pursuant to Rule 144, as promulgated under the Securities Act of 1933, as amended. Although we do not believe that our affiliates have any present intentions to dispose of any shares of common stock owned by them, there can be no assurance that such intentions will not change in the future. We have filed a registration statement with the Securities and Exchange Commission on Form S-8 covering up to 12,000,000 shares of our common stock that are issuable upon exercise of outstanding warrants. The exercise of those options or warrants, and the prompt resale of shares of our common stock received, may result in downward pressure on the price of our common stock. A DECLINE IN THE PRICE OF OUR COMMON STOCK COULD AFFECT OUR ABILITY TO RAISE FURTHER WORKING CAPITAL AND ADVERSELY IMPACT OUR ABILITY TO CONTINUE OUR NORMAL OPERATIONS. A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because our operations primarily have been financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our operations. We may be forced to reallocate funds from other planned uses and this would have a significant negative effect on our business plans and operations, including our ability to develop new products and 16 continue our current operations. If our stock price declines, there can be no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not have the resources to continue our normal operations. OUR COMMON STOCK IS QUOTED ON THE OTC BULLETIN BOARD AND TRADING MAY BE SPORADIC AND VOLATILE. Our common stock is quoted on the OTC Bulletin Board. Trading in stock quoted on the OTC Bulletin Board is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. Moreover, the OTC Bulletin Board is not a stock exchange, and trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on a quotation system or a stock exchange. THE PRICE OF OUR COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE AND STOCKHOLDERS COULD INCUR SUBSTANTIAL LOSSES. The market price of our common stock has been, and in the future is likely to be, highly volatile. This volatility could result in substantial losses for stockholders. Our stock price may fluctuate widely for a number of reasons, including: o Media reports and announcements with respect to electronic voting technology in general or our products or those of our competitors; o Qualification or certification, or withdrawal of certification, of our products or those of our competitors; o Changes in federal voting system standards, state certification standards or other legal requirements pertaining to our products; o Litigation initiated by or against us, including litigation pertaining to patents or other intellectual property rights; o Dissemination of information about us by others, including on Internet bulletin boards; o Changes in our key personnel; o General economic conditions; and o The occurrence of other events or circumstances described in these Risk Factors. Companies are often sued by investors after periods of stock price volatility. This type of litigation could be filed against us in the future which could result in substantial expense and diversion of management's attention and, if successful, substantial damage awards. TRADING OF OUR STOCK MAY BE RESTRICTED BY THE SEC'S "PENNY STOCK" REGULATIONS WHICH MAY LIMIT A STOCKHOLDER'S ABILITY TO BUY AND SELL OUR STOCK. The Securities and Exchange Commission has adopted regulations which generally define "penny stock" to be any equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the 17 broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure and suitability requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock. OUR ARTICLES OF INCORPORATION AUTHORIZE THE BOARD OF DIRECTORS TO ISSUE AND DESIGNATE THE RIGHTS OF SERIES OF PREFERRED STOCK WITHOUT ACTION BY THE STOCKHOLDERS. Our authorized capital stock consists of 600,000,000 shares of common stock and 80,000 shares of preferred stock. Our board of directors, without any action by stockholders, is authorized to divide the authorized shares of preferred stock into series and to designate the rights, qualifications, preferences, limitations and terms of the shares of any series of preferred stock, including but not limited to dividend, redemption, voting rights and preferences. The rights of holders of shares of preferred stock that may be issued might be superior to the rights granted to the holders of existing shares of common stock. Further, the ability of our board of directors to designate and issue series of preferred shares could impede or deter an unsolicited tender offer or takeover proposal and the issuance of additional shares having preferential rights could affect adversely the voting power and other rights of holders of our common stock. PROVISIONS OF NEVADA LAW COULD DISCOURAGE, DELAY OR PREVENT A MERGER, ACQUISITION OR OTHER CHANGE IN CONTROL OF US, EVEN IF A CHANGE IN CONTROL WOULD BENEFIT OUR STOCKHOLDERS. At any time that we have 200 or more stockholders of record, we will be subject to Nevada's statutes that prohibit us from engaging in specified business combinations with "interested stockholders," including beneficial owners of 10% or more of the voting power of our outstanding shares. Thereafter, combinations may be permissible only if specified conditions are satisfied. Nevada law also provides that directors may resist a change or potential change in control if the directors determine that the change is opposed to, or not in the best interest of, the corporation. Additionally, Nevada law permits directors and officers in exercising their respective powers with a view to the interests of the corporation, to consider: the interests of the corporation's employees, suppliers, creditors and customers; the economy of the state and the nation; the interests of community and society; and the long-term as well as short-term interests of the corporation and its stockholders, including the possibility that these interests may be best served by the continued independence of the corporation. Accordingly, these statutory provisions could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future. ITEM 2. PROPERTIES We occupy approximately 10,000 square feet of office space located at 15101 Red Hill Ave. Suite # 220, Tustin, California. The cost of the lease is $1.10 per square foot. Our lease expires on July 31, 2006. ITEM 3. LEGAL PROCEEDINGS. In September 2003, we were served with a lawsuit filed in the Supreme Court of New York, County of New York, by Stern & Co Communications LLC, d/b/a Stern + Co. Stern alleging that we breached a contract with them by failing to tender payment in full for services rendered. Stern sought to recover damages in the amount of $35,000, and a warrant to purchase 36,000 shares of our common stock. In November 2003, we entered into a stipulated settlement agreement with Stern. In consideration for a full release of Stern's claims, we granted Stern 15,000 shares of common stock and a warrant to purchase 15,000 shares of common stock at an exercise price equal to our closing stock price on the date of issuance. 18 In December 2003, Paul Musco, the ex-President of our wholly-owned subsidiary, Z prompt, Inc. filed suit against us and Z prompt in Superior Court of California, County of Orange, California. The claim alleged breach of contract, fraud and misrepresentation stemming from our acquisition of, and his termination of his employment with, Z prompt. Mr. Musco is seeking damages in excess of $800,000, plus punitive damages. We believe that Mr. Musco breached his agreements with Z prompt and have filed a cross complaint for breach of contract, fraud, negligence and breach of fiduciary duty seeking $2,000,000. Mr. Musco has since filed his own cross-complaint against us, Dennis Vadura, Frank Wiebe and Craig Hewitt alleging fraud and tortious interference with contract. In addition, Michael Shockett has joined the suit and filed a cross complaint against us, Z prompt, Dennis Vadura, Frank Wiebe and Craig Hewitt alleging fraud, tortuous interference with contract and wrongful termination. Michael Shockett was terminated from employment with us in April 2004 for cause. Although no assurance can be given that we will prevail on the merits, we will vigorously defend these allegations. In October 2003, a former employee of Z prompt, Nathalie Luu, filed suit against us and Z prompt in Superior Court of California, County of Orange, California. The complaint claims wrongful termination, intentional infliction of emotional distress and retaliatory discharge, based on allegations that the plaintiff was terminated for reporting to management alleged fraudulent accounting practices by Z prompt management. The former employee is seeking $112,000 in monetary damages including loss of wages, plus punitive damages. This suit is currently in negotiations to be settled for $100,000 to be paid by the issuance by us of common stock. A settlement would release us and Z prompt from liability in connection with the suit. On March 23, 2004, our wholly-owned subsidiary, Z prompt, Inc., filed a petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court, Central District of California. As of June 30, 2004, Z prompt had not filed a proposed Plan of Reorganization. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There was no matter submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES MARKET INFORMATION Our common stock is currently quoted on the Over-The-Counter Bulletin Board under the symbol ACUP. For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. The below prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions. Fiscal 2004 ------------ ------------ COMMON STOCK High (1) Low (1) -------------------------------------- ------------ ------------ First Quarter Ended September 30, 2003 $2.00 $0.81 Second Quarter Ended December 31, 2003 $1.75 $1.35 Third Quarter Ended March 31, 2004 $3.85 $1.44 Fourth Quarter ended June 30, 2004 $3.57 $0.90 19 Fiscal 2003 ------------ ------------ COMMON STOCK High (1) Low (1) -------------------------------------- ------------ ------------ First Quarter Ended September 30, 2002 $1.24 $0.90 Second Quarter Ended December 31, 2002 $1.70 $0.85 Third Quarter Ended March 31, 2003 $1.70 $1.01 Fourth Quarter ended June 30, 2003 $1.14 $0.91 (1)Prices adjusted to reflect a 4 for 1 stock dividend that was effective July 2002. As of September 24th, 2004, 180,705,970 shares of common stock were held by approximately 1,817 stockholders of record. Our registrar and transfer agent is Signature Stock Transfer, Inc., One Preston Park, 2301 Ohio Dr., Suite 100, Plano, Texas 75093; telephone (972) 612-4120. DIVIDEND POLICY We have not adopted any policy regarding the payment of dividends on its Common Stock. The Company does not intend to pay any cash dividends on its Common Stock in the foreseeable future. All cash resources are expected to be invested in developing the Company's business. There are no restrictions that materially limit our ability to pay cash dividends. RECENT SALES OF UNREGISTERED SECURITIES AccuPoll sold the following unregistered securities during the three month period ended June 30, 2004 without registration under the Securities Act of 1933. In May, 2004 the Company issued 1,960,000 shares of common stock to three different shareholders, as a result of a net exercise of warrants with a strike price of $.0625 per share. The Company relied upon Section 4(2) of the Securities Act as an exemption from registration. In June, 2004 the Company issued 3,105,262 shares of common stock to three different shareholders, as a result of a net exercise of warrants with a strike price of $.0625 per share. The Company relied upon Section 4(2) of the Securities Act as an exemption from registration. In June, 2004 the Company issued 2,156,250 shares of common stock as a result of a convertible debt of $250,000 which was converted at $.1224 per share. The Company relied upon Section 4(2) of the Securities Act as an exemption from registration. ITEM 6. SELECTED FINANCIAL DATA -------------------------------------------------------------------------------- ACCUPOLL HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2004, 2003 AND 2002 --------------------------------------------------------------------------------
(Restated) 2004 2003 2002 ------------ ----------- ----------- ASSETS CURRENT ASSETS Cash $ 113,789 $ -- $ 288,675 Accounts receivable, net 254,895 -- -- Note Receivable 50,000 Inventories 168,636 -- -- Deferred acquisition costs -- 144,206 Prepaid expenses -- 2,500 156,000 ------------ ----------- ----------- 537,320 146,706 494,675 PROPERTY AND EQUIPMENT, net 14,012 -- 411,966 CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net 2,544,207 1,403,899 74,376 OTHER ASSETS 26,246 -- 130,000 ------------ ----------- ----------- TOTAL ASSETS $ 3,121,785 $ 1,550,605 $ 1,111,017 ============ =========== ===========
20
(Restated) 2004 2003 2002 ------------ ----------- ----------- LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable and accrued expenses $ 1,817,284 $ 931,503 $ 401,548 Related party payables 1,228,070 872,940 Deferred revenues 74,628 -- -- Convertible debt 3,304,600 -- (68,750) Notes payable to related parties 30,000 175,000 Put liability related to warrant issuance 163,760 113,750 -- Liabilities subject to compromise 732,544 -- ------------ ----------- ----------- TOTAL LIABILITIES 7,350,886 2,093,193 332,798 ------------ ----------- ----------- EQUITY INSTRUMENTS SUBJECT TO RESCISSION 6,200,000 4,377,033 -- ------------ ----------- ----------- STOCKHOLDERS' DEFICIT Convertible Series A preferred stock, $0.01 par value, 80,000 shares authorized, no shares issued and outstanding (liquidation preference of zero) -- -- -- Common stock, par value of $0.001, 600,000,000 shares authorized; 158,482,171 and 112,945,963 shares issued and outstanding at June 30, 2004 and 2003, respectively 158,482 112,946 (12,500) Capital Stock 173,203 Additional paid-in capital 12,046,817 2,222,580 3,024,096 Accumulated deficit (22,634,400) (7,255,147) (2,406,580) ------------ ----------- ----------- (10,429,101) (4,919,621) 778,219 ------------ ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,121,785 $ 1,550,605 $ 1,111,017 ============ =========== ===========
-------------------------------------------------------------------------------- ACCUPOLL HOLDING CORP. CONSOLIDATED STATEMENTS OF OPERATIONS For The Years Ended June 30, 2004 and 2003, and For The Period From August 9, 2001 (Inception) Through June 30, 2002 --------------------------------------------------------------------------------
(Restated) Year Ended Year Ended Period Ended June 30, 2004 June 30, 2003 June 30, 2002 ------------- ------------- ------------ NET SALES $ 1,508,656 $ -- $ -- COST OF SALES 1,185,797 -- -- ------------- ------------- ------------ GROSS PROFIT 322,859 -- -- EXPENSES General and administrative 6,770,137 3,104,192 904,083 Professional fees 654,276 1,714,475 1,198,622 Interest 4,534,947 29,900 303,875 Loss on disposal of investment 1,200,000 -- -- Impairment of goodwill 2,542,752 -- -- ------------- ------------- ------------ 15,702,112 4,848,567 2,406,580 ------------- ------------- ------------ NET LOSS $ (15,379,253) $ (4,848,567) $ (2,406,580) ============= ============= ============ BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.12) $ (0.05) $ (0.04) ============= ============= ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 130,782,481 106,687,447 68,735,272 ============= ============= ============
21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We are in the business of developing and marketing computerized voting machines and their associated products and services for use in federal, state, local and private elections. We have developed a direct recording electronic (DRE) voting system that provides a voter-verified paper audit trail that is both human and machine readable. Our system was qualified as meeting the federal voting system standards on March 25, 2004 and we believe that it is currently the only electronic voting system providing these features that is so qualified. As of September 22, 2004, our DRE voting system was certified by the states of Alabama, Arkansas, Kentucky, Mississippi, Ohio, South Dakota, Utah and West Virginia. Currently, we are in the process of applying for certification in additional states. For the fiscal years ended June 30, 2004, 2003 and 2002, we incurred losses of $15,379,253, $4,848,567 and $2,406,580, respectively. As of June 30, 2004 we had an accumulated deficit of $22,634,400. SUBSEQUENT EVENT On September 13, 2004, AccuPoll Holding Corp. completed a private placement transaction with 11 accredited investors, pursuant to which AccuPoll sold an aggregate of 3,666,668 shares of common stock, 1,833,338 Series A Warrants, 1,833,338 Series B Warrants and 1,833,338 Series C Warrants. AccuPoll received gross proceeds totaling $1,649,900.10. For each two shares of common stock, AccuPoll issued investors one A Warrant, one B Warrant and one C Warrant. Each two shares and three warrants were sold at a price of $0.90. The private placement was deemed exempt from registration requirements under Rule 506 of Regulation D under the Securities Act of 1933. J.P. Turner + Company, LLC acted as placement agent for the transaction. AccuPoll agreed to pay J.P. Turner + Company a cash fee of 8% of the aggregate purchase price. AccuPoll will also pay J.P. Turner + Company 8% of the cash proceeds received from the exercise of warrants issued in connection with the placement. In addition, AccuPoll issued J.P. Turner + Company warrants to purchase 458,333 shares of common stock, exercisable for five years at an exercise price of $0.54 per share. Further, J.P. Turner + Company will receive: (a) one Placement Agent's A Warrant, exercisable at $0.66 per share, for each eight A Warrants exercised by an investor on a cash basis; (b) one Placement Agent's B Warrant, exercisable at $1.07 per share, for each eight B Warrants exercised by an investor on a cash basis; and (c) one Placement Agent's C Warrant, exercisable at $2.40 per share, for each eight C Warrants exercised by an investor on a cash basis. All Placement Agent's Warrants are exercisable for five years after the respective issue dates, are not subject to call and may be exercised on a cashless basis. On one occasion, for a period commencing 91 days after the closing date, but not later than two years after the closing date, upon written request of the holders of more than 50% of the shares and warrant shares actually issued upon exercise of warrants, AccuPoll is required to prepare and file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 registering the shares of common stock issued to the investors and the shares underlying the warrants, including warrant shares issuable upon exercise of warrants issued to the placement agent (the "Registration Statement"). The A Warrants expire 150 days from the date the Registration Statement is declared effective by the Securities and Exchange Commission and are exercisable at $0.55 per share. The B Warrants expire four years after the date the Registration Statement is declared effective by the Securities and Exchange Commission and are exercisable at $0.89 per share. The C Warrants expire three years after the date the Registration Statement is declared effective by the Securities and Exchange Commission and are exercisable at $2.00 per share. AccuPoll may call the warrants beginning 30 trading days after the effective date of the Registration Statement and ending 30 trading days before the expiration of the warrants. A call notice may be given by AccuPoll for the A Warrants only within five trading days after the common stock has had a closing price as reported for the principal market of $1.10 or higher for 15 consecutive trading days. A call notice may be given by AccuPoll for the B Warrants only within five trading days after the common stock has had a closing price as reported for the principal market of $1.78 or higher for 15 consecutive trading days. A call notice may be given by AccuPoll for the C 22 Warrants only within five trading days after the common stock has had a closing price as reported for the principal market of $2.95 or higher for 15 consecutive trading days. Beginning September 8, 2004 and until the Registration Statement has been effective for 150 days, the investors must be given at least ten business days prior written notice of any proposed sale by AccuPoll of its common stock or other securities or debt obligations except in connection with (a) employee stock options or compensation plans, (b) as full or partial consideration in connection with any merger, consolidation or purchase of substantially all of the securities or assets of any corporation or other entity, or (c) as has been described in the reports or other written information filed with the Securities and Exchange Commission or delivered to the investors prior to the closing date ("Excepted Issuances"). Other than the Excepted Issuances, if at any time until the Registration Statement has been effective for 150 days, if AccuPoll offers, issues or agrees to issue any common stock or securities convertible into or exercisable for shares of common stock (or modify any of the foregoing which may be outstanding at any time prior to the closing date) to any person or entity at a price per share or conversion or exercise price per share which shall be less than $0.45, without the consent of each investor, then AccuPoll is required to issue, for each such occasion, additional shares of common stock to each investor so that the average per share purchase price of the shares of common stock issued to the investor (of only the common stock or warrant shares still owned by the investor) is equal to such other lower price per share. For purposes of this issuance and adjustment, the issuance of any security of AccuPoll carrying the right to convert such security into shares of common