Vanguard, a wholly-owned subsidiary of the Corporation, continues to own the previous home office of the Corporation, a two-story building located in Jackson, Mississippi. Under the terms of the sale of Dixie Life, Standard is obligated to pay $15,000 per month plus certain expenses to Vanguard on an existing lease that expired December 31, 1996. Standard is currently in default of this agreement by not paying rent and certain other charges due for the months of October, November, and December, 1996.
The Corporation began its transition to an applied technology company during 1996 through the acquisition of TRS and CDS (See "Recent Developments" above). TRS and CDS are engaged in publishing electronic reference libraries that link related data sources for convenient access by personal computers.
On October 2, 1995, the Corporation completed the sale of Dixie Life, which was 99.3% owned by the Corporation, to Standard. The sale resulted in a loss of $4,174,535 ($.441 per share). In accordance with Accounting Principles Board Opinion No. 30 (APB 30) which calls for reporting the operations of discontinued operations as a single net amount in the statement of operations, the Corporation's prior year's financial statements have been restated to reflect discontinued operations. The Company incurred a net loss of $ 6,849,572 in 1995 compared to a net loss of $2,554,779 in 1994. On a per-share basis the net loss for 1995 was $.72 compared to a net loss of $.39 in 1994.
In March 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 - Earnings Per Share, which the Corporation is required to adopt next year. Basic earnings per share, as defined by the new standard, will represent only the weighted-average shares outstanding and will exclude common share equivalents from the calculation. Diluted earnings per share, as defined by the new standard, would include common share equivalents. The Corporation does not expect that this standard will significantly affect the reporting of the results of operations.
Limited Operating History, New Business Strategy and Potential Changes to Business Strategies
The Corporation has had a limited operating history since the sale of its life insurance subsidiary. The Corporation reported a net loss of $2,283,391 and an accumulated deficit of $7,421,470 for its fiscal year ended December 31, 1996. No assurance can be given that the Corporation will be able to achieve or sustain profitable operations.
The Corporation's current business strategy is to pursue the acquisition of new business opportunities, initially focusing on businesses utilizing applied technology. The Corporation began implementing this new strategy in early 1996 based on Management's analysis of the potential markets, products, opportunities and difficulties that face the Corporation. There can be no assurance that underlying assumptions accurately reflect trends in the industry or market and industry and customer acceptance of the target products. Competitive forces on marketing, distribution, and price of the Corporation's products, coupled with a need to generate new and innovative developments on a continual basis, make estimates of customer acceptance, sales, revenues and costs extremely difficult and unpredictable. There is no assurance that factors may not arise, presently known and unknown, that could dramatically alter or diminish the Corporation's market opportunities or the value of its products.
The Corporation continues to focus on acquiring companies and products in areas complementary to its current business, but no assurance can be given that it can identify and acquire such companies and products on terms acceptable to the Corporation or that, once acquired, such businesses and products will successfully contribute to the growth of the Corporation. The Corporation may, from time to time, undertake acquisitions or transactions in businesses and industries different from those currently engaged in by the Corporation. The effectiveness of the Corporation's strategies will not be measurable for some period of time.
The software products currently distributed by the Corporation, and certain products which the Corporation is negotiating to acquire, utilize text search software developed by Folio Corp. ("Folio"). The Corporation relies on its relationship with Folio, which includes licensing of Folio technology, collaborative product development and product support. Folio is not contractually obligated to continue such collaborative development or support activities and could discontinue such activities at any time. In addition, Folio is not contractually obligated to renew its licenses with the Corporation. Folio is collaborating with other vendors of products that compete with the Corporation's products, and Folio may elect not to renew its licenses with the Corporation in the future. There can be no assurance that Folio will continue to cooperate with the Corporation, and the inability of the Corporation to maintain and further develop its relationship with Folio would have a material adverse effect on the Corporation's results of operations.
