SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual Report UNDER Section 13 or 15(d) of the Securities Exchange Act of
--- 1934
For the fiscal year ended: December 31, 2002
-----------------
OR
____ Transition Report UNDER Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _____to _____
Commission file number: 1-10932
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INDEX DEVELOPMENT PARTNERS, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 13-3487784
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
125 Broad Street, 14th Floor, New York, New York 10004
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(Address of Principal Executive Offices) (Zip Code)
(212) 742-2277
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(Issuer's Telephone Number, Including Area Code)
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities registered under Section 12(g) of the Act:
Common Shares, $.01 par value per share
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(Title of Class)
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 Issuer 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 Issuer'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. [ ]
The Issuer did not record any revenues from continuing operations for its
most recent fiscal year.
As of June 19, 2003, the aggregate market value of the Issuer's Common
Stock (based on the closing sale price of the Common Stock on that date on the
Nasdaq National Market) held by non-affiliates of the Issuer, was approximately
$778,090.
As of May 9, 2003, 7,918,552 shares of the Common Stock of the Issuer were
outstanding.
Transition Small Business Disclosure Format (check one): Yes [___] No [ X ]
INDEX DEVELOPMENT PARTNERS, INC.
2002 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
SECTION PAGE NO.
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PART I
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Item 1. Description of Business 3
Item 2. Description of Property 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters 7
Item 6. Management's Discussion and Analysis 9
Item 7. Consolidated Financial Statements and Supplementary Data 15
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 34
PART III
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Item 9. Directors and Executive Officers of the Issuer 35
Item 10. Executive Compensation 36
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 39
Item 12. Certain Relationships and Related Transactions 42
PART IV
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Item 13 Exhibits, List and Reports on Form 8-K 43
Item 14 Controls and Procedures 46
Signatures 47
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
Index Development Partners, Inc. (formerly known as Individual Investor
Group, Inc.) and its subsidiaries ("collectively the Company") has developed
stock indexes, including its flagship brand, the America's Fastest Growing
CompaniesSM ("AFGC") family of indexes and seeks to commercially exploit such
indexes.
The Company's first stock index, launched in February 1998, is now known as
the America's Fastest Growing CompaniesSM SmallCap Index. In the first quarter
of 2001, the Company expanded its index offering with the launch of three
additional indexes; now know as the America's Fastest GrowingSM MidCap Index,
the America's Fastest Growing CompaniesSM LargeCap Index, and the America's
Fastest Growing CompaniesSM Total Market Index. The Company has since expanded
its list of proprietary indexes to include the America's Fastest Growing
CompaniesSM SmallCap Value Index, the America's Fastest Growing CompaniesSM
MidCap Value Index, the America's Fastest Growing CompaniesSM LargeCap Value
Index, and the America's Fastest Growing CompaniesSM Total Value Index. In
addition, the Company has developed other stock indexes.
The Company's indexes are based upon unique, proprietary rules-based
methodologies developed by the Company. One important characteristic of the
Company's indexes is that they are rebalanced each quarter, with approximately
10% of the companies deleted and new companies added. The deletions and
additions are made according to a proprietary set of rules. The rebalancing is
primarily intended to eliminate companies that have fundamentals lagging those
of the other index members and replace the deleted companies with companies
having exceptional fundamentals. In developing its indexes the Company did not
seek to simply create benchmarks for certain market segments, but rather sought
to develop a set of rules that would attempt to identify companies that might be
expected to have superior performance. The Company is proud of the backtested
performance results of its indexes, both in terms of absolute return and
risk-adjusted return. Although the backtested performance numbers obviously
cannot assure future performance, the Company believes that its data may be of
great interest to potential licensees that would contemplate creating financial
products based upon the Company's "performance indexes." In January 2002, the
Company reconstituted its four core indexes using this revised methodology and
re-launched the indexes on the American Stock Exchange, which has been pricing
the indexes and disseminating their values in real time ever since. The tickers
for these four core indexes are as follows: America's Fastest Growing
CompaniesSM SmallCap Index (NDI); the America's Fastest Growing CompaniesSM
MidCap Index (FGM); the America's Fastest Growing CompaniesSM LargeCap Index
(FGL); the America's Fastest Growing CompaniesSM Total Market Index (FGT).
The Company intends to become the fund sponsor for exchange-traded funds
based on the AFGC indexes. To accomplish this, the Company intends to assign the
AFGC indexes to a third party and take back a perpetual, exclusive license to
the indexes, including the right to sublicense to third parties. The Company has
had discussions with a variety of parties concerning the potential assignment
and the Company is currently negotiating this transaction with a third party.
The Company expects it will complete such a transaction when and if it obtains
the financing described below. Under this arrangement, the Company would seek to
earn revenue from any exploitation of the AFGC indexes, whether done by the
Company directly or done by a third party to whom the Company has granted a
sublicense.
3
The Company intends to retain subadvisors to perform all portfolio
management, fund administration, accounting, custody, securities lending and
other operational activities relating to the funds. The Company will be
responsible for sales and marketing, regulatory matters and product development.
The Company anticipates it will require approximately $8 million to $10
million in external financing to pursue its business plan to become a fund
sponsor. The Company is currently in discussions with interested parties to
raise the necessary capital to execute this plan.
Upon receipt of necessary regulatory approval and commencement of trading
of the Company-sponsored exchange-traded funds based on the AFGC indexes, the
Company would receive quarterly advisory fees based on the expense ratio that
its charges for each exchange-traded fund. Since the Company could have minimal
fixed expenses, the advisory fees the Company may derive will have a high gross
margin and will scale larger as each exchange-traded fund attracts more assets
under management. In March 2002, the Securities and Exchange Commission granted
a former licensee of the Company's indexes an exemptive order it sought in order
to be allowed to sponsor an exchange-traded fund based upon one of the Company's
AFGC Indexes. Given this precedent, the Company believes that it will be able to
obtain regulatory approval for exchange-traded funds it may sponsor based upon
the AFGC family of indexes. Such an exchange-traded fund could only commence
trading upon the effectiveness of a registration statement with respect to each
fund. There is no assurance that the Company will receive exemptive relief and
have a registration statement declared effective. There also can be no assurance
that, if they did commence trading, exchange-traded funds based upon the AFGC
family of indexes would prove popular or that the Company will receive any
material amount of revenues with respect to the licenses described in this
paragraph. Moreover, there can be no assurance that the Company will secure the
necessary capital to execute this plan.
Discontinued Operations
In its annual report for the year ended December 31, 2001, the Company
accounted for the revenues and expenses from its Print Publications operation as
a distinct business segment. The Print Publications segment has since become a
discontinued operation and the financial statements for the year ended December
31, 2001 have been restated to conform to the December 31, 2002 financial
presentation whereby there are no revenues from continuing operations. Print
Publications operation expenses from the discontinued operation are offset
against Print Publications revenues. At such time as the Company's index
operations may generate revenues, the Company expects it will report such
revenues as being derived from a distinct business segment.
Print Publications
------------------
In May 2002, the Company transferred the assets of its remaining print
publication, Individual Investor's Special Situations Report newsletter, to an
unrelated third party, who assumed the deferred subscription liability of the
newsletter. As a result of the transaction, the Company discontinued its Print
Publications operations. The operating results relating to Print Publications
operations have been segregated from continuing operations and reported within a
separate line item on the consolidated statements of operations as discontinued
operations.
During parts of 2001, the Company also published a monthly magazine,
Individual Investor. In July 2001, the Company sold the subscriber list of
Individual Investor magazine to The Kiplinger Washington Editors, Inc. and
agreed not to publish a print periodical under the Individual Investor name for
five years, in exchange for a cash payment of approximately $3.5 million and the
assumption by the purchaser of an approximately $2.6 million deferred
subscription liability, reflecting a total consideration of approximately $6.1
4
million. Individual Investor magazine, was (prior to the sale of its subscriber
list in July 2001) a consumer-oriented monthly investment magazine sold through
subscriptions and at newsstands that offered proprietary research, analysis and
recommendations, together with commentary and opinion on investment ideas.