stock or of any warrant, right or option to purchase common stock will result in the issuance of the additional shares of common stock upon the issuance of such convertible security, warrant, right or option and again upon any subsequent issuances of shares of common stock upon exercise of such conversion or purchase rights if such issuance is at a price lower than $0.45. The exercise price of the warrants is subject to adjustment in the event AccuPoll effects a reorganization, consolidation or merger, or transfers all or substantially all of its properties or assets. Also, until the expiration date of the warrants, if AccuPoll issues any common stock except for Excepted Issuances, prior to the complete exercise of the warrants for a consideration less than the purchase price that would be in effect at the time of such issue, then the exercise price shall be reduced to such other lower issue price. For purposes of this adjustment, the issuance of any security or debt instrument of AccuPoll carrying the right to convert such security or debt instrument into common stock or of any warrant, right or option to purchase common stock shall result in an adjustment to the exercise price upon the issuance of the above-described security, debt instrument, warrant, right, or option. RESULTS OF OPERATIONS COMPARISON OF YEAR ENDED JUNE 30, 2004 TO YEAR ENDED JUNE 30, 2003 REVENUES: For the year ended June 30, 2004 we had revenues of approximately $1.5 million. For the year ended June 30, 2003 we had no revenue. The increase was caused by our acquisition of Z prompt which was recorded for accounting purposes in November 2003. GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were $3,160,257 for the year ended June 30, 2004 as compared to $3,104,192 for the year ended June 30, 2003. The increase in general and administrative expenses is the result of addtional staff. PROFESSIONAL FEES: Professional fees were $4,264,156 for the year ended June 30, 2004 as compared to $1,714,475 for the year ended June 30, 2003. The increase in professional fees is due to costs of services to develop the Ballot Buddy product and non-cash expenses related to the issuance of warrants to consultants. INTEREST EXPENSE: Interest expense was $4,534,947 for the year ended June 30, 2004 as compared to $29,900 for the year ended June 30, 2003. The increase in interest expense is due to non-cash beneficial conversion charges for equity instruments tied to fun raising. NET LOSS: For the year ended June 30, 2004, we incurred a net loss of $15,379,253 and a loss per common share of $0.12. This compares to a net loss of $4,848,567 and a loss per common share of $0.05 for the year ended June 30, 2003. The increased loss is due to increased professional fees and interest expense plus the 23 impairment of goodwill totalling $2,542,752 and a loss on the disposal of an investment totalling $1,200,000, as well as the additional expenses of our newly acquired subsidiary. COMPARISON OF YEAR ENDED JUNE 30, 2003 TO PERIOD ENDED JUNE 30, 2002 REVENUES: For the years ended June 30, 2003 and 2002 we had no revenues. GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses increased by approximately 243% to $3,104,192 for the year ended June 30, 2003 from $904,083 for the period ended June 30, 2002. The increase in general and administrative expenses is the result of addtional staff, and non-cash expenses related to the issuance of options and warrants to employees and consultants that are in the money. PROFESSIONAL FEES: Professional fees were $1,714,475 for the year ended June 30, 2003 as compared to $1,198,622 for the year ended June 30, 2002. The increase in professional fees by approximately 43% was due to increases in development fees of ballot buddy product and increased legal and accounting expenses. INTEREST EXPENSE: Interest expense was $29,900 for the year ended June 30, 2003 as compared to $303,875 for the year ended June 30, 2002. The significant decrease in interest expense less non-cash beneficial conversion for investments. RESEARCH AND DEVELOPMENT: Research and development expenses was $0 for the year ended June 30, 2003 as compared to $176,064 for the year ended June 30, 2002. NET LOSS: For the year ended June 30, 2003, we incurred a net loss of $4,848,567 and a net loss per share of $0.05. This compares to a net loss of $2,406,580 and a net loss per share of $0.04 for the year ended June 30, 2002. LIQUIDITY AND CAPITAL RESOURCES From August 2001, the date of our inception, through June 30, 2004, we have raised a total of approximately 9.7 million from the sale of common stock and convertible notes and other securities. As of June 30, 2004 we had cash of approximately $114,000 and a working capital deficiency of approximately $6.8 million. Our accumulated deficit as of June 30, 2004 was approximately $22.6 million. In November 2003, we secured a $5 million dollar revolving credit facility, in the form of two seven-month convertible notes. The notes bear interest at an annual rate of 10% and originally matured on June 30, 2004, but have been extended to December 31, 2004. The notes are convertible on 90 days written notice by the holders at the lesser of (i) 50% of the average three lowest closing prices for our common stock for the twenty days immediately preceding the conversion date or (ii) $.0625 per share. At June 30, 2004, we had borrowed $2,180,000 under such notes. We have a convertible debenture with Palisades Holdings, LLC whereby Palisades Holdings, at its discretion, may provide us loans of up to $1,250,000. The convertible debenture bears interest at an annual rate of 10% and originally matured on June 30, 2004, but has been extended to December 31, 2004. The debenture is convertible on 90 days written notice by Palisades Holdings at the lesser of (i) 50% of the average three lowest closing prices for our common stock for the twenty days immediately preceding the conversion date or (ii) $.0625 per share. At June 30, 2004, we had borrowed $872,000 under such debenture. On December 19, 2002 we issued a $165,000 note to an individual investor. The note bears interest at an annual rate of 8% and is payable upon demand. At June 30, 2004, the principal and accrued but unpaid interest under such debenture equaled $15,000. We have offered and sold a substantial number of shares of common stock and warrants and options to purchase common stock without registration under the Securities Act of 1933, as amended, or qualification under state securities laws. If any offer or sale were not exempt from, or otherwise not subject to, federal and state 24 registration and qualification requirements, the purchaser would have a number of remedies, including the right to rescind the purchase. The Securities Act of 1933, as amended, requires that any claim for rescission be brought within one year of the violation. We have sold approximately 11,878,000 shares of common stock and warrants and options to purchase shares of common stock in the United States within one year of June 30, 2004. The time periods within which claims for rescission must be brought under state securities laws vary and may be two years or more from the date of the violation. We have sold approximately 14,170,000 shares of common stock and warrants and options to purchase shares of common stock in the United States within two years of June 30, 2004. Further, we cannot assure you that courts will not apply equitable or other doctrines to extend the period within which purchasers may bring their claims. The number of warrants and options described above does not include warrants and options to purchase 3,600,000 shares of common stock issued within two years of May 31, 2004 to our chief executive officer, Dennis Vadura and our president, Frank Wiebe and a warrant to purchase 12,400,000 shares of common stock for which the holder has agreed in writing that it will not assert any right to rescission that it may have. However, we cannot assure you that this agreement is enforceable. CAPITAL EXPENDITURES We anticipate certain capital expenditures related to developing and testing subsequent versions of the voting system hardware and software. We estimate such capital expenditures for hardware to be approximately $250,000 and an additional $250,000 for software over the course of the fiscal year ending June 30, 2005. We will be reliant on future fund raising in order to pay for development and testing of these subsequent versions. GOING CONCERN Our independent registered public accounting firm has stated in its audit report included in this Form 10-K/A, that we have incurred losses from operations since inception, have negative working capital of approximately $6.8 million at June 30, 2004, and lack operational history. These conditions, among others, raise substantial doubt about our ability to continue as a going concern. The Company has not generated any revenues from its Voting System operations, and there is no assurance of any future revenues. The Company will require substantial additional funding for continuing the development, obtaining regulatory approval, and commercialization of its product. There is no assurance that the Company will be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to the Company. Management has taken actions to address these matters, which include: o Retention of experienced management personnel with particular skills in the commercialization of such products; o Attainment of technology to develop such products and additional products; and o Raising additional funds through the sale of debt and/or equity securities. Federal, State and various foreign government regulations govern the sale of the Company's products. There can be no assurance that the Company will receive the regulatory approval required to market its proposed products. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. As stated above, the Company has incurred losses through June 30, 2004, has negative working capital at that date and has a lack of operational history which, among other factors, raise substantial doubt about its ability to continue as a going concern. The Company intends to fund operations through sales of the Voting System, but there is no commitment by any entities for the purchase of any of the proposed products. In the absence of significant sales and profits, the Company may seek to raise additional funds to meet its working capital requirements through debt and/or equity financing arrangements. Management believes that such arrangements, combined with the net proceeds from the transaction described above in the "Subsequent Event" 25 section of this Item 7, will be sufficient to fund the Company's capital expenditures, working capital needs and other cash requirements for the year ending June 30, 2005. The successful outcome of future activities cannot be determined at this time, and there is no assurance that, if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results. These circumstances, combined with the potential liability associated with certain equity instruments subject to rescission (see "Critical Accounting Policies" below for additional information), raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. INFLATION Our management believes that inflation has not had a material effect on our results of operations. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures. CONTRACTUAL OBLIGATIONS As of June 30, 2004, we had the following contractual obligations:
Contractual Obligations Payments due by period ----------------------- ------------------------------------------------------------ Less then More than Total 1 year 1-3 years 3-5 years 5 years ----------- ---------- ---------- --------- --------- Operating Lease Obligations Greenberg Farrow Architecture - Tustin office $ 132,000 $ 132,000 Olen Lease - Irvine facility $ 39,911 $ 39,911 Amarillo Grant - Texas facility $ 250,000 $ 250,000 Long-Term Debt Bank of America line of Credit $ 225,000 $ 225,000 Notes Payable $ 201,657 $ 201,657 Convertible Debt $ 3,304,600 $3,304,600 Consulting agreements National Strategies Inc. $ 60,000 $ 60,000 ----------- ---------- ---------- --------- --------- Total $ 4,213,168 $4,081,168 $ 132,000 $ -- $ -- =========== ========== =========
BUSINESS TRENDS There are three business trends evident in the market today that are material to AccuPoll's operations. The first is the delay in the procurement cycle until after the November 2004 election. This trend was influenced by two factors: 1) the delay in the distribution of the federal funds by EAC, and 2) the upcoming Presidential Election in November 2004. The delay in the distribution of the federal funds was caused by the delay in nominating and confirming the EAC Commissioners (scheduled to be completed by April 2003, but instead was completed in December 2003), and the delay on the part of some states in meeting all the requirements for the funds to be released by the EAC. With the delay in funding until June 2004, less than five months before the November 2004 election, the majority of counties have decided not to risk making any changes until after the November 2004 election. 26 The second business trend is the growing momentum of the VVPAT movement. As of May 2004, eighteen states (Alabama, Alaska, Arizona, California, Connecticut, Georgia, Illinois, Maine, Maryland, Minnesota, New Hampshire, New Jersey, New York, Ohio, Vermont, Virginia, West Virginia and Wisconsin) have either passed or are actively considering legislation that would make it a requirement for any DRE voting system used in the state to produce a VVPAT. In another five states (California, Missouri, Oregon, New Hampshire and Nevada), the Secretary of State has issued a directive mandating VVPAT in the state. The third business trend is the growing list of states that are requiring DRE voting systems to be qualified under the 2002 federal voting system standards. This requirement is primarily focused in states where electronic voting systems have not been previously used (e.g., Illinois, Missouri, Iowa and North Carolina). Overall the net impact of these trends on AccuPoll is positive. AccuPoll already has a DRE voting system with a VVPAT qualified under the 1990 federal voting system standards. We are currently in the process of testing our DRE voting system under the 2002 federal voting system standards. We expect to complete federal qualification testing under the 2002 federal voting system standards by January 1, 2005. This places AccuPoll in position as one of the few vendors with a DRE voting system that is federally qualified under the 2002 voting system standards and has a VVPAT in time for the beginning of the procurement cycle after the November 2004 election. This is especially important in states like Missouri and Illinois that have not previously authorized DRE voting systems to be used in the state, but must at a minimum meet the accessibility requirements under HAVA (i.e., one DRE voting machine per polling place). CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and the accompanying notes. The amount of assets and liabilities reported on our balance sheet and the amount of revenues and expenses reported for each of our fiscal periods are affected by estimates and assumptions, which are used for, but not limited to, the accounting for equity instruments subject to rescission, software development costs, estimated allowance for doubtful accounts, the realizability of our investments in affiliated companies and the valuation of deferred tax assets. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the financial statements: EQUITY INSTRUMENTS SUBJECT TO RESCISSION We account for common stock and other equity instruments that may be subject to rescission claims at estimated fair value (based on applicable measurement criteria) in accordance with the Securities and Exchange Commission's promulgated accounting rules and interpretive releases. Under the Securities and Exchange Commission's interpretation of accounting principles generally accepted in the United States, reporting such claims outside of stockholders' equity is required, regardless of how remote the redemption event may be. The Company may be subject to possible claims for rescission with respect to the sale or other issuances of certain common stock, options and warrants. The accompanying consolidated balance sheets reflect an adjustment for the matter described below. Approximately 26.6 million shares of the Company's common stock, options and warrants that were issued or granted in the United States without registration or qualification under federal or state securities laws during the two-year period ended June 30, 2004 may be subject to rescission. The fair value of these securities was estimated based on a combination of (a) the selling price of the common stock on the dates sold, (b) the price per the agreement for stock issued in conversion of debt, (c) the fair value of the stock options and warrants on their grant dates, and (d) an independent valuation. Based in part on advice of counsel, the fair value of these options and warrants was estimated using the Black-Scholes option-pricing model. Based on these measurement criteria, the Company's potential liability directly associated with the aforementioned securities transactions is estimated to approximate $6.2 million (including interest) at June 30, 2004 plus legal fees and any fines or penalties that might be assessed by regulatory agencies. 27 Based on advice of counsel, the potential liability discussed above does not include options to purchase a total of 3.6 million shares of common stock issued to the Company's president and to its chief executive officer because these two individuals are also principal stockholders of the Company; acting together, they have the ability to control the Company. The estimated fair value of the options described in this paragraph (excluding interest) approximated $1,360,000 at June 30, 2004. Management is unable to determine at this time whether any claim for rescission may be filed against the Company; however, there can be no assurance that such claims will not be asserted. In addition, regulatory agencies could launch a formal investigation and/or institute an enforcement proceeding against the Company. The ultimate outcome of the matters discussed above is not presently determinable. Accordingly, management is unable to estimate the total liability, if any, that the Company may incur as a result of such contingencies. Regardless of how remote a rescission event may be, GAAP as interpreted by the SEC requires that equity securities subject to rescission be reported outside of the stockholders' equity section of the balance sheet until the applicable statutes of limitations have expired. Thus, the Company has reported approximately $6.2 million as "mezzanine equity" in the accompanying June 30, 2004 consolidated balance sheet. Approximately 8.5 million shares of the Company's common stock issued in connection with the acquisition of Z prompt, with an issuance-date estimated fair value of approximately $1.8 million, have been excluded from the June 30, 2003 mezzanine equity amount, as the acquisition was not recorded until November 2003 for reasons described in Note 3 to the accompanying consolidated financial statements. CAPITALIZED SOFTWARE DEVELOPMENT COSTS In accordance with SFAS No. 86 "Accounting for the Costs of Computer Software to be Sold Leased or Otherwise Marketed," we capitalize certain costs related to the development of new software products or the enhancement of existing software products for sale or license. These costs are capitalized from the point in time that technological feasibility has been established, as evidenced by a working model or detailed working program design to the point in time that the product is available for general release to customers. Capitalized development costs will be amortized on a straight-line basis over the estimated economic lives of the products, beginning with the general product release to customers. Research and development costs incurred prior to establishing technological feasibility and costs incurred subsequent to general product release to customers are charged to expense as incurred. We periodically evaluate whether events or circumstances have occurred that indicate that the remaining useful lives of the capitalized software development costs should be revised or that the remaining balance of such assets may not be recoverable. At June 30, 2004, we believe that no revisions to the remaining useful lives or write-down of capitalized software development costs are required. Our systems were qualified as meeting federal voting system standards in late March 2004. We began amortizing the capitalized software development costs over a period of thirty-six months beginning April 2004. STOCK BASED COMPENSATION We account for stock-based compensation issued to employees using the intrinsic value based method as prescribed by Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock issued to Employees." Under the intrinsic value based method, compensation expense is the excess, if any, of the fair value of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Compensation expense, if any, is recognized over the applicable service period, which is usually the vesting period. SFAS 123, "Accounting for Stock-Based Compensation," if fully adopted, changes the method of accounting for employee stock-based compensation plans to the fair value based method. For stock options and warrants, fair value is determined using an option pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option or warrant, stock volatility and the annual rate of quarterly dividends. Compensation expense, if any, is recognized over the applicable service period, which is usually the vesting period. 