UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 0-26415
Evolve One, Inc.
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(Name of small business issuer in its charter)
Delaware 13-3876100
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Post Office Box 859
Tallevast, Florida 34270
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number 941-351-2720
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None not applicable
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(Title of each class)
Securities registered under Section 12(g) of the Exchange Act:
common stock, par value $0.0001 per share
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(Title of class)
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [ ]
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act) Yes [X] No [ ]
State issuer's revenues for its most recent fiscal year. $ 0 for the
fiscal year ended December 31, 2005.
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 sold, or the average bid and asked prices of such common
equity, as of a specified date within the past 60 days. The aggregate market
value of the common equity held by non-affiliates computed at the closing price
of the registrant's common stock on March 30, 2006 is approximately $1,897,000
At March 30, 2006 52,451,348 shares of common stock are issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) of the Securities Act of 1933 ("Securities Act"). Not
Applicable.
Transitional Small Business Disclosure Form (check one): Yes ___ No _X_
CERTAIN CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this annual report on Form 10-KSB contain or may
contain forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous assumptions and other factors that could cause our actual
results to differ materially from those in the forward-looking statements. These
factors include, but are not limited to, economic, political and market
conditions and fluctuations, government and industry regulation, interest rate
risk, U.S. and global competition, and other factors. Most of these factors are
difficult to predict accurately and are generally beyond our control. You should
consider the areas of risk described in connection with any forward-looking
statements that may be made herein. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. Readers should carefully review this quarterly report in its
entirety, including but not limited to our financial statements and the notes
thereto. Except for our ongoing obligations to disclose material information
under the Federal securities laws, we undertake no obligation to release
publicly any revisions to any forward-looking statements, to report events or to
report the occurrence of unanticipated events. For any forward-looking
statements contained in any document, we claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
When used in this quarterly report, the terms "Evolve One," " we,"
"our," and "us" refers to Evolve One, Inc. a Delaware corporation, and our
subsidiaries.
All share and per share information contained in this annual report
gives effect to the 250 for 1 (250:1) reverse stock split effective January 31,
2003 and a one for eight (1:8) forward stock split effective December 3, 2004.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
During fiscal 2005 our operations consisted of two Internet based
businesses, StogiesOnline.com and AuctionStore.com. StogiesOnline.com was an
online distributor and retailer of brand name premium cigars. AuctionStore.com
was an eBay(R) Trading Assistant and Internet-based seller of consigned
merchandise whose primary medium of sales is eBay(R). While we reported sales
from these operations of $114,904 for the nine months ended September 30, 2005,
as a result of competition in the marketplace and a lack of sufficient working
capital, during October 2005 we determined that our business model was
unprofitable and decided to discontinue the balance of our operations.
As a result of the discontinuation of our operations we intend to seek
to acquire assets or shares of an entity actively engaged in business which
generates revenues, in exchange for our securities. Our purpose is to seek,
investigate and, if such investigation warrants, acquire an interest in business
opportunities presented to us by persons or firms who or which desire to seek
the perceived advantages our company may offer. We will not restrict our search
to any specific business, industry, or geographical location and we may
participate in a business venture of virtually any kind or nature. This
discussion of the proposed business is purposefully general and is not meant to
be restrictive of our virtually unlimited discretion to search for and enter
into potential business opportunities. Management anticipates that it may be
able to participate in only one potential business venture because we have
nominal assets and limited financial resources. This lack of diversification
should be considered a substantial risk to our stockholders because it will not
permit us to offset potential losses from one venture against gains from
another.
We may seek a business opportunity with entities which have recently
commenced operations, or which wish to utilize the public marketplace in order
to raise additional capital in order to expand into new products or markets, to
develop a new product or service, or for other corporate purposes. We may
acquire assets and establish wholly-owned subsidiaries in various businesses or
acquire existing businesses as subsidiaries. We anticipate that the selection of
a business opportunity in which to participate will be complex and extremely
risky. Due to general economic conditions, rapid technological advances being
made in some industries and shortages of available capital, management believes
that there are numerous firms seeking the perceived benefits of a publicly
registered corporation. These perceived benefits may include facilitating or
improving the terms on which additional equity financing may be sought,
providing liquidity for incentive stock options or similar benefits to key
employees, providing liquidity (subject to restrictions of applicable statutes),
for all stockholders and other factors. Potentially, available business
opportunities may occur in many different industries and at various stages of
development, all of which will make the task of comparative investigation and
analysis of such business opportunities extremely difficult and complex.
The analysis of new business opportunities will be undertaken by, or
under the supervision of, Dr. Irwin Horowitz, our CEO, who may not be considered
a professional business analyst. Dr. Horowitz will be the key person in the
search, review and negotiation with potential acquisition or merger candidates.
We intend to concentrate on identifying preliminary prospective business
opportunities which may be brought to our attention through present associations
of our officers and directors, or by our stockholders. In analyzing prospective
business opportunities, we will consider such matters as the available
technical, financial and managerial resources; working capital and other
financial requirements; history of operations, if any; prospects for the future;
nature of present and expected competition; the quality and experience of
management services which may be available and the depth of that management; the
potential for further research, development, or exploration; specific risk
factors not now foreseeable but which then may be anticipated to impact our
proposed activities; the potential for growth or expansion; the potential for
profit; the perceived public recognition of acceptance of products, services, or
trades; name identification; and other relevant factors. We will not acquire or
merge with any company for which audited financial statements cannot be obtained
within the time period prescribed by applicable rules of the
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Securities and Exchange Commission which is presently four business days from
the closing date of the transaction. This requirement for readily available
audited financial statement may require us to preclude a transaction with a
potential candidate which might otherwise be beneficial to our stockholders.
We will not restrict our search for any specific kind of company, but
may acquire a venture which is in its preliminary or development stage, which is
already in operation, or in essentially any stage of its corporate life. It is
impossible to predict at this time the status of any business in which we may
become engaged, in that such business may need to seek additional capital, may
desire to have its shares publicly traded, or may seek other perceived
advantages which we may offer. However, we do not intend to obtain funds in one
or more private placements to finance the operation of any acquired business
opportunity until such time as we have successfully consummated such a merger or
acquisition.
We anticipate that we will incur nominal expenses in the implementation
of our business plan described herein. Because we have no capital with which to
pay these anticipated expenses, these expenses will be paid by Dr. Horowitz with
his personal funds as interest-free loans. However, the only opportunity to have
these loans repaid will be from a prospective merger or acquisition candidate.
Repayment of any loans made on our behalf will not impede, or be made
conditional in any manner, to consummation of a proposed transaction.
In implementing a structure for a particular business acquisition, we
may become a party to a merger, consolidation, reorganization, joint venture, or
licensing agreement with another corporation or entity. We may also acquire
stock or assets of an existing business. On the consummation of a transaction,
it is probable that our present management and stockholders will no longer be in
control of our company. In addition, our directors may, as part of the terms of
the acquisition transaction, resign and be replaced by new directors without a
vote of our stockholders or may sell their stock. Any terms of sale of the
shares presently held by officers and/or directors will be also afforded to all
other stockholders on similar terms and conditions. Any and all such sales will
only be made in compliance with federal and applicable state securities laws.
We anticipate that any securities issued in any such reorganization
would be issued in reliance upon exemption from registration under applicable
federal and state securities laws. In some circumstances, however, as a
negotiated element of a transaction, we may agree to register all or a part of
such securities immediately after the transaction is consummated or at specified
times thereafter. If such registration occurs, of which there can be no
assurance, it will be undertaken by the surviving entity after we have
successfully consummated a merger or acquisition and we are no longer considered
a "shell" company. Until such time as this occurs, we will not attempt to
register any additional securities. The issuance of substantial additional
securities and their potential sale into any trading market which may develop in
our securities may have a depressive effect on the value of our securities in
the future, if such a market develops, of which there is no assurance.
EMPLOYEES
As of March 30, 2006, we had one full-time employee, Dr. Horowitz, our
president and Chief Executive Officer. Our employee is not covered by collective
bargaining agreements, and we believe our relationship with our employee to be
good.
OUR HISTORY
We were incorporated on June 7, 1999 in Delaware initially under the
name Caprock Corporation to engage in any lawful corporate undertaking,
including, but not limited to, selected mergers and acquisitions. On November
26, 1999, International Internet, Inc., a Delaware corporation, acquired 100% of
our issued and outstanding stock from TPG Capital Corporation, our sole
stockholder, pursuant to a stock purchase agreement in exchange for 500,000
shares of common stock of International Internet, Inc. In December 1999 Caprock
was merged into International Internet with International Internet being the
surviving company. Effective November 21, 2000, International Internet changed
its name to Evolve One, Inc.
4
Our original business was operated as a developmental stage company in
Mr. Cigar, Inc. which was formed in May 1997. Mr. Cigar was in the business of
licensing, selling and/or operating cigar vending machines. We formed
StogiesOnline.com, Inc. in April 1999. StogiesOnline was an online distributor
and retailer of brand name premium cigars within the United States. As a result
of the initial success of the StogiesOnline website, we refocused our resources
in 1999 into the Internet cigar sales market and other specialty goods. We sold
the vending equipment and business of Mr. Cigar in December 1999. As described
earlier in this section, in October 2005 we discontinued the operations of
StogiesOnline.com.
In February 1999, we formed GoldOnline.com, Inc. for the purpose of
acquiring the domain name GoldOnline.com. The domain name was acquired for
$25,000 and 32,000 shares of our common stock. In June 1999, we sold 100% of the
issued and outstanding stock in GoldOnline.com, Inc. for 10,000,000 shares of
the common stock of GoldOnline International, Inc. resulting in no gain or loss
to us.
We formed Web Humidor.com Corp. in April 1999. for the purpose of
acquiring the domain name WebHumidor.com. The domain name was acquired for
$3,000 and 30,000 shares of WebHumidor.com, Corp. common stock and 3,200 shares
of our common stock. This subsidiary remains inactive.
We acquired American Computer Systems ("ACS") effective September 30,
1999 for $150,000. We sold 80% of our investment effective March 31, 2001 for
$500,000, and on September 11, 2001 we sold the remaining 20% interest to an ACS
officer in exchange for discharge of any liabilities of ACS.
We acquired 90% of the capital stock of TheBroadcastWeb.com, Inc. in
June 1999 for $18,000 cash and 1,200 shares of our common stock. On December 14,
2001, we sold our interest to NYCLE Acquisition Corp. Under the terms of the
transaction, the purchaser assumed substantially all of the on-going liabilities
of TheBroadcastWeb.com, Inc. and we received certain advertising time which was
valued at approximately $100,000, consisting of two ad spots per hour, per
format for a two year period. The purchaser did not assume an intra-company
payable or any liabilities for outstanding federal, state and local taxes as
well as payroll obligations incurred prior to December 15, 2001.
On September 28, 2001, we formed A1DiscountPerfume Inc. and in October
2001, launched a new e-commerce site specializing in men's and women's
fragrances. As a result of an increase in charge backs related to the
unauthorized use of credit cards by third parties to make online purchases of
merchandise from A1DiscountPerfume, as well as significant competition within
this market segment, as of December 31, 2004 we discontinued the operations of
A1Discount Perfume Inc.
On June 25, 2004, we purchased the URL www.Auctionstore.com for $6,500.
On July 22, 2004 we formed, Auctionstore.com which was to function as an
Internet-based seller of consigned merchandise whose primary medium of sales is
eBay(TM). In May 2005 we formed a new subsidiary, AuctionStore Franchise Corp.,
to market and service franchises of AuctionStore.com. This subsidiary is
inactive. As described earlier in this section, in October 2005 we discontinued
the operations of AuctionStore.com.
RISK FACTORS
Before you invest in our securities, you should be aware that there are
various risks. You should consider carefully these risk factors, together with
all of the other information included in this annual report before you decide to
purchase our securities. If any of the following risks and uncertainties develop
into actual events, our business, financial condition or results of operations
could be materially adversely affected.
OUR AUDITORS HAVE RAISED SUBSTANTIAL DOUBTS AS TO OUR ABILITY TO CONTINUE AS A
GOING CONCERN.
Our consolidated financial statements have been prepared assuming we
will continue as a going concern. Since inception we have experienced recurring
losses from operations, which losses have caused an accumulated deficit of
5
$8,118,714 as of December 31, 2005. In addition, for the year ended December 31,
2005 we reported a net loss of $1,292,651. We have a working capital deficit of
$2,170 at December 31, 2005 and cash on hand of $1,964. These factors, among
others, raise substantial doubt about our ability to continue as a going
concern. Our financial statements do not include any adjustments that might
result from the outcome of this uncertainty. We anticipate that we will continue
to incur losses in future periods and we will need to raise substantial amounts
of capital to pay our current obligations and implement our business model. No
assurances can be given that adequate financing can be obtained to meet our
capital needs. If we are unable to generate profits and unable to continue to
obtain financing to meet our working capital requirements, we may have to
curtail our business sharply or cease operations altogether. Our continuation as
a going concern is dependent upon our ability to generate sufficient cash flow
to meet our obligations on a timely basis, to obtain additional financing, and,
ultimately, to attain profitability. Should any of these events not occur, the
accompanying financial statements will be adversely effected and we may have to
cease operations.