Individual Investor had a total paid subscriber and newsstand circulation of
approximately 500,000 when it was sold. The Company recognized a gain on the
sale of the subscriber list of Individual Investor magazine of approximately
$2.2 million. The Company continues to recognize income in this discontinued
operation as a result of deferred consulting revenue and deferred subscription
revenue in connection with the July 2001 sale of the subscriber list.
Online Services
---------------
In November 2001, the Company assigned to Telescan, certain of the
Company's internet assets, including the domain name www.individualinvestor.com,
in exchange for the 1,063,531 shares of the Company's Common Stock owned by
Telescan. The Company subsequently closed the web site www.shortinterest.com.
The online operations of the Company have ceased and the results of operations
report online operations as a discontinued operation.
A loss of approximately $340,000 was recognized in November 2001 upon the
transfer of the online assets to Telescan, primarily attributable to the
write-off of (1) computer equipment that was written down to an estimated net
salvage value (2) a web site service and license agreement acquired in 1999 that
was abandoned as a result of the transfer and (3) accrued expenses related to
the online operation through the disposal date. No material expenses were
incurred or revenues recognized after the disposal date.
Investment Management Services
------------------------------
On April 30, 1998, the Company's Board of Directors decided to discontinue
the Company's investment management services business. The investment management
services business was principally conducted by a wholly owned subsidiary of the
Company, WisdomTree Capital Management, Inc., which served as general partner of
(and is an investor in) a domestic private investment fund.
In 1998 the Company recorded a provision of $591,741 to accrue for its
share of any net operating losses of the domestic fund and related costs that it
expected to occur until the fund liquidated its investments. A final
distribution of the domestic fund's assets was received in December 2001. The
Company received approximately $9,000 in excess of the carrying amount that it
had recorded in 1998 and recorded a gain accordingly.
Employees
As of June 19, 2003, the Company had three full-time employees engaged in
developing and seeking to exploit the Company's proprietary indexes and
performing administrative services. The Company also utilizes services of other
persons on an independent contractor basis.
Intellectual Property
The Company believes that respective methodologies of the Company's indexes
constitute one of the Company's core assets and the Company is committed to
protecting the value of that intellectual property. The Company only discloses
the methodologies of its indexes to those third parties that have executed
confidentiality agreements and who the Company believes may be instrumental in
assisting the Company to derive value from its intellectual property.
5
The Company believes that trademarks and service marks are important to its
business and actively pursues strategies to protect and strengthen its current
marks for use in connection with its products and for future products. The
Company has registered the trademarks AMERICA'S FASTEST GROWING COMPANIES(R),
MAGIC 25(R), INVESTOR UNIVERSITY(R) and INVESTMENT UNIVERSITY(R). The Company
has also filed for registration of ASIA'S FASTEST GROWING COMPANIESSM, EUROPE'S
FASTEST GROWING COMPANIESSM and THE WORLD'S FASTEST GROWING COMPANIESSM and has
received a Notice of Allowance for each of these marks. In addition, the
Company's intellectual property includes copyrights to its former print and
online publishing content.
The Company will continue to seek to derive value from the development and
exploitation of its intellectual property. There can be no assurance, however,
that the Company's intellectual property rights will be successfully exploited
or that such rights will not be challenged or invalidated in the future.
ITEM 2. DESCRIPTION OF PROPERTY
Until April 30, 2003, the Company leased 35,000 square feet at 125 Broad
Street, New York, New York for its corporate office. The lease ran through March
31, 2004. Aggregate annual rental for this lease was $997,500 plus escalation
costs. The Company had sublet approximately 95% of this space to two unrelated
third parties through March 31, 2004, at a rental amount in excess of the rent
the Company was paying. Effective April 30, 2003, the Company and its landlord
entered into a Partial Assignment of Lease and Assignment of Subleases, the
effect of which is that the Company (i) continues to lease approximately 5% of
its former space, with a corresponding reduction in base rental expense (to
approximately $4,400 per month) and security deposit (from $250,000 to $11,770),
and (ii) will be paid by the landlord on a monthly basis approximately $9,000,
which is equal to the difference between the higher monthly payments the
Company's two former sub-lessors were obligated to pay the Company and the lower
amount that the Company was obligated to pay the landlord with respect to the
formerly sublet space, plus the monthly cost of electricity for the entire space
(which averaged approximately $3,000 per month in 2002).
The Company also leases 10,000 square feet at its former location in New
York City, which space was sublet as of February 1996 to an unrelated third
party. This lease expires March 1, 2005. The annual rent for the lease over the
term of the sublease ranging from $160,000 to approximately $210,000, plus
escalation costs. The sublease also expires on March 1, 2005, and provides for
aggregate annual rental receipts ranging from $160,000 to $205,000 over the term
of the sublease, plus escalation costs. Although the Company does not currently
anticipate that it will incur any material liability with respect to the lease
for its former location, there exists the possibility of such liability.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is involved in ordinary and routine
litigation incidental to its business. The Company currently believes that there
is no such pending legal proceeding that would have a material adverse effect on
the consolidated financial statements of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Effective with the Company's initial public offering on December 4, 1991,
the Company's Common Stock was quoted on the Nasdaq SmallCap Market and the
Boston Stock Exchange under the symbol "INDI." On December 9, 1996, the
Company's Common Stock commenced trading on the Nasdaq National Market. On
October 4, 2000, the Company's Nasdaq National Market ticker symbol was changed
to "IIGP." Effective May 23, 2001, the Company's Common Stock was delisted from
the Nasdaq National Market on the grounds that the Company's Common Stock had
failed to maintain a minimum closing bid price of $1.00 as required by Nasdaq
Marketplace Rule 4450(a)(5) and that the Company did not satisfy the $5,000,000
minimum market value of public float requirement of Nasdaq Marketplace Rule
4450(a)(2). From May 23, 2001 until May 23, 2003, the Company's Common Stock was
traded on the NASD OTC Bulletin Board under the symbol "IXDP." The Common Stock
was removed from the OTC Bulletin Board on May 23, 2003 because the Company had
failed to file this Form 10-KSB. On May 23, 2003, the Company's Common Stock
began trading on www.pinksheets.com, an electronic quotation medium sponsored by
Pink Sheets LLC, under the symbol "IXDP."
The table below sets forth for the periods indicated the high and low
closing sales prices on the Nasdaq National Market (prior to May 23, 2001) and
the NASD OTC Bulletin Board (since May 23, 2001) for the Company's Common Stock.
2002: Low ($) High ($)
----- ------- --------
First Quarter 0.055 0.075
Second Quarter 0.040 0.070
Third Quarter 0.030 0.055
Fourth Quarter 0.020 0.190
2001: Low ($) High ($)
----- ------- --------
First Quarter 0.375 1.375
Second Quarter 0.21 0.625
Third Quarter 0.08 0.29
Fourth Quarter 0.05 0.14
These amounts represent sales between dealers in securities and do not
include retail markups, markdowns or commissions. On May 9, 2003, the last sale
price for the Company's Common Stock, as reported by the NASD OTC Bulletin
Board, was $0.10.
Holders
On June 19, 2003, there were 69 holders of record of the Company's Common
Stock. The Company believes that there are more than 2,500 beneficial owners of
the Company's Common Stock.
Dividends
To date, the Company has not paid any dividends on its Common Stock. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors, subject to the preferential right of the Company's Series A
7
Preferred Stock, and will depend upon the Company's earnings, its capital
requirements and financial condition, and other relevant factors. The Company
does not intend to declare any dividends in the foreseeable future, but instead
intends to retain any capital for use in the business.
Dividends on the Company's Series A Preferred Stock are payable annually at
the rate of $20 per share and in preference to any potential dividends on the
Company's Common Stock. The Company did not make the dividend payment of
$157,600 that was required on December 31, 2002 and does not presently have the
resources to pay this accrued dividend. Until such time as it is paid, the
Company is prohibited from paying any dividends or making any distributions to
the holders of its Common Stock.