28 The adoption of the accounting methodology of SFAS 123 is optional and we have elected to continue accounting for stock-based compensation issued to employees using APB 25; however, pro forma disclosures, as if we adopted the cost recognition requirement under SFAS 123, are required to be presented. For stock-based compensation issued to non-employees, we use the fair value method of accounting under the provisions of SFAS 123. Financial Accounting Standards Board (FASB) Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB 25" clarifies the application of APB 25 for (a) the definition of employee for purposes of applying APB 25, (b) the criteria for determining whether a plan qualifies as a non compensatory plan, (c) the accounting consequence for various modifications to the terms of a previously fixed stock option or award and (d) the accounting for an exchange of stock compensation awards in a business combination. We believe that we account for transactions involving stock compensation in accordance with FIN 44. SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123," provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. FINANCIAL REPORTING RELATED TO WEB TOOLS INTERNATIONAL, INC. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51". The primary objectives of FIN No. 46 are to provide guidance on the identification of entities for which control is achieved through means other than voting rights (variable interest entities, or VIEs), and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity for which either: (a) the equity investors do not have a controlling financial interest; or (b) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. As amended in December 2003, the effective dates of FIN No. 46 for us are as follows: (a) for interests in special-purpose entities: the first period ended after December 15, 2003; and (b) for all other types of VIEs: the first period ended after March 15, 2004. As disclosed in the notes to our accompanying consolidated financial statements, we are associated with Web Tools International, Inc. (WTI) through common ownership; in addition, we were virtually WTI's only customer for software development services in fiscal 2003. Based on these and other factors, we determined that (1) WTI is a VIE and (2) we were its primary beneficiary as of January 1, 2004. Therefore, effective January 1, 2004, the accounts of WTI were consolidated with those of AccuPoll. For reasons explained in the notes to our June 30, 2004 consolidated financial statements, the accounts of WTI were de-consolidated effective April 1, 2004. THE CONTINUED CONSOLIDATION OF A SUBSIDIARY IN BANKRUPTCY As discussed in the notes to our accompanying consolidated financial statements, Z prompt (a wholly-owned subsidiary of the Company) filed bankruptcy in March 2004. The Company is the single largest pre-petition creditor of Z prompt. Management has determined that it would not be meaningful to de-consolidate the accounts of Z prompt at this time because the Company (a) has a substantial negative investment in Z prompt as of June 30, 2004 and (b) expects to regain control of this subsidiary based on the expectation that Z prompt will be able to negotiate a confirmed reorganization plan and emerge from bankruptcy by approximately March 2005. RECENT ACCOUNTING PRONOUNCEMENTS We continue to assess the effects of recently issued accounting standards. The impact of all recently adopted and issued accounting standards has been disclosed in Note 1 of the consolidated financial statements included in this amended report on Form 10-K/A. 29 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Changes in United States interest rates would affect the interest earned on our cash and cash equivalents. Based on our overall interest rate exposure at June 30, 2004, a near-term change in interest rates, based on historical movements, would not materially affect the fair value of interest rate sensitive instruments. Our debt instruments have fixed interest rates and terms and, therefore, a significant change in interest rates would not have a material adverse effect on our financial position or results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial information required by this Item is attached hereto at the end of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our principal (chief) executive officer and principal (chief) financial officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon the evaluation, our principal (chief) executive officer and principal (chief) financial officer concluded that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be or have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, and/or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, and/or the degree of compliance with the policies and procedures may deteriorate. Because of the inherent limitations in a cost-effective internal control system, misstatements due to error or fraud may occur and not be detected. During the year ended June 30, 2004, we hired additional accounting personnel to re-evaluate and revise our disclosure controls and procedures and to implement new disclosure controls and procedures. As part of this plan and implementation, we are reevaluating, redesigning, and documenting policies and procedures, putting those procedures in operation and monitoring the effectiveness of the procedures. Except as described above, there was no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS AND EXECUTIVE OFFICERS Our current directors and executive officers are as follows: NAME (1) (2) AGE POSITION ------------------- --- -------- Dennis Vadura 43 Chief Executive Officer and Director Frank J. Wiebe 44 President, Secretary, Treasurer and Director Craig A. Hewitt 37 Chief Financial Officer Chester Noblett Jr. 60 Executive Vice President, Sales Jo-Ann Zakielarz 52 Vice President, Government Affairs/Global Alliances Andrea M. Porcelli 36 Director Phil Trubey 41 Director (1) We do not have a separately designated executive committee, nominating committee or audit committee of the Board of Directors. (2) Our executive officers hold office until their successors are elected and qualified, or until their death, resignation or removal. The background and principal occupations of each director and executive officer are as follows: Mr. Vadura became a director and our Chief Executive Officer on May 20, 2002. From April 2000 to the present, he has been the Chief Executive Officer of Web Tools International, Inc. From April 1999 to April 2000, Mr. Vadura was a senior technical architect employed by Electronic Data Systems ("EDS"). From 1996 to April 1999, he was employed by companies acquired by EDS in similar positions. Mr. Wiebe became a director and our President, Secretary and Treasurer on May 20, 2002. From May 2000 to the present, he has been the Vice President of Web Tools International, Inc. From November 1992 to the present, he has been a Strategic Program Manager with EDS E.solutions business unit. He previously held various positions with the Gemini Group. Mr. Hewitt became our Chief Financial Officer in May 2002. Mr. Hewitt also owns and operates Hewitt & Associates, Inc., a financial consulting company. From August 2000 to September 2001, he was the Chief Financial Officer of Junum Incorporated, a public company engaged in credit and finance services. From August 1998 to August 2000, Mr. Hewitt was Chief Financial Officer/Controller for Universal Broadband Networks, a public company engaged in telecommunications. Mr. Noblett has been Vice President of Sales since July 2002 and is responsible for our sales organization. He was Chief Executive Officer for eSAT from June 1999 until December 2001. From January1997 to February 1998, Mr. Noblett served as interim Chief Financial Officer of eSAT and subsequently served as Chief Operating Officer as eSAT until June 1999. Ms. Zakielarz was hired as Vice President of Government Relations and Global Alliances in January 2003. Ms. Zakielarz was with Unisys Corp. for 13 years where she developed, promoted and implemented technology solutions for state and local election officials. Her experience ranged from selling and consulting on the implementation of precinct voting systems to statewide-centralized voter registration systems. Ms. Andreea M. Porcelli became a director on May 20, 2002. From August 2, 2002 to the present Ms. Porcelli has been an independent consultant with Continental Advisors S.A. (U.K.). From October 2000 to August 2002, she was a registered representative of Schneider Securities, Inc. From May 2000 to October 2000, she was a registered representative of Berry-Shino Securities, Inc. From March 1999 to May 2000, Ms. Porcelli was a registered representative of Paulson Investment Company, Inc. Mr. Phil Trubey was appointed to our Board of Directors on August 27, 2004. Mr. Trubey was the CEO of Merchandising Avenue, an e-commerce infrastructure startup from 1999 to 2001. In 1994, Mr. Trubey founded and operated Websense, Inc. ("WBSN"), an enterprise software company, until 1999. FAMILY RELATIONSHIPS There are no family relationships between or among our directors, executive officers or persons nominated 31 or charged by us to become directors or executive officers. INVOLVEMENT IN LEGAL PROCEEDINGS On March 23, 2004, our wholly-owned subsidiary, Z prompt, Inc., filed a petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court, Central District of California. Z prompt, and its Bankruptcy counsel are in the process of preparing a disclosure statement and proposed plan of re-organization. Mr. Vadura and Mr. Wiebe who are our CEO and President , respectively, are also directors of Z prompt, and held such positions at the time of the Bankruptcy filing. Mr. Vadura is also the Chairman of Zprompt, and Mr. Wiebe is a Director of Z prompt. Mr. Hewitt, our CFO, was formerly a member of Z prompt's Board of Directors, but resigned from the Board of Z prompt prior to the Bankrupcty filing. Based solely in reliance on representations made by our officers and directors, during the past five years, none of the following occurred with respect to such persons: (1) no petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such persons; (2) other than the Z prompt bankruptcy described above, there has been no petition under the Federal bankruptcy laws or any state insolvency law filed by or against, or a receiver, fiscal agent or similar officer appointed by a court for the business or property of any partnership in which such persons were a general partner at or within two years before the time of such filing, or any corporation or business association of which such persons were executive officers at or within two years before the time of such filing; (3) no such persons were convicted in a criminal proceeding or are a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (4) no such persons were the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of any competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting their involvement in any type of business practice, or in securities or banking or other financial institution activities; and (5) no such persons were found by a court of competent jurisdiction in a civil action by the SEC or by the Commodity Futures Trading Commission to have violated any Federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated. AUDIT COMMITTEE FINANCIAL EXPERT We do not have an audit committee financial expert (as defined in Item 401 of Regulation S-K) serving on our Board of Directors. We have not yet employed an audit committee financial expert on our Board due to the inability to attract such a person. Within the past fiscal year, we obtained Directors and Officers insurance which we expect will help to attract such a member to our Board. In addition, our financial position and the pending litigation against us has made it difficult to place such an individual on our Board of Directors. CODE OF ETHICS We have adopted a Code of Ethics and Business Conduct that applies to all of our officers, directors and employees. The Code of Ethics has been filed with our annual report for the fiscal year ended June 30, 2004 on Form 10-K as Exhibit 14.1, filed with the Securities and Exchange Commission on September 28, 2004. Upon request, we will provide to any person without charge a copy of our Code of Ethics. Any such request should be made to Attn: Frank Wiebe, AccuPoll Holding Corp., 15101 Red Hill Ave # 220, Tustin, CA 92780. Our telephone number is (949) 200-4000. We are in the process of building a section of our website at WWW.ACCUPOLL.COM where our Code of Ethics will be available to investors. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of change in ownership of common stock and other equity securities of our company. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on the review of copies of such reports furnished to us and written representations that no other reports were required, we believe that during the fiscal year ended June 30, 2004, our executive officers, directors and all persons who own more than ten percent of a registered class of our 32 equity securities complied with all Section 16(a) filing requirements, except Mr. Hewitt reported two transactions and filed one Form 4 late, and Mr. Trubey filed his Form 3 late. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information concerning the total compensation that we have paid or that has accrued on behalf of our chief executive officer and other executive officers with annual compensation exceeding $100,000 (collectively, the "named executive officers") during the fiscal years ending June 30, 2004, 2003 and 2002. SUMMARY COMPENSATION TABLE
Long-Term Compensation ---------------------------------------- Annual Compensation Awards Payouts ----------------------------------- -------------------------- ----------- Other Securities All Annual Restricted Underlying Other Name and Compen- Stock Options/ LTIP Compen- Principal Position Year Salary ($) Bonus ($) sation ($) Award(s)($) SARs (#) Payouts ($) sation ($) ----------------------------- ---- ---------- --------- ---------- ----------- ---------- ----------- ---------- Frank Wiebe, 2004 $126,500 -0- -0- -0- 0 -0- -0- President 2003 $115,000 -0- -0- -0- 1,200,000 -0- -0- 2002 $ 28,750 -0- -0- -0- 2,016,000 -0- -0- Dennis Vadura, 2004 $126,500 -0- -0- -0- 0 -0- -0- Chief Executive Officer 2003 $115,000 -0- -0- -0- 2,400,000 -0- -0- 2002 $ 28,750 -0- -0- -0- 4,032,000 -0- -0-
- Personal benefits received by our named executive officers are valued below the levels which would otherwise require disclosure under the rules of the U.S. Securities and Exchange Commission. - We do not currently provide any contingent or deferred forms of compensation arrangements, annuities, pension or retirement benefits to our named executive officers officers. - We have employment agreements with Dennis Vadura and Frank J. Wiebe. OPTIONS GRANTS We made no grants of stock options during fiscal year ended June 30, 2004 to any of the named executive officers. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table provides information concerning the number and value of stock options exercised during the fiscal year ended June 30, 2004, and held at the end of such fiscal year, by the named executive officers. 33
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES (a) (b) (c) (d) (e) Number of Securities Underlying Value of Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at June June 30, 2004 (#) 30, 2004 ($) Shares Acquired Exercisable/ Exercisable/ Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable ------------------------------------------------------------------------------------------------------------- Frank Wiebe 0 N/A 2,300,000/916,000 $ 974,500/$423,020 Dennis Vadura 0 N/A 4,600,000/1,832,000 $1,949,000/$846,040
EXECUTIVE EMPLOYMENT AGREEMENTS On May 20, 2002, we entered into employment agreements with Dennis Vadura, our Chief Executive Officer, and Frank Wiebe, our President, Secretary and Treasurer. Each employment agreement has a three-year term and provides for an annual base salary of $115,000, with a minimum annual 10% increase as determined by our board of directors. The agreements also provide that Messrs. Vadura and Wiebe will be entitled to participate in our management stock incentive plan as soon as reasonably practicable. Bonus compensation, if any, is to be determined by the Board of Directors or the Compensation Committee of the Board of Directors, but cannot exceed 100% of their then applicable annual salary. Under the agreements, if either Mr. Vadura or Mr. Wiebe voluntarily resigns or is terminated with cause (as defined in the agreements), he will only be entitled to receive his compensation through the date of termination. If either Mr. Vadura's or Mr. Wiebe's employment is terminated by either officer for good reason (as defined in the agreements) or by us without cause, he will be entitled to a lump-sum severance payment in an amount equal to his then current annual salary and we will be required to provide all of his benefits for a twelve month period. If either Mr. Vadura or Mr. Wiebe is permanently disabled, we will pay him his then current annual salary and provide all benefits through the remainder of the calendar year and a three-month period thereafter. If either Mr. Vadura or Mr. Wiebe dies, we will pay his then current annual salary through the calendar month in which such death occurs. On May 29, 2004, we entered into an agreement with Hewitt & Associates, Inc. which provides for the services of Craig Hewitt as our consulting Chief Financial Officer. This agreement provides for compensation of $7,500 per month. This agreement expires on May 29, 2005. BENEFIT PLANS We do not have any pension plan, profit sharing plan, or similar plans for the benefit of our officers, directors or employees. However, we may establish such plans in the future. BOARD COMPENSATION We do not have any formal or informal arrangements or agreements to compensate our directors for services they provide as members of our Board of Directors. PERFORMANCE GRAPH The following performance graph assumes an investment of $100 on 6/30/2002 and compares the change to June 30, 2004, in the market prices of our common stock with the change a broad market index (S & P 500 - U.S.) and an Special Composite Index comprised of the following Companies: GPTX, NCR, and TRMM. We have paid no dividends. The performance of the indeces is shown on a total return (dividend reinvestment) basis. The graph lines merely connect the prices on the dates indicated and do not reflect fluctuations between those dates. 6/30/2000 6/30/2001 6/30/2002 6/30/2003 6/30/2004 ------------------------------------------------------------- ACUP n/a n/a $ 100.00 $ 79.17 $ 84.39 S&P 500 n/a n/a $ 100.00 $ 98.44 $ 115.25 Special Composite* n/a n/a $ 100.00 $ 79.86 $ 164.02 * includes the following three companies GPTX, $5.95/share at 6/30/02, $4.39/share at 6/30/03, and $3.70/share at 34 6/30/04 NCR, $34.60/share at 6/30/02, $26.76/share at 6/30/03, and $49.59/share at 6/30/04 TRMM, $85/share at 6/30/02, $1.85/share at 6/30/03, and $14.49/share at 6/30/04 [CHART OMITTED] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information, as of September 28, 2004 with respect to the beneficial ownership of our outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of our executive officers and directors; and (iii) our directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned. Percentage of Common Stock Common Stock Name of Beneficial Owner (1) Beneficially Owned (2) Ownership (2) ------------------------------- ---------------------- ------------- Dennis Vadura (3) (4) (5) 55,718,560 30.8% Frank Wiebe (3) (4) (6) 43,463,040 24.1% Phil Trubey (7) 17,464,220 9.7% Hyde Investments Ltd.(8) 20,928,000 11.6% Livingston Investments Ltd.(9) 13,952,000 7.7% Palisades Holdings LLC(10) 13,376,000 7.4% ------------------------------- ---------------------- ------------- All officers and directors as a group (3 persons) 116,645,820 64.6% (1) Except as otherwise indicated, the address of each beneficial owner is c/o AccuPoll Holding Corp., 15101 Red Hill Ave. Suite # 220, Tustin, Ca 92780. (2) Applicable percentage ownership is based on 180,705,970 shares of common stock outstanding as of September 28, 2004, together with securities exercisable or convertible into shares of common stock within 60 days of September 28, 2004 for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of September 28, 2004 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (3) Includes 3,064,000 shares of common stock held by Web Tools International, Inc., a company owned and controlled by Messrs. Vadura and Mr. Wiebe. (4) Includes 18,400,000 shares of common stock as to which Messrs. Vadura and Wiebe have shared voting power pursuant to proxies granted by stockholders. Messrs. Vadura and Wiebe have no economic interest in such stock. (5) Includes an option to purchase 2,000,000 shares at an exercise price of $.91 per share which expires on June 18, 2013; and an option to purchase 3,024,000 shares at an exercise price of $.3125 per share which expires on May 29, 2012 (6) Includes an option to purchase 1,000,000 shares at an exercise price of $.91 per share which expires on June 18, 2013; and an option to purchase 1,512,000 shares at an exercise price of $.3125 per share which expires on May 29, 2012. (7) Includes 9,057,970 shares of common stock underlying warrants exercisable at $1.55 per share. 35 (8) Assumes conversion of $1,308,000 debt at $.0625 per share into 20,928,000 shares due December 31, 2004. (9) Assumes conversion of $872,000 debt at $.0625 per share into 13,952,000 shares due December 31, 2004. (10) Assumes conversion of $836,000 debt at $.0625 per share into 13,376,000 shares due December 31, 2004. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The following table shows information with respect to each equity compensation plan under which our common stock is authorized for issuance as of the fiscal year ended June 30, 2004.