WE CURRENTLY DO NOT HAVE AN OPERATING BUSINESS, BUT ALSO DO NOT INTEND TO PURSUE
A COURSE OF COMPLETE LIQUIDATION AND DISSOLUTION, AND ACCORDINGLY, THE VALUE OF
YOUR SHARES MAY DECREASE.
We currently do not have any operating business. We continue to incur
operating expenses while we consider alternative operating plans. These plans
may include business combinations with or investments in other operating
companies, or entering into a completely new line of business. We have not yet
identified any such opportunities, and thus, you will not be able to evaluate
the impact of such a business strategy on the value of your stock. In addition,
we cannot assure you that we will be able to identify any appropriate business
opportunities. Even if we are able to identify business opportunities that our
Board deems appropriate, we cannot assure you that such a strategy will provide
you with a positive return on your investment, and it may in fact result in a
substantial decrease in the value of your stock. These factors will
substantially increase the uncertainty, and thus the risk, of investing in our
shares.
WE MAY NOT BE ABLE TO IDENTIFY OR FULLY CAPITALIZE ON ANY APPROPRIATE BUSINESS
OPPORTUNITIES.
We have not yet identified any appropriate business opportunities, and,
due to a variety of factors outside of our control, we may not be able to
identify or fully capitalize on any such opportunities. These factors include:
o competition from other potential acquirors and partners of and
investors in potential acquisitions, many of whom may have greater
financial resources than we do;
o in specific cases, failure to agree on the terms of a potential
acquisition, such as the amount or price of our acquired interest,
or incompatibility between us and management of the company we wish
to acquire; and
o the possibility that we may lack sufficient capital and/or expertise
to develop promising opportunities.
Even if we are able to identify business opportunities that our Board
deems appropriate, we cannot assure you that such a strategy will provide you
with a positive return on your investment, and may in fact result in a
substantial decrease in the value of your stock. In addition, if we enter into a
combination with a business that has operating income, we cannot assure you that
we will be able to utilize all or even a portion of our existing net operating
loss carryover for federal or state tax purposes following such a business
combination. If we are unable to make use of our existing net operating loss
carryover, the tax advantages of such a combination may be limited, which could
negatively impact the price of our stock and the value of your investment. These
factors will substantially increase the uncertainty, and thus the risk, of
investing in our shares.
6
BECAUSE OUR STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED ON THE
OTC BULLETIN BOARD, OUR STOCK IS CONSIDERED A "PENNY STOCK" WHICH CAN ADVERSELY
AFFECT ITS LIQUIDITY.
For so long as the trading price of our common stock is less than $5.00
per share, our common stock is considered a "penny stock," and trading in our
common stock is subject to the requirements of Rule 15g-9 under the Securities
Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced
securities to persons other than established customers and accredited investors
must satisfy special sales practice requirements. The broker/dealer must make an
individualized written suitability determination for the purchaser and receive
the purchaser's written consent prior to the transaction.
SEC regulations also require additional disclosure in connection with
any trades involving a "penny stock," including the delivery, prior to any penny
stock transaction, of a disclosure schedule explaining the penny stock market
and its associated risks. These requirements severely limit the liquidity of
securities in the secondary market because few broker or dealers are likely to
undertake these compliance activities. In addition to the applicability of the
penny stock rules, other risks associated with trading in penny stocks could
also be price fluctuations and the lack of a liquid market. Finally, as a penny
stock we may not be entitled to the protections provided by the Private
Securities Litigation Reform Act of 1995.
PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS MAY DELAY OR PREVENT A
TAKE-OVER WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR STOCKHOLDERS.
Provisions of our articles of incorporation and bylaws may be deemed to
have anti-takeover effects, which include when and by whom special meetings of
our stockholders may be called, and may delay, defer or prevent a takeover
attempt. In addition, certain provisions of the Nevada Revised Statutes also may
be deemed to have certain anti-takeover effects which include that control of
shares acquired in excess of certain specified thresholds will not possess any
voting rights unless these voting rights are approved by a majority of a
corporation's disinterested stockholders.
In addition, our articles of incorporation authorize the issuance of up
to 10,000,000 shares of preferred stock with such rights and preferences as may
be determined from time to time by our board of directors, of which no shares
are presently issued and outstanding. Our board of directors may, without
stockholder approval, issue preferred stock with dividends, liquidation,
conversion, voting or other rights that could adversely affect the voting power
or other rights of the holders of our common stock.
ITEM 2. DESCRIPTION OF PROPERTY
We utilize office space provided to us under the terms of an oral
agreement with Diversifax Inc., an affiliate through common control by Dr. Irwin
Horowitz, our CEO. The cost of the office space is included in the monthly
management fee paid to Diversifax Inc. See Part III, Item 12. Certain
Relationships and Related Transactions.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
"EVLO." The following table sets forth the high and low closing sale prices for
our common stock as reported on the OTCBB and for the last two fiscal years and
the subsequent interim period. These prices do not include retail mark-ups,
markdowns or commissions, and may not necessarily represent actual transactions.
7
High Low
Fiscal 2004 ---- ---
First quarter ended March 31, 2004 $0.02 $0.016
Second quarter ended June 30, 2004 $0.05 $0.0156
Third quarter ended September 30, 2004 $0.02 $0.0148
Fourth quarter ended July 31, 2004 $0.78 $0.0175
Fiscal 2005
First quarter ended March 31, 2005 $0.53 $0.085
Second quarter ended June 30, 2005 $0.07 $0.066
Third quarter ended September 30, 2005 $0.24 $0.12
Fourth quarter ended December 31, 2005 $0.13 $0.038
On March 30, 2006, the last reported sale prices of the common stock on
OTCBB was $0.057 per share. As of March 30, 2006 there were approximately 2,000
stockholders of record of the common stock.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. Under Delaware
law, we may declare and pay dividends on our capital stock either out of our
surplus, as defined in the relevant Delaware statutes, or if there is no such
surplus, out of our net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. If, however, the capital of our
company, computed in accordance with the relevant Delaware statutes, has been
diminished by depreciation in the value of our property, or by losses, or
otherwise, to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets, we are prohibited from declaring and
paying out of such net profits any dividends upon any shares of our capital
stock until the deficiency in the amount of capital represented by the issued
and outstanding stock.
RECENT SALES OF UNREGISTERED SECURITIES
None.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth securities authorized for issuance under
equity compensation plans, including individual compensation arrangements, by us
under our Evolve One, Inc. Stock Option Plan and any compensation plans not
previously approved by our stockholders as of December 31, 2005 which includes
our 2005 Equity Compensation Plan.
Weighted
Number of average Number of
securities to be exercise securities remaining
issued upon price of available for future
exercise of outstanding issuance under equity
of outstanding options, compensation plans
options, warrants warrants (excluding securities
Plan category and rights and rights reflected in column (a))
(a) (b) (c)
------------- ----------------- ----------- ------------------------
Plans approved by our stockholders (1) 2,896,000 $0.526 4,952,000
Plans not approved by our stockholders(2) 81,125,000 $0.279 73,875,000
__________
(1) Includes our Evolve One, Inc. Stock Option Plan.
(2) Includes 26,125,000 shares underlying options granted under our 2005 Equity
Compensation Plan and options to purchase 55,000,000 shares of our common stock
granted to Dr. Horowitz which are not included in either plan.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following analysis of our results of operations and financial
condition should be read in conjunction with the accompanying consolidated
financial statements for the year ended December 31, 2005 and notes thereto
appearing elsewhere in this annual report.
OVERVIEW
During the fiscal year ended December 31, 2005 our operations consisted
of two Internet-based businesses, StogiesOnline.com and AuctionStore.com.
StogiesOnline.com was an online distributor and retailer of brand name premium
cigars. AuctionStore.com was an eBay(R) Trading Assistant and Internet-based
seller of consigned merchandise whose primary medium of sales is eBay(R). While
we reported sales from these operations of $114,904 for the nine months ended
September 30, 2005, as a result of competition in the marketplace and a lack of
sufficient working capital, during October 2005 we determined that our business
model was unprofitable and decided to discontinue the balance of our operations.
As described earlier in this annual report we intend to seek to acquire assets
or shares of an entity actively engaged in business which generates revenues, in
exchange for our securities. Our ability to continue as a going concern is
dependent on our ability to identify and close a business combination with an
operating entity. We have not yet identified any such opportunities, and we
cannot assure you that we will be able to identify any appropriate business
opportunities, or, if identified, that we will be able to close a transaction
which is inevitably beneficial to our stockholders. In addition, as it is likely
that if we enter into a business combination the structure of the transaction
will be such that the approval of our stockholders is not necessary before the
transaction is closed. As such, our stockholders are relying entirely upon the
judgment of our management in structuring a transaction which provides some
benefit to our stockholders.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 2005 ("FISCAL 2005") AS COMPARED TO THE FISCAL
YEAR ENDED DECEMBER 31, 2004 ("FISCAL 2004")
Increase/ Increase/
Fiscal 2005 Fiscal 2004 (Decrease) (Decrease)
$ 2005 vs 2004 % 2005 vs 2004
----------- ----------- -------------- --------------
Operating expenses:
Stock compensation expenses ....... 536,796 0 536,796 100%
Selling, general and
administrative expenses ....... 149,979 779,752 (629,773) (80.8)%
----------- ----------- -----------
Total operating expenses ............. 686,775 779,752 (92,977) (11.9)%
----------- ----------- ----------- -----
Loss from continuing operations ...... (686,775) (779,752) (92,977) (11.9)%
Other income (expense) ............... 0 13,662 13,662 100%
----------------------
Loss from discontinued operations .... (605,876) (560,909) 44,967 8.0%
=========== =========== =========== =====
Net loss ............................. $(1,292,651) $(1,326,999) $ (34,348) (2.6)%
=========== =========== =========== =====
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Total operating expenses for fiscal 2005 were $686,775, a decrease of
$92,977, or approximately 11.9%, from fiscal 2004. Included in total operating
expenses for fiscal 2005 were:
o Stock compensation expense of $536,796 which was primarily
attributable to stock issued to Diversifax Inc. valued at $527,728 as
compensation for services to us. As we presently have no sources of revenues and
minimal assets, we entered into an arrangement with this company which is
controlled by our principal stockholder to provide us with management and other
administrative services. We issued that company an aggregate of 6,868,916 shares
of our common stock during fiscal 2005 as compensation for these services. We
did not have comparable expenses in fiscal 2004 and do not anticipate incurring
similar expenses during fiscal 2006.
o Selling, general and administrative expenses, which includes
salaries, rent and other overhead expenses, professional fees and similar
general operating expenses, was $149,979 for fiscal 2005, a decrease of
$629,773, or approximately 80.8%, from fiscal 2004. A significant portion of
this decrease is attributable to inclusion of certain of the traditional SG&A
expenses in the stock based compensation expense represented by the management
and administrative fees paid to the company controlled by our principal
stockholder as described above.
We reported total other income in fiscal 2005 of $0 as compared to
$13,662 in fiscal 2004. Total other income for fiscal 2004 represented
investment income. We did not have comparable transactions in fiscal 2005 and we
do not anticipate that we will have comparable expenses in fiscal 2006 based
upon our current operations.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations and otherwise operate on
an ongoing basis. At December 31, 2005 we had cash on hand of $1,964 and a
working capital deficit of $2,170.
Net cash used in operating activities for fiscal 2005 was $514,600 as
compared to net cash used in operating activities of $548,723 for fiscal 2004.
Included in the changes between fiscal 2005 and fiscal 2004 were:
o stock issued for services was $536,796 for fiscal 2005 which
primarily represented the value of the stock issued to the company
controlled by our principal stockholder as compensation for
management and administrative services. We did not have a comparable
expense in fiscal 2004,
o accrued salaries decreased $248,074 in fiscal 2005 from fiscal 2004
as we did not have comparable expenses in fiscal 2005, and
o discontinued operations, net increased $241,195 for fiscal 2005 from
fiscal 2004 as a result of the wind down of our operations in the
third quarter of fiscal 2005.
Net cash used in investing activities for fiscal 2005 was $1,000 as
compared to net cash provided by investing activities of $576,135 for fiscal
2004. The change from period to period is primarily attributable to a reduction
of $110,205 in capital expenditures in fiscal 2005 from fiscal 2004, as well as
the loans we made to an affiliate entity in fiscal 2004 for which there were no
comparable transactions in fiscal 2005.