Sales of Unregistered Securities
The Company made the following sales of unregistered securities during the
fourth quarter of 2002:
Consideration Received
and Description of
Underwriting or Other Exemption If Option, Warrant or
Discounts to Market from Convertible Security,
Price Afforded Registration Terms of Exercise or
Date of Sale Title of Security Number Sold to Purchasers Claimed Conversion
------------ ----------------- ----------- ----------------------- -------- ---------------------
11/6/02 Options to 130,000 Continued service; 4(2) Vesting in three
purchase common Company will also equal annual
stock granted to receive exercise price installments on
employees upon exercise first, second and
third anniversary of
date of grant, subject
to continued service;
exercisable for a
period of 10 years
from the date of
grant at an
exercise price
of $0.07 per
share, the fair
market value on
the date of grant.
11/6/02 Options to 50,000 Continued service; 4(2) Vesting in two equal
purchase common Company will also installments on
stock granted to receive exercise price 12/31/02 and
employee upon exercise 3/31/03; exercisable
until 3/31/05 at an
exercise price of
$0.07 per share,
the fair market
value on the date
of the grant.
8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Important Notice Concerning "Forward-looking Statements" in this Report
(Including Without Limitation in Items 1 and 6)
1. "Forward-looking Statements." Certain parts of this Report describe
historical information (such as operating results for the year ended December
31, 2002), and the Company believes the descriptions to be accurate. In contrast
to describing the past, various sentences of this Report indicate that the
Company believes certain results are likely to occur after December 31, 2002.
These sentences typically use words or phrases like "believes," "expects,"
"anticipates," "estimates," "projects," "will continue" and similar expressions.
Statements using those words or similar expressions are intended to identify
"forward-looking statements" as that term is used in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements include, but are not limited
to, projections of operating results for periods after December 31, 2002,
concerning either a specific segment of the Company's business or the Company as
a whole. For example, projections concerning the following are forward-looking
statements: net revenues, operating expenses, gross margins and net income or
loss. Except to the extent that a statement in this Report is describing a
historical fact, each statement in this Report is deemed to be a forward-looking
statement.
2. Actual Results May Be Different than Projections. Due to a variety of
risks and uncertainties, however, actual results may be materially different
from the results projected in the forward-looking statements. These risks and
uncertainties include those set forth in Item 1 of Part I hereof (entitled
"Business"), in Item 6 of Part II hereof (entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations"), in Exhibit 99
hereof and elsewhere in this Report.
3. The Company Has No Duty to Update Projections. The forward-looking
statements in this Report are current only on the date this Report is filed.
After the filing of this Report, the Company's expectations of likely results
may change, and the Company might come to believe that certain forward-looking
statements in this Report are no longer accurate. The Company shall not have any
obligation, however, to release publicly any corrections or revisions to any
forward-looking statements contained in this Report, even if the Company
believes the forward-looking statements are no longer accurate.
Year Ended December 31, 2002 as Compared to the Year Ended December 31,
2001
In May 2002, the Company transferred the assets of its remaining print
publication, Individual Investor's Special Situations Report newsletter, to an
unrelated third party, who assumed the deferred subscription liability of the
newsletter. As a result of the transaction, the Company discontinued its Print
Publications operations. The operating results relating to Print Publications
operations have been segregated from continuing operations and reported within a
separate line item on the consolidated statements of operations as discontinued
operations.
During the year ended December 31, 2001, the Company's Print Publications
operations published and marketed Individual Investor magazine, a personal
finance and investment magazine, and Individual Investor's Special Situations
Report, a financial investment newsletter. On July 9, 2001, the Company
completed the transactions (the "Magazine Sale") contemplated by an agreement
with The Kiplinger Washington Editors, Inc., the publisher of Kiplinger's
Personal Finance Magazine and discontinued publishing Individual Investor
magazine. During the year ended December 31, 2001, the Company's Online Services
9
operations operated www.individualinvestor.com, certain assets of which,
including the domain name, were sold to an unrelated third party in November
2001.
Net Loss from Continuing Operations
The Company's net loss from continuing operations for the year ended
December 31, 2002 was approximately $0.9 million, a decrease of approximately
$5.7 million as compared to a net loss from continuing operations of
approximately $6.6 million in 2001. The decrease in the loss from the prior year
is primarily due to the 2001 writedowns of investments and a decrease in general
and administrative expenses as a result of downsizing the Company's operations
following the Magazine Sale and the sale of the Company's online operations. No
income taxes were provided in 2002 because of the Company's net operating loss
carryforwards. The basic and dilutive net loss from continuing operations per
weighted average common share for the year ended December 31, 2002 was
approximately $0.13 and $0.13, respectively as compared to a basic and dilutive
loss per weighted average common share of $0.76 and $0.76, respectively, for the
year ended December 31, 2001. There were approximately 21,000 fewer common
shares outstanding at the end of December 2002 as compared to December 31, 2001.
Operating Revenues
No revenues were recorded for the year ended December 31, 2002 or 2001 for
the Company's Index Licensing and Development segment.
Operating Expenses
Total operating expenses for the year ended December 31, 2002 decreased
approximately 65%, to approximately $1.1 million as compared to approximately
$3.1 million for the year ended December 31, 2001. The decline is attributable
primarily to the reduction of expenses following the Magazine Sale and the
discontinuation of the Online Services operations. Operating expenses for the
year ended December 31, 2002 have been reduced by approximately $150,000, an
amount received by the Company in the second quarter 2002 from a business
assistance program related to the September 11, 2001 disaster.
General and administrative expenses for the year ended December 31, 2002
decreased approximately 63%, to approximately $1.0 million as compared to
approximately $2.7 million, for the year ended December 31, 2001. The decline is
primarily attributable to a reduction in corporate headcount. General and
administrative expenses for the year ended December 31, 2002 have been reduced
by approximately $150,000, an amount received by the Company in the second
quarter 2002 from a business assistance program related to the September 11,
2001 disaster offset by approximately $100,000 of potential operating cost
increases related to the lease of the Company's office space.
Depreciation and amortization expense for the year ended December 31, 2002
decreased approximately 78%, to approximately $0.1 million as compared to
approximately $0.5 million for the year ended December 31, 2001. The decrease is
primarily due to the disposal of assets related to the Magazine Sale and the
disposition of furniture and fixtures and computer equipment in connection with
the subleases that commenced May 2001 and January 2002, respectively.
Gain on Sale of Furniture and Fixtures
Gain on sale of furniture and fixtures for the year ended December 31, 2002
of approximately $0.1 million represents proceeds received from the sale of
furniture and fixtures and computer equipment during the year.
10
Gain on Disposition of Investments
Gain on disposition of investments for the year ended December 31, 2002 of
approximately $0.2 million represents proceeds from distributions received as a
result of an investment that had previously been written off during the quarter
ended December 31, 2000. There were no comparable gains for the year ended
December 31, 2001.
Impairment of Investments and Other Assets
The Company recorded impairment in the third quarter of 2001 of
approximately $2.7 million with respect to its investments in Tradeworx, Inc.
(acquired in May 2000) and Pricing Dynamics Solutions, Inc. (acquired in
February 2000). The Company reviewed the operations and financial position of
these entities and concluded that it had incurred an other than temporary
decline in the value of its Tradeworx, Inc. and Pricing Dynamics Solutions, Inc.
investments. The Company adjusted the carrying value to estimated fair market
value and accordingly reduced the carrying value of its investments by
approximately $2.7 million. Additionally, the Company recorded a loss of
approximately $0.8 million during the quarter ended December 31, 2001, as the
Company sublet approximately 95% of its office space to two unrelated third
parties and abandoned the space.
Investment and Other Income
Investment and other income for the year ended December 31, 2002 was
approximately $13,000 as compared to approximately $95,000 for the year ended
December 31, 2001. The decreased amount of investment income earned in 2001
compared to 2000 is primarily due to lower cash balances available for
investment and a decrease in interest rates.
Gain from Discontinued Operations
The Company's gain from discontinued operations for the year ended December
31, 2002 was approximately $1.9 million, a gain of approximately $0.7 million as
compared to a gain from discontinued operations of approximately $1.2 million
for the year ended December 31, 2001. The gain from the discontinued print
segment for the year ended December 31, 2002 was approximately $1.6 million, a
decrease of approximately $0.5 million as compared to a gain from discontinued
operations of approximately $2.1 million for the year ended December 31, 2001.