PLAN CATEGORY Number of securities Weighted average Number of securities to be issued upon exercise price of remaining available for exercise of outstanding options, future issuance under outstanding options, warrants and rights equity compensation plans warrants and rights (excluding securities reflected in column (a) ------------------------------------ ------------------- ------------------- ----------------------- (a) (b) (c) ------------------------------------ ------------------- ------------------- ----------------------- Equity compensation plans approved by security holders -0- -0- N/a ------------------------------------ ------------------- ------------------- ----------------------- ------------------------------------ ------------------- ------------------- ----------------------- Equity compensation plans not approved by security holders 75,699,913 $0.44 7,765,829 ------------------------------------ ------------------- ------------------- ----------------------- Total 75,699,913 $0.44 7,765,829 ------------------------------------ ------------------- ------------------- ----------------------- Notes (1)(2)(3)(4)(5) (6) ------------------------------------ ------------------- ------------------- -----------------------
NOTE 1: Included in the total are 16,954,492 warrants issued with exercise prices between $.06 and $1.55 per share from inception through June 30, 2004, in connection with debt instruments, minus 2,000,000 of these warrants exercised into shares of common stock at a price of $.50 per share. NOTE 2: Included in the total are 63,573,214 warrants issued with exercise prices between $.06 and $1.55 per share from inception through June 30, 2004, in connection with equity instruments, minus 25,649,020 of these warrants exercised into shares of common stock at prices between $.06 and $.35 per share. NOTE 3: Included in the total are 4,553,551 warrants issued with exercise prices between $.06 and $.75 per share from inception through June 30, 2004, for placement agent fees, minus 631,000 of these warrants exercised into shares of common stock at prices between $.06 and $.75 per share. NOTE 4: Included in the total are 7,552,336 warrants issued with exercise prices between $.06 and $1.54 per share from inception through June 30, 2004, for services rendered, minus 1,153,660 of these warrants exercised into shares of common stock at prices between $.08 and $.75 per share. NOTE 5: Included in the total are 13,050,000 options issued to employees with exercise prices between $.31 and $1.54 per share from inception through June 30, 2004, for employment services, minus 550,000 of these options exercised into shares of common stock at prices between $.31 and $.75 per share. Such options were granted under the Plan described in Note 6 below. NOTE 6: We have a 2002 Consultant Compensation Plan which authorizes us to grant non-qualified stock options with or without stock appreciation rights (SAR's) and stock bonuses to our consultants. There are 12,000,000 shares 36 of common stock available for grant to participants under the plan. Our board of directors determined to adopt the plan to retain and compensate consultants and to provide additional incentives for consultants. Shares involved in the unexercised portion of any terminated or expired option may again be available for grant, provided that to the extent any option in whole or in part is surrendered as the result of the exercise of a SAR, the shares subject to the surrendered portion of the option will no longer be available for use under the plan. The exercise price of any option issued under the plan may not be less than 85% of the fair market value of the shares on the date of grant. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MASTER SERVICES AGREEMENT In April 2002, we entered into a Master Services Agreement whereby Web Tools International, Inc. (WTI) provided substantially all non-production services related to the manufacture of our voting system. Under the agreement we were charged hourly rates for WTI's employees working on our matters. In addition, we reimbursed WTI for all reimbursable expenses, as defined in the agreement. We were not charged for the use of the office space or fixed assets of WTI. All overhead related charges were included in the basic hourly rates charged to us by WTI. The agreement expired on March 31, 2004. All ideas, inventions, concepts, know-how, methods, methodologies, processes, algorithms, techniques, compilations, software and other works of authorship of any nature created or developed by WTI during the course of performance of the agreement are our exclusive property. WTI is owned and operated by Dennis Vadura and Frank Wiebe. Mr. Vadura is our Chief Executive Officer, a director and stockholder. Mr. Wiebe is our President, Treasurer, Secretary, a director and a stockholder. During the fiscal year ended June 30, 2004, WTI invoiced approximately $1,450,000 to us under the terms of the agreement, of which approximately $1,488,000 remained due and payable as of June 30, 2004. From January 2002 to June 30, 2004, Andreea Porcelli, a member of our board of directors, has assisted us in the placement of our securities offerings in Europe. These offerings were excluded from registration under the Securities Act pursuant to Regulation S. As compensation for these services, Ms. Porcelli was entitled to receive $528,000 in cash and warrants to purchase an aggregate of 1,501,752 shares of our common stock at exercise prices ranging from $.1224 to $.75 per share. Ms. Porcelli has directed us to pay all cash compensation and issue all warrants to Montacino Ltd, Southampton Ltd and Continental Advisors S.A. Ms. Porcelli has advised us that she is not a beneficial owner or affiliate of any of these entities. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES AUDIT FEES The aggregate fees incurred for professional services rendered by our principal accountants for the audit of our financial statements, the reviews of our annual report on Forms 10-KSB or Form 10-K, the review of our unaudited financial statements included in our quarterly reports filed with the Securities and Exchange Commission, and for other services normally provided in connection with statutory filings approximated $137,000 and $95,000 for the years ended June 30, 2004 and 2003, respectively. AUDIT-RELATED FEES We incurred fees of approximately $11,000 and $50,000 for the years ended June 30, 2004 and 2003, respectively, for professional services rendered by our principal accountants that are reasonably related to the performance of the audit or review of our financial statements and not included in "Audit Fees." TAX FEES The aggregate fees incurred for professional services rendered by our principal accountants for tax compliance, tax advice, and tax planning were approximately $6,000 and $5,500, for the years ended June 30, 2004 and 2003, respectively. ALL OTHER FEES 37 We did not incur any fees for other professional services rendered by our principal accountants during the years ended June 30, 2004 and 2003. AUDIT COMMITTEE PRE-APPROVAL POLICIES The board of directors acts as the audit committee, and consults with respect to audit policy, choice of auditors, and approval of out of the ordinary financial transactions. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES EXHIBITS EXHIBIT NUMBER DESCRIPTION -------------------------------------------------------------------------------- 2.1 Reorganization Agreement dated April 9, 2003 between AccuPoll and Z prompt, Inc. (Incorporated by reference from Exhibit 1 to Form 8-K, filed April 23, 2003) 2.2 Agreement and Plan of Reorganization dated June 30, 2004 by and among AccuPoll Holding Corp., NTSD Acquisition, Inc., NTS Data Services Corp., NTS Data Services, Inc., Matthew M. Biondi and John F. Jennings (Incorporated by reference from Exhibit 10.1 to Form 8-K, filed July 1, 2004). 3.1 Articles of Incorporation dated January 25, 1985 (Incorporated by reference from Exhibit 3(i) to Form 10-KSB for fiscal year ended June 30, 2000) 3.2 Amendment to Articles of Incorporation dated November 4, 1985 (Incorporated by reference from Exhibit 3(ii) to Form 10-KSB for fiscal year ended June 30, 2000) 3.3 Certificate of Amendment to Articles of Incorporation dated May 2, 2002 (Incorporated by reference from Exhibit 3.3 to Form 10-K/A filed with the Securities and Exchange Commission on October 6, 2004) 3.4 Certificate of Amendment to Articles of Incorporatoin dated May 23, 2002 (Incorporated by reference from Exhibit 3.3 to Form 10-K/A filed with the Securities and Exchange Commission on October 6, 2004) 3.5 Certificate of Amendment to Articles of Incorporation dated June 2, 2003 (Incorporated by reference from Exhibit 3.3 to Form 10-K/A filed with the Securities and Exchange Commission on October 6, 2004) 3.6 Bylaws (Incorporated by reference to Exhibit 3(iii) to Form 10-KSB for the fiscal year ended June 30, 2000, filed September 8, 2000) 3.7 Amendment to Bylaws dated April 20, 2000 (Incorporated by reference from Exhibit 3.3 to Form 10-K/A filed with the 38 EXHIBIT NUMBER DESCRIPTION -------------------------------------------------------------------------------- Securities and Exchange Commission on October 6, 2004) 4.1 Debenture, dated June 20, 2003 between AccuPoll and Palisades Holdings, LLC (Incorporated by reference from Exhibit 4.1 to Form 10-KSB/A for the fiscal year ended June 30, 2003, filed June 8, 2004) 4.2 Debenture, dated November 20, 2003, by and between AccuPoll Holding Corp., AccuPoll, Inc. and Hyde Investments, Ltd, as amended (Incorporated by reference from Exhibit 10.1 to Form 10-Q/A for the quarter ended December 31, 2003, filed June 8, 2004) 4.3 Debenture, dated November 20, 2003, by and between AccuPoll Holding Corp., AccuPoll, Inc. and Livingston Investments, Ltd., as amended (Incorporated by reference from Exhibit 10.1 to Form 10-Q/A for the quarter ended December 31, 2003, filed June 8, 2004) 4.4 Convertible Note, dated July 2003, between AccuPoll and Pan American Management (Incorporated by reference from Exhibit 10.1 to Form 10-Q/A for the quarter ended September 30, 2003, filed June 8, 2004) 4.5 Subscription Agreement, dated September 8, 2004 (Incorporated by reference from Exhibit 4.1 to Form 8-K, filed September 17, 2004) 4.6 Form of Common Stock Purchase Warrant A (Incorporated by reference from Exhibit 4.2 to Form 8-K, filed September 17, 2004) 4.7 Form of Common Stock Purchase Warrant B (Incorporated by reference from Exhibit 4.3 to Form 8-K, filed September 17, 2004) 4.8 Form of Common Stock Purchase Warrant C (Incorporated by reference from Exhibit 4.4 to Form 8-K, filed September 17, 2004) 4.9 Form of Placement Agent Warrant (Incorporated by reference from Exhibit 4.5 to Form 8-K, filed September 17, 2004) 4.10 Form of Funds Escrow Agreement (Incorporated by reference from Exhibit 4.6 to Form 8-K, filed September 17, 2004) 9.1 Proxy in favor of Dennis Vadura and Frank Wiebe from Picasso, LLC (Incorporated by reference from Exhibit 10.9 to the Form 10-KSB for the fiscal year ended June 30, 2002, filed October 7, 2002) 9.2 Proxy in favor of Dennis Vadura and Frank Wiebe from ViperTrust (Incorporated by reference from Exhibit 10.10 to the Form 10-KSB for the fiscal year ended June 30, 2002, filed October 7, 2002) 9.3 Proxy in favor of Dennis Vadura and Frank Wiebe from Aramis 39 EXHIBIT NUMBER DESCRIPTION -------------------------------------------------------------------------------- Investment, LLC (Incorporated by reference from Exhibit 9.3 to Form 10-KSB/A for the fiscal year ended June 30, 2003, filed June 8, 2004) 9.4 Proxy in favor of Dennis Vadura and Frank Wiebe from The Glacier Trust (Incorporated by reference from Exhibit 9.4 to Form 10-KSB/A for the fiscal year ended June 30, 2003, filed June 8, 2004) 9.5 Proxy in favor of Dennis Vadura and Frank Wiebe from Morpheus Trust (Incorporated by reference from Exhibit 9.5 to Form 10-KSB/A for the fiscal year ended June 30, 2003, filed June 8, 2004) 10.1 Stock Exchange Agreement dated May 20, 2002, between WIPC and AccuPoll, Inc., Dennis Vadura and Frank Wiebe (Incorporated by reference from Exhibit 1 to Form 8-K/A filed May 28, 2002) 10.2 Employment Agreement, dated May 20, 2002, between Dennis Vadura and AccuPoll (Incorporated by reference from Exhibit 10.2 to Form 10-KSB/A for the fiscal year ended June 30, 2003, filed June 8, 2004) 10.3 Employment Agreement, dated May 20, 2002, between Frank Wiebe and AccuPoll (Incorporated by reference from Exhibit 10.2 to Form 10-KSB/A for the fiscal year ended June 30, 2003, filed June 8, 2004) 10.4 Indemnification Agreement, between Dennis Vadura and AccuPoll (Incorporated by reference from Exhibit 10.13 to the Form-KSB for fiscal year ended June 30, 2002, filed October 7, 2002) 10.5 Indemnification Agreement, between Frank Wiebe and AccuPoll (Incorporated by reference from Exhibit 10.14 to the Form-KSB for fiscal year ended June 30, 2002, filed October 7, 2002) 10.6 Master Services Agreement dated April 2002 with Web Tools International, Inc. (Incorporated by reference from Exhibit 10.7 to Form-KSB for fiscal year ended June 30, 2002, filed October 7, 2002) 10.7 Consulting Agreement dated April 23, 2002 between AccuPoll and GCH Capital, Ltd (Incorporated by reference from Exhibit 10.8 to Form-KSB for fiscal year ended June 30, 2002, filed October 7, 2002) 10.8 Consulting Agreement, dated May 29, 20002 between Craig Hewitt and AccuPoll (Incorporated by reference from Exhibit 10.17 to the Form-KSB for fiscal year ended June 30, 2002, filed October 7, 2002) 10.9 AccuPoll 2002 Consultant Compensation Plan (Incorporated by reference from Exhibit 10 to Form S-8 filed June 11, 2002) 10.10 Exclusive Territory and Compensation Agreement, November 4, 2003, by and between AccuPoll and AmCad, LLC (Incorporated by reference from Exhibit 10.12 to Form 10-KSB/A for the fiscal year ended June 30, 2003, filed June 8, 2004) 40 EXHIBIT NUMBER DESCRIPTION -------------------------------------------------------------------------------- 10.11 Standard Sublease dated July 23, 2003 between Greenberg Farrow Architecture, Inc. and AccuPoll (Incorporated by reference from Exhibit 10.14 to Form 10-KSB/A for the fiscal year ended June 30, 2003, filed June 8, 2004) 10.12 Teaming Agreement dated July 9, 2004 by and between AccuPoll, Inc. and Alternative Resources Corporation (Incorporated by reference from Exhibit 10.12 to Form 10-K for the fiscal year ended June 30, 2004, filed September 28, 2004). 10.13 Exclusive Supply Agreement dated December 20, 2001 by and between Source Technologies, Inc. and Web Tools International, Inc. (Incorporated by reference from Exhibit 10.13 to Form 10-K for the fiscal year ended June 30, 2004, filed September 28, 2004 14.1 Code of Ethics (Incorporated by reference from Exhibit 14.1 to Form 10-K for the fiscal year ended June 30, 2004, filed September 28, 2004). 21.1 List of Subsidiaries (Incorporated by reference from Exhibit 21.1 to Form 10-K for the fiscal year ended June 30, 2004, filed September 28, 2004). 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 FINANCIAL STATEMENT SCHEDULES The information required by this Item is either not applicable, included in the notes to consolidated financial statements, or is not significant. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ACCUPOLL HOLDING CORP. Dated: March 14, 2005 By: /s/ Dennis Vadura -------------------------------------- Dennis Vadura, Chief Executive Officer and Director Dated: March 14, 2005 By: /s/ Frank J. Wiebe -------------------------------------- Frank J. Wiebe, President, Secretary, Treasurer and Director Dated: March 14, 2005 By: /s/ Craig A. Hewitt -------------------------------------- Craig A. Hewitt, Chief Financial Officer and Principal Accounting Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE -------- ----- ---- /s/ Dennis Vadura ----------------------------- Chief Executive Officer Dennis Vadura and Director March 11, 2005 /s/ Frank J. Wiebe President, Secretary, ----------------------------- Treasurer and Director March 14, 2005 Frank J. Wiebe /s/ Andrea M. Porcelli ----------------------------- Director March 14, 2005 Andrea M. Porcelli /s/ Phil Trubey ----------------------------- Director March 14, 2005 Phil Trubey 42 Index to Financial Statements Page ---- Report of Independant Registered Public Accounting Firm.................F-1 Consolidated balance sheets at June 30, 2004 and 2003...................F-2 Consolidated statements of operations for the years ended June 30, 2004 and 2003 and for the period from August 9, 2001 (Inception) through June 30, 2002.......................................F-3 Consolidated statements of stockholders' deficit for the years ended June 30, 2004 and 2003 and for the period from August 9, 2001 (Inception) through June 30, 2002.......................................F-4 Consolidated statements of cash flows for the years ended June 30, 2004 and 2003 and for the period from August 9, 2001 (Inception) through June 30, 2002.......................................F-7 Notes to consolidated financial statements..............................F-8 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors AccuPoll Holding Corp. We have audited the accompanying consolidated balance sheets of AccuPoll Holding Corp. and subsidiaries ("the "Company") as of June 30, 2004 and 2003, and the related consolidated statements of operations, stockholders' deficit and cash flows for the period from August 9, 2001 (Inception) through June 30, 2002 and for the years ended June 30, 2004 and 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AccuPoll Holding Corp. and subsidiaries as of June 30, 2004 and 2003, and the results of their operations and their cash flows for the period from August 9, 2001 (Inception) through June 30, 2002 and for the years ended June 30, 2004 and 2003, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company has losses from operations through June 30, 2004 and an accumulated deficit of approximately $22.6 million at that date, negative working capital at June 30, 2004 approximating $6.8 million and a lack of operational history. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty. As discussed in Note 10 to the accompanying consolidated financial statements, the Company may be subject to possible rescission claims regarding the sale or other issuances of certain equity instruments. Accordingly, the June 30, 2003 consolidated balance sheet has been restated to reflect the potential liability associated with such transactions. As discussed in Note 11, an expense of $655,000 relating to warrants issued for services that were not provided by the vendor was recorded during the year ended June 30, 2003. Accordingly, the consolidated statement of operations for the year then ended has been restated to reduce the previously reported net loss by $655,000. /S/ SQUAR, MILNER, REEHL & WILLIAMSON, LLP NEWPORT BEACH, CALIFORNIA SEPTEMBER 27, 2004 F-1 ACCUPOLL HOLDING CORP. CONSOLIDATED BALANCE SHEETS June 30, 2004 and 2003
2004 2003 (AS RESTATED) ------------ ------------ ASSETS CURRENT ASSETS Cash $ 113,789 $ -- Accounts receivable, net 254,895 -- Inventories 168,636 -- Deferred acquisition costs -- 144,206 Prepaid expenses -- 2,500 ------------ ------------ 537,320 146,706 PROPERTY AND EQUIPMENT, net 14,012 -- CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net 2,544,207 1,403,899 OTHER ASSETS 26,246 -- ------------ ------------ TOTAL ASSETS $ 3,121,785 $ 1,550,605 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable and accrued expenses $ 1,817,284 $ 931,503 Related party payables 1,228,070 872,940 Deferred revenues 74,628 -- Convertible debt. net of discount 3,304,600 -- Notes and accrued interest payable to related parties 30,000 175,000 Put liability related to warrant issuance 163,760 113,750 Liabilities subject to compromise 732,544 -- ------------ ------------ 7,350,886 2,093,193 ------------ ------------ EQUITY INSTRUMENTS SUBJECT TO RESCISSION 6,200,000 4,377,033 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT Convertible Series A preferred stock, $0.01 par value, 80,000 shares authorized, no shares issued or outstanding (liquidation preference of zero) -- -- Common stock, par value of $0.001, 600,000,000 shares authorized; 158,482,171 and 112,945,963 shares issued and outstanding at June 30, 2004 and 2003, respectively 158,482 112,946 Additional paid-in capital 12,046,817 2,222,580 Accumulated deficit (22,634,400) (7,255,147) ------------ ------------ (10,429,101) (4,919,621) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,121,785 $ 1,550,605 ============ ============
PAGE F-2 SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS ACCUPOLL HOLDING CORP. CONSOLIDATED STATEMENTS OF OPERATIONS For The Years Ended June 30, 2004 and 2003, and FOR THE PERIOD FROM AUGUST 9, 2001 (INCEPTION) THROUGH JUNE 30, 2002
YEAR ENDED YEAR ENDED PERIOD ENDED JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2002 (As Restated) ------------- ------------- ------------- NET SALES $ 1,508,656 $ -- $ -- COST OF SALES 1,185,797 -- -- ------------- ------------- ------------- GROSS PROFIT 322,859 -- -- EXPENSES General and administrative 3,160,257 3,104,192 904,083 Professional fees 4,264,156 1,714,475 1,198,622 Interest 4,534,947 29,900 303,875 Loss on disposal of investment 1,200,000 -- -- Impairment of goodwill 2,542,752 -- -- ------------- ------------- ------------- 15,702,112 4,848,567 2,406,580 ------------- ------------- ------------- NET LOSS $ (15,379,253) $ (4,848,567) $ (2,406,580) ============= ============= ============= BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.12) $ (0.05) $ (0.04) ============= ============= ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 130,782,481 106,687,447 68,735,272 ============= ============= =============