While the Corporation believes that the market and demand for electronic information retrieval systems will continue to grow, there can be no assurance as to the extent of any such growth. In addition, even if there is continued growth in the use of such systems, there can be no assurance that an increasing number of customers will elect to use products such as the Corporation's, to fulfill their needs, in lieu of obtaining and using alternative systems and equipment to fulfill such needs. The Corporation's estimates of future performance are based on Management's current analysis of the potential markets, products, opportunities and difficulties that face the Corporation. There can be no assurance that underlying assumptions accurately reflect trends in the industry or market and industry and consumer reactions to the products.
The Corporation competes in the marketplace primarily with other companies offering software products on federal and state tax regulations, legal resource materials and related matters, and with larger publishers of traditional print compilations of such materials. Existing competitors may continue to broaden their product lines and potential competitors, including large software manufacturers and publishers, may enter or increase their focus on the market, resulting in greater competition for the Corporation. New or existing competitors may also utilize new technologies, such as the Internet, to develop alternative systems for delivering these types of information. There can be no assurance that any of the Corporation's products will compete effectively against other products in general or legal, tax and related information products in particular. The Corporation's competitors include many companies, most of which have substantially greater financial, development, marketing and personnel resources than those of the Corporation.
substantially. In addition, the stock markets recently have experienced significant price and volume fluctuations that particularly have affected technology-based companies and resulted in changes in the market prices of the stocks of many companies that have not been directly related to the operating performance of those companies.
The Corporation's securities are currently traded on the NASDAQ "Small-Cap Market" system. Under the rules of the National Association of Securities Dealers, Inc. ("NASD"), in order to maintain listing in the system, the Corporation must, among other things, have at least $2,000,000 in assets, $1,000,000 in capital, a minimum bid price for its common stock of $1.00 per share, and at least two market makers. The Corporation's common stock is currently trading below $1.00 per share, but the Corporation is entitled to continue its listing pursuant to a provision providing exceptions for companies with a market float in excess of $1,000,000 and at least $2,000,000 in capital and surplus. The NASD has commenced the elimination of this exception, which will require that the Corporation's share price be at least $1.00 for the Corporation to continue its listing on NASDAQ. This amendment will permit the Corporation to maintain the standards for NASDAQ Small-Cap Market listing with respect to its common stock only if the minimum bid price of the Corporation's common stock rises to, and remains at or above, $1.00. No assurance can be given that this will be achieved and sustained. If the Corporation is unable to continue to satisfy the listing maintenance criteria, its listed securities will be subject to delisting. Trading, if any, in the listed securities would thereafter cease to be quoted in the NASDAQ system, and would be conducted in the over-the-counter market with inter-dealer bid and ask price quotes published in what are commonly referred to as the "pink sheets."
In addition, if the Corporation fails to maintain NASDAQ Small-Cap Market listing for its securities, and no other exclusion from the definition of a "penny stock" under the Securities Exchange Act of 1934 (the "Exchange Act") is available, then any broker engaging in a transaction in the Corporation's securities would be required to provide any customer with a risk disclosure document, disclosure of market quotations, if any, disclosure of the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market values of the Corporation's securities held in the customer's accounts. The bid and offer quotation and compensation information must be provided prior to effecting the transaction and must be contained on the customer's confirmation. If brokers become subject to the "penny stock" rules when engaging in transactions in the Corporation's securities, they would become less willing to engage in such transactions.
Basis of Presentation: As of October 2, 1995, the Corporation sold its life insurance subsidiary, Dixie Life Insurance Company (Dixie Life). The operations of this segment have been presented as discontinued operations in the accompanying financial statements.
Investments: At December 31, 1996, the Corporation had no investments in marketable securities. At December 31, 1995, marketable securities were classified as trading, which, under the provisions of Statement of Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt and Equity Securities, were reported at market value with unrealized market gains or losses being reflected in operations.
Income Taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their income tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for changes in tax laws and rates on the date of enactment.