The 2002 amount recognizes income in this discontinued operation as a result of
Individual Investor's Special Situations Report newsletter in 2002 and deferred
consulting revenue and deferred subscription revenue in connection with the July
2001 Magazine Sale. The amounts for the year ended December 31, 2001 reflect the
net gain on the July 2001 Magazine Sale of $2.2 million and approximately $1.7
million of deferred consulting revenue and deferred subscription revenue earned
in 2001 offset by the loss from the Print Publication operation prior to the
sale.
The gain from the Online Services discontinued segment for the year ended
December 31, 2002 was approximately $0.4 million, an increase of approximately
$1.3 million as compared to a loss from the Online Services discontinued segment
of approximately $0.9 million for the year ended December 31, 2001. The 2002
gain is the adjustment of estimated expenses accrued upon the disposition of the
segment during the year ended December 31, 2001.
The basic and dilutive net income from discontinued operations per weighted
average common share for the year ended December 31, 2002 was approximately
$0.24, as compared to approximately $0.14 in 2001.
11
At December 31, 2002, the remaining balance of deferred revenue related to
discontinued operations is: deferred non-compete revenue, approximately $87,500,
recognizable ratably through the second quarter of 2006; and net deferred
subscription revenue, approximately $0.3 million, recognizable in decreasing
monthly amounts through the second quarter of 2011.
Net Income (Loss)
The Company recorded net income for the year ended December 30, 2002 of
approximately $1.1 million, as compared to a net loss of approximately $5.3
million for the year ended December 31, 2001. No income taxes were provided in
2002 due to the net operating loss carryovers or in 2001 due to the net loss.
The basic net income (loss) per weighted average common share for the years
ended December 31, 2002 and 2001 was approximately $0.11 and ($0.62),
respectively. In 2001 and 2002, the exercise of stock options, warrants, and
other securities convertible into shares of common stock were not assumed in the
computation of dilutive loss per common share as the effect would have been
anti-dilutive.
Liquidity and Capital Resources
As of December 31, 2002, the Company had cash and cash equivalents totaling
approximately $0.5 million and negative working capital of approximately $0.3
million. Net cash used in operating activities during the year ended December
31, 2002 was approximately $1.1 million. Net cash provided by investing
activities for the year ended December 31, 2002, was approximately $182,000. Net
cash used in financing activities for the year ended December 31, 2002, was
approximately $-0-. Net cash provided by discontinued operations for the year
ended December 31, 2002, was approximately $38,000. The Company's cash and cash
equivalents balance of approximately $0.5 million at December 31, 2002
represented a decrease of approximately $0.8 million from the December 31, 2001
balance.
The Company's continuing operations are not generating any revenues.
Over the past two years the Company has had discussions with a variety of
parties concerning the potential license of the Company's indexes for the
creation of financial products. With one exception, these discussions have not
resulted in the Company licensing any of its indexes. As previously reported,
the Company had licensed the America's Fastest Growing Companies(SM) Index to
Nuveen Investments for the creation of an exchange-traded fund to be sponsored
by Nuveen and based upon that index. After receiving an exemptive order it
sought from the Securities and Exchange Commission to be allowed to sponsor this
fund and filing with the SEC a registration statement, Nuveen did not take
further action to have the registration statement declared effective nor did it
launch such a fund. As a result, on November 1, 2002, the Company gave notice to
Nuveen that the license was terminated effective January 30, 2003. There can be
no assurance that the Company will execute licensing agreements with respect to
its indexes, that financial products based upon such indexes would enter the
market or that the Company would derive any material revenues with respect to
any such licenses.
The Company also has had discussions with a variety of parties concerning
the potential assignment of the Company's indexes to a third party, in
connection with which the Company receiving back a license to sponsor financial
products based upon the indexes and is currently negotiating such a transaction
with one party. There can be no assurance the Company will complete any such
transaction or that the Company would be able to successfully sponsor financial
products based upon the indexes. If the Company were successful in reaching such
an agreement with a third party, the Company would still need to raise external
financing of approximately $8 million to $10 million in order to be able to
implement its business plan to sponsor and market these financial products, and
there can be no assurance that the Company would be successful in raising such
financing.
12
A cash dividend of $157,600 payable on the Company's outstanding Series A
Preferred Stock is included in the consolidated balance sheet as of December 31,
2002. The Company contacted the holder prior to the payment date to explain that
the Company would not be making the December 31, 2002 dividend payment while it
sought the financing it required to implement its business plan.
If the Company continues to defer payment of the dividends accrued and
accruing on the Series A Preferred Stock and the Company eliminates certain
expenses within its control by the fourth quarter of 2003, the Company believes
that its working capital and the amount it is entitled to receive from its
landlord on a monthly basis will be sufficient to fund its presently limited
operations and enable it to continue to seek through December 31, 2003 the
external financing described above that it needs to implement its business plan
to become a fund sponsor. Beyond that time, in all likelihood, the Company would
need to cease operations if it does not obtain external financing. There can be
no assurance that the Company would be able to obtain additional capital, nor
can there be assurance as to the terms upon which the Company might be able to
obtain additional capital. Obtaining any additional capital could result in a
substantial dilution of an investor's equity investment in the Company.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which is effective in 2003. It requires the
recording of an asset and a liability equal to the present value of the
estimated costs associated with the retirement of long-lived assets where a
legal or contractual obligation exists. The asset is required to be depreciated
over the life of the related equipment or facility, and the liability accreted
each year based on a present value interest rate. This standard, which the
Company adopted in 2003, will not have a material effect on the Company's
consolidated financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement eliminates the automatic classification of gain or
loss on extinguishment of debt as an extraordinary item of income and requires
that such gain or loss be evaluated for extraordinary classification under the
criteria of Accounting Principles Board No. 30, "Reporting Results of
Operations." This statement also requires sales-leaseback accounting for certain
lease modifications that have economic effects that are similar to
sales-leaseback transactions, and makes various other technical corrections to
existing pronouncements. This statement will be effective for the Company for
the year ending December 31, 2003, with the effective date for certain
provisions of SFAS No. 145 being May 15, 2002. The adoption of this statement
will not have a material effect on our results of operations or financial
position or cash flows of the Company.
In September 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The Statement is
effective for such activities implemented after January 1, 2003.
In November 2002, the FASB issued Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
13
measurement provisions of this Interpretation apply to guarantees issued or
modified after December 31, 2002. The Company has evaluated the impact of the
adoption of FIN 45, and does not believe it will have a material impact on the
Company's financial position or results of operations because the Company is not
currently the guarantor of any third party obligations,
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123," to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We have adopted the disclosure
requirements of SFAS No. 148 as of December 31, 2002. We account for stock-based
employee compensation arrangements in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and comply with the disclosure provisions of SFAS No. 123, as
amended. Under APB Opinion No. 25, compensation expense is based on the
difference, if any, on the date of grant, between the quoted market price of our
stock and the exercise price.
On January 17, 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 addresses consolidation of entities that are not
controllable through voting interests or in which the equity investors do not
bear the residual economic risks and rewards. These entities have been commonly
referred to as special purpose entities. The Interpretation provides guidance
related to identifying variable interest entities and determining whether such
entities should be consolidated. It also provides guidance related to the
initial and subsequent measurement of assets, liabilities and noncontrolling
interests in newly consolidated variable interest entities and requires
disclosures for both the primary beneficiary of a variable interest entity and
other beneficiaries of the entity. The Company will adopt the provision of FIN
No. 46 effective January 1, 2003 but does not believe it will have a material
impact on the Company's financial position or results of operations as the
Company does not have any involvement with variable interest entities.
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement is effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The Company does not believe the adoption of this standard will
have a material impact on the Company's financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. This standard, which the Company will adopt in
2003, will not have a material effect on the Company's consolidated financial
position or results of operations.
14
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 16
Consolidated Balance Sheet as of December 31, 2002 17
Consolidated Statements of Operations for the Years
Ended December 31, 2002 and 2001 18
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 2002 and 2001 19
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002 and 2001 20
Notes to Consolidated Financial Statements 21
15
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Index Development Partners, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of Index Development
Partners, Inc. (the "Company") as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years ended December 31, 2002 and 2001. 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2002 and the
results of its operations and its cash flows for the years ended December 31,
2002 and 2001, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and
stockholders' capital deficiency raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
New York, New York
June 25, 2003
16
INDEX DEVELOPMENT PARTNERS, INC.