PAGE F-3 SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS ACCUPOLL HOLDING CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT For The Years Ended June, 30 2004 and 2003 and For The Period From August 9, 2001 (Inception) Through June 30, 2002
Common Stock Common Stock Additional Total -------------------------- Subscription Paid-in Accumulated Stockholder's Shares Amount Receivable Capital Deficit Deficit ----------- ------------ -------- ------------ ------------ ------------ Balance at August 9, 2001 (Inception) -- $ -- $ -- $ -- $ -- $ -- Issuance of common stock upon formation 61,280,000 61,280 -- (61,280) -- -- Issuance of common stock at $0.08 per share for the conversion of notes payable, including accrued interest of $16,375 3,724,292 3,724 -- 300,151 -- 303,875 Issuance of common stock at $0.08 per share for note receivable 612,800 613 -- 49,387 -- 50,000 Proceeds from the issuance of common stock at $0.08 per share in connection with the exercise of warrants 3,724,292 3,724 (12,500) 298,744 -- 289,968 Proceeds from the issuance of common stock at $0.12 per share in connection with the exercise of warrants 6,177,024 6,177 -- 750,004 -- 756,181 Issuance of common stock in connection with the merger with WIPC (including 18,400,000 shares issued to brokers) 18,639,000 18,639 -- (18,639) -- -- Issuance of common stock at $0.06 per share for services 4,800,000 4,800 -- 295,200 -- 300,000 Issuance of common stock at $0.08 per share for services 3,840,000 3,840 -- 309,504 -- 313,344 Estimated fair value of warrants granted in connection with convertible debt -- -- -- 287,500 -- 287,500 Estimated fair value of options and warrants granted for services -- -- -- 813,525 -- 813,525 Equity instruments subject to rescission -- -- -- (1,021,834) -- (1,021,834) Interest on equity instruments subject to rescission -- -- -- (12,137) -- (12,137) Net loss -- -- -- -- (2,406,580) (2,406,580) ----------- ------------ -------- ------------ ------------ ------------ Balance at June 30, 2002 (as restated) 102,797,408 $ 102,797 $(12,500) $ 1,990,125 $ (2,406,580) $ (326,158) =========== ============ ======== ============ ============ ============ Issuance of common stock at $0.91 for services 6,593 7 -- 5,993 -- 6,000 Issuance of common stock at $1.02 for services 32,862 33 -- 33,486 -- 33,519 Issuance of common stock at $1.04 for services 17,000 17 -- 17,663 -- 17,680 Issuance of common stock at $1.05 for services 207,142 207 -- 217,292 -- 217,499 Issuance of common stock at $1.17 for services 120,000 120 -- 140,280 -- 140,400 Issuance of common stock at $1.18 for services 6,667 7 -- 7,860 -- 7,867 Issuance of common stock at $1.20 for services 30,000 30 -- 35,970 -- 36,000 Issuance of common stock at $1.25 for services 8,500 9 -- 10,616 -- 10,625 Issuance of common stock at $1.40 for services 20,000 20 -- 27,980 -- 28,000 Issuance of common stock at $0.00 per share in connection with the cashless exercises of warrants 208,540 209 -- (209) -- -- Proceeds from the issuance of common stock at $0.06 per share in connection with the exercise of warrants 911,954 912 -- 56,201 -- 57,113 Proceeds from the issuance of common stock at $0.08 per share in connection with the exercise of warrants 245,120 245 -- 19,755 -- 20,000 Proceeds from the issuance of common stock at $0.12 per share in connection with the exercise of warrants 2,828,272 2,828 -- 343,113 -- 345,941 Proceeds from the issuance of common stock at $0.25 per share in connection with the exercise of warrants 200,000 $ 200 $ -- $ 49,800 $ -- $ 50,000
...continued PAGE F-4 SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS ...continued
Common Stock Common Stock Additional Total -------------------------- Subscription Paid-in Accumulated Stockholder's Shares Amount Receivable Capital Deficit Deficit ----------- ------------ -------- ------------ ------------ ------------ Proceeds from the issuance of common stock at $0.06 per share for cash 535,445 $ 535 $- $ 32,929 $- $ 33,464 Proceeds from the issuance of common stock at $0.12 per share for cash 3,642,480 3,642 -- 444,057 -- 447,699 Proceeds from the issuance of common stock at $0.25 per share for cash 840,000 840 -- 209,160 -- 210,000 Proceeds from the issuance of common stock at $0.30 per share for cash 52,280 52 -- 15,782 -- 15,834 Proceeds from the issuance of common stock at $0.40 per share for cash 62,500 63 -- 24,937 -- 25,000 Proceeds from the issuance of common stock at $0.47 per share for cash 95,200 95 -- 44,940 -- 45,035 Proceeds from the issuance of common stock at $0.50 per share for cash 50,000 50 -- 24,950 -- 25,000 Proceeds from the issuance of common stock at $0.95 per share for cash 28,000 28 -- 26,572 -- 26,600 Commissions paid for fund raising activity -- -- -- (281,944) -- (281,944) Beneficial conversion feature in connection with the issuance of convertible debt -- -- -- 50,000 -- 50,000 Estimated fair value of warrants granted in connection with note payable -- -- -- 20,000 -- 20,000 Estimated fair value of warrants granted for services -- -- -- 1,839,000 -- 1,839,000 Estimated fair value of options granted for services -- -- -- 273,084 -- 273,084 Liability incurred in connection with the issuance of warrants -- -- -- (113,750) -- (113,750) Equity instruments subject to rescission -- -- -- (3,185,309) -- (3,185,309) Interest on equity instruments subject to rescission -- -- -- (157,753) -- (157,753) Write off of subscriptions receivable -- -- 12,500 -- -- 12,500 Net loss -- -- -- -- (4,848,567) (4,848,567) ----------- ------------ -------- ------------ ------------ ------------ Balance at June 30, 2003 (as restated) 112,945,963 112,946 $ -- $ 2,222,580 $ (7,255,147) $ (4,919,621) =========== ============ ======== ============ ============ ============ Common stock issued for cash 6,553,857 6,554 -- 799,518 -- 806,072 Common stock issued for services 35,000 35 -- 34,915 -- 34,950 Proceeds from the issuance of common stock in connection with the exercise of warrants 20,502,794 20,503 -- 3,778,113 -- 3,798,616 Estimated fair value of warrants granted for services -- -- -- 786,000 -- 786,000 Liability incurred in connection with the issuance of warrants -- -- -- (50,010) -- (50,010)
...continued PAGE F-5 SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS ...continued
Common Stock Common Stock Additional Total -------------------------- Subscription Paid-in Accumulated Stockholder's Shares Amount Receivable Capital Deficit Deficit ----------- ------------ -------- ------------ ------------ ------------ Estimated fair value of warrants granted in connection with convertible debt -- -- -- 362,800 -- 362,800 Common stock issued in connection with conversion of convertible debt and accrued interest 3,881,250 3,881 -- 772,369 -- 776,250 Beneficial conversion feature in connection with the issuance of convertible debt -- -- -- 3,641,800 -- 3,641,800 Issuance of common stock in connection with cashless exercise of options 6,030,307 6,030 -- (6,030) -- -- Commissions paid for fund raising activity -- -- -- (277,000) -- (277,000) Acquisition of Z Prompt 8,533,000 8,533 -- 1,804,729 -- 1,813,262 Equity instruments subject to rescission -- -- -- (1,500,967) -- (1,500,967) Interest on equity instruments subject to rescission -- -- -- (322,000) -- (322,000) Net loss -- -- -- -- (15,379,253) (15,379,253) ----------- ------------ -------- ------------ ------------ ------------ Balance at June 30, 2004 158,482,171 $ 158,482 $ -- $ 12,046,817 $(22,634,400) $(10,429,101) =========== ============ ======== ============ ============ ============
PAGE F-6 SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS ACCUPOLL HOLDING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended June 30, 2004 and 2003, and FOR THE PERIOD FROM AUGUST 9, 2001 (INCEPTION) THROUGH JUNE 30, 2002
YEAR ENDED YEAR ENDED PERIOD ENDED Cash flows from operating activities: JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2002 (AS RESTATED) ---------------------------------------------- Net loss $(15,379,253) $ (4,848,567) $ (2,406,580) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 245,408 -- -- Loss on disposal of fixed assets 12,640 -- -- Estimated fair value of warrants granted in connection with notes payable -- 20,000 287,500 Estimated fair value of options and warrants granted for services 786,000 2,112,084 813,525 Estimated fair value of common stock issued for services 34,950 497,590 327,344 Amortization of estimated fair value of warrants granted and beneficial conversion feature in connection with the issuance of convertible notes payable 4,054,600 -- -- Convertible debt issued for services 1,276,000 -- -- Loss on disposal of investment 1,200,000 -- -- Impairment of goodwill 2,542,752 -- -- Accrued interest related to the conversion of notes payable -- -- 16,375 Write off of subscription receivable -- 12,500 -- Write off of prepaid consulting -- 286,000 -- Changes in operating assets and liabilities: Accounts receivable (209,939) -- -- Inventories (73,300) -- -- Prepaid expenses 2,500 (2,500) -- Other assets 128,996 -- -- Accounts payable and accrued expenses 622,237 755,211 176,292 Related party payables 358,327 10,000 151,020 Increase in capitalized software development costs (1,371,600) (530,013) (111,966) ------------ ------------ ------------ Net cash used in operating activities (5,769,682) (1,687,695) (746,490) ------------ ------------ ------------ Cash flows from investing activities: Increase in deferred acquisition costs -- (144,206) -- Purchases of property and equipment (11,135) -- -- Proceeds from related party note receivable -- 300,000 (300,000) Cash of acquired entity 2,368 -- -- ------------ ------------ ------------ Net cash provided by (used in) investing activities (8,767) 155,794 (300,000) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from the issuance of notes payable to related parties 210,950 175,000 -- Principal payments of notes payable to related parties (195,000) -- -- Proceeds from issuance of convertible debt 1,528,600 50,000 287,500 Borrowings on line-of-credit 20,000 -- -- Proceeds from the issuance of common stock 806,072 546,688 -- Proceeds from issuance of common stock upon exercise of warrants, net 3,521,616 473,054 1,046,149 ------------ ------------ ------------ Net cash provided by financing activities 5,892,238 1,244,742 1,333,649 ------------ ------------ ------------ Net increase (decrease) in cash 113,789 (287,159) 287,159 Cash at beginning of period -- 287,159 -- ------------ ------------ ------------ Cash at end of period $ 113,789 $ -- $ 287,159 ============ ============ ============ Supplemental disclosure of cash flow information - Cash paid during the period for: Interest (none paid in cash) $ -- $ -- $ -- ============ ============ ============ Income taxes $ 800 $ 800 $ 800 ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND OPERATING ACTIVITIES See accompanying notes to the consolidated financial statements for information relating to non-cash investing and financing activities concerning prepaid consulting fees, issuance of common stock related to convertible debt and warrants, issuance of preferred stock, increase in capitalized software development costs, beneficial conversion features and related party payables. PAGE F-7 SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS AccuPoll Holding Corp. Notes to Consolidated Financial Statements June 30, 2004 NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AccuPoll Holding Corporation, a Nevada corporation (the "parent company"), principally operates through its wholly owned subsidiary AccuPoll, Inc., which was incorporated on August 9, 2001 in Delaware. The parent company is engaged in the design and development of a voting system with an intuitive touch-screen interface (the "Voting System") that provides a polling place electronic voting solution that is reliable, accurate, immediate, secure, easy to use, confidential and auditable. The Voting System has the ability to simultaneously produce two different electronic audit trails (recorded on both the polling place administrative work station and the local voting station), in addition to generating a printed-paper ballot. The parent company completed a reverse acquisition with a publicly traded company (see Note 2) in May 2002, and its common stock is quoted on the Over-The-Counter Bulletin Board under the symbol "ACUP." For financial reporting purposes, the parent company was classified as a development stage enterprise until November 2003. PRINCIPLES OF CONSOLIDATION GENERAL The accompanying consolidated financial statements include the accounts of the parent company and its wholly-owned subsidiary AccuPoll, Inc. In addition, the accounts of Z prompt, Inc. ("Z prompt"), a wholly-owned subsidiary, are included in such financial statements from November 1, 2003. All significant inter-company balances and transactions have been eliminated in consolidation. Except where the context requires otherwise, the entities named in the preceding paragraph are hereinafter collectively referred to as the "Company." BANKRUPTCY OF Z PROMPT As discussed in Note 12, Z prompt filed voluntary bankruptcy in March 2004. Although the Company is not presently a member of the unsecured creditors committee that was formed in connection with the bankruptcy proceedings, the Company is the single largest pre-petition creditor of Z prompt. F-8 In addition, as described in Note 6, the Company and certain of its officers and principal stockholders are presently involved in civil litigation with certain former stockholders and officers of Z prompt. Management has determined that it would not be meaningful to de-consolidate the accounts of Z prompt at this time because the Company (a) has a substantial negative investment in Z prompt as of June 30, 2004, and (b) expects to re-gain control of this subsidiary based on the expectation that Z prompt will be able to negotiate a confirmed reorganization plan and emerge from bankruptcy by approximately March of 2005. See Note 3 for additional information regarding Z prompt. AFFILIATED ENTITY As further explained below in the "Variable Interest Entity" section of this note, the accounts of affiliate Web Tools International, Inc. ("WTI") were consolidated with those of the Company as of January 1, 2004 in accordance with Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 46. For reasons discussed in Note 5, WTI was de-consolidated as of April 1, 2004. GOING CONCERN/LIQUIDITY CONSIDERATIONS The Company has not generated any revenues from its Voting System operations, and there is no assurance of any future revenues. The Company will require substantial additional funding for continuing the development, obtaining regulatory approval, and commercialization of its product. There is no assurance that the Company will be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to the Company. Management has taken actions to address these matters, which include: o Retention of experienced management personnel with particular skills in the commercialization of such products; o Attainment of technology to develop such products and additional products; and o Raising additional funds through the sale of debt and/or equity securities. Federal, State and various foreign government regulations govern the sale of the Company's products. There can be no assurance that the Company will receive the regulatory approval required to market its proposed products. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. The Company has incurred losses through June 30, 2004, has negative working capital at that date of approximately $6.8 million, and has a lack of operational history which, among other factors, F-9 raise substantial doubt about its ability to continue as a going concern. The Company intends to fund operations through sales of the Voting System, but there is no commitment by any entities for the purchase of any of the proposed products. In the absence of significant sales and profits, the Company may seek to raise additional funds to meet its working capital requirements through debt and/or equity financing arrangements. Management believes that such arrangements, combined with the net proceeds from the transaction described in Note 18, will be sufficient to fund the Company's capital expenditures, working capital needs and other cash requirements for the year ending June 30, 2005. The successful outcome of future activities cannot be determined at this time, and there is no assurance that, if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results. These circumstances, combined with the potential liability described in Note 10, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. OTHER RISKS AND UNCERTAINTIES The Company intends to operate in an industry that is subject to intense competition, government regulation and technological change. The Company's operations are subject to significant risks and uncertainties including financial, operational, technological, regulatory and other risks associated with an emerging business, including the potential risk of business failure. From time to time, the Company maintains cash balances at certain institutions in excess of the FDIC limit of $100,000. USE OF ESTIMATES The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include realization of long-lived assets, equity instruments subject to rescission, valuation of stock options and warrants, and the continued consolidation of a wholly-owned subsidiary in bankruptcy. Actual results could differ from those estimates. SOFTWARE DEVELOPMENT COSTS In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," F-10 the Company capitalizes certain costs related to the development of new software products or the enhancement of existing software products for sale or license. These costs are capitalized from the point in time that technological feasibility has been established, as evidenced by a working model or detailed working-program design to the point in time that the product is available for general release to customers. Capitalized software development costs are amortized on a straight-line basis over the three-year estimated economic life of the products, beginning (as applicable) with the general product release to customers or when the Voting System qualified under certain federal standards. Research and development costs incurred prior to establishing technological feasibility and costs incurred subsequent to the events described in the preceding sentence are charged to expense as incurred. The Company periodically evaluates whether events or circumstances have occurred that indicate that the remaining useful lives of the capitalized software development costs should be revised or that the remaining balance of such assets may not be recoverable. At June 30, 2004, management believes that no revisions to the remaining useful lives or write-down of capitalized software development costs are required. The Company began amortizing its capitalized software development costs in April 2004, following the March 2004 qualification of its Voting System as complying with certain federal voting system standards; at June 30, 2004, accumulated amortization approximated $ 230,000. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments when it is practicable to estimate that value. The carrying amount of the Company's accounts payable and accrued expenses approximates their estimated fair values due to the short-term maturities of those financial instruments. In the opinion of management, the fair value of payables to related parties cannot be estimated without incurring excessive costs; for that reason, the Company has not provided such disclosure. Other information about related-party liabilities (such as the carrying amount, the interest rate, and the maturity date) is provided, where applicable, elsewhere in these notes to consolidated financial statements. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation issued to employees using the intrinsic value based method as prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Under the intrinsic value based method, compensation is the excess, if any, of the fair value of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Compensation, if any, is recognized over the applicable service period, which is usually the vesting period. F-11 SFAS No. 123, "Accounting for Stock-Based Compensation," if fully adopted, changes the method of accounting for employee stock-based compensation to the fair value based method. In addition, under this pronouncement, the fair value of options and warrants issued to non-employees is estimated using an option pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the equity instrument, and the annual rate of quarterly dividends. Compensation expense, if any, is recognized over the applicable service period, which is usually the vesting period. FIN No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB 25," clarifies the application of APB 25 for (a) the definition of "employee" for purposes of applying APB 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (d) accounting for an exchange of stock compensation awards in a business combination. Management believes that the Company accounts for transactions involving stock-based employee compensation in accordance with FIN No. 44. SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS 123," was issued in December 2002 and is effective for fiscal years ended after December 15, 2002. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about (a) the method of accounting for stock-based employee compensation and (2) the effect of the method used on reported results. The adoption of the accounting methodology of SFAS No. 123 is optional for stock-based employee compensation, and the Company has elected to continue accounting for options issued to employees using APB 25. However, pro forma disclosures, as if the Company adopted the cost recognition requirements of SFAS No. 123, are required to be presented. At June 30, 2004, the Company has no stock-based employee compensation plans; however, there have been non-plan options granted by the Company to certain employees. There is no stock-based employee compensation expense reflected in net loss for fiscal 2004, fiscal 2003, or for the period from August 9, 2001 (Inception) through June 30, 2002 because options granted to employees had an exercise price equal to or greater than the market value of the underlying common stock on the grant date. The following table illustrates the effect on net loss and loss per common share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation. F-12