10
Net cash provided by financing activities increased $310,100 for fiscal
2005 from fiscal 2004 and reflects the increase in cash we received from the
exercise of stock options, the sale of our securities and proceeds from a loan.
At December 31, 2005 we had an accumulated deficit of $8,118,714. The
report from our independent registered public accounting firm on our audited
financial statements at December 31, 2005 contains an explanatory paragraph
regarding doubt as to our ability to continue as a going concern as a result of
our significant recurring losses from operations since inception and our
accumulated deficit. As discussed earlier in this report, in October 2005 we
discontinued our operations and are now seeking to acquire assets or shares of
an entity actively engaged in business which generates revenues, in exchange for
our securities. We cannot predict when, if ever, we will be successful in this
venture and, accordingly, we may be required to cease operations at any time. We
do not have sufficient working capital to pay our operating costs for the next
12 months and we will require additional funds to pay our legal, accounting and
other fees associated with our company and its filing obligations under federal
securities laws, as well as to pay our other accounts payable generated in the
ordinary course of our business. We have no commitments from any party to
provide such funds to us. If we are unable to obtain additional capital as
necessary until such time as we are able to conclude a business combination, we
will be unable to satisfy our obligations and otherwise continue to meet our
reporting obligations under federal securities laws. In that event, our stock
would no longer be quoted on the OTC Bulletin Board and our ability to
consummate a business combination with upon terms and conditions which would be
beneficial to our existing stockholders would be adversely affected.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United States.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. These estimates and assumptions are affected by management's
applications of accounting policies. Critical accounting policies for our
company include the following:
Accounting for Stock Based Compensation - We account for stock based
compensation utilizing Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which encourages, but
does not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. We have chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the estimated fair market value of our stock
at the date of the grant over the amount an employee must pay to acquire the
stock. We have adopted the "disclosure only" alternative described in SFAS 123
and SFAS 148 (See Recent Accounting Pronouncements), which require pro forma
disclosures of net income and earnings per share as if the fair value method of
accounting had been applied.
NEW ACCOUNTING STANDARDS
In March 2004, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments." EITF 03-01 provides guidance on
other-than-temporary impairment models for marketable debt and equity securities
accounted for under SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," and SFAS No. 124, "Accounting for Certain Investments
Held by Not-for-Profit Organizations," and non-marketable equity securities
accounted for under the cost method. The EITF developed a basic three-step model
to evaluate whether an investment is other-than-temporarily impaired. In
September 2004, the FASB issued FASB Staff Position EITF 03-01-1, which delays
the effective date until additional guidance is issued for the application of
the recognition and measurement provisions of EITF 03-01 to investments in
securities that are impaired; however, the disclosure requirements are effective
for annual periods ending after June 15, 2004. The adoption of the disclosure
provisions of EITF 03-01 did not have a material effect on our results of
operations or financial condition.
11
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS 151, Inventory Costs--An Amendment Of ARB No. 43, Chapter 4. The
Statement Amends The Guidance Of ARB No. 43, Chapter 4, Inventory Pricing, by
clarifying that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as current-period
charges and by requiring the allocation of fixed production overheads to
inventory based on the normal capacity of the production facilities. It does not
appear that this Statement will have a material effect on our financial
position, operations or cash flows when it becomes effective in 2006.
In December 2004, the FASB issued SFAS No. 123R "Share-Based Payment"
("SFAS 123R"), a revision to SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), and superseding APB Opinion No. 25 "Accounting for
Stock Issued to Employees" and its related implementation guidance. SFAS 123R
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services, including obtaining
employee services in share-based payment transactions. SFAS 123R applies to all
awards granted after the required effective date and to awards modified,
repurchased, or cancelled after that date. Adoption of the provisions of SFAS
123R were effective as of the beginning of the first interim or annual reporting
period that began after December 15, 2005. We are currently in the process of
evaluating the potential impact that the adoption of SFAS 123R will have on our
consolidated financial position and results of operations.
In December 2004, the FASB issued SFAS 153, "Exchanges of Non-monetary
Assets, an amendment of APB 29, Accounting for Non-monetary Transactions." The
amendments made by SFAS 153 are based on the principle that exchanges of
non-monetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
non-monetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of non-monetary assets that do not have
commercial substance. Previously, APB 29 required that the accounting for an
exchange of a productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded
amount of the asset relinquished. APB 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The FASB believes that exception required that some non-monetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the FASB believes
SFAS 153 produces financial reporting that more faithfully represents the
economics of the transactions. SFAS 153 was effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for non-monetary asset exchanges occurring in fiscal
period beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. We do not believe that SFAS 153 will have a
material impact on our consolidated financial statements.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements are contained in pages F-1 through F-20, which
appear at the end of this annual report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 11, 2005, we dismissed Goldstein Lewin & Co. as our
independent registered public accounting firm. Goldstein Lewin & Co. had been
the independent registered public accounting firm for and audited our
consolidated financial statements as of December 31, 2004 and 2003. The reports
of Goldstein Lewin & Co. on our financial statements for the past two fiscal
years contained no adverse opinion or disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope or accounting principles,
except such reports were modified as to the effects, if any, for adjustments
related to the verification of shares of an investment held by us and an
explanatory paragraph relating to our ability to continue as a "going concern"
as a result of our continuing losses and accumulated deficit and lack of
sufficient capital for completion of its business plan. The decision to change
accountants was approved unanimously by the Board of Directors.
12
In connection with the audit for the two most recent fiscal years and
in connection with Goldstein Lewin & Co.'s review of the subsequent interim
periods preceding dismissal on April 11, 2005, there have been no disagreements
between our company and Goldstein Lewin & Co. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to the satisfaction of Goldstein Lewin & Co.,
would have caused Goldstein Lewin & Co. to make reference thereto in their
report on our financial statements for these fiscal years. During the two most
recent fiscal years and prior to the date hereof, we had no reportable events
(as defined in Item 304(a)(1) of Regulation S-B).
On April 13, 2005 we engaged Webb & Company, P.A. as our independent
registered public accounting firm. We had not consulted with Webb & Company,
P.A. regarding the application of accounting principles to any contemplated or
completed transactions nor the type of audit opinion that might be rendered on
our financial statements, and neither written nor oral advice was provided that
would be an important factor considered by us in reaching a decision as to an
accounting, auditing or financial reporting issues.
ITEM 8A. CONTROLS AND PROCEDURES
In September 2005 we restated our Consolidated Balance Sheet at
December 31, 2004 and Consolidated Statement of Operations, Consolidated
Statement of Stockholders' Equity and Consolidated Statement of Cash Flows for
the years ended December 31, 2004 and 2003 . In September 2005 we also restated
our Condensed Consolidated Balance Sheet (unaudited) at March 31, 2005. These
restatements were made to reflect a change in certain marketable securities to
recognize the other-than-temporary impairment on these marketable equity
securities in 2002. The restatements resulted from comments from the staff of
the Securities and Exchange Commission.
Because of this accounting error, our management, which includes our
Chief Executive Officer who also serves as our principal financial and
accounting officer, previously determined that a deficiency in our internal
controls existed related to the accounting for unrealized gain from marketable
securities. Specifically, we did not have adequate controls over the
presentation of unrealized gain from marketable securities. Accordingly,
management determined that this control deficiency constituted a material
weakness. A material weakness is a control deficiency, or combination of control
deficiencies, that results is a more than remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Subsequent to these restatements our management believes that we
have taken the steps necessary to eliminate this material weakness. As described
elsewhere herein we have subsequently discontinued our operations and now have
one person, our CEO, responsible for all accounting functions within our
company. As a result, there is an inherent weakness in our internal controls at
December 31, 2005 which will continue until such time as we expand our employee
base and maintain a sufficient complement of personnel with an appropriate level
of accounting knowledge, experience and training in the application of generally
accepted accounting principles which is commensurate with our financial
reporting requirements.
Our Chief Executive Officer, who also serves as our principal financial
and accounting officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated
under the Securities Exchange Act of 1934, as amended) as of a date (the
"Evaluation Date") as of the end of the period covered by the report. Based upon
that evaluation, our Chief Executive Officer has concluded that our disclosure
controls and procedures are effective in gathering, analyzing and disclosing
information needed to satisfy our disclosure obligations under the Exchange Act.
Other than the changes discussed above, based upon the foregoing evaluation
there have been no change in our internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
13
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE POSITION
---- --- --------
Dr. Irwin Horowitz 68 Director, Chief Executive Officer and President
Dr. Irwin Horowitz. Dr. Horowitz has been a member of our Board of
Directors since November 2004 and has served as President and Chief Executive
Officer since January 2005. Dr. Horowitz previously served as a member of our
Board of Directors from 1998 until 2000. Since 1992, Dr. Horowitz has been the
Chairman of the Board, Chief Executive Officer and the President of Diversifax
Inc. (Pink Sheets: DFAX) and Dr. Horowitz serves as Chairman of the Board and
President of IMSG Systems, Inc. and certain affiliated companies that were
acquired by Diversifax. Diversifax conducts business as IMSG Systems and certain
affiliated companies in the coin-operated copier business. Dr. Horowitz received
his podiatry degree from the M.J. Lewis College of Podiatric Medicine in 1959.
DIRECTORS' COMPENSATION
While we do not have an established compensation policy for our
directors, from time to time we may issue members of our Board of Directors
options as compensation for their services to us in those positions. During
fiscal 2005 we issued an aggregate of 100,000 shares of our common stock valued
at $9,000 to Messrs. Robert Sands and Lonnie Sciambi, who were then members of
our Board of Directors, as compensation for their services.
DIRECTOR INDEPENDENCE, AUDIT COMMITTEE OF THE BOARD OF DIRECTORS AND AUDIT
COMMITTEE FINANCIAL EXPERT
As our Board of Directors is comprised of only one individual we do not
have any directors who are "independent" within the meaning of definitions
established by the Securities and Exchange Commission. We anticipate that if we
are successful in closing a business combination with an operating entity, that
our future Board of Directors will include members who are independent. We do
not currently have any committees of our Board of Directors. We are not
currently subject to any law, rule or regulation requiring that all or any
portion of our Board of Directors include "independent" directors, nor are we
required to establish or maintain an Audit Committee of our Board of Directors.
Our sole director is not an "audit committee financial expert" within
the meaning of Item 401(e) of Regulation S-B. In general, an "audit committee
financial expert" is an individual member of the audit committee or Board of
Directors who:
o understands generally accepted accounting principles and financial
statements,
o is able to assess the general application of such principles in
connection with accounting for estimates, accruals and reserves,
o has experience preparing, auditing, analyzing or evaluating
financial statements comparable to the breadth and complexity to our
financial statements,
o understands internal controls over financial reporting, and
o understands audit committee functions.
14
CODE OF ETHICS
Effective November 18, 2002, our Board of Directors adopted a Code of
Business Conduct and Ethics that applies to, among other persons, our President
(being our principal executive officer) as well as all employees. As adopted,
our Code of Business Conduct and Ethics sets forth written standards that are
designed to deter wrongdoing and to promote:
o honest and ethical conduct, including the ethical handling of actual
or apparent conflicts of interest between personal and professional
relationships;
o full, fair, accurate, timely, and understandable disclosure in
reports and documents that we file with, or submit to, the SEC and
in other public communications made by us;
o compliance with applicable governmental laws, rules and regulations;
o the prompt internal reporting of violations of the Code of Business
Conduct and Ethics to an appropriate person or persons identified in
the Code of Business Conduct and Ethics; and
o accountability for adherence to the Code of Business Conduct and
Ethics.
Our Code of Business Conduct and Ethics requires, among other things,
that all of our company's personnel are accorded full access to our President
with respect to any matter that may arise relating to the Code of Business
Conduct and Ethics. Further, all of our company's personnel are to be accorded
full access to our Board of Directors if any such matter involves an alleged
breach of the Code of Business Conduct and Ethics by our President.
In addition, our Code of Business Conduct and Ethics emphasizes that
all employees, and particularly managers and/or supervisors, have a
responsibility for maintaining financial integrity within our company,
consistent with generally accepted accounting principles, and federal,
provincial and state securities laws. Any employee who becomes aware of any
incidents involving financial or accounting manipulation or other
irregularities, whether by witnessing the incident or being told of it, must
report it to his or her immediate supervisor or to our company's President. If
the incident involves an alleged breach of the Code of Business Conduct and
Ethics by the President, the incident must be reported to any member of our
Board Of Directors. Any failure to report such inappropriate or irregular
conduct of others is to be treated as a severe disciplinary matter. It is
against our company policy to retaliate against any individual who reports in
good faith the violation or potential violation of our company's Code of
Business Conduct and Ethics by another.