Reclassifications: Certain amounts in the prior years' statements have been reclassified to conform with the current year financial statements.
On April 2, 1996 the Corporation completed the acquisition of Text Retrieval Systems, Inc. ("TRS"), a privately-held corporation based in Ponte Vedra Beach, Florida. The transaction has been accounted for as a purchase and accordingly the results of operations of TRS since April 2, 1996 have been included in the Corporation's Results of Operations. TRS publishes electronic reference libraries that link related data sources for convenient access by personal computers. The Corporation had previously acquired a 35% initial ownership interest in TRS through the issuance of 100,000 shares of its stock to the TRS
shareholders and the extension of a line of credit during 1995. The completion of the purchase transaction included cash paid through prior advances to TRS and the issuance of 2,500,000 shares of contingently returnable common stock. The shares are returnable to the Corporation if certain 1997 earning targets are not achieved. Management originally believed that it was probable that the established targets would be met in total; accordingly, as of April 2, 1996, the fair value of the 2,500,000 contingent returnable shares ($1,991,250) was included in the purchase price resulting in a total estimated purchase price at acquisition of $2,659,482. In the fourth quarter, Management determined that the earnings targets would not be met in total and accordingly, recorded an adjustment to the purchase price reducing intangible assets by the remaining unamortized balance related to the contingent shares of $1,792,125. The Corporation has amended the agreement with TRS whereby the earnings targets have been revised and extended through December 31, 1997. The Corporation will adjust intangible assets as the contingencies are resolved. If the earnings targets are not totally met, the former shareholders will return all or part of the contingent shares to the Corporation.
Effective August 17, 1996, the Corporation purchased 100% of the outstanding common stock of CDS, a privately-held corporation based in Salt Lake City, Utah for a total purchase price of $500,000 which included the issuance of 726,612 shares of the Corporation's common stock with a fair market value of $400,000. CDS publishes electronic information reference services to a wide variety of industries and organizations. Among its principal product offerings are state tax law reference libraries which keep subscribers current on tax law changes. The transaction has been accounted for as a purchase, accordingly the results of operations of CDS since August 17, 1996 have been included in the accompanying statement of operations. Intangible assets of $460,765 are being amortized over a three year period. Amortization of $63,806 was recorded during 1996.
The Corporation files a consolidated federal income tax return and state income returns in various states as required by the applicable state income tax laws.
The (provision) for benefit from income taxes for the years ended December 31 is summarized as follows:
In addition, Standard was obligated to pay $15,000 per month rent to Vanguard, Inc., a wholly-owned subsidiary of the Corporation through December 31, 1996, the expiration date of an existing lease on the office building previously occupied by the Corporation and Dixie Life. Standard is currently in default of this agreement by not paying rent and certain other charges due for the months of October, November, and December, 1996. The sale resulted in a loss of $4,174,536 ($.44 per share). The sale of Dixie Life constitutes discontinuance of the life insurance business by the Corporation, and, as such has been accounted for as discontinued operations in the accompanying financial statements. Accordingly, the financial statements for the year ended December 31, 1995 and 1994 have been restated for this transaction.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995:
The fair value of options granted during 1996 and 1995 was $53,901 and $68,081 respectively.
On April 20, 1995, the Corporation and UMS entered into an amended and restated agreement effective as of March 24, 1995 ("Second Amended and Restated UMS Agreement") which provided that UMS had certain rights, since expired, to assist the Corporation in placing shares of the Corporation's common stock. In connection with the Second Amended and Restated UMS Agreement, on June 29, 1995, the Corporation issued 2,000,000 shares of its common stock in exchange for 16% of the outstanding common shares of PMM, a privately-owned company, and 100,000 shares of its common stock for an option to acquire the remaining 84% of the common shares of PMM for 10,400,000 additional shares of the Corporation's common stock. The 84% option was relinquished by the Corporation in July 1995.