PERIODS ENDED JUNE 30, 2004 2003 2002 ----------- ----------- ----------- Net loss attributable to common stockholders * $(15,701,253) $(5,006,567) $(2,418,717) Add: total stock-based employee compensation expense determined under fair value based method for all awards (1,421,100) (598,230) (68,340) ----------- ----------- ----------- Pro-forma $(17,122,353) $(5,604,797) $(2,487,057) =========== =========== =========== Basic and diluted loss per common share: As reported $ (0.12) $ (0.05) $ (0.04) =========== =========== =========== Pro-forma $ (0.13) $ (0.05) $ (0.04) =========== =========== ===========
* These amounts include interest related to certain equity instruments subject to rescission (see Note 10). BENEFICIAL CONVERSION FEATURE The convertible feature of a note payable (see Note 4) provides for a rate of conversion that is below market value. This feature is normally characterized as a beneficial conversion feature ("BCF"). Pursuant to Emerging Issues Task Force ("EITF") Issue No. 98-5 ("EITF 98-5"), "Accounting For Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratio," and EITF Issue No. 00-27, "Application of EITF Issue No. 98-5 To Certain Convertible Instruments," the Company has estimated the fair value of such BCF to approximate $50,000 for the year ended June 30, 2003 and none for the period ended June 30, 2002. In connection with its fiscal 2004 borrowings under several convertible notes payable, the Company recorded and amortized BCFs of approximately $3,640,000 (including the transactions described in Notes 4, 13 and 14) during the year ended June 30, 2004. INVENTORIES Inventories are stated at the lower of cost or estimated market, and consist entirely of finished goods (Voting System machines). Cost is determined on a weighted average basis that approximates the first-in, first-out method. Market is estimated by comparison with recent purchases or net realizable value. The net realizable value is estimated based on management's forecast for sales of the Company's products or services in the ensuing years. The industry in which the Company operates is characterized by technological advancement and change. Should demand for the Company's products prove to be significantly less than anticipated, the ultimate realizable value of the Company's inventory could be substantially less than the amount shown in the accompanying consolidated balance sheets. F-13 REVENUE RECOGNITION The Company records sales when goods are shipped to the customer or upon the completion of the service. Amounts received prior to the completion of the earnings process, such as maintenance contracts paid in advance, are included in deferred revenues in the accompanying consolidated balance sheets. The Securities and Exchange Commission (the "SEC") has issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition," which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosures related to revenue recognition policies in financial statements filed with the SEC. Management believes that the Company's revenue recognition accounting policy conforms to SAB 104. INDEFINITE-LIFE INTANGIBLE ASSETS Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired. The Company has applied the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," in accounting for goodwill. SFAS No. 142 requires that goodwill and other intangible assets that have indefinite lives not be amortized, but instead be tested at least annually for impairment when events or changes in circumstances indicate that the asset might be impaired. For indefinite-life intangible assets, impairment is tested by comparing the carrying value of the asset to the estimated fair value of the reporting unit to which they are assigned. The Company recorded an impairment charge approximating $2,543,000 to write-off all of the goodwill associated with the acquisition of Z Prompt described in Note 3. IMPAIRMENT OF LONG LIVED-ASSETS The Company periodically evaluates the carrying value of its long-lived assets under the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets, and supersedes (a) SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and (b) the accounting and reporting provisions of APB Opinion No. 30 ("Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions") for the disposal of a segment of a business as previously defined in that Opinion. SFAS No. 144 also amends Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation of a subsidiary when control is likely to be temporary. SFAS No. 144 requires impairment losses to be recorded on long-lived assets used in operations, including amortizable intangible assets when indicators of impairment are present. Indicators of impairment include an economic downturn or a change in the assessment of F-14 future operations. In the event a condition is identified that may indicate an impairment issue, an assessment is performed using a variety of methodologies, including analysis of undiscounted future cash flows, estimates of sales proceeds and independent appraisals. If such assets are impaired, the expense recognized is the amount by which the carrying amount of the asset exceeds the estimated fair value. Assets to be disposed of are reported at the lower of the carrying value or the estimated fair market value, less cost to sell. On March 31, 2004, the Company's wholly-owned subsidiary Z prompt filed bankruptcy (see Note 12). In connection with the bankruptcy filing, the Company recorded an impairment charge approximating $2,543,000 to write-off all of the goodwill associated with the acquisition of this subsidiary (see Note 3). INCOME TAXES Deferred income taxes reflect the estimated tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes. The Company records a valuation allowance for deferred tax assets when, based on management's best estimate of taxable income (if any) in the foreseeable future, it is more likely than not that some portion of the deferred tax assets may not be realized. ADVERTISING The Company expenses the cost of advertising as incurred. Advertising expense approximated $170,000, $310,000, and $90,000 for the years ended June 30, 2004 and 2003 and for the period from August 9, 2001 (Inception) through June 30, 2002, respectively. RESEARCH AND DEVELOPMENT Certain expenditures for research and development activities relating to product development and improvement are charged to expense as incurred. Such expenditures approximated $175,000 for the period August 9, 2001 (Inception) through June 30, 2002. There were no such expenditures for the year ended June 30, 2003. The Company incurred approximately $137,000 for development of its products during fiscal 2004. F-15 LOSS PER COMMON SHARE Under SFAS No. 128, "Earnings per Share," basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares assumed to be outstanding during the period of computation. Diluted earnings per common share is computed similar to basic earnings per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and the additional common shares were dilutive (approximating 75,000,000, 31,700,000, and 28,200,000 shares at June 30, 2004, 2003 and 2002, respectively), based on the treasury stock method. Because the Company has incurred net losses, basic and diluted loss per common share are equal because additional potential common shares would be anti-dilutive. PERIODS ENDED JUNE 30, 2004 2003 2002 ----------- ----------- ------------ Net loss, as reported $(15,379,253) $(4,848,567) $(2,406,580) Interest related to equity instruments subject to rescission (322,000) (158,000) (12,137) ----------- ----------- ------------ Net loss available to common stockholders $(15,701,253) $(5,006,567) $(2,418,717) =========== =========== ============ Shares used to compute basic and diluted loss per common share: Weighted-average common shares 130,782,481 106,687,447 68,735,272 =========== =========== ============ Basic and diluted loss per common share $ (0.12) $ (0.05) $ (0.04) =========== =========== ============ DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES SFAS No. 133, "Accounting For Derivative Instruments and Hedging Activities" (as amended by SFAS Nos. 137, 138, 140, 141 and 145), establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet at their fair value. The Company has no derivatives or hedging activities as of June 30, 2004 or June 30, 2003. COMPREHENSIVE INCOME F-16 SFAS No. 130, "Reporting Comprehensive Income," establishes the standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The adoption of SFAS 130 has not materially impacted the Company's financial position or results of operations. SEGMENT INFORMATION SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," changed the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the products and services an entity provides, the foreign countries in which it holds significant assets and its major customers. At June 30, 2004 and 2003, the Company operates in one segment, as disclosed in the accompanying consolidated statements of operations. VARIABLE INTEREST ENTITY In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51." The primary objectives of FIN No. 46 are to provide guidance on the identification of entities for which control is achieved through means other than voting rights (variable interest entities, or "VIEs"), and how to determine when and which business enterprise (if any) should consolidate the VIE. This new model for consolidation applies to an entity for which either: (a) the equity investors do not have a controlling financial interest; or (b) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. As amended in December 2003, the effective dates of FIN No. 46 for the Company are as follows: (a) For interests in special-purpose entities: the first period ended after December 15, 2003; and (b) For all other types of VIEs: the first period ended after March 15, 2004. The Company is associated with WTI through common ownership; in addition, until April 2004 the Company was a major customer of WTI for software development services. (WTI derived approximately 75% and 98% of their revenue from services provided to the Company for the year ended June 30, 2003 and the seven months ended January 31, 2004, respectively.) Based on these and other factors, the Company determined that, as of January 1, 2004, (i) WTI is a VIE and (ii) the Company was its primary beneficiary. Therefore, effective January 1, 2004, the accounts of WTI were consolidated with those of the Company. For reasons explained in Note 5, the accounts of WTI were de-consolidated effective April 1, 2004. F-17 SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. This pronouncement is effective for contracts entered into or modified after June 30, 2003 (with certain exceptions), and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity, and is effective for public companies as follows: (i) in November 2003, the FASB issued FASB Staff Position ("FSP") FAS 150-03 ("FSP 150-3"), which defers indefinitely (a) the measurement and classification guidance of SFAS No. 150 for all mandatorily redeemable non-controlling interests in (and issued by) limited-life consolidated subsidiaries, and (b) SFAS No. 150's measurement guidance for other types of mandatorily redeemable non-controlling interests, provided they were created before November 5, 2003; (ii) for financial instruments entered into or modified after May 31, 2003 that are outside the scope of FSP 150-3; and (iii) otherwise, at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS No. 150 on the aforementioned effective dates. The adoption of this pronouncement did not have a material impact on the Company's results of operations or financial condition. In December 2003, the FASB issued a revision of SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. This pronouncement ("SFAS No. 132-R") expands employers' disclosures about pension plans and other post-retirement benefits, but does not change the measurement or recognition of such plans required by SFAS No. 87, No. 88, or No. 106. SFAS No. 132-R retains the existing disclosure requirements of SFAS No. 132, and requires certain additional disclosures about defined benefit post-retirement plans. Except as described in the following sentence, SFAS No. 132-R is effective for foreign plans for fiscal years ending after June 15, 2004; after the effective date, restatement for some of the new disclosures is required for earlier annual periods. Some of the interim-period disclosures mandated by SFAS No. 132-R (such as the components of net periodic benefit cost, and certain key assumptions) are effective for foreign plans for quarters beginning after December 15, 2003; other interim-period disclosures will not be required for the Company until the first quarter of 2005. Since the Company does not have any defined benefit post-retirement plans, the adoption of this pronouncement did not have any impact on the Company's results of operations or financial condition. F-18 Other significant recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC are discussed elsewhere in these notes to the consolidated financial statements. In the opinion of management, significant recent accounting pronouncements did not or will not have a material effect on the consolidated financial statements, other than FIN No. 46 as discussed above. STOCK DIVIDEND Effective July 18, 2002, the Company's Board of Directors approved a stock dividend that was accounted for as a four-for-one stock split. All references throughout these consolidated financial statements and notes to the number of shares, per share amounts, stock options, and market prices of the Company's common stock have been restated to reflect such stock dividend. EQUITY INSTRUMENTS SUBJECT TO RESCISSION The Company accounts for common stock and other equity instruments that may be subject to rescission claims at estimated fair value (based on applicable measurement criteria) in accordance with the SEC's promulgated accounting rules and interpretive releases. Since equity instruments subject to rescission are redeemable at the holder's option or upon the occurrence of an uncertain event not solely within the Company's control, such equity instruments are outside the scope of SFAS No. 150 and its related interpretations. Under the SEC's interpretation of GAAP, reporting such claims outside of stockholders' equity (as "mezzanine equity") is required, regardless of how remote the redemption event may be. RESTATEMENTS AND RECLASSIFICATIONS As previously reported, the accompanying June 30, 2003 consolidated balance sheet has been restated to reflect equity instruments subject to rescission, and the financial statements described in Note 11 have been restated as explained therein. All financial information included in these notes to consolidated financial statements that relates to the quarters ended September 30, 2003 and December 31, 2003 reflects (a) the applicable adjustments described in the amended Form 10-Q's for such periods, and (b) the restatement of the balance sheets as of those dates to reflect equity instruments subject to rescission. In addition, all financial information included in these notes to consolidated financial statements for the first three quarters of fiscal 2003 has been adjusted as described in Note 9. As of the effective date of SFAS No. 150 (see above), management reclassified the June 30, 2003 balance (approximately $114,000) of the put liability related to warrant issuances from "mezzanine equity" to the liability section of the Company's consolidated balance sheet. F-19 Certain reclassifications have been made to the 2003 and 2002 financial statement presentation to conform to the current year's presentation. NOTE 2 REVERSE ACQUISITION On May 20, 2002, Western International Pizza Corporation ("WIPC"), a publicly traded company, entered into a Stock Exchange Agreement (the "Exchange Agreement") with AccuPoll, Inc ("AccuPoll") in a tax-free share exchange under Section 368(a)(1)(B) of the Internal Revenue Code. Such transaction was accounted for as a reorganization. In May 2002, pursuant to a Certificate filed with the Nevada Secretary of State, WIPC effected a one for 2000 reverse split of all the outstanding shares of its common stock. Thereafter, in May 2002, WIPC effected a 1 for 5 reverse stock split of all the outstanding shares of its common stock. Pursuant to the Exchange Agreement, all of the outstanding common and preferred stock and outstanding warrants of AccuPoll were exchanged for shares of WIPC on a 1 for 1.532 basis. By virtue of the reorganization, the stockholders of AccuPoll acquired 75,500,000 restricted common shares of WIPC. Management accounted for the reorganization as a capital stock transaction. Accordingly, the reorganization was reported as a recapitalization of the Company and AccuPoll is considered the acquirer for accounting purposes. Through its former stockholders, the Company is deemed the acquirer for accounting purposes because of (a) its majority ownership of WIPC, (b) its representation on WIPC's board of directors, and (c) the executive management positions held by former officers of AccuPoll. In connection with the reverse acquisition, the Company issued 4.8 million shares of restricted common stock at $0.06 per share (estimated to be the fair value of the services rendered) to a broker. The related $300,000 was expensed during the period ended June 30, 2002. NOTE 3 PURCHASE OF BUSINESS On April 9, 2003, the Company entered into an agreement with Z prompt (a California corporation) to purchase all of the outstanding capital stock of Z prompt from its stockholders in exchange for 8 million shares of the Company's restricted common stock. The primary reason for this purchase was to acquire a nationwide network of qualified computer hardware technicians who could assist with the maintenance of the AccuPoll Ballot Buddy product - specifically its integrated printer. Additionally, the Company was required to settle an outstanding promissory note of Z prompt in the principal amount of approximately $400,000 that was held by a former stockholder of Z prompt, in exchange for 533,000 shares of restricted common stock of the Company. The Company advanced Z Prompt approximately $144,000 in connection with the acquisition; such F-20 advances were initially recorded as deferred acquisition costs because of the contingency described in the following paragraph. The agreement between AccuPoll and the Z prompt stockholders provided that the transaction could be rescinded by the former Z prompt shareholders if AccuPoll's electronic voting system was not certified by Wyle Labs by September 30, 2003. Such certification was obtained on October 31, 2003; accordingly, the Z prompt acquisition was recorded for accounting purposes in November 2003. Based on an independent valuation, the estimated fair value of AccuPoll's common stock issued for the Z prompt acquisition approximated $1.8 million ($0.213 per common share). Among other factors, the valuation utilized information from then-recent issuances of the Company's common stock in equity-raising transactions. The purchase price was allocated to the business acquired based on the estimated fair value of the assets acquired and liabilities assumed, as follows: Assets $ 183,329 Goodwill 2,542,752 Liabilities (912,819) ----------- $ 1,813,262 =========== The results of operations of Z prompt are included in the accompanying consolidated financial statements from November 1, 2003. The following pro forma summary presents condensed consolidated results of operations as if Z prompt had been acquired as of the beginning of the years ended June 30, 2004 and 2003: YEAR ENDED JUNE 30 2004 2003 ------------- ------------- Net loss $(14,043,675) $ (5,761,013) ============= ============= Loss per common share $ (0.11) $ (0.05) ============= ============= The above amounts are based upon certain assumptions and estimates, which the Company believes are reasonable. The pro forma results of operations do not purport to necessarily be F-21 indicative of the results which would have been obtained had the business combination occurred as of the beginning of the aforementioned years, or which may be obtained in fiscal 2005 and thereafter. See Notes 6 and 12 for additional information related to Z Prompt. NOTE 4 CONVERTIBLE NOTE PAYABLE We have a convertible debenture which at the discretion of the convertible debenture grantor (the "Grantor") may provide us loans of up to $1,250,000. The convertible debenture bears interest at an annual rate of 10% and originally matured on June 30, 2004, but has been extended to December 31, 2004. The debenture is convertible on ninety days written notice by Grantor at the lesser of (i) 50% of the average three lowest closing prices for our common stock for the twenty days immediately preceding the conversion date or (ii) $0.625 per share. At June 30, 2004, we had borrowed $872,000 under such debenture. In connection with such borrowing, the Company granted a warrant to purchase 6,400,000 shares of the Company's restricted common stock at an exercise price of $0.06 per common share. The warrant vested upon grant and expires in July 2008. The Company recorded the relative fair value of the warrant and the beneficial conversion feature as a debt discount in the total amount of approximately $200,000. The discount associated with the warrant is being amortized to interest expense over the term of the related debt. The discount associated with the beneficial conversion feature was insignificant, and was recorded as interest expense upon issuance. In November 2003, the Company issued an additional warrant to the Grantor to purchase 6 million shares of the Company's restricted common stock at an exercise price of $0.06 per share in connection with a deferral of the maturity date of the above convertible debt instrument to December 2004 and an increase of the available borrowings to $1,250,000 from the original amount of $600,000. The warrant vested upon grant and expires in October 2008. The Company recorded the relative fair value of the warrant, which approximated $40,000, as a debt discount which is being amortized to interest expense over the extended term of the convertible debenture. See Notes 13 and 14 for other convertible notes payable. NOTE 5 RELATED PARTY TRANSACTIONS RELATED PARTY PAYABLES Related party payables approximated $1,487,000 and $875,000 at June 30, 2004 and 2003, respectively, which represent expenses incurred by the Company relating to the management services agreement entered into with WTI (see below). The amounts bear no interest and are due within thirty days of receipt. NOTES PAYABLE TO RELATED PARTIES During the year ended June 30, 2003, the Company borrowed an aggregate of $165,000 for working capital purposes from a related party. The note calls for interest at 8% and is due on demand. Per the note agreement, the Company issued the creditor warrants (with an estimated value of $20,000) to purchase 40,000 shares of restricted common stock of the Company. At June 30, 2004, this note was paid in full. MASTER SERVICES AGREEMENT F-22 In April 2002, the Company entered into a Master Services Agreement (the "Services Agreement") whereby WTI provided substantially all non-production services related to the Company's Voting System. Under the Services Agreement, the Company was charged hourly rates for the services of WTI employees who worked on developing the computer software for the Company's Voting System. In addition, the Company paid WTI for all reimbursable expenses, as defined in the Services Agreement. The Company was not charged for the use of the office space or fixed assets of WTI; overhead-related charges were included in the basic hourly rates charged by WTI to the Company. All inventions, concepts, know-how, methodologies, processes, algorithms, techniques, compilations, software and other works of authorship of any nature created or developed by WTI during the life of the Services Agreement remain the exclusive property of AccuPoll. WTI, which was incorporated in 1996, is in the business of software engineering in various computer languages with an emphasis on Linux/Apache, Sun Solaris, and Microsoft NT/Win2K platforms. WTI is owned and operated by Dennis Vadura and Frank Wiebe. Mr. Vadura is the Company' chief executive officer, a director, and a principal stockholder; Mr. Wiebe is the Company's president and treasurer, a director, and a principal stockholder (collectively the "controlling stockholders"). During the years ended June 30, 2004 and 2003, WTI invoiced approximately $1,450,000 and $1,300,000, respectively, to the Company under the terms of the Services Agreement, of which approximately $1,487,000 is due and payable at June 30, 2004. The Services Agreement expired on March 31, 2004. Since that date, the Company has not used the services of WTI because the software for the Voting System is now substantially complete; any additional computer programming that may be necessary will be provided by Company employees (some of whom are former WTI employees). At this time, WTI is virtually a dormant entity with just two minor customers and only a few employees. Although the Company's June 30, 2004 payable to WTI is a substantial amount (see the preceding paragraph), there is no intent to pay this liability in the foreseeable future. Given its minimal operations at this time, management believes that WTI is no longer dependent for its continued existence upon additional subordinated financial support from the Company or its controlling stockholders. For these reasons, management has concluded that the Company is no longer the primary beneficiary of WTI and, therefore, has de-consolidated the accounts of WTI as of April 1, 2004. NOTE 6 OTHER COMMITMENTS AND CONTINGENCIES CONSULTING AGREEMENTS F-23 In April 2002, the Company issued consultants 3,840,000 shares of common stock at $0.08 per share, valued at $313,344 (based on the market value on the date of grant), of which $286,000 was included in the June 30, 2002 consolidated balance sheet as prepaid consulting fees and $27,344 was expensed during the period ended June 30, 2002. The related consulting services were to be provided through April 2004, and the Company was amortizing the prepaid consulting fees over the service period on a straight-line basis. As part of the same transaction, the Company granted warrants to purchase 2 million shares of its restricted common stock at an exercise price of $0.06 per share, valued at $500,000 (based on the Black-Scholes pricing model) to such consultants as a non-refundable fee in exchange for general business consulting services, which the Company recorded in the accompanying consolidated statement of operations for the period ended June 30, 2002. During the year ended June 30, 2003, the Company determined it was no longer receiving benefit from the consultant and expensed the remaining $286,000 in the accompanying consolidated statement of operations for the year ended June 30, 2003. LITIGATION Z prompt In October 2003, a former officer and principal stockholder of Z prompt (the "plaintiff") filed a lawsuit against the Company and Z prompt (hereinafter collectively referred to as the "defendants") alleging breach of contract, conversion, and fraud relating to (a) the plaintiff's employment contract with Z prompt, (b) the merger agreement described in Note 3, and/or (c) a Z prompt promissory note (approximately $167,000 plus interest) payable to the plaintiff. The plaintiff is seeking minimum compensatory damages (including deferred salary and collection of the promissory note) of approximately $1.6 million, an unstated amount in excess of $1 million based on the fraud allegation, and punitive damages according to proof. In December 2003, the defendants sued the plaintiff in a cross-complaint, alleging (among other things) breach of good faith/fair dealing covenant, breach of contract, fraud, misrepresentation, negligence, and breach of fiduciary duty. The cross-complainants are seeking (a) compensatory damages of approximately $1,960,000, (b) the rescission of all agreements between the plaintiff and the defendants (such as the aforementioned merger agreement), (c) the cancellation of all Company stock currently owned by the plaintiff, and (d) punitive damages in an unstated amount. This cross-complaint was amended in February 2004 to name two other former officers/stockholders of Z prompt as additional defendants. In January of 2004, the plaintiff amended his complaint to name certain officers/stockholders of the Company as additional defendants, alleging fraud and interference with contract. This action seeks compensatory damages in excess of $2 million and punitive damages according to proof. In June 2004, the Bankruptcy Court granted the plaintiff relief from the automatic stay provided by the Bankruptcy Code (see Note 12) regarding the litigation described above, and the matter F-24 is presently scheduled for trial in Orange County (California) Superior Court in January 2005. In the same action, Z prompt agreed to withdraw its motion in Bankruptcy Court seeking rejection of the executory contracts described above. Management intends to vigorously defend the October 2003 lawsuit described above (as amended), and does not believe that the plaintiff's recovery (if any) of uninsured damages will have a material adverse effect on the Company's consolidated financial statements. GENERAL From time to time, the Company may be involved in various claims, lawsuits or disputes arising in the normal operations of its business. Other than the matter described in Note 10, the Company is not currently involved in any such matters which management believes could have a material adverse effect on the Company's financial position or results of operations. Exclusive Supply Agreement In December 2001, the Company entered into an exclusive supply contract expiring in 2006 with a vendor to manufacture the Voting System product. Per the agreement, if the supplier is unable to produce and deliver on time the required quantity of product, the Company may obtain the Voting System product from another supplier. PROFESSIONAL The Company has entered into general consulting/lobbying agreements with various third parties to provide services related to the marketing and sale of the Company's product in certain cities; such agreements expired through April 2004. Pursuant to the agreements, the Company will pay commissions on sales within the various territories, as defined. During the year ended June 30, 2003, the Company entered into a Location Incentives Agreement (the "LIA") with the Amarillo Economic Development Corporation ("AEDC") to establish the Company's customer service center and voting machine repair operations in Amarillo, Texas. According to the terms of the LIA, the AEDC paid the Company $250,000 upon execution of a lease for facilities in Amarillo. The funds advanced under the LIA are to be used solely for the operations in Amarillo. If the Company does not meet certain minimum employment requirements (as defined in the LIA), it will be required to repay all amounts advanced. The Company has recorded the advance in the accompanying consolidated balance sheets in accounts payable and accrued expenses. In connection with the LIA, the Company granted warrants to purchase 250,000 shares of its restricted common stock at an exercise price of $1.04 per share, valued at approximately $174,000 based on the Black-Scholes pricing model. The warrants vested on the grant date, and expire in November 2012. LEASE COMMITMENTS The Company rents office space under operating lease agreements which expire at various dates through June 30, 2006. The minimum annual rent under such leases approximates $170,000 in fiscal 2005 and $130,000 in fiscal 2006. NOTE 7 STOCKHOLDERS' EQUITY PREFERRED STOCK F-25 In December 2003, the Company entered into an agreement to issue 8,471 shares of its cumulative convertible Series A Preferred Stock ("Series A") and $1,200,000 of convertible notes payable in exchange for 3,325,000 shares of free trading common stock of Material Technologies, Inc., a publicly traded company whose common stock is quoted on the Over-The-Counter Bulletin Board under the symbol "MTNA." In attempting to execute such transaction, the Company's intent was to gain access to capital markets through the potential sale of MTNA common stock. The Company has not filed a certificate of designation with respect to any series of preferred stock. On May 7, 2004, management entered into an agreement whereby the Company exchanged the 3,325,000 shares of common stock of Material Technologies, Inc. for the 8,471 shares of Series A. Accordingly, as of May 7, 2004, no preferred stock was issued or outstanding. However, the Company remains liable on the $1.2 million convertible note payable; see Note 14 for additional information. The accounting adjustment for the transaction described in the preceding paragraph has been reflected in the accompanying June 30, 2004 consolidated financial statements of the Company as "loss on disposal of investment". This adjustment of the Company's financial statements increased the previously reported net loss for the quarter ended December 31, 2003 by approximately $1.2 million ($0.01 per common share). COMMON STOCK In August 2003, the Company issued 7,000,000 shares of restricted common stock as collateral for potential loan proceeds approximating $1,650,000 ("Secured Note"), less applicable commissions. The Secured Note accrues interest at 4.5%, will require quarterly interest-only payments through maturity, and matures two years from receipt of proceeds. As of the date of this filing, the Company has not received any proceeds or paid any related commissions. During the quarter ended March 31, 2004, the Company issued 13,884,534 shares of restricted common stock in connection with the exercise of warrants for proceeds of approximately $2.3 million, net of commissions approximating $400,000. During the quarter ended March 31, 2004, the Company also issued 1,724,167 shares of restricted common stock in connection with the conversion of a $500,000 note payable plus accrued interest approximating $17,000. In May, 2004, the Company issued 1,960,000 shares of common stock to three different shareholders, as a result of a net exercise of warrants with an exercise price of $.0625 per share. In June, 2004, the Company issued 3,105,262 shares of common stock to three different shareholders, as a result of a net exercise of warrants with an exercise price of $.0625 per share. In June, 2004, the Company issued 2,156,250 shares of common stock as a result of convertible debt of $250,000 which was converted at $.1224 per share. In July 2004, the Company issued 18,406,248 shares of common stock to seven different shareholders, as a result of a net exercise of warrants with an exercise price of $.0625 per share. F-26 WARRANTS From time to time, the Company issues warrants pursuant to various consulting agreements During the year ended June 30, 2003, the Company granted warrants to purchase 250,000 shares of the Company's restricted common stock at an exercise price of $0.91 per share valued at $206,000 (based on the Black-Scholes pricing model) to a consultant for services rendered, which has been expensed in the accompanying consolidated statement of operations for the year ended June 30, 2003. In connection with the issuance, the warrant holder may cause the Company to re-purchase any warrants not previously exercised by the warrant holder on or after June 2006 for $0.46 per share. Accordingly, a related liability of $113,750 was recorded in the accompanying June 30, 2003 consolidated balance sheet, representing the Company's re-purchase liability. During the quarter ended March 31, 2004, the Company granted warrants to purchase 375,000 shares of the Company's restricted common stock with exercise prices ranging from $0.18 to 1.54 per share, valued at approximately $953,000 (based on the Black-Scholes pricing model), to various consultants for services to be rendered through February 2005. The Company is amortizing such expense over the term of the related services. During the quarter ended March 31, 2004, the Company granted warrants to purchase 11,346,180 shares of the Company's restricted common stock with exercise prices ranging from $0.12 to $1.00 per share. These warrants vested upon grant, and are exercisable through March 2009. Such warrants were issued in connection with equity fund-raising activities and, accordingly, no related expense was reported in the accompanying consolidated financial statements. F-27 A summary of changes in warrants during each period is presented below: Weighted Average Warrants Exercise Price ---------------- ----------------- Balance, August 9, 2001 (Inception) -- $ -- Warrants granted 34,512,804 0.08 Warrants exercised (9,901,316) (0.11) Warrants granted 15,340,813 0.29 Warrants exercised (4,393,886) (0.11) Warrants cancelled (3,972,000) (0.25) ---------------- ----------------- Balance, June 30, 2003 31,586,415 $ 0.15 ================ ================= Warrants granted 52,681,292 0.48 Warrants exercised (21,067,794) (0.22) Warrants cancelled -- -- ---------------- ----------------- Balance, June 30, 2004 63,199,913 $ 0.40 ================ ================= Warrants exercisable at June 30, 2004 63,199,913 $ 0.40 ================ ================= Per share values at grant date of Weighted Average Weighted Average warrants issued during fiscal 2004: Fair Value Exercise Price ---------------- ----------------- Less than fair market value $ 0.72 $ 1.55 ================ ================= Equal to fair market value $ 0.87 $ 1.54 ================ ================= Greater than fair market value $ 1.39 $ 0.25 ================ ================= The following table summarizes information related to warrants outstanding at June 30, 2004:
Warrants Outstanding Warrants Exercisable ------------------------------------------------------------------ ------------------------------------- Weighted Average Weighted Average Weighted Average Exercise Price Number Remaining Contractual Life Exercise Price Number Exercise Price -------------------------------------- -------------------------- ------------------- ------------------ ----------------- $0.01 - $0.08 33,145,366 4.66 $ 0.06 33,145,366 $ 0.06 $0.12 - $0.25 8,828,992 7.59 0.17 8,828,992 0.17 $0.26 - $0.50 4,239,428 5.14 0.36 4,239,428 0.36 $0.75 - $0.90 7,313,157 0.25 0.76 7,313,157 0.76 $1.00 - $1.40 9,672,970 4.63 1.52 9,672,970 1.52 ----------------- -------------------------- ------------------- ---------------- ----------------- 63,199,913 4.68 $ 0.40 63,199,913 $ 0.40
F-28 The following outlines the significant assumptions used to calculate the estimated fair value information presented utilizing the Black-Scholes pricing model: Year Ended Year Ended Period Ended June 30, 2004 June 30, 2003 June 30, 2002 ---------------- --------------- -------------- Discount rate 2.00% 3.50% 3.50% Volatility 72% - 112% 105% - 170% 0% - 51% Expected life in years 3 3 1 Expected dividend yield -- -- -- ---------------- --------------- -------------- STOCK OPTIONS From time to time, the Company issues non-plan stock options pursuant to various agreements and other compensatory arrangements to employees and third parties. A summary of changes in stock options during each year is presented below: Weighted average Stock Options Exercise Price ---------------- ---------------- Balance, August 9, 2001 (Inception) -- $ -- Options granted 6,780,000 0.31 Options exercised -- -- Options cancelled -- -- ---------------- ---------------- Balance, June 30, 2002 6,780,000 0.31 Options granted 5,670,000 0.94 Options exercised -- -- Options cancelled -- -- ---------------- ---------------- Balance, June 30, 2003 12,450,000 $ 0.60 Options granted 600,000 1.54 Options exercised (550,000 0.51 Options cancelled -- -- ---------------- Balance, June 30, 2004 12,500,000 $ 0.65 ================ ================ Options exercisable at June 30, 2004 9,117,500 $ 0.64 ================ ================ F-29 Per share values at grant date of Weighted Average Weighted Average options issued during fiscal 2004: Fair Value Exercise Price ---------------- ---------------- Less than fair market value N/A N/A ================ ================ Equal to fair market value $ 0.74 $ 1.54 ================ ================ Greater than fair market value N/A N/A ================ ================ The following table summarizes information related to options at June 30, 2004:
Options Outstanding Options Exercisable ------------------------------------------------------------------------------------ Weighted Average Remaining Contractual Weighted Average Weighted Average Exercise Price Number Life Exercise Price Number Exercise Price ------------------------------------ --------------------- ------------------ --------- ----------------- $0.31 6,480,000 7.92 $ 0.31 4,500,000 $ 0.45 $0.91 5,160,000 8.97 0.91 3,982,500 1.21 $1.50 260,000 1.61 1.50 260,000 1.50 $1.54 600,000 8.44 1.54 375,000 0.24 ----------- --------------------- ------------------ --------- ----------------- Total 12,500,000 8.25 $ 0.68 9,117,500 $ 0.64 ----------- --------------------- ------------------ --------- -----------------
The following outlines the significant assumptions used to calculate the estimated fair value information presented utilizing the Black-Scholes pricing model: Year Ended Year Ended Period Ended June 30, 2004 June 30, 2003 June 30, 2002 ------------- ------------- ---------------- Discount rate 2.00% 3.50% 3.50% Volatility 72% 170% 0% - 51% Expected life in years 3 3 3 Expected dividend yield -- -- -- ------------- ------------- ---------------- F-30 NOTE 8 INCOME TAXES Income tax expense, all current, for the years ended June 30, 2004 and 2003 and the period from August 9, 2001 (Inception) through June 30, 2002 differed from the amounts computed by applying the U.S. Federal income tax rate of 34 percent to the loss before income taxes as a result of the following:
2004 2003 2002 ----------- ----------- ----------- Computed "expected" tax benefit $(4,756,000) $(1,649,000) $ (801,000) Adjustment in income taxes resulting from: Change in valuation allowance 4,334,000 1,891,000 921,000 Other -- 800 800 State and local income taxes, net of federal (439,600) (242,000) (120,000) Goodwill Impairment 864,000 -- -- ----------- ----------- ----------- $ 2,400 $ 800 $ 800 =========== =========== ===========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at June 30, 2004, 2003 and 2002 are presented below:
2004 2003 2002 ----------- ----------- ----------- Net Operating Losses 4,052,000 199,000 86,000 Stock-based Compensation 1,327,000 1,327,000 456,000 Start-up Costs 1,142,000 1,142,000 309,000 Loss on Investments 480,000 -- -- Capitalized research and development 70,000 70,000 70,000 Other 75,000 74,000 -- ----------- ----------- ----------- Deferred tax asset 7,146,000 2,812,000 921,000 Less: Valuation Allowance (7,146,000) (2,812,000) (921,000) ----------- ----------- ----------- Net deferred tax asset -- -- -- =========== =========== ===========
As of June 30, 2004, the Company had tax net operating loss carryforwards ("NOLs") of approximately $10,800,000 and $6,400,000 available to offset future taxable income for Federal and State purposes, respectively. The Federal and State carryforwards expire in varying amounts through 2024. Effective September 11, 2002, pursuant to California revenue and tax code section 24416.3, no net operating loss deduction will be allowed for any taxable year beginning on or after January 1, 2002, and before January 1, 2004. For any suspended losses, the carryforward period is extended by one year for losses incurred in tax years beginning on or after January 1, 2002, and before January 1, 2003; and by two years for losses incurred in taxable years beginning before January 1, 2002. F-31 Due to the change in ownership provisions of the Internal Revenue Code Section 382, net operating loss carryforwards for Federal and State income tax reporting purposes are subject to annual limitations. Should an additional change in ownership occur, net operating loss carryforwards may be limited as to their use in future years. In 2004, 2003 and 2002, the Company concluded that a full valuation allowance against its net deferred tax assets was appropriate. SFAS 109 requires that a valuation allowance must be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. In making such determination, a review of all available positive and negative evidence must be considered, including scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. The accounting guidance further states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. As a result of the Company's recent cumulative losses, the Company concluded that a full valuation allowance should be recorded in 2004, 2003 and 2002. NOTE 9 SIGNIFICANT FOURTH QUARTER ADJUSTMENTS - FISCAL 2003 In June 2003, the Company recorded an adjustment to capitalize software development costs of approximately $436,000 that were previously expensed in earlier fiscal 2003 quarters relating to WTI. The allocation of such costs incurred from a related party (see Note 5) was adjusted in the fourth quarter of fiscal 2003. The effect of this adjustment on the first three quarters of fiscal 2003 is summarized below: QUARTER ENDED 9/30/02 12/31/02 3/31/03 ----------- ----------- ----------- Net loss, as previously reported $ (738,639) $(1,683,613) $(1,115,187) Adjustment described above 162,315 157,725 115,775 ----------- ----------- ----------- Net loss, as restated $ (576,324) $(1,528,888) $ (999,412) =========== =========== =========== Such adjustment had no effect on the basic/diluted (rounded) loss per common share for any of the first three quarters of fiscal 2003. NOTE 10 EQUITY INSTRUMENTS SUBJECT TO RESCISSION The Company may be subject to possible claims for rescission with respect to the sale or other issuances of certain common stock, options and warrants. The accompanying consolidated balance sheets reflect an adjustment for the matter described below. Approximately 26.6 million shares of the Company's common stock, options and warrants that were issued or granted in the United States without registration or qualification under federal or state securities laws during the two-year period ended June 30, 2004 may be subject to rescission. The fair value of these securities was estimated based on a combination of (a) the selling price of the common stock on the dates sold, (b) the price per the agreement for stock issued in conversion of debt, (c) the fair value of the stock options and warrants on their grant dates, and (d) an independent valuation. Based in part on advice of counsel, the fair value of these options and warrants was estimated using the Black-Scholes option-pricing model. Based on these measurement criteria, the Company's potential liability directly associated with the aforementioned securities transactions is estimated to approximate $6.2 million (including interest) at June 30, 2004 plus legal fees and any fines or penalties that might be assessed by regulatory agencies. Based on advice of counsel, the potential liability discussed above does not include options to purchase a total of 3.6 million shares of common stock issued to the Company's president and to its chief executive officer because these two individuals are also principal stockholders of the Company; acting together, they have the ability to control the Company. The estimated fair value of the options described in this paragraph (excluding interest) approximated $1,360,000 at June 30, 2004. Management is unable to determine at this time whether any claim for rescission may be filed against the Company; however, there can be no assurance that such claims will not be asserted. F-32 In addition, regulatory agencies could launch a formal investigation and/or institute an enforcement proceeding against the Company. The ultimate outcome of the matters discussed above is not presently determinable. Accordingly, management is unable to estimate the total liability, if any, that the Company may incur as a result of such contingencies. Regardless of how remote a rescission event may be, GAAP as interpreted by the SEC requires that equity securities subject to rescission be reported outside of the stockholders' equity section of the balance sheet until the applicable statutes of limitations have expired. Thus, the Company has reported approximately $6.2 million as "mezzanine equity" in the accompanying June 30, 2004 consolidated balance sheet. Approximately 8.5 million shares of the Company's common stock issued in connection with the acquisition of Z prompt, with an issuance-date estimated fair value of approximately $1.8 million, have been excluded from the June 30, 2003 mezzanine equity amount, as the acquisition was not recorded until November 2003 for reasons described in Note 3. NOTE 11 RESTATEMENT OF STATEMENTS OF OPERATIONS Subsequent to the original issuance of the Company's June 30, 2003 financial statements, it was determined that consulting services, for which the Company had granted a warrant to purchase 1 million shares of common stock with an estimated fair value of $655,000, had not been and will not be performed. Therefore, the accompanying consolidated statements of operations for the year ended June 30, 2003 and for the period from Inception through June 30, 2003 have been restated. The effect of such restatement was to reduce the previously reported net loss by $655,000 with no effect on (rounded) loss per common share. NOTE 12. BANKRUPTCY FILING OF WHOLLY-OWNED SUBSIDIARY Z PROMPT On March 23, 2004 (the "Petition Date"), Z prompt (or the "Debtor") filed a voluntary petition for relief (the "Chapter 11 Case") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Central District of California (the "Bankruptcy Court"). Since the Petition Date, Z prompt has conducted its business activities as a debtor-in-possession under the Bankruptcy Code. As a result of the Chapter 11 Case, the realization of Z prompt's assets and the liquidation of its liabilities are subject to uncertainty. In the Chapter 11 Case, a substantial portion of the Debtor's liabilities as of the Petition Date is subject to compromise or other treatment under a confirmed plan of reorganization. Generally, actions to enforce or otherwise effect repayment of all pre-Chapter 11 liabilities (as well as any pending litigation, absent a stipulation to the contrary - see the "Z prompt litigation" section of Note 6) against the Debtor are stayed while Z prompt operates as a debtor-in-possession during bankruptcy proceedings. Schedules have been filed by the Debtor with F-33 the Bankruptcy Court setting forth the liabilities (approximately $1 million) and assets of Z prompt as of the Petition Date based on its unaudited accounting records. Any differences between amounts reflected in such schedules and claims filed by creditors will be investigated, and will either be amicably resolved or adjudicated by the Bankruptcy Court. The ultimate amount and settlement terms of such liabilities are not presently determinable. Financial accounting and reporting during a Chapter 11 case are governed by Statement of Position No. 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE ("SOP No. 90-7"). For financial reporting purposes, Z prompt's pre-petition liabilities and obligations, which may be subject to settlement or otherwise dependent on the outcome of the Chapter 11 case, have been segregated and classified as "liabilities subject to compromise" in the accompanying June 30, 2004 consolidated balance sheet (see Note 17). Z prompt did not have any significant reorganization items (income or expense) during the year ended June 30, 2004. Certain additional disclosures including (a) claims not subject to reasonable estimation of the amount to be allowed and (b) any significant difference between reported interest expense and stated contractual interest will be provided (as required by SOP No. 90-7) when such amounts are determinable and/or when the related transactions occur. Management continues to conduct the business activities of Z prompt under the supervision of the Bankruptcy Court and, among other things, the Debtor is granted a 120-day exclusive right to propose a plan of reorganization which must be approved by the creditors and confirmed by the Bankruptcy Court. In accordance with the Bankruptcy Code, an automatic stay provides that creditors of Z prompt and other parties in interest are prevented from seeking repayment of pre-petition debts. Additionally, unless otherwise approved by the Bankruptcy Court, the Debtor must refrain from paying any pre-petition indebtedness. On April 20, 2004, the Bankruptcy Court approved a debtor-in-possession financing arrangement whereby Z prompt is permitted to obtain credit from AeroFund Financial, Inc. of no more than $500,000 through the sale and/or factoring of its post-petition accounts receivable; this credit facility is collateralized by a security interest in such accounts receivable. Although legal fees and other administrative expenses to complete Z Prompt's bankruptcy proceedings may be significant, they are not susceptible of reasonable estimation at this time. Z prompt could decide to reject some or all of its lease obligations in the Chapter 11 Case. This action may result in lease rejection claims pursuant to the Bankruptcy Code; any such claims would be adjudicated by the Bankruptcy Court. An important element in successfully reorganizing the Debtor will be the ability to restructure certain liabilities in order to reduce indebtedness and provide funding for operations. As part of the process of attempting to reorganize, Z prompt intends to pursue various financing F-34 alternatives that may be available, although there can be no assurance that the Debtor will be able to successfully implement any such alternatives. Though Z prompt intends to make efforts to increase its revenues to improve operations, it is possible that losses will continue for the foreseeable future and that the Debtor will require additional funding and financial support from a third party and/or its parent company. There can be no assurance that any such additional financing will be available on acceptable terms, that such funds (if available) would enable Z prompt to continue operating, or that the Debtor will be successful in increasing its revenues. In addition, there is no assurance that the creditors and the Bankruptcy Court will approve a reorganization plan that will allow Z prompt to survive. The Company's March 23, 2004 receivable from Z prompt (which has been eliminated in consolidation, and therefore is not included in the Note 18 disclosure) of approximately $275,000 is subject to compromise in the bankruptcy proceedings. Condensed financial information of Z prompt as of June 30, 2004 and for the period from November 1, 2003 (when the acquisition was recorded for accounting purposes) to June 30, 2004 is presented below. Z PROMPT INC. BALANCE SHEET (Unaudited) June 30, 2004 ASSETS CURRENT ASSETS Cash $ 34,010 Accounts receivable, net 254,895 Inventories 20,667 ------------ 309,572 OTHER, net 2,512 ------------ TOTAL ASSETS $ 312,084 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable and accrued expenses $ 301,734 Loan from parent company 620,395 Deferred revenues 74,628 Liabilities subject to compromise 732,544 ------------ TOTAL LIABILITIES 1,729,301 ------------ STOCKHOLDERS' DEFICIT (1,417,217) ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 312,084 ============ F-35 Z PROMPT INC. STATEMENT OF OPERATIONS (UNAUDITED) EIGHT MONTHS ENDED JUNE 30, 2004 ------------- NET SALES $ 1,508,656 COST OF SALES 1,185,797 ------------- GROSS PROFIT 322,859 EXPENSES General and administrative 586,011 Salaries and related 279,293 Interest 128,710 Loss on disposal of assets 16,648 ------------- 1,010,662 ------------- PRETAX LOSS $ (687,803) ============= F-36 NOTE 13 SUBORDINATED CONVERTIBLE DEBT In July 2003, the Company borrowed $500,000 under a subordinated convertible note payable, (the "Subordinated Convertible Note"), which bears interest at 7% per annum. All borrowings were due six months from the receipt of proceeds, with semi-annual interest payments on the outstanding balance. In December 2003, the Subordinated Convertible Note was converted into 1,666,667 shares of the Company's restricted common stock at $0.30 per share. A BCF approximating $500,000 was recorded during the quarter ended September 30, 2003. Such discount was amortized to interest expense during the three months ended September 30, 2003 as the subordinated convertible note was convertible upon issuance. Since the Subordinated Convertible Note was immediately convertible, the entire BCF was charged to interest expense in the Company's restated financial statements for the quarter ended September 30, 2003. NOTE 14 CONVERTIBLE NOTES PAYABLE THE NOVEMBER 2003 NOTES In November 2003, we secured a $5 million dollar revolving credit facility, in the form of two seven-month convertible notes. The notes bear interest at an annual rate of 10% and originally matured on June 30, 2004, but have been extended to December 31, 2004. The notes are convertible on ninety days written notice by the holders at the lesser of (i) 50% of the average three lowest closing prices for our common stock for the twenty days immediately preceding the conversion date or (ii) $.0625 per share. At June 30, 2004, we had borrowed $2,180,000 under such notes. Included in this balance the Company borrowed $1,200,000 in connection with a transaction with Material Technologies, Inc. (see Note 7). The Company subsequently un-wound the Material Technologies Inc. transaction and expensed the entire $1,200,000 as a loss on disposal of the investment in Material Technologies Inc.'s common stock. At June 30, 2004, the Company remains liable for the $1.2 million convertible debt as part of the total borrowings under such notes. OTHER FISCAL 2004 ACTIVITY As consideration for renewing certain convertible debt (including the credit facility described in the preceding paragraph) and in payment of interest on such debt, the Company issued a total of approximately $1.3 million of additional convertible debt during the year ended June 30, 2004. F-37 THE JANUARY 2004 NOTE In January 2004, the Company borrowed $250,000 under a convertible note payable (the "January Note"), which bears interest at 7% per annum. All borrowings, including interest, were due in July 2004. The January Note was convertible into restricted common stock of the Company at a rate of $0.12 per share, at any time at the option of the note holder. In June 2004, the January Note was converted into 2,083,333 shares of the Company's common stock. A beneficial conversion feature approximating $250,000 was recorded during the quarter ended March 31, 2004, and was expensed upon issuance of the January Note based on the immediate conversion feature. NOTE 15 LINE OF CREDIT Z prompt had a revolving line of credit agreement (the "Line") with a financial institution, which bore interest at 5% per annum. A shareholder of the Company, who is a former majority shareholder of Z prompt, has guaranteed the Line. At June 30, 2004, the outstanding borrowings under this credit facility totaled $225,000, which is included in "liabilities subject to compromise" in the accompanying June 30, 2004 consolidated balance sheet. NOTE 16 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for each of the quarters in the two-year period ended June 30, 2004 are presented below. FOR THE QUARTER ENDED 9/30/03 12/31/03 3/31/04 6/30/04 ------- -------- ------- ------- Net sales $ -- $ 361,232 $ 620,140 $ 527,284 Gross profit -- 218,729 15,568 88,562 Net loss (1,612,690) (3,593,022) (4,282,293) (5,891,248) Loss per common share (0.01) (0.03) (0.03) (0.04) FOR THE QUARTER ENDED 9/30/02 12/31/02 3/31/03 6/30/03 ------- -------- ------- ------- Net sales $ -- $ -- $ -- $ -- Gross profit -- -- -- -- Net loss (576,324) (1,528,888) (999,412) (1,743,943) Loss per common share (0.01) (0.01) (0.01) (0.02) See the "Restatements and Reclassifications" section of Note 1 for additional information. F-38 NOTE 17 LIABILITIES SUBJECT TO COMPROMISE The March 23, 2004 balances of Z prompt's liabilities that became subject to compromise on that date (excluding its liability to the parent company) are approximately as follows: Accounts payable and accrued expenses $ 335,544 Secured line of credit payable (Note 15) 225,000 Note payable to related party 172,000 --------- Total $ 732,544 ========= NOTE 18 SUBSEQUENT EVENT (UNAUDITED) On September 13, 2004, the Company completed a private placement transaction (the "private transaction") with eleven accredited investors pursuant to which the Company sold a total of 3,666,668 common shares and 1,833,338 each of Series A warrants, Series B warrants, and Series C warrants (collectively the "investor warrants"). Net proceeds from the private transaction approximated $1,518,000. Upon request of the holders of more than 50% of the issued shares (including the exercised investor warrants) at any time between mid-December 2004 and September 13, 2006, the Company is obligated to file a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), to register the common stock sold and the stock underlying both types of warrants issued in the private transaction. The terms of the investor warrants are as follows: SERIES A: expire 150 days after the registration statement is declared effective by the SEC ("effectiveness"), with an exercise price of $0.55/share; SERIES B: expire four years after effectiveness, with an exercise price of $0.89/share; and SERIES C: expire three years after effectiveness, with an exercise price of $2.00/share. During the period from thirty trading days after effectiveness to thirty trading days before the expiration of the investor warrants, such warrants are callable if the closing price of the Company's common stock reaches certain minimum levels for a defined time period. The investor warrants are price-protected against the issuance of any equity instruments (including securities exercisable or convertible into common stock) at less than $0.45 per common share. In addition to the cash fee paid to the placement agent for the initial phase of the private transaction, the Company (a) issued warrants to the placement agent to purchase 458,333 shares of common stock exercisable for five years at an exercise price of $0.54 per share, (b) agreed to pay the placement agent 8% of the cash proceeds from the exercise of any investor warrants, and (c) will issue five-year non-callable placement agent warrants when investor warrants are exercised in multiples of eight. The placement agent warrants have exercise prices that range from $0.66 to $2.40 per common share. Management has determined that the private transaction is exempt from the registration requirements under Rule 506 of Regulation D of the Securities Act. F-39