We will provide a copy of the Code of Business Conduct and Ethics to
any person without charge, upon request. Requests can be sent to Post Office Box
859, Tallevast, Florida 34270.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to us under Rule 16a-3(d) of the Securities Exchange Act of 1934, as
amended, during the fiscal year ended December 31, 2005 and Forms 5 and
amendments thereto furnished to us with respect to the fiscal year ended
December 31, 2005, as well as any written representation from a reporting person
that no Form 5 is required, we are aware that the above Board members failed to
file on a timely basis, as disclosed in the aforementioned Forms, reports
required by Section 16(a) of the Securities Exchange Act of 1934 during the
fiscal year ended December 31, 2005 other than:
o Dr. Horowitz failed to timely file a Form 4 following the granting of
options to purchase 5,000,000 shares of our common stock in March 2005, a Form 4
to following the purchase in a private transaction of 6,000,000 shares of our
common stock and common stock purchase warrants to purchase an additional
6,000,000 shares of common stock in June 2005.
15
o Mr. Lonnie L. Sciambi, who served as a member of our Board of
Directors in fiscal 2005, who failed to file his initial Form 3 upon joining the
Board and a Form 4 following the issuance of 50,000 shares of common stock to
him in October 2005.
o Mr. Robert Sands, who also served as a member of our Board of
Directors in fiscal 2005, who failed to file a Form 4 related to his purchase in
a private transaction of 6,000,000 shares of our common stock and common stock
purchase warrants to purchase an additional 6,000,000 shares of our common stock
in September 2005 and a Form 4 following the issuance of 50,000 shares of common
stock to him in October 2005.
ITEM 10. EXECUTIVE COMPENSATION
The following table summarizes all compensation recorded by us in each
of the last three fiscal years for our Chief Executive Officer and each other
executive officers serving as such (the "Named Executive Officers") whose annual
compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-term Compensation
-------------------------------------- ---------------------------------------------
Name Other Securities All other
and Annual Restricted underlying LTIP compen-
principal Fiscal Salary Bonus Compen- stock options/ payouts sation
position Year ($) ($) sation($) awards($) SARs(#) ($) ($)
------------------- ------ -------- ------ --------- ---------- ---------- ------- ---------
Irwin Horowitz (1) 2005 $ 12,000 $ 0 $0 $0 55,000,000 $0 $0
Gary Schultheis (2) 2005 $ 2,000 $ 0 $0 $0 10,000,000 $0 $0
2004 $ (4) $ 0 $0 $0 32,000 $0 $0
2003 $100,000 $5,572 $0 $0 0 $0 $0
Herbert Tabin (3) 2005 $ 2,000 $ 0 $0 $0 10,000,000 $0 $0
2004 $ (4) $ 0 $0 $0 32,000 $0 $0
2003 $100,000 $5,572 $0 $0 0 $0 $0
__________
(1) Dr. Horowitz has served as our President and Chief Executive Officer since
January 22, 2005. In January 2005 we granted Dr. Horowitz options to purchase
50,000,000 shares of our common stock with an exercise price of $0.30 per share
expiring in January 2013 valued at $3,500,000 and in March 2005 we granted him
options to purchase 5,000,000 shares of our common stock with an exercise price
of $0.001 per share valued at $700,000 as additional compensation. Excludes
compensation paid to Diversifax Inc., a company of which Dr. Horowitz is an
officer, director and principal shareholder, under the terms of a management
agreement. See "Item 12. Certain Relationships and Related Transactions"
appearing later in this annual report.
(2) Mr. Schultheis served as our President from February 1998 until January
2005. As compensation under the Separation and Severance Agreement entered into
with Mr. Schultheis in January 2005 we paid him $6,144 and issued him options to
purchase 10,000,000 shares of our common stock at an exercise price of $0.30
expiring in January 2013 which were valued at $700,000. During fiscal 2004 we
granted Mr. Schultheis options to purchase 32,000 shares of our common stock
with an exercise price of $.0016375 per share expiring in January 2009 as
additional compensation.
(3) Mr. Tabin served as our Director of Marketing from February 1998 until
January 2005. As compensation under the Separation and Severance Agreement
entered into with Mr. Tabin in January 2005 we paid him $6,144 and issued him
options to purchase 10,000,000 shares of our common stock at an exercise price
of $0.30 expiring in January 2013 which were valued at $700,000. During fiscal
2004 we granted Mr. Tabin options to purchase 32,000 shares of our common stock
with an exercise price of $.0016375 per share expiring in January 2009 as
additional compensation.
(4) In 2004 and 2003 we accrued $248,074 and $230,000 in salaries for Messrs.
Schultheis and Tabin in accordance with the terms of their employment agreement.
On December 20, 2004 Messrs. Schultheis and Tabin forgave $478,074 of these
accrued salaries.
16
EMPLOYMENT AGREEMENTS
On January 26, 2005 we entered into a three year employment agreement
with Dr. Irwin Horowitz to serve as our President and Chief Executive Officer.
Under the terms of the agreement Dr. Horowitz is to receive an annual salary of
$12,000 per year, reimbursement of his expenses, including travel and lodging
costs until such as time as he relocates his principal residence to the location
of our offices, and an automobile allowance of up to $1,500 on a monthly basis.
In addition, we granted Dr. Horowitz an option to purchase up to 50,000,000
shares of common stock exercisable at $0.30 per share and expiring January 26,
2013. The agreement may be extended for successive one year terms. Dr.
Horowitz's employment will terminate in the event of his death or disability, in
which event we are obligated to pay Dr. Horowitz or his estate a sum equal to
two months salary. In addition, we can terminate the agreement for "cause" which
is defined to include (i) committing or participating in an injurious act of
gross neglect or embezzlement against our company, (ii) committing or
participating in any other injurious act or omission wantonly, willfully,
recklessly or in a manner which was grossly negligent against our company,
monetarily or otherwise, (iii) engaging in a criminal enterprise involving moral
turpitude or (iv) conviction of an act or acts constituting a felony under the
laws of the United States or any state thereof. In the event we should terminate
Dr. Horowitz's agreement for cause we are obligated to pay him a sum equal to 20
days salary. We can also terminate the agreement without cause upon three
months' notice to Dr. Horowitz and in such event are obligated to pay Dr.
Horowitz his salary and benefits through the expiration of the initial term of
the employment agreement. The agreement may also be terminated by the mutual
consent of both parties in which event we would owe Dr. Horowitz a lump sum
equal to 20 days salary.
SEPARATION AND SEVERANCE AGREEMENTS
In January 2002, we entered into employment agreements with Mr. Gary
Schultheis, our then President, and Mr. Herb Tabin, our then Director of
Marketing. The terms of the contracts were identical and expired in January
2009. The annual salary under each of the agreements was $150,000, which was to
be increased by 10% each year, and provided for the annual granting of stock
options to purchase 32,000 shares of our common stock at an exercise price of
the average of closing price for the five trading days preceding the anniversary
date less 15% percent each year.
On January 26, 2005 Messrs. Schultheis and Tabin each entered into
separate Separation and Severance Agreements with us pursuant to which they
provided their resignations and also agreed to the termination of their
employment agreements. Each individual received options to purchase up to
10,000,000 shares of common stock at an exercise price of $0.30 per share
expiring January 26, 2013, and both were paid the sum of $6,144 to defray health
insurance premiums for the ensuing six months. The Separation and Severance
Agreements contain restrictions against either Messrs. Schultheis or Tabin
soliciting or doing business with our past or current customers for a period of
three years. We also agreed to indemnify each of Messrs. Schultheis and Tabin in
any matters arising from their employment with our company, subject to certain
limitations.
STOCK OPTION INFORMATION
The following table sets forth certain information with respect to
stock options granted in fiscal 2005 to the Named Executive Officers.
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 2005
(INDIVIDUAL GRANTS)
NO. OF SECURITIES % OF TOTAL OPTIONS/SARs
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION
NAME SARs GRANTED IN FISCAL YEAR PRICE DATE
---- ------------------ ----------------------- -------- ------------
Dr. Irwin Horowitz 55,000,000 66.9% (1) (1)
Gary Schultheis 10,000,000 12.2% $0.30 January 2013
Herb Tabin 10,000,000 12.2% $0.30 January 2013
__________
(1) Includes options to purchase 50,000,000 shares of our common stock with an
exercise price of $0.30 per share expiring in January 2013 and options to
purchase 5,000,000 shares of our common stock with an exercise price of $0.001
expiring in March 2013.
17
The following table sets forth certain information regarding stock
options held as of December 31, 2005 by the Named Executive Officers.
AGGREGATE OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 2005
AND YEAR-END OPTION VALUES
NO. OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE DECEMBER 31, 2005 DECEMBER 31, 2005(1)
ON REALIZED --------------------------- ---------------------------
NAME EXERCISE $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
Dr. Irwin Horowitz 32,000 $0 55,000,000 0 $230,000 n/a
Gary Schultheis 0 n/a 10,000,000 0 $ (1) n/a
Herb Tabin 0 n/a 10,000,000 0 $ (1) n/a
__________
(1) The dollar value of the unexercised in-the-money options is calculated based
upon the difference between the option exercise price and $0.047 per share,
being the last sale price of our common stock on December 31, 2005 as reported
by the OTC Bulletin Board. As the exercise price of the outstanding options are
$0.30 per share, based upon the trading price of our common stock on December
31, 2005 none of these outstanding options are in the money at December 31,
2005.
(2) Dr. Horowitz holds options to purchase 50,000,000 shares of common stock
with an exercise price of $0.30 per share which were out of the money at
December 31, 2005 and options to purchase 5,000,000 shares of common stock with
an exercise price of $0.001 per share which were valued at $230,000 at December
31, 2005.
STOCK OPTION PLANS
We presently have two stock option plans, our Evolve One, Inc. Stock
Option Plan (the "1999 Plan") and our 2005 Equity Compensation Plan (the "2005
Plan"). The purpose of the each of the 1999 Plan and the 2005 Plan is to advance
the interests of our company by providing an incentive to attract, retain and
motivate highly qualified and competent persons who are important to us and upon
whose efforts and judgment the success of our company is largely dependent,
including our officers and directors, key employees, consultants and independent
contractors. Our officers, directors, key employees and consultants are eligible
to receive awards under the each of the plans. Only our employees are eligible
to receive incentive options.
Both plans are administered by our Board of Directors. The Board of
Directors determines, from time to time, those of our officers, directors,
employees and consultants to whom plan options will be granted, the terms and
provisions of the plan options, the dates such plan options will become
exercisable, the number of shares subject to each plan option, the purchase
price of such shares and the form of payment of such purchase price. All other
questions relating to the administration of either plan, and the interpretation
of the provisions thereof are to be resolved at the sole discretion of the Board
of Directors.
The Board of Directors may amend, suspend or terminate either the 1999
Plan or the 2005 Plan at any time, except that no amendment shall be made which:
o increases the total number of shares subject to the plan or changes
the minimum purchase price therefore (except in either case in the
event of adjustments due to changes in our capitalization),
o affects outstanding options or any exercise right thereunder,
o extends the term of any option beyond 10 years, or
o extends the termination date of the plan.
18
Unless the plan is earlier suspended or terminated by the Board of
Directors, each plan terminates 10 years from the date of the plan's adoption.
Any termination of the plan does not affect the validity of any options
previously granted thereunder.
Evolve One, Inc. Stock Option Plan
In November 1999, our Board of Directors adopted our 1999 Plan, which
was approved by a majority of the stockholders at a meeting on November 11,
1999. Under the 1999 Plan we initially reserved 25,000,000 shares of common
stock for the grant of qualified incentive options or non-qualified options. On
January 31, 2003 we effected a one-for-250 reverse stock split which had the
effect of proportionately reducing both the number of shares of our common stock
available for issuance under the 1999 Plan as well as the number of shares of
common stock issuable upon the exercise of the then outstanding options. As a
result of the reverse stock split, we had 100,000 shares reserved for issuance
under the 1999 Plan. Effective December 6, 2004 the holders of a majority of our
issued and outstanding common stock adopted and amendment to the 1999 Plan to
ratify the increase the number of shares of common stock issuable under the 1999
Plan to our employees, directors and advisors from 100,000 shares to 1,000,000
shares. Pursuant to the plan amendment, the number of shares available for
issuance under the 1999 Plan was further increased to 8,000,000 shares on the
8:1 forward split which was also effective on that date. Other than increasing
the number of shares of our common stock available for issuance under the 1999
Plan, there are no changes to the terms or conditions of the 1999 Plan. On
December 31, 2005 we had options to purchase an aggregate of 2,896,000 shares of
common stock outstanding under the 1999 Plan at exercise prices ranging from
$0.000125 to $0.5625 per share.
The term of each option and the manner in which it may be exercised is
determined by the Board of Directors, provided that no option may be exercisable
more than 10 years after the date of its grant and, in the case of an incentive
option granted to an eligible employee owning more than 10% of our common stock,
no more than five years after the date of the grant.
Plan options granted under the 1999 Plan may either be options
qualifying as incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or options that do not so qualify. Any
incentive option granted under the 1999 Plan must provide for an exercise price
of not less than 100% of the fair market value of the underlying shares on the
date of such grant, but the exercise price of any incentive option granted to an
eligible employee owning more than 10% of our common stock must be at least 110%
of such fair market value as determined on the date of the grant. Non-qualified
options must provide for an exercise price of not less than 85% of the fair
market value of our common stock on the date of grant.
The per share purchase price of shares subject to options granted under
the 1999 Plan may be adjusted in the event of certain changes in our
capitalization, but any such adjustment will not change the total purchase price
payable upon the exercise in full of options granted under the 1999 Plan. All
options are nonassignable and nontransferable, except by will or by the laws of
descent and distribution and, during the lifetime of the optionee, may be
exercised only by such optionee. Previously granted options are subject to early
termination in the event of the death, disability or mental incapacity of the
option holder, or in the instance of options granted to employees, the
termination of that employee's employment with our company.
2005 Equity Compensation Plan
On May 6, 2005, our Board of Directors authorized the2005 Plan covering
100,000,000 shares of common stock. In the event the 2005 Plan is not approved
by our stockholders prior to May 6, 2006, the 2005 Plan will not be invalidated,
however, in the absence of stockholder approval, incentive stock options may not
be awarded under the 2005 Plan and any incentive stock options previously
19
awarded under the 2005 Plan shall be converted into non-qualified options upon
terms and conditions determined by the Board, as nearly as is reasonably
practicable in its sole determination, the terms and conditions of the incentive
stock options being so converted. As of December 31, 2005 we had options to
purchase an aggregate of 27,250,000 shares of common stock outstanding under the
2005 Plan at exercise prices ranging from $0.075 to $0.30 per share.
Plan options under the 2005 Plan may also either be options qualifying
as incentive stock options under Code or non-qualified options. In addition, the
2005 Plan allows for the inclusion of a reload option provision, which permits
an eligible person to pay the exercise price of the option with shares of common
stock owned by the eligible person and receive a new option to purchase shares
of common stock equal in number to the tendered shares. Furthermore,
compensatory stock amounts may also be issued. Additionally, deferred stock
grants and stock appreciation rights may also be granted under the 2005 Plan.
Any incentive option granted under the 2005 Plan must provide for an exercise
price of not less than 60% of the fair market value of the underlying shares on
the date of grant, but the exercise price of any incentive option granted to an
eligible employee owning more than 10% of our outstanding common stock must not
be less than 110% of fair market value on the date of the grant.
Subject to the limitation on the aggregate number of shares issuable
under the 2005 Plan, there is no maximum or minimum number of shares as to which
a stock grant or plan option may be granted to any person. Shares used for stock
grants and plan options may be authorized and unissued shares or shares
reacquired by us, including shares purchased in the open market. Shares covered
by plan options which terminate unexercised will again become available for
grant as additional options, without decreasing the maximum number of shares
issuable under the 2005 Plan, although such shares may also be used by us for
other purposes.
The 2005 Plan provides that, if our outstanding shares are increased,
decreased, exchanged or otherwise adjusted due to a share dividend, forward or
reverse share split, recapitalization, reorganization, merger, consolidation,
combination or exchange of shares, an appropriate and proportionate adjustment
shall be made in the number or kind of shares subject to the plan or subject to
unexercised options and in the purchase price per share under such options. Any
adjustment, however, does not change the total purchase price payable for the
shares subject to outstanding options. In the event of our proposed dissolution
or liquidation, a proposed sale of all or substantially all of our assets, a
merger or tender offer for our shares of common stock, the Board of Directors
may declare that each option granted under the plan shall terminate as of a date
to be fixed by the Board of Directors; provided that not less than 30 days
written notice of the date so fixed shall be given to each participant holding
an option, and each such participant shall have the right, during the period of
30 days preceding such termination, to exercise the participant's option, in
whole or in part, including as to options not otherwise exercisable.
The 2005 Plan provides that, with respect to incentive stock options,
the aggregate fair market value (determined as of the time the option is
granted) of the shares of common stock, with respect to which incentive stock
options are first exercisable by any option holder during any calendar year
shall not exceed $100,000. The purchase price for shares subject to incentive
stock options must be at least 100% of the fair market value of our common stock
on the date the option is granted, except that the purchase price must be at
least 110% of the fair market value in the case of an incentive option granted
to a person who is a "10% stockholder." A "10% stockholder" is a person who owns
(within the meaning of Section 422(b)(6) of the Code of 1986) at the time the
incentive option is granted, shares possessing more than 10% of the total
combined voting power of all classes of our outstanding shares. The 2005 Plan
provides that fair market value shall be determined by the Board in accordance
with procedures which it may from time to time establish. If the purchase price
is paid with consideration other than cash, the Board will determine the fair
value of such consideration to us in monetary terms. The exercise price of
non-qualified options shall be determined by the Board of Directors, but cannot
be less than the par value of our common stock on the date the option is
granted.
20
All plan options which are Incentive Stock Options are nonassignable
and nontransferable, except by will or by the laws of descent and distribution,
and during the lifetime of the optionee, may be exercised only by such optionee,
except as provided by the board of the Committee. If an optionee shall die while
our employee or within three months after termination of employment by us
because of disability, or retirement or otherwise, such options may be
exercised, to the extent that the optionee shall have been entitled to do so on
the date of death or termination of employment, by the person or persons to whom
the optionee's right under the option pass by will or applicable law, or if no
such person has such right, by his executors or administrators. Options are also
subject to termination by the Board under certain conditions.
In the event of termination of employment because of death while an
employee, or because of disability, the optionee's options may be exercised not
later than the expiration date specified in the option or one year after the
optionee's death, whichever date is earlier, or in the event of termination of
employment because of retirement or otherwise, not later than the expiration
date specified in the option or one year after the optionee's death, whichever
date is earlier. If an optionee's employment by us terminates because of
disability and such optionee has not died within the following three months, the
options may be exercised, to the extent that the optionee shall have been
entitled to do so at the date of the termination of employment, at any time, or
from time to time, but not later than the expiration date specified in the
option or one year after termination of employment, whichever date is earlier.
If an optionee's employment shall terminate for any reason other than death or
disability, optionee may exercise the options to the same extent that the
options were exercisable on the date of termination, for up to three months
following such termination, or on or before the expiration date of the options,
whichever occurs first. In the event that the optionee was not entitled to
exercise the options at the date of termination or if the optionee does not
exercise such options (which were then exercisable) within the time specified
herein, the options shall terminate. If an optionee's employment shall terminate
for any reason other than death, disability or retirement, all right to exercise
the option shall terminate not later than 90 days following the date of such
termination of employment, except as otherwise provided under the plan.
Non-qualified options are not subject to the foregoing restrictions unless
specified by the Board of Directors or Committee.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
At March 30, 2006, there were 52,451,348 shares of our common stock
issued and outstanding. The following table sets forth, as of that date
information known to us relating to the beneficial ownership of these shares by:
- each person who is the beneficial owner of more than 5% of the
outstanding shares of the class of stock;
- each director;
- each executive officer; and
- all executive officers and directors as a group.
Unless otherwise indicated, the business address of each person listed
is in care of Post Office Box 859, Tallevast, Florida 34270. We believe that all
persons named in the table have sole voting and investment power with respect to
all shares beneficially owned by them. Under securities laws, a person is
considered to be the beneficial owner of securities he owns and that can be
acquired by him within 60 days from March 30, 2006 upon the exercise of options,
warrants, convertible securities or other understandings. We determine a
beneficial owner's percentage ownership by assuming that options, warrants or
convertible securities that are held by him, but not those held by any other
person and which are exercisable within 60 days of that date have been exercised
or converted.
21
Name of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- --------
Dr. Irwin Horowitz(1) ............... 86,170,503 72.1%
All officers and directors as
a group (one person)(1) ........... 86,170,503 72.1%
Robert Sands (2) .................... 12,050,000 20.6%
Diversifax, Inc. (3) ................ 18,848,916 32.2%
Gary J. Schultheis (4) .............. 18,145,096 29.1%
Herbert Tabin (4) ................... 17,102,560 27.4%
_________
* represents less than 1%
(1) Includes 6,321,587 shares of our common stock presently outstanding together
with options to purchase 55,000,000 shares of our common stock with exercise
prices ranging from $0.001 to $0.30 per share and common stock purchase warrants
to purchase 6,000,000 shares of our common stock with exercise prices ranging
from $0.075 to $0.15 per share owned individually by Dr. Horowitz and 12,848,916
shares of our common stock presently outstanding together with common stock
purchase warrants to purchase 6,000,000 shares of our common stock with exercise
prices ranging from $0.075 to $0.15 per share owned of record by Diversifax,
Inc. Dr. Horowitz holds voting and dispositive control over the securities held
by Diversifax, Inc.
(2) Includes 6,050,000 shares of our common stock presently outstanding together
with common stock purchase warrants to purchase 6,000,000 shares of our common
stock with exercise prices ranging from $0.075 to $0.15 per share. Mr. Sands
served as a member of our Board of Directors in fiscal 2005.
(3) Includes 12,848,916 shares of our common stock presently outstanding
together with common stock purchase warrants to purchase 6,000,000 shares of our
common stock with exercise prices ranging from $0.075 to $0.15 per share. See
footnote 1 above.
(4) Includes options to purchase 10,000,000 shares of our common stock with an
exercise price of $0.30 per share. The number of shares owned by Mr. Tabin
excludes securities held by Onspan Networking, Inc., a publicly-held company of
which Mr. Tabin is Chairman of the Board and Chief Executive Officer.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 15, 2005, we entered into a Management Agreement with
Diversifax Inc. Dr. Irwin Horowitz, a principal stockholder and our Chief
Executive officer is also a principal stockholder and Chief Executive Officer of
Diversifax Inc. and Mr. Lonnie L. Sciambi, a former member of our Board of
Directors, is also a member of the Board of Directors of Diversifax Inc.
Under the terms of the agreement, Diversifax Inc. made available to our
company its facilities at 39 Stringham Avenue, Valley Stream, New York; the
services on a part-time basis of seven persons presently employed by Diversifax
Inc. for approximately 100 hours per week; equipment, hardware and software of
Diversifax Inc. and related utilities and overhead functions at that facility.
The term of the agreement was for six months and could be terminated prior to
the conclusion of its term on 10 days' prior written notice by either party, or
the agreement may be renewed for a successive six-month term.
22
In consideration for the management services and facilities provided by
Diversifax during the initial six-month term, we issued Diversifax 3,595,041
shares of our common stock. In addition, in the event the market price of our
common stock on the six-month anniversary date was below $0.15 per share, we
agreed to issue to Diversifax additional shares of our common stock so that the
common shares provided to Diversifax plus such additional shares of common stock
would be equal in value to $435,000. In addition, Diversifax was to receive 10%
of the total amount of the monies received as a result of their efforts with
regard to auctions being completed for accounts they have introduced to
AuctionStore.com, our wholly-owned subsidiary. Payment of the percentage fee was
to be made in cash or stock as determined by Diversifax. Following the
termination of the agreement we continued to utilize these services under an
oral arrangement and in January 2006 we issued Diversifax 3,253,875 shares of
our common stock in full settlement of services through December 31, 2005. We
recorded an expense of $527,728 as the value of the shares we issued to
Diversifax in fiscal 2005 for these services.
On March 22, 2005 we entered into a subscription agreement with Mr.
Robert Sands, a former member of our Board of Directors, for the sale of 20
units of our securities for an aggregate price of $100,000. Each unit had a cost
of $5,000 and consisted of 100,000 shares of common stock and one three year
option consisting of 100,000 shares of common stock exercisable at $.25 cents
per share. We rejected the subscription agreement and recorded the proceeds as a
loan payable at March 31, 2005. The loan was unsecured, non-interest bearing and
due on demand.
During May 2005, Dr. Irwin Horowitz loaned us $100,000 for working
capital. The loan was non-interest bearing, unsecured and payable on demand. As
described below, this loan was converted into equity in June 2005.
In June 2005, we sold units of our securities in a private placement
resulting in gross proceeds of us of $320,000. The purchasers included four
accredited investors and one unaccredited family member of Dr. Horowitz. As
consideration we received $220,000 in cash and the conversion of a $100,000 loan
payable. In this transaction we issued 19,200,000 shares of our common stock and
an equal number of warrants exercisable at $0.15 per share for a term ending in
May 2008. Dr. Horowitz and Diversifax Inc. purchased an aggregate $200,000 of
units in this offering and received 12,000,000 shares of common stock and
warrants to purchase 12,000,000 shares. Mr. Sands converted the $100,000 note
payable described earlier in this section into 6,000,000 shares of common stock
and 6,000,000 common stock purchase warrants as part of the offering.
We previously issued a $100,000 demand line of credit to Onspan
Networking, Inc., an affiliated entity of which Messrs. Gary Schultheis and Herb
Tabin, our former officers and directors, were officers and directors, under
which Onspan Networking, Inc. was allowed to borrow on an unsecured basis at 5%
annually. On June 19, 2003 Onspan Networking, Inc. borrowed $675,000 under this
line of credit. On March 30, 2004, Onspan Networking, Inc. borrowed an
additional $6,000 under this line of credit, for a total of $681,000. On April
5, 2004 Onspan Networking, Inc. repaid the additional $6,000. On May 27, 2004,
Onspan Networking, Inc. repaid the original balance outstanding under the line
of credit, including accrued interest. This line of credit expired upon
repayment on May 27, 2004. Under the terms of the demand line of credit Onspan
Networking, Inc. granted us options to purchase 67,500 shares of its common
stock with an exercise price of $.10 per share. Onspan Networking, Inc. also
granted us options to purchase 607,500 shares of its common stock with an
exercise price of $.30 per share.
In December 2004 Messrs. Gary Schultheis and Herbert Tabin, our former
officers and directors, forgave an aggregate of $478,074 due them for accrued
but unpaid compensation and the amount was contributed to our capital.
On October 15, 2004, we sold 1,360,000 shares of our common stock in a
private transaction. Purchasers included OnSpan Networking Inc., which purchased
1,200,000 shares of common stock for $27,000, as well as Mr. Martin Scott, a
former director, and Dr. Irwin Horowitz, who was then a member of our Board of
Directors. Each of Mr. Scott and Dr. Horowitz purchased 80,000 shares of common
stock for $1,800.
23
PART IV
ITEM 13. EXHIBITS
The following documents are filed as a part of this report or are
incorporated by reference to previous filings, if so indicated:
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Reorganization with International Internet, Inc.
(2)
2.2 Certificate of Ownership and Merger (3)
3.1 Certificate of Incorporation (1)
3.2 Bylaws (1)
10.1 Stock Purchase Agreement with NYCLE Acquisition Corp.(4)
10.2 Management Agreement dated March 15, 2005 with Diversifax (6)
10.3 Employment Agreement with Dr. Irwin Horowitz (9)
10.4 Employment Agreement with Mr. Gary Schultheis (8)
10.5 Employment Agreement with Mr. Herb Tabin (8)
10.6 Separation and Severance Agreement with Mr. Gary Schultheis (9)
10.7 Separation and Severance Agreement with Mr. Herb Tabin (9)
14.1 Code of Business Conduct and Ethics adopted November 18, 2002 (5)
16.1 Letter from Goldstein Lewin & Co. to the SEC dated April 11, 2005 (7)
31.1 Section 302 Certification of Chief Executive Officer *
31.2 Section 302 Certification of Chief Financial Officer *
32.1 Section 906 Certification of Chief Executive Officer *
_________
* filed herewith
(1) Incorporated by reference to the Form 10-SB as filed on June 17, 1999.
(2) Incorporated by reference to the Report on Form 8-K as filed on December 3,
1999.
(3) Incorporated by reference to the Report on Form 8-K as filed on December 8,
1999.
(4) Incorporated by reference to the Report on Form 8-K as filed on December
27, 2001.
(5) Incorporated by reference to the annual report on Form 10-KSB for the
fiscal year ended December 31, 2002.
(6) Incorporated by reference to the Report on Form 8-K as filed on March 17,
2005.
(7) Incorporated by reference to the Report on Form 8-K as filed on April 15,
2005.
(8) Incorporated by reference to the Report on Form 8-K as filed on January 31,
2002.
(9) Incorporated by reference to the Report on Form 8-K as filed on February 1,
2005.
24
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Goldstein Lewin & Co. served as our independent registered public
accounting firm for fiscal 2004 and Webb & Company, P.A. served as our
independent registered public accounting firm for fiscal 2005. The following
table shows the fees that were billed for the audit and other services provided
by each of these firms for the 2005 and 2005 fiscal years.
Fiscal 2005 Fiscal 2004
----------- -----------
Audit Fees ......................... $16,878 $28,045
Audit-Related Fees ................. 3,035 0
Tax Fees ........................... 0 5,400
All Other Fees ..................... 0 0
------- -------
Total ..................... $19,913 $33,445
======= =======
Audit Fees -- This category includes the audit of our annual financial
statements, review of financial statements included in our Form 10-QSB Quarterly
Reports and services that are normally provided by the independent auditors in
connection with engagements for those fiscal years. This category also includes
advice on audit and accounting matters that arose during, or as a result of, the
audit or the review of interim financial statements.
Audit-Related Fees -- This category consists of assurance and related
services by the independent auditors that are reasonably related to the
performance of the audit or review of our financial statements and are not
reported above under "Audit Fees." The services for the fees disclosed under
this category include consultation regarding our correspondence with the SEC and
other accounting consulting.
Tax Fees -- This category consists of professional services rendered by
our independent auditors for tax compliance and tax advice. The services for the
fees disclosed under this category include tax return preparation and technical
tax advice.
All Other Fees -- This category consists of fees for other
miscellaneous items.
Our Board of Directors has adopted a procedure for pre-approval of all
fees charged by the our independent auditors. Under the procedure, the Board
approves the engagement letter with respect to audit, tax and review services.
Other fees are subject to pre-approval by the Board, or, in the period between
meetings, by a designated member of Board. Any such approval by the designated
member is disclosed to the entire Board at the next meeting. The audit and tax
fees paid to the auditors with respect to fiscal year 2005 were pre-approved by
the entire Board of Directors.
25
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Evolve One, Inc.
March 30, 2006 By: /s/ Irwin Horowitz
------------------
Irwin Horowitz, CEO and President,
principal executive officer and
principal financial and 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/ Irwin Horowitz CEO, President and director March 30, 2006
------------------
Irwin Horowitz
26
EVOLVE ONE, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
F-1
EVOLVE ONE, INC. AND SUBSIDIARIES
CONTENTS
PAGES F-3 - 4 REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
PAGE F-5 CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2005
PAGE F-6 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004
PAGE F-7 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY) FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
PAGES F-8 - 9 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004
PAGES F-11 - 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors of:
Evolve One, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Evolve One, Inc.
and subsidiaries as of December 31, 2005, and the related consolidated
statement of operations, changes in stockholders' equity (deficiency) and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the financial position of Evolve One, Inc. and
subsidiaries as of December 31, 2005 and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
the consolidated financial statements, the Company had a net loss of $1,292,651,
a working capital deficiency of $2,170, has had recurring losses since inception
and has an accumulated deficit of $8,118,714. This raises substantial doubt
about its ability to continue as a going concern. Management's plans concerning
this matter are also described in Note 10. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
WEBB & COMPANY, P.A.
Boynton Beach, Florida
February 27, 2006
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Evolve One, Inc. and Subsidiaries
Boca Raton, Florida
We have audited the accompanying statements of operations, stockholders' equity
and cash flows of Evolve One Inc., and Subsidiaries for the year ended December
31, 2004. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Pubic Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements of Evolve One, Inc. and Subsidiaries
referred to above present fairly, in all material respects, the results of their
operations and their cash flows for the year ended December 31, 2004 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 more fully described in
Note 10 to the financial statements, the Company has incurred significant
recurring losses from operations since inception. This condition raises
substantial doubt about its ability to continue as a going concern. Management's
plans regarding these matters are described in Note 10. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note 9, the consolidated financial statements have been
reclassified.
/s/ Goldstein Lewin & Co.
Certified Public Accountants
Boca Raton, Florida
March 18, 2005, except for Note 9
as to which the date is February 27, 2006
F-4
EVOLVE ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2005
-----------------------
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents ..................................... $ 1,964
-----------
TOTAL ASSETS .................................................... $ 1,964
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES
Accounts payable .............................................. $ 4,134
-----------
Total Current Liabilities ................................. 4,134
-----------
COMMITMENTS AND CONTINGENCIES ................................... -
STOCKHOLDERS' DEFICIENCY
Cumulative convertible preferred stock, $0.0001 par value,
10,000,000 shares authorized, none issued and outstanding .... -
Common stock, $0.0001 par value, 1,000,000,000 shares
authorized, 52,451,348 shares issued and outstanding ......... 523
Additional paid in capital .................................... 8,116,021
Accumulated deficit ........................................... (8,118,714)
-----------
Total Stockholders' Deficiency ............................ (2,170)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY .................. $ 1,964
===========
See accompanying notes to consolidated financial statements.
F-5
EVOLVE ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
----------------------------------------------
2005 2004
------------ ------------
SALES AND REVENUE ................................ $ - $ -
COST OF SALES .................................... - -
------------ ------------
GROSS PROFIT (LOSS) .............................. - -
------------ ------------
OPERATING EXPENSES
Stock compensation expense ...................... 536,796 -
Selling, general and administrative expenses .... 149,979 779,752
------------ ------------
Total Operating Expenses ................... 686,775 779,752
------------ ------------
LOSS FROM CONTINUING OPERATIONS .................. (686,775) (779,752)
------------ ------------
OTHER INCOME (EXPENSE)
Loss from sale of marketable equities ........... - -
Investment income ............................... - 13,662
------------ ------------
Total Other Income (Expense) ............... - 13,662
------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS .............. (686,775) (766,090)
LOSS FROM DISCONTINUED OPERATIONS ................ (605,876) (560,909)
------------ ------------
NET LOSS ......................................... $ (1,292,651) $ (1,326,999)
-------- ============ ============
LOSS PER COMMON SHARE - BASIC AND DILUTED
Loss from continuing operations ................. $ (0.02) $ (0.03)
Loss from discontinued operations ............... (0.01) (0.02)
------------ ------------
Net loss per share - basic and diluted ........... $ (0.03) $ (0.05)
------------ ------------
Weighted average number of shares outstanding
during the period - basic and diluted ........... 38,971,184 25,038,487
============ ============
See accompanying notes to consolidated financial statements.
F-6
EVOLVE ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Accumulated
Additional Other
Common Stock Paid-In Accumulated Comprehensive
Shares Amount Capital Deficit Income (Loss) Total
---------- ------ ---------- ------------ ------------- -----------
Balance, December 31, 2003 ............ 24,770,432 $ 247 $6,730,127 $(5,499,064) $ 31,110 $ 1,262,420
Issuance of common stock for cash ..... 1,360,000 14 30,586 - - 30,600
Contribution to capital of liability to
directors/shareholders ............... - - 478,074 - - 478,074
Comprehensive income (loss):
Unrealized gain on available-for-sale
securities, net ...................... - - - - (36,060) (36,060)
Net loss .............................. - - - (1,326,999) - (1,326,999)
-----------
Total comprehensive income (loss) ..... - - - - - (1,363,060)
---------- ------ ---------- ----------- ------------ -----------
Balance, December 31, 2004 ............ 26,130,432 261 7,238,787 (6,826,063) (4,950) 408,035
Exercise of stock options ............. 152,000 1 20,699 - - 20,700
Stock issued to directors for services 100,000 1 8,999 - - 9,000
Stock issued for cash ................. 19,200,000 192 319,808 - - 320,000
Stock issued for services ............. 6,868,916 68 527,728 - - 527,728
Comprehensive income (loss):
Unrealized gain on available-for-sale
securities, net ...................... - - - - 4,950 4,950
Net loss .............................. - - - (1,292,651) - (1,292,651)
Total comprehensive income (loss) ..... - - - - - (1,287,701)
---------- ------ ---------- ----------- ------------ ===========
BALANCE, DECEMBER 31, 2005 ............ 52,451,348 $ 523 $8,116,021 $(8,118,714) $ - $ (2,170)
========== ====== ========== =========== ============ ===========
See accompanying notes to consolidated financial statements.
F-7
EVOLVE ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
----------------------------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................... $(1,292,651) $(1,326,999)
Net loss from discontinued operations ............ (605,876) 560,909
Loss from continuing operations (686,775) (766,090)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization .................. - 3,489
Stock issued for services ...................... 536,796 -
Changes in operating assets and liabilities:
Decrease (increase) in:
Other assets ................................. - (13,385)
Increase (decrease) in:
Accounts payable ............................. - (11,921)
Accrued salaries ............................. - 248,074
Discontinued operations, net ................. 241,195 (8,890)
----------- -----------
Net Cash Used In Operating Activities ...... (514,660) (548,723)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ............................. (1,000) (111,205)
Loan receivable - Onspan Networking, Inc., Net ... - 675,000
Interest receivable - Onspan Networking, Inc. .... - 17,940
Discontinued investing activities, net - (5,600)
----------- -----------
Net Cash Provided By (Used In) Investing
Activities ................................ (1,000) 576,135
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options ........................ 20,700 -
Proceeds from sale of common stock ............... 220,000 30,600
Proceeds from loan payable ....................... 100,000 -
----------- -----------
Net Cash Provided By Financing Activities .. 340,700 30,600
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (174,960) 58,012
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ... 176,924 118,912
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......... $ 1,964 $ 176,924
=========== ===========
(continued)
See accompanying notes to consolidated financial statements.
F-8
EVOLVE ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (continued)
----------------------------------------------------------
2005 2004
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-------------------------------------------------
Cash paid for income taxes ......................... $ - $ -
=========== ===========
Cash paid for interest expense ..................... $ - $ -
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
-----------------------------------------------------------------------
During 2005, a stockholder converted $100,000 in loans payable to common stock.
During 2004, directors and stockholders contributed $478,074 of capital to the
Company.
See accompanying notes to consolidated financial statements.
F-9
EVOLVE ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
-----------------------
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------ -----------------------------------------------------------
(A) ORGANIZATION
----------------
Evolve One, Inc. (the "Company" or "EONE") is a diversified holding
company that develops and operates Internet and direct retail marketing
companies. The Company's operating subsidiaries have all been
classified as discontinued operations. These include
A1DiscountProducts.com, StogiesOnline.com, Inc. ("Stogies")
(www.CigarCigar.com), an online distributor of brand name premium
cigars and accessories, AuctionStore.com Inc. ("Auctionstore")
(www.Auctionstore.com), is an eBay(R) Trading Assistant and
Internet-based seller of consigned merchandise whose primary medium of
sales is through eBay(R), AuctionStore Franchise Corp. ("Franchise"), a
recently formed subsidiary that was to have marketed and serviced
AuctionStore franchises, and International Internet Venture I, LLC
(Ventures") which from time to time has owned an equity interest in
several companies, some of which were classified as trading securities
and some of which were classified as available-for-sale securities.
EONE was incorporated in Delaware on June 21, 1994. As of December 31,
2005, the Company decided to discontinue the operations of all its
operating subsidiaries and has classified these operations also as
discontinued. (See Note 9).
(B) ACCOUNTING ESTIMATES
------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
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 revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
(C) PRINCIPLES OF CONSOLIDATION
-------------------------------
The consolidated financial statements include the accounts of EONE,
Inc. and its wholly-owned subsidiaries, Auctionstore.com, Inc., Stogies
Online, Inc., II Ventures, Inc., and Auctionstore Franchise Corp. All
significant intercompany balances and transactions have been eliminated
in consolidation.
(D) CASH AND CASH EQUIVALENTS
-----------------------------
For purposes of the cash flow statements, the Company considers all
highly liquid investments with original maturities of three months or
less at the time of purchase to be cash equivalents.
(E) MARKETABLE SECURITIES
-------------------------
Marketable equity securities are classified into three categories as
follows: (1) held-to-maturity securities reported at amortized cost,
(2) trading securities reported at fair value with unrealized gains and
losses included in earnings, and (3) available-for-sale securities
reported at fair value with unrealized gains and losses reported in
other comprehensive income (loss). Cost of securities are determined by
the specific identification method.
F-10
EVOLVE ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
-----------------------
(F) INVENTORIES
---------------
Inventories are stated at the lower of cost or market determined by the
first-in, first-out method. Inventories consist of cigars, colognes and
related accessories. As of December 31, 2005, the Company recognized an
impairment of its remaining inventory due to the closing of its
offices.
(G) NET EARNINGS (LOSS) PER SHARE
---------------------------------
Basic net earnings (loss) per share is computed by dividing net
earnings (loss) by the weighted-average number of shares outstanding.
Diluted net earnings (loss) per share includes the dilutive effect of
stock options. The calculation of diluted weighted average shares
outstanding for the years ended December 31, 2005 and 2004 excludes
104,346,000 and 3,048,000 stock options and warrants, respectively.
These shares were excluded because their effect was anti-dilutive.
(H) STOCK-BASED COMPENSATION
----------------------------
The Company granted stock options to directors and employees that are
more fully described in Note 5. The Company accounts for its stock
options using the intrinsic value method under Accounting Principles
Board Opinion ("APB") No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES."
During the year ended December 31, 2005, the Company granted 82,250,000
stock options to employees. The Company granted 2,920,000 stock options
to certain employees during the year ended December 31, 2004. The
Company applies APB Opinion No. 25 and related interpretations in
accounting for stock options issued to employees. Had compensation cost
been determined based on the fair market value at the grant date,
consistent with SFAS 123, the Company's net income (loss) would have
changed to the pro-forma amounts indicated below.
For the Year For the Year
Ended Ended
December 31, December 31,
2005 2004
------------ ------------
Net loss available to common stockholders As Reported $(1,245,751) $(1,326,999)
Pro Forma $(7,333,751) $(1,326,999)
Basic and diluted loss per share As Reported (0.03) (0.05)
Pro Forma (0.18) (0.05)
F-11
EVOLVE ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
-----------------------
(I) REVENUE RECOGNITION
-----------------------
Revenue form sales of cigars, perfume and cologne, and auction items
over the Internet, is recognized upon shipment. Provision is made at
the time the related revenue is recognized for estimated product
returns.
(J) PROPERTY AND EQUIPMENT
--------------------------
Property and equipment are stated at cost and depreciated on an
accelerated basis over the estimated useful lives of the assets.
Depreciation expense for the years ended December 31, 2005 and 2004
amounted to $25,367 and $3,489, respectively. During 2005, the Company
closed down its operations in Florida and recognized an impairment loss
of $130,776.
(K) OTHER COMPREHENSIVE INCOME
------------------------------
Other comprehensive income refers to revenue, expense and gains and
losses that under generally accepted accounting principles are included
in comprehensive income but are excluded from net earnings (loss) as
these amounts are recorded directly to an adjustment to stockholders'
equity, net of tax. The Company's other comprehensive income is
composed of net unrealized losses on available-for-sale securities.
(L) INCOME TAXES
----------------
The Company recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that are expected to
be in effect when the differences are expected to be recovered. The
Company provides a valuation allowance for deferred tax assets for
which it does not consider realization of such assets to be more likely
than not.
(M) FAIR VALUE OF FINANCIAL INSTRUMENTS
---------------------------------------
The carrying amount of cash, accounts payable and accrued liabilities
approximate fair value because of the short maturity of the instruments
and the provision, if any, for what management believes to be adequate
reserves for potential losses.
(N) LONG-LIVED ASSETS
---------------------
The Company reviews for the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. An impairment loss would be recognized
when estimated future cash flows expected to result from the use of the
asset and its eventual disposition is less than its carrying amount.
(O) ADVERTISING EXPENSE
-----------------------
The Company expenses advertising costs as they are incurred.
Advertising expense for the years ended December 31, 2005 and 2004
amounted to $27,792 and $61,558, respectively.
F-12
EVOLVE ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
-----------------------
(P) ALLOWANCE FOR DOUBTFUL ACCOUNTS
-----------------------------------
The Company's accounts receivable are reported net of bad debt
reserves, which are regularly evaluated by management for adequacy. The
evaluation includes and is not limited to a review of individual
customer accounts that have balances beyond the agreed upon terms of
the sale. Reserve values are assigned to individual accounts based on
the Company's recent payment experience with the customer and knowledge
of the customer's creditworthiness. During 2005, the Company recognized
a provision for uncollectible accounts of $940.
(Q) RECENT ACCOUNTING PRONOUNCEMENTS
------------------------------------
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS 151,INVENTORY COSTS--AN AMENDMENT OF ARB NO. 43, CHAPTER 4.
The Statement amends the guidance of ARB No. 43, Chapter 4,INVENTORY
PRICING, by clarifying that abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials (spoilage) should be
recognized as current-period charges and by requiring the allocation of
fixed production overheads to inventory based on the normal capacity of
the production facilities. It does not appear that this Statement will
have a material effect on the financial position, operations or cash
flows of the Company when it becomes effective in 2006.
In December 2004, the FASB issued SFAS No. 123R "Share-Based Payment"
("SFAS 123R"), a revision to SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), and superseding APB Opinion No. 25
"Accounting for Stock Issued to Employees" and its related
implementation guidance. SFAS 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity
instruments for goods or services, including obtaining employee
services in share-based payment transactions. SFAS 123R applies to all
awards granted after the required effective date and to awards
modified, repurchased, or cancelled after that date. Adoption of the
provisions of SFAS 123R is effective as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005. The
Company is currently in the process of evaluating the potential impact
that the adoption of SFAS 123R will have on its consolidated financial
position and results of operations.
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary
Assets, an amendment of APB 29, Accounting for Nonmonetary
Transactions." The amendments made by SFAS 153 are based on the
principle that exchanges of nonmonetary assets should be measured based
on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for nonmonetary exchanges of similar
productive assets and replace it with a broader exception for exchanges
of nonmonetary assets that do not have commercial substance.
Previously, APB 29 required that the accounting for an exchange of a
productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the
recorded amount of the asset relinquished. APB 29 provided an exception
to its basic measurement principle (fair value) for exchanges of
similar productive assets. The FASB believes that exception required
that some nonmonetary exchanges, although commercially substantive, be
recorded on a carryover basis. By focusing the exception on exchanges
that lack commercial substance, the FASB believes SFAS 153 produces
financial reporting that more faithfully represents the economics of
the transactions. SFAS 153 is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in
fiscal period. The adoption of this statement will not have a material
effect on the financial position, operations or cash flow of the
Company.
F-13
EVOLVE ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
-----------------------
NOTE 2 MARKETABLE EQUITY SECURITIES
------ ----------------------------
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities," requires that all applicable investments be classified as
trading securities, available-for-sale securities or held-to-maturity
securities. The Company has classified certain of its investments as
trading securities which are reported at fair value, which is defined
to be the last closing price for the listed securities. The unrealized
gains and losses which the Company recognizes from its trading
securities are included in earnings. The Company also has investments
classified as available-for-sale, which are also required to be
reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity
(net of the effect of income taxes). Fair value is also defined to be
the last closing price for the listed security. Due to the size of
certain of the Company's investments and their limited trading volume,
there can be no assurance that the Company will realize the value which
is required to be used by SFAS No. 115.
The amortized cost of equity securities as shown in the accompanying
balance sheet and their estimated market value at December 31, 2005 are
as follows:
Available-for-sale securities:
Cost ........................................... $ 6,450
Realized loss .................................. 6,450
--------
Marketable equity securities classified as current $ -
========
Losses from trading securities that were included in earnings from
discontinued operations for the years ended December 31, 2005 and 2004
were as follows:
2005 2004
-------- --------
Realized loss ................... $ 6,450 $(54,074)
======== ========
Unrealized loss ................. $ - $ (1,487)
======== ========
The change in unrealized gains (losses) from available-for-sale
securities included as a component of equity for the years ended
December 31, 2005 and 2004 were as follows:
2005 2004
-------- ----
Net unrealized gains (losses).... $ (4,950) $ 0
-------- ----
Unrealized gain ................. $ - $ 0
======== ====
F-14
EVOLVE ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
-----------------------
NOTE 3 LOAN RECEIVABLE
------ ---------------
The Company issued a demand line of credit with Onspan Networking, Inc
a related party, totaling $1,000,000, under which Onspan Networking,
Inc. was allowed to borrow on an unsecured basis at 5% annually. On
June 19, 2003 Onspan Networking, Inc. borrowed $675,000 under this line
of credit. On March 30, 2004, Onspan Networking, Inc. borrowed an
additional $6,000 under this line of credit, for a total of $681,000.
On April 5, 2004 Onspan Networking, Inc. repaid the additional $6,000.
On May 27, 2004, Onspan Networking, Inc. repaid the original balance
outstanding under the line of credit, including accrued interest. This
line of credit expired upon repayment on May 27, 2004.
The terms of the demand line of credit state that Onspan Networking,
Inc. must issue options to the Company to purchase common stock equal
to 10% of the dollar amount of the loan advance at an exercise price of
$0.10 per share, and options to purchase common stock equal to 90% of
the dollar amount of the loan advance at the ten trading day average at
the time of the draw ($0.30 at June 30, 2003). On June 19, 2003, Onspan
Networking, Inc. granted 67,500 stock options to Evolve One, Inc. under
the revolving note agreement. The options have an exercise price of
$.10 per share. Onspan Networking, Inc. also granted on June 19, 2003,
607,500 stock options to Evolve One, Inc. in the same note agreement.
These options have an exercise price of $.30 per share. The Company
currently has excluded these "options" on common stock from assets of
the company as the underlying stock due to market conditions, are not
readily convertible to cash. If conditions are satisfied and the
underlying stock becomes marketable, the "options" would be
reclassified as a derivative and recorded at fair value as an
adjustment through current period results of operations.
NOTE 4 CAPITAL STOCK
------ -------------
(A) COMMON STOCK
----------------
On October 15, 2004, the Company issued in a private transaction exempt
from registration under the Securities Act of 1933, as amended (the
"Securities Act") in reliance on an exemption provided by Section 4(2)
of the Securities Act 1,360,000 shares of common stock of the Company.
OnSpan Networking Inc., a related party where certain majority
shareholders of the Company are also officers and directors of Onspan
Networking Inc., purchased 1,200,000 shares of common stock for
$27,000. Martin Scott, a former director and Dr. Irwin Horowitz, an
officer and director of the Company, each purchased 80,000 shares of
common stock for $1,800.
On March 15, 2005, Evolve One entered into a Management Agreement with
Diversifax Inc. ("Diversifax"). Irwin Horowitz, a principal shareholder
and Chief Executive officer of Evolve One, is also a principal
shareholder and Chief Executive Officer of Diversifax. Under the terms
of the agreement, Diversifax will make available to Evolve One its
facilities at 39 Stringham Avenue, Valley Stream, New York; the
services on a part-time basis of 7 persons presently employed by
Diversifax for approximately 100 hours per week; equipment, hardware
and software of Diversifax; and related utilities and overhead
F-15
EVOLVE ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
-----------------------
functions at that facility. The term of the agreement is for six months
and may be terminated prior to the conclusion of its term on ten days'
prior written notice by either party, or the agreement may be renewed
for a successive six-month term.
In consideration for the management services and facilities provided by
Diversifax during the initial six-month term, Evolve One issued to
Diversifax 2,900,000 shares of its common stock. In addition, in the
event the market price of the common stock of Evolve One on the
six-month anniversary date is below $0.15 per share, Evolve One will
issue to Diversifax additional shares of its common stock so that the
common shares provided to Diversifax plus such additional shares of
common stock will be equal in value to $435,000. In addition,
Diversifax will receive 10% of the total amount of the monies received
as a result of their efforts with regard to auctions being completed
for accounts they have introduced to AuctionStore.com, Evolve One's
wholly-owned subsidiary. Payment of the percentage fee will be made in
cash or stock as determined by Diversifax. During December 2005, the
Company issued an additional 3,968,916 shares of common stock to
Diversifax in full settlement of services through December 31, 2005. As
of December 31, 2005, the Company recorded an expense of $527,728, the
fair value on the date of grant.
On June 20, 2005, Evolve One completed subscription arrangements with
four accredited investors and one unaccredited family member of the
chief executive officer of the Company for a total of $320,000.
Pursuant to the subscription arrangements, the Company issued
19,200,000 shares and 19,200,000 warrants exercisable at $0.15 per
share for a term ending in May 2008. Members of management invested
$200,000 of this amount and received 12,000,000 shares and warrants to
purchase 12,000,000 shares. No commissions or fees were paid in
connection with the issuance. Inasmuch as the investors were all
members of management and accredited investors or, in one instance, was
a relative of a member of management, the shares were exempt from
registration under the Securities Act of 1933 by virtue of Section 4(2)
of that Act.
During November 2005 the Company issued 100,000 shares to two members
of the Board of Directors for services. The shares were valued at
$9,000, the fair value on the date of grant.
During January 2005 two employees of the Company exercised 152,000
stock options and received 152,000 shares of common stock for cash of
$20,700.
(B) CONTRIBUTION TO CAPITAL OF LIABILITIES TO DIRECTORS/SHAREHOLDERS
--------------------------------------------------------------------
On December 20, 2004 the Company eliminated virtually all of its debt
when certain shareholders contributed $478,074 of debt to capital.
F-16
EVOLVE ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
-----------------------
(C) PREFERRED STOCK
-------------------
The Company has 10,000,000 shares of cumulative convertible preferred
stock (par value $.0001) authorized at December 31, 2005. The Board has
the authority to issue the shares in one or more series and to fix the
designation, preferences, powers and other rights, as it deems
appropriate. At December 31, 2005 there were no shares issued or
outstanding.
NOTE 5 STOCK OPTIONS
------ -------------
In November 1999, the Board of Directors approved the establishment of
Evolve One, Inc. Stock Option Plan (the "Plan") to provide incentives
to attract future employees and retain existing key employees with the
Company. The Company has reserved 100,000,000 shares of common stock
for the grant of qualified incentive options or non-qualified options
to employees and directors of the Company or its parents or
subsidiaries, and to non-employee directors, consultants and advisors
and other persons who may perform significant services for or on behalf
of the Company under the Plan. These options were granted in accordance
with employment agreements. Prices for incentive stock options must
provide for an exercise price of not less than 100% of the fair market
value of the common stock on the date the options are granted unless
the eligible employee owns more than 10% of the Company's common stock
for which the exercise price must be at least 110% of such fair market
value. Non-statutory options must provide for an exercise price of not
less than 85% of the fair market value. The Plan was approved by the
shareholders at a meeting on November 11, 1999.
The Company applied Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for the incentive stock options
granted to employees under its stock option plan in its statements of
operations. During 2005, the Company amended its stock option Plan to
increase the number of shares covered by the Plan from 8,000,000 to
100,000,000 shares of common stock.
A summary of the status of the Company's stock options as of December
31, 2005 and the changes during the years ended December 31, 2005 and
2004 is presented below:
F-17
EVOLVE ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
-----------------------
Weighted
Shares Average Price
----------- -------------
Beginning Balance, January 1, 2004 .... 128,000 $ 0.0005
Options granted ...................... 2,920,000 0.0549
Options exercised .................... - -
Options cancelled .................... - -
----------- --------
Ending Balance, December 31, 2004 ..... 3,048,000 0.0528
Options granted ...................... 82,250,000 0.285
Options exercised .................... (152,000) 0.136
Options cancelled .................... - -
----------- --------
Ending Balance, December 31, 2005 ..... 85,146,000 $ 0.291
=========== ========
Options exercisable at period end ..... 85,146,000
===========
Weighted average fair value of options
granted to employees during the year .. 0.285 0.285
=========== ========
2005
Options Outstanding Options Exercisable
------------------------------------------------------------- -----------------------
Number
Average Weighted Weighted Number Weighted
Outstanding at Remaining Average Exercisable Average
Range of December 31, Contractual Exercise at December Exercise
Exercise Price 2005 Life Price 31, 2005 Price
---------------- -------------- ----------- -------- ----------- --------
$.000125 - .5625 82,250,000 7.39 0.285 82,250,000 0.285
2004
Options Outstanding Options Exercisable
------------------------------------------------------------- -----------------------
Number
Average Weighted Weighted Number Weighted
Outstanding at Remaining Average Exercisable Average
Range of December 31, Contractual Exercise at December Exercise
Exercise Price 2004 Life Price 31, 2004 Price
---------------- -------------- ----------- -------- ----------- --------
$.000125 - .5625 3,048,000 4.93 0.0526 3,048,000 0.05
F-18
EVOLVE ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
-----------------------
NOTE 6 COMMITMENTS AND CONTINGENCIES
------ -----------------------------
On August 20, 2004, the Company entered into a five year lease for
5,325 square feet of office and warehouse space in Boca Raton, Florida.
The initial monthly base rent is approximately $6,500 plus sales tax
and other charges. When operations were terminated on November 30,
2005, the facility was abandoned to the landlord, together with the
leasehold improvements, as per an agreement with the landlord. The
Company recognized a loss of $13,876 on the settlement agreement with
the landlord.
During 2005, Messrs. Schultheis and Tabin entered into separate
Separation and Severance Agreements with the Company pursuant to which
they provided their resignations and also agreed to the termination of
their prior employment agreements with the Company. Both of them
received options to purchase 10,000,000 shares of common stock at an
exercise price of $0.30 per share expiring January 26, 2013, and both
were paid the sum of $6,144 to defray health insurance premiums for the
ensuing six months.
On January 26, 2005, Irwin Horowitz, a director of the Company was
elected as President and Chief Executive Officer of Evolve One. Mr.
Horowitz has entered into an employment agreement with the Company
pursuant to which he will receive an annual salary of $12,000 per year,
reimbursement of his expenses, including travel and lodging costs until
such as time as he relocates his principal residence to the location of
the Company's offices, and an automobile allowance of up to $1,500 on a
monthly basis. In addition, the Company granted to Mr. Horowitz an
option to purchase up to 50,000,000 shares of common stock exercisable
at $0.30 per share and expiring January 26, 2013.
During April 2005, the Company entered into an employment agreement
with an individual as the Director of Franchising. The agreement calls
for the individual to receive a salary of $ 52,000, 3,000,000 stock
options exercisable at $0.075 for a period of three years and 3,000,000
stock options exercisable at $0.15 for a period of three years. During
2005, the Director of Franchising abandoned his position and as a
result, the Company terminated his employment agreement.
NOTE 7 INCOME TAXES
------ ------------
The Company recorded no income tax expense for the years ended December
31, 2005 and 2004.
Total income tax expense (benefit) applicable to earnings (loss) from
continuing operations before income taxes is reconciled with the
"normally expected" federal income tax expense as follows for the year
ended December 31, 2005 and 2004:
F-19
EVOLVE ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
-----------------------
2005 2004
--------- ---------
"Normally expected" income tax expense
(benefit) ................................... $(374,700) $(451,200)
Increase (decrease) in taxes resulting from:
State income taxes, net of Federal income tax
benefit .................................... (54,500) (48,100)
Other ....................................... - 196,500
Change in valuation allowance ............... 429,200 302,800
--------- ---------
$ - $ -
========= =========
The deferred income tax liabilities (assets) at December 31, 2005 are
comprised of the following:
Current Non-Current
----------- -----------
Net operating loss ..................... $(1,101,973) $ -
Total deferred income tax (assets) ..... (1,101,973) -
Valuation allowance .................... 1,101,973 -
----------- ----------
Net deferred income tax (assets) ....... $ - $ -
=========== ==========
The Company has provided a valuation allowance on the deferred tax
assets because of uncertainty regarding its realization. The increase
in the valuation account during the years ended December 31, 2005 and
2004 were $429,200 and $302,800 respectively. Management utilizes tax
planning strategies and projected future taxable income in assessing
these assets.
The Company has net operating loss carry forwards as of December 31,
2005, approximating $5,942,000 for federal and state income tax
purposes, which expire as follows:
Available Loss
Year of Origination Expiring Carryforward
------------------- -------- --------------
2000 2020 $ 864,000
2001 2021 1,329,000
2002 2022 965,000
2003 2023 726,000
2004 2024 956,000
2005 2025 1,102,000
------------
$ 5,942,000
============
F-20
EVOLVE ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
-----------------------
The Company has net capital loss carry forwards as of December 31,
2005, approximating $1,376,000 for federal and state income tax
purposes, which expire as follows:
Available Loss
Year of Origination Expiring Carryforward
------------------- -------- --------------
2001 2006 $ 777,000
2002 2007 9,000
2003 2008 476,000
2004 2009 114,000
------------
$ 1,376,000
============
NOTE 8 RELATED PARTY TRANSACTIONS
------ --------------------------
During 2005, the Company issued 100,000 shares to members of the Board
of Directors for services valued at $9,000.
During 2005, the Company issued 6,868,916 shares to a company owned by
its Chief Executive Officer with a fair value of $527,728.
During 2005, the Company received cash of $200,000 for 12,000,000
shares of common stock and 12,000,000 warrants.
NOTE 9 DISCONTINUED OPERATIONS
------ -----------------------
As of December 31, 2005, the Company had discontinued all operations in
all of its subsidiaries. Accordingly, all prior year amounts have been
reclassified to conform to this presentation.
Discontinued operations for the years ended December 31, 2005 and 2004
are as follows:
2005 2004
--------- ---------
Sales .................................... $ 120,209 $ 533,936
Cost of goods sold ....................... 326,177 (371,253)
Operating expenses ....................... (383,458) (545,495)
Other income (expense) ................... (16,450) (178,097)
--------- ---------
Income (loss) from discontinued operations $(605,876) $(560,909)
========= =========
F-21
EVOLVE ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
-----------------------
NOTE 10 GOING CONCERN
------- -------------
As reflected in the accompanying consolidated financial statements, the
Company had a net loss of $1,292,651, a working capital deficiency of
$2,170, has had recurring losses since inception and has an accumulated
deficit of $8,118,714. This raises substantial doubt about its ability
to continue as a going concern. The ability of the Company to continue
as a going concern is dependent on the Company's ability to raise
additional capital and implement its business plan. The financial
statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
Management believes that actions presently being taken to obtain
additional funding and implement its business plan provide the
opportunity for the Company to continue as a going concern.
F-22