CONSOLIDATED BALANCE SHEET
December 31,
ASSETS 2002
-------------------
Current assets:
Cash and cash equivalents $ 460,798
Prepaid expenses and other current assets 62,218
-------------------
Total current assets 523,016
Property and equipment - net 90,961
Security deposits 285,942
Other assets 299,292
-------------------
Total assets $ 1,199,211
===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 351,647
Accrued expenses 228,460
Accrued preferred stock dividend 157,600
Deferred consulting fees and non compete 87,500
-------------------
Total current liabilities 825,207
Deferred subscription revenue 624,964
-------------------
Total liabilities 1,450,171
-------------------
Stockholders' Deficit
Preferred stock, $.01 par value, authorized 2,000,000 shares,
7,880 issued and outstanding 79
Common stock, $.01 par value; authorized 40,000,000
shares, 7,894,552, issued and outstanding 78,946
Additional paid-in capital 33,410,579
Warrants 770,842
Accumulated deficit (34,511,406)
-------------------
Total stockholders' deficit (250,960)
-------------------
Total liabilities and stockholders' deficit $ 1,199,211
===================
See Notes to Consolidated Finanical Statements
17
INDEX DEVELOPMENT PARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
2002 2001
---------------- ----------------
Operating expenses:
General and administrative $ 997,822 $ 2,666,450
Depreciation and amortization 103,545 468,159
---------------- ----------------
Total operating expenses 1,101,367 3,134,609
---------------- ----------------
Gain on sale of furniture and fixtures 70,871 -
Gain on disposition of investments 151,980 -
Impairment of investments and other assets - (3,530,268)
---------------- ----------------
Operating loss from continuing operations (878,516) (6,664,877)
Investment and other income 12,771 95,296
---------------- ----------------
Net loss from continuing operations (865,745) (6,569,581)
---------------- ----------------
Discontinued operations
Gain from print operations (includes $ 69,499 1,593,737 2,104,078
of gain in 2002 and $2,175,497 of gain in 2001
with repect to the sale of print publications)
Gain (loss) from online operations (includes 335,941 (867,853)
$340,445 of loss on sale of online operations ---------------- ----------------
in 2001)
Gain from discontinued operations 1,929,678 1,236,225
---------------- ----------------
Net income (loss) $ 1,063,933 $ (5,333,356)
================ ================
Basic and dilutive income (loss) per common share:
Continuing operations ($0.13) ($0.76)
Discontinued operations $0.24 $0.14
---------------- ----------------
Net basic and dilutive income (loss) per share $0.11 ($0.62)
================ ================
Average number of common shares used in computing
basic and dilutive income (loss) per common share 7,897,988 8,887,631
See Notes to Consolidated Financial Statements
18
INDEX DEVELOPMENT PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2002 2001
------------------- -------------------
Cash flows from operating activities:
Net income (loss) $ 1,063,933 $ (5,333,356)
Reconciliation of net income (loss) to net cash used in
operating activities:
Gain from discontinued operations (1,929,678) (1,236,225)
Loss on impairment of investments and other assets - 3,530,268
Gain on sale of furniture and fixtures
and investments (222,851) -
Depreciation and amortization 103,545 468,159
Stock option and warrant transactions (7,574) (73,708)
Changes in operating assets and liabilities:
(Increase) decrease in:
Prepaid expenses and other current assets 93,511 515,874
Security deposits 86,604 3,035
Increase (decrease) in:
Accounts payable and accrued expenses (238,938) 796,434
------------------- -------------------
Net cash used in operating activities (1,051,448) (1,329,519)
------------------- -------------------
Cash flows from investing activities:
Purchase of property and equipment (40,543) (512,490)
Proceeds from sale of investments 151,980 -
Net proceeds from sale of assets 70,871 -
------------------- -------------------
Net cash provided by (used in) investing activities 182,308 (512,490)
------------------- -------------------
Cash flows from financing activities:
Preferred stock dividends - (157,600)
------------------- -------------------
Net cash (used in) financing activities - (157,600)
------------------- -------------------
Net cash provided by (used in) discontinued operations 38,494 (1,403,423)
------------------- -------------------
Net decrease in cash and cash equivalents (830,646) (3,403,032)
Cash and cash equivalents, beginning of period 1,291,444 $4,694,476
------------------- -------------------
Cash and cash equivalents, end of period $ 460,798 $ 1,291,444
=================== ===================
See Notes to Consolidated Financial Statements
19
INDEX DEVELOPMENT PARTNERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY (DEFICIT)
Preferred Stock Common Stock
------------------------------------ Additional
Shares Par Shares Par Paid-in Deferred Accumulated
Issued Value Issued Value Capital Warrants Compensation Deficit Total
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 7,880 $79 8,972,886 $89,729 $33,576,719 $872,052 ($29,490) ($29,926,783) $4,582,306
Stock option and
warrant transactions - - - - (77,070) (101,210) 38,190 - (140,090)
Repurchase and
cancellation of common stock - - (1,063,531) (10,635) (85,082) - - - (95,718)
Cancellation of
common stock (restricted) - - (22,803) (228) (5,033) - - - (5,261)
Issuance of common
stock (restricted) - - 29,000 290 12,760 - (13,050) - -
Net loss - - - - - - - (5,333,356) (5,333,356)
Preferred stock dividends - - - - - - - (157,600) (157,600)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 7,880 79 7,915,552 79,156 33,422,294 770,842 (4,350) (35,417,739) (1,149,718)
Amortization of
deferred compensation - - - - - - 2,925 - 2,925
Cancellation of
common stock (restricted) - - (21,000) (210) (11,715) - 1,425 - (10,500)
Net income - - - - - - - 1,063,933 1,063,933
Preferred stock dividends - - - - - - - (157,600) (157,600)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 7,880 $79 7,894,552 $78,946 $33,410,579 $770,842 $ 0 $ (34,511,406) $ (250,960)
====================================================================================================================================
See Notes to Consolidated Financial Statements
20
INDEX DEVELOPMENT PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Index Development Partners, Inc. and its subsidiaries (collectively, the
"Company") has developed several stock indexes that it seeks to commercially
exploit by becoming the fund sponsor for exchange-traded funds based on such
indexes. Until 2002, the Company also published a semi-monthly newsletter,
Individual Investor's Special Situations Report. During part of 2001, the
Company also published Individual Investor magazine, a monthly personal finance
magazine and operated certain websites and reported its operating results in two
distinct business segments: Print Publications and Online Services. Between
approximately October 1996 and September 2000, the Company's Print Publications
segment also included Ticker, a magazine for investment professionals. The
Company's Online Services segment included individualinvestor.com and, between
approximately November 1998 and September 2000, InsiderTrader.com. In September
2000, the Company sold InsiderTrader.com and Ticker magazine to two different
parties in two unrelated transactions. In July 2001, the Company sold the
subscriber list of and discontinued publishing Individual Investor magazine (see
Note 4). In November 2001, the Company sold certain assets related to
individualinvestor.com and subsequently discontinued its Online Services
operations (see Note 4). As a result of these transactions, the Print
Publications and Online Services segments are reported as discontinued
operations for all periods.
The Company's continuing operations are not generating any revenues. The
Company's recurring losses from operations and stockholders' capital deficiency
raise substantial doubt about its ability to continue as a going concern. The
Company has had discussions with a variety of parties concerning the potential
assignment of the Company's indexes to a third party, in connection with which
the Company receiving back a license to sponsor financial products based upon
the indexes and is currently negotiating such a transaction with one party.
There can be no assurance the Company will complete any such transaction or that
the Company would be able to successfully sponsor financial products based upon
the indexes. If the Company were successful in reaching such an agreement with a
third party, the Company would still need to raise external financing in order
to be able to implement its business plan to sponsor and market these financial
products, and there can be no assurance that the Company would be successful in
raising such financing.
A cash dividend of $157,600 payable on the Company's outstanding Series A
Preferred Stock is included in the consolidated balance sheet as of December 31,
2002. The Company contacted the holder prior to the payment date to explain that
the Company would not be making the December 31, 2002 dividend payment while it
sought the financing it required to implement its business plan.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Management's plans concerning these
matters are also included in the preceding paragraphs. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
If the Company continues to defer payment of the cash dividends accrued and
accruing on the Series A Preferred Stock and the Company eliminates certain
expenses within its control by the fourth quarter of 2003, the Company believes
that its working capital and the amount it is entitled to receive from its
landlord on a monthly basis will be sufficient to fund its presently limited
operations and enable it to continue to seek through December 31, 2003 the
external financing described above that it needs to implement its business plan
to become a fund sponsor. Beyond that time, in all likelihood, the Company would
need to cease operations if it does not obtain external financing. There can be
no assurance that the Company would be able to obtain additional capital, nor
21
can there be assurance as to the terms upon which the Company might be able to
obtain additional capital. Obtaining any additional capital could result in a
substantial dilution of an investor's equity investment in the Company.
Principles of Consolidation - The consolidated financial statements include
the accounts of Index Development Partners, Inc. and its subsidiaries:
Individual Investor Holdings, Inc., WisdomTree Capital Management, Inc.,
WisdomTree Administration, Inc., WisdomTree Capital Advisors, LLC, I.I.
Interactive, Inc. I.I. Strategic Consultants, Inc. and Advanced Marketing
Ventures, Inc. All of these subsidiaries are inactive and, with the exception of
WisdomTree Capital Management, Inc., have been dissolved by proclamation in
their various states of incorporation.
Property and Equipment - Property and equipment are recorded at cost.
Depreciation of property and equipment is calculated on the straight-line method
over the estimated useful lives of the respective assets, ranging from three to
five years. Leasehold improvements are amortized over the lesser of the useful
life of the asset or the term of the lease.
Income Taxes - Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss carryforwards 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 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
may not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Financial Instruments - For financial instruments including cash and cash
equivalents, accounts payable and accrued expenses, the carrying amount
approximated fair value because of their short maturity. Cash equivalents
consist of investments in a government fund that invests in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, which have
original average maturities of 30 days or less.
Impairment of Long-Lived Assets -- Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. In such situations,
long-lived assets are considered impaired when estimated future cash flows
(undiscounted and without interest charges) resulting from the use of the asset
and its eventual disposition are less than the asset's carrying amount.
Stock-Based Compensation -- The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions SFAS No. 123, "Accounting for Stock-Based Compensation."
Under APB Opinion No. 25, compensation expense is based on the difference, if
any, on the date of grant, between the quoted market price of the Company's
stock and the exercise price. The Company's general policy is to grant options
with an exercise price not less than the fair market value of the Company's
stock on the date of grant. Transactions with non-employees in which goods or
services are received by the Company for the issuance of stock options or other
equity instruments are accounted for based on fair value, which is based on the
value of the equity instruments or the consideration received, whichever is more
reliably measured.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123," to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of Statement No. 123
22
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options granted under the fair value method of
SFAS No. 123. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 2002 and 2001, respectively: risk-free interest
rates of 4.75% and 5.4%, respectively; volatility factors of the expected market
price of the Company's common stock of 71% and 124%, respectively; a
weighted-average expected life of the options of 5 years; and a dividend rate of
0% for both years. The weighted average option fair value at date of grant was
$0.04 and $0.53 during 2002 and 2001, respectively.
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation:
Year Ended December 31,
------------------------------------------------
2002 2001
---- ----
Net income (losses) $1,063,933 $(5,333,356)
Deduct total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects (258,484) (334,683)
----------- ------------
Pro forma net earnings (losses) $ 805,449 $(5,668,039)
=========== ============
Net income (loss) per share
As reported: Basic and Diluted $ 0.11 ($ 0.62)
Pro forma: Basic and Diluted $ 0.08 ($ 0.66)
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities reported in the financial statements. Significant accounting
estimates used include pro forma disclosures regarding the fair value of stock
options granted in 2002 and 2001. Actual results could differ materially from
those estimates.
Recent Accounting Pronouncements - In August 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standard
("SFAS") No. 143, "Accounting for Asset Retirement Obligations," which is
effective in 2003. It requires the recording of an asset and a liability equal
to the present value of the estimated costs associated with the retirement of
long-lived assets where a legal or contractual obligation exists. The asset is
required to be depreciated over the life of the related equipment or facility,
and the liability accreted each year based on a present value interest rate.
This standard, which the Company adopted in 2003, will not have a material
effect on the Company's consolidated financial position or results of
operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44,and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement eliminates the automatic classification of gain or
loss on extinguishment of debt as an extraordinary item of income and requires
23
that such gain or loss be evaluated for extraordinary classification under the
criteria of Accounting Principles Board No. 30, "Reporting Results of
Operations." This statement also requires sales-leaseback accounting for certain
lease modifications that have economic effects that are similar to
sales-leaseback transactions, and makes various other technical corrections to
existing pronouncements. This statement will be effective for the Company for
the year ending December 31, 2003, with the effective date for certain
provisions of SFAS No. 145 being May 15, 2002. The adoption of this statement
will not have a material effect on our results of operations or financial
position or cash flows of the Company.
In September 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The Statement is
effective for such activities implemented after January 1, 2003.
In November 2002, the FASB issued Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this Interpretation apply to guarantees issued or
modified after December 31, 2002. The Company has evaluated the impact of the
adoption of FIN 45, and does not believe it will have a material impact on the
Company's consolidated financial position or results of operations because the
Company is not currently the guarantor of any third party obligations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123," to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We have adopted the disclosure
requirements of SFAS No. 148 as of December 31, 2002. We account for stock-based
employee compensation arrangements in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and comply with the disclosure provisions of SFAS No. 123, as
amended. Under APB Opinion No. 25, compensation expense is based on the
difference, if any, on the date of grant, between the quoted market price of our
stock and the exercise price.
On January 17, 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 addresses consolidation of entities that are not
controllable through voting interests or in which the equity investors do not
bear the residual economic risks and rewards. These entities have been commonly
referred to as special purpose entities. The Interpretation provides guidance
related to identifying variable interest entities and determining whether such
entities should be consolidated. It also provides guidance related to the
initial and subsequent measurement of assets, liabilities and noncontrolling
interests in newly consolidated variable interest entities and requires
disclosures for both the primary beneficiary of a variable interest entity and
other beneficiaries of the entity. The Company will adopt the provision of FIN
No. 46 effective January 1, 2003 but does not believe it will have a material
impact on the Company's financial position or results of operations as the
Company does not have any involvement with variable interest entities.
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
24
and Hedging Activities." This Statement is effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The Company does not believe the adoption of this standard will
have a material impact on the Company's financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. This standard, which the Company will adopt in
2003, will not have a material effect on the Company's consolidated financial
position or results of operations.
2. NAME CHANGE
In April 2002, the Board of Directors authorized an amendment to the
Company's certificate of incorporation to change the Company's name to "Index
Development Partners, Inc.," subject to stockholder approval at the Company's
annual meeting held on June 18, 2002. At the annual meeting, the Company's
stockholders approved the name change, which became effective that day.
Effective June 26, 2002, the Company's common stock began trading on the OTC
Bulletin Board under the symbol "IXDP."
The Company's sole focus is on the development and licensing of proprietary
stock indexes, including the America's Fastest Growing Companies(SM) family of
stock indexes. The Company therefore believed it was appropriate to change its
name to Index Development Partners, Inc., to align its corporate name with its
current mission.
3. INVESTMENTS
On June 2, 1999, the Company, Kirlin Holding Corp ("Kirlin") and Venture
Highway, Inc. (at the time a wholly-owned subsidiary of Kirlin), entered into an
agreement pursuant to which the Company acquired 19.9% of the then-outstanding
shares of common stock. The purchase price was paid in the form of a credit for
VentureHighway to use to purchase advertising in the Company's magazines and web
sites. During the year ended December 31, 2000, the Company reduced the carrying
value of its investments in Venture Highway by approximately $2.6 million, to
zero. During the year ended December 31, 2002 the Company received distributions
from Venture Highway of approximately $141,000. This amount has been recorded as
a gain on disposition of investments. The Company has not accrued for any
additional recoveries and will record such amounts, if any, when received.
Also during the year ended December 31, 2002, the Company received a
distribution from the domestic investment fund it formerly managed. The Company
recorded a gain of $10,980 in connection with this distribution.
On May 4, 2000, the Company and Tradeworx, Inc. ("Tradeworx") entered into
an agreement pursuant to which the Company acquired 1,045,000 newly issued
shares of common stock of Tradeworx, representing at the time a 7% stake (with
warrants to acquire up to 10.5%), on a fully diluted basis, of Tradeworx. The
purchase price was paid for in the form of a credit for Tradeworx to use to
purchase advertising in the Company's magazines and websites during the 24
months ended August 1, 2002. The investment and the deferred advertising
revenues were recorded at the fair market value at the date of the transaction
of approximately $1.1 million.
25
The Company reviewed the operations and financial position of Tradeworx and
concluded in the third quarter of 2001 that it had incurred an other than
temporary decline in the value of its Tradeworx investment. The Company adjusted
the carrying value to estimated fair market value and accordingly reduced the
carrying value of its investment in Tradeworx by approximately $1.1 million
during the third quarter ended September 30, 2001.
On February 23, 2000, the Company and Pricing Dynamics Solutions, Inc.
("Pricing Dynamics") entered into an agreement pursuant to which the Company
acquired 1,166,667 newly issued shares of common stock of Pricing Dynamics,
representing at the time a 3.3% stake (on a fully-diluted basis) of Pricing
Dynamics (constituting 7.4% of the then-outstanding shares). The purchase price
was paid in the form of a credit for Pricing Dynamics to use to purchase
advertising in the Company's magazines and web sites during the 21 months ended
December 31, 2001. The investment and the deferred advertising revenues were
recorded at the fair market value at the date of the transaction of
approximately $1.5 million.
During the quarter ended September 30, 2001 the Company became aware of an
other than temporary decline in the value of its Pricing Dynamics investment and
adjusted the carrying value to estimated fair market value. Accordingly, the
Company reduced the carrying value of its investments by approximately $1.5
million during the third quarter ended September 30, 2001.
4. DISCONTINUED OPERATIONS
On May 17, 2002, the Company sold Horizon Publishing Company ("Horizon"),
an unrelated third party, assets related to the Company's Individual Investor's
Special Situations Report newsletter ("SSR") and Horizon agreed to provide SSR
subscribers with one or more Horizon investment related newsletters, at no
additional cost to SSR subscribers, for the number of issues of SSR that such
subscribers have paid for but have not been served, representing approximately
$0.1 million of deferred subscription liability of the Company. In connection
with this transaction, the Company discontinued publication of SSR. As a result
of the transaction, the Company discontinued its Print Publications operations.
The operating results relating to Print Publications operations have been
segregated from continuing operations and reported within a separate line item
on the consolidated condensed statements of operations as discontinued
operations.
In November 2001, the Company assigned to Telescan, Inc., certain of the
Company's internet assets, including the domain name www.individualinvestor.com,
in exchange for the 1,063,531 shares of the Company's Common Stock owned by
Telescan and the Company subsequently discontinued its Online Services
operations. The operating results relating to Online Services operations have
been segregated from continuing operations and reported as a separate line item
on the consolidated statements of operations as discontinued operations.
On July 9, 2001, the Company completed the transactions (the "Magazine
Sale") contemplated by an agreement ("Agreement") with The Kiplinger Washington
Editors, Inc. ("Kiplinger"), the publisher of Kiplinger's Personal Finance
Magazine ("KPFM"). Pursuant to the Agreement, the Company, among other things,
sold to Kiplinger the subscriber list to the Company's Individual Investor
magazine ("II"); agreed, until July 9, 2006, not to use the name "Individual
Investor" for print periodical publishing or list rental purposes, except in
connection with the Company's Individual Investor's Special Situations Report
newsletter; and agreed to provide certain consulting services to Kiplinger until
July 9, 2002. In return, Kiplinger agreed to provide II subscribers with KPFM,
at no additional cost to II subscribers, for the number of issues of II that
such subscribers have paid for but have not been served, representing
approximately $2.6 million of deferred subscription liability of the Company;
and paid the Company $3.5 million in cash, a portion of which was placed in
escrow to secure certain obligations.
26
The gain (loss) from discontinued operations consisted of the following
components:
PRINT PUBLICATIONS
2002 2001
---- ----
Revenues and other income $ 1,550,637 $ 5,929,994
------------------ ----------------
Gain (loss) from operations 1,524,238 (71,419)
Gain from disposal 69,499 2,175,497
------------------ ----------------
Total $ 1,593,737 $ 2,104,078
================== ================
ONLINE SERVICES
2002 2001
---- ----
Revenues and other income $ -- $ 1,256,331
------------------ ----------------
Gain (loss) from operations 335,941 (527,408)
Loss from disposal -- (340,445)
------------------ ----------------
Total $ 335,941 $ (867,853)
================== ================
Net current assets at December 31, 2002 and 2001 related to the Print
Publications discontinued operation are approximately $0 and $251,000,
respectively. Net current liabilities at December 31, 2002 and 2001 related to
the Print Operations are approximately $295,000 and $643,000, respectively. Net
current liabilities at December 31, 2002 and 2001 related to the Online Services
discontinued operation are approximately $36,000 and $336,000, respectively.
Deferred subscription revenue, net of amounts recoverable from purchasers
of print operations recorded in other assets, of approximately $0.3 million is
recognizable in decreasing monthly amounts through the second quarter of 2011.
5. PROPERTY AND EQUIPMENT
December 31,
2002
------------------
Equipment $283,071
Furniture and fixtures 62,119
Leasehold improvements 168,378
------------------
513,568
Less: accumulated depreciation
and amortization (422,607)
------------------
$ 90,961
==================
Upon the completion of the sublease arrangements for office space in 2001,
the Company abandoned the leasehold improvements related to the sublet space.
Approximately, $0.9 million was recognized as a loss upon the abandonment of the
leasehold and has been included in the recorded impairment of investments and
other assets in 2001.
6. ACCRUED EXPENSES
December 31,
2002
---------------------
Accrued operating expenses $ 99,530
Accrued professional fees 65,500
Prepaid sublease rentals 52,048
Other 11,382
---------------------
$228,460
=====================
27
7. COMMITMENTS AND CONTINGENCIES
Litigation -The Company from time to time is involved in ordinary and
routine litigation incidental to its business; the Company currently believes
that there is no such pending legal proceeding that would have a material
adverse effect on the consolidated financial statements of the Company.
Profit Sharing Plan - The Company has a profit sharing plan (the "Plan"),
subject to Section 401(k) of the Internal Revenue Code. All employees who
complete at least two months of service and have attained the age of 21 are
eligible to participate. The Company can make discretionary contributions to the
Plan, but none were made in 2002 and 2001.
Lease Agreements - The Company leases office space in New York City under
an operating lease that expires on March 31, 2004. In May 2001, the Company
commenced a sublease of a portion of its headquarters office space to an
unrelated third party and in January 2002 the Company commenced a sublease of
another portion of it headquarters office space to a different unrelated third
party. Effective April 30, 2003, the Company and its landlord entered into a
Partial Assignment of Lease and Assignment of Subleases, the effect of which is
that the Company (i) continues to lease approximately 5% of its former space,
with a corresponding reduction in base rental expense, and (ii) will be paid by
the landlord on a monthly basis approximately $9,000, an amount that is equal to
the difference between the higher monthly payments the Company's two former
sub-lessors were obligated to pay the Company and the lower amount that the
Company was obligated to pay the landlord with respect to the formerly sublet
space, plus the cost of electricity for the entire space (which averaged
approximately $3,000 per month in 2002). The Company also subleases its former
office space in New York City under an operating lease that expires March 1,
2005. All of the above leases and subleases provide for escalation of lease
payments as well as real estate tax increases. Rent expense for the years ended
December 31, 2002 and 2001 was approximately $0.1 million and $1.2 million,
respectively. Future minimum lease payments and related sublease rentals
receivable with respect to non-cancelable operating leases are approximately as
follows:
Future Minimum Rents Receivable
Year Rental Payments Under Sublease
---- ------------------------ --------------------------
2003 $589,000 $610,000
2004 300,000 303,000
2005 36,000 35,000
Thereafter 0 0
------------------------ --------------------------
Total $925,000 $948,000
======================== ==========================
The Company had an outstanding letter of credit totaling $250,000 related
to the security deposit for the Company's New York City corporate office space.
The Company had received letters of credit from its sublease tenants in the
aggregate amount of approximately $145,000. Effective April 30, 2003, the
Company's security deposit was reduced to $11,770 and the Company transferred
the letters of credit from its subtenants to its landlord.
28
8. INCOME TAXES
The Company has available net operating loss carryforwards ("NOL") totaling
approximately $24.0 million. Based upon a change of ownership, which transpired
in December 1991, the utilization of approximately $2.1 million of pre-change
NOL are limited in accordance with Section 382 of the Internal Revenue Code,
which affects the amount and timing of when the NOL can be offset against
taxable income. Then Company's NOL expire at differing amounts between January
1, 2003 through 2021. The Company also has an unrealized tax loss of
approximately $5.8 million related to the impairment of its investments (see
Note 3). The tax effects of temporary differences from discontinuing and
continuing operations that give rise to significant portions of the deferred tax
assets and liabilities at December 31, 2002 and 2001, respectively, are
presented below:
2002 2001
---- ----
Deferred tax assets:
Net operating loss carryforwards 10,600,000 $ 10,822,000
Unrealized tax loss 2,604,000 2,473,000
Deferred revenues 202,000 625,000
Net fixed assets 578,000 290,000
Other - 254,000
----------------------------- -----------------------------
Total 13,984,000 14,464,000
Deferred tax liabilities: - -
----------------------------- -----------------------------
13,984,000 14,464,000
Less: valuation allowance 13,984,000 14,464,000
----------------------------- -----------------------------
Net deferred tax asset $ - $ -
============================= =============================
The provision for income taxes from continuing operations for the years
ended December 31, 2002 and 2001, respectively, is different than the amount
computed using the applicable statutory Federal income tax rate with the
difference summarized below:
2002 2001
---- ----
Hypothetical income tax benefit
at the US Federal statutory rate ($303,000) ($2,299,353)
Hypothetical State and local income taxes benefit,
less US Federal income tax benefit (87,000) (447,000)
Permanent differences 1,000 118,000
Unrealized tax loss - 1,286,000
Net operating loss benefit not recognized 389,000 1,272,353
------------------------------- -----------------------------
$ - $ -
=============================== =============================
9. STOCK OPTIONS
In April 2002, the Company's board of directors and its chief executive
officer, Jonathan Steinberg, agreed that between April 16, 2002 and December 31,
2002, Mr. Steinberg would receive no cash salary and instead would be granted a
ten-year option to purchase the Company's Common Stock at an exercise price of
$0.05 per share (the fair market value of the Common Stock on the date of the
grant), vesting in bimonthly installments. Pursuant to that agreement, in April
2002, Mr. Steinberg was granted such an option for an aggregate of approximately
3.6 million shares, vesting bimonthly between April 30, 2002 and December 31,
2002, in installments of between approximately 208,000-216,000 shares. Together
with a similar grant to another employee in lieu of foregoing a portion of his
salary, the total number of options granted to employees during 2002 is
3,893,985 options. On July 31, 2002, the Company granted a director an option to
purchase 30,000 shares of the Company's common stock at an exercise price of
$0.04 per share.
29
In May 2001, the Stock Option Committee, pursuant to the Company's 2000
Performance Equity Plan, awarded 223,000 shares of authorized but unissued
Common Stock in the aggregate to certain employees subject to the terms of a
restricted stock agreement. 194,000 of these shares were cancelled during 2001
and an additional 21,000 were cancelled in March 2002 upon the termination of
employment of the respective employees. The restriction period on the remaining
shares expired in May 2002.
The Company has six stock option plans: the 1991 Stock Option Plan, the
1993 Stock Option Plan, the 1996 Performance Equity Plan, the 1996 Management
Incentive Plan; the 2000 Performance Equity Plan ("2000 Plan") and the 2001
Performance Equity Plan ("2001 Plan") (collectively, the "Plans"). Under the
Plans, the Company can issue a maximum of 4,200,000 shares of Common Stock.
Options issued pursuant to the Plans may be exercisable for a period of up to 10
years from the date of the grant. Options granted pursuant to the 1991 Stock
Option Plan must be at an exercise price which is not less than the fair market
value of the stock at the date of grant; options granted pursuant to the other
Plans may have, but to date have not had, exercise prices less than the fair
market value at the date of grant.
In addition to the Plans, the Company has options outstanding that were
granted outside of the Plans. These options were granted at fair market value at
the date of grant and expire at various dates through November, 2012.
Activity in the Plans noted above is summarized in the following table:
2002 2001
---- ----
Weighted
Average Weighted Average
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
Options outstanding,
January 1 1,330,501 $1.37 1,291,043 $2.90
Granted 319,693 $0.06 1,109,000 $0.46
Exercised - - (62,697) - -
Canceled (682,001) $1.66 (1,006,845) $2.41
------------------- -------------------
Balance, December 31 968,193 $0.63 1,330,501 $1.37
=================== ===================
Options exercisable under the Plans at December 31, 2002 and 2001,
respectively, were 475,692 and 457,876, respectively, at weighted average
exercise prices of $0.92, and $2.71, respectively. At December 31, 2002 and
2001, respectively, options available for grant under the Plans were 1,380,655
and 2,020,347, respectively, while total shares of Common Stock reserved for
future issuances under the Plans were 2,348,848 and 3,350,848, respectively.
In April 2001, the Company's board of directors approved the 2001
Performance Equity Plan ("2001 Plan"). The 2001 Plan covers 1,000,000 shares of
the Company's common stock, and is similar to the Company's 1993, 1996 and 2000
Plans, except that incentive options may not be granted since shareholder
approval for the 2001 Plan will not be obtained within one year of its adoption.
The Company's stock option committee will administer the 2001 Plan.
30
Options granted outside of the Plans are as follows:
2002 2001
---- ----
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
Options outstanding,
January 1 1,498,650 $2.59 1,658,150 $2.73
Granted 3,604,292 $0.05 130,000 $0.45
Exercised - - - -
Canceled (728,650) $5.37 (289,500) $2.45
----------------- ----------------
Balance, December 31 4,374,292 $0.39 1,498,650 $2.59
================= ================
Options granted outside the Plans that were exercisable at December 31,
2002 and 2001, respectively, were 4,334,292 and 1,358,5650, respectively, at
weighted average exercise prices of $0.39 and $2.79, respectively.
The following table summarizes information about total stock options
outstanding at December 31, 2002:
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted-Average Number
Range of Exercise Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Prices 12/31/2002 Contractual Life Exercise Price 12/31/2002 Exercise Price
------ ---------- ---------------- -------------- ---------- --------------
$0.4062- $1.250 5,158,985 8.09 $0.25 4,628,984 $0.24
$2.00-$4.00 153,500 2.21 $2.17 151,000 $2.16
$4.25-$4.4375 30,000 6.95 $4.44 30,000 $4.44
---------------- -------------------
5,342,485 7.60 $0.43 4,809,984 $0.44
================ ===================
10. STOCKHOLDERS' EQUITY
Cancellation of Common Stock - In connection with the November 2001 sale of
certain assets by the Company to Telescan, Inc., the Company received as
consideration 1,063,531 shares of the Company's Common Stock, which represented
100% of Telescan's shareholdings of Company Common Stock on that date. These
shares were retired by the Company and are part of the authorized but unissued
shares.
Issuance of Preferred Stock - On December 2, 1998, the Company issued a
total of 10,000 shares of Series A Preferred Stock ("Series A Preferred Stock")
to two parties unrelated to the Company pursuant to Stock Purchase Agreements,
for an aggregate purchase price of $2.0 million. The Series A Preferred Stock
has a par value of $.01 per share and a stated value of $200 per share. The
Series A Preferred Stock is convertible into the Company's Common Stock at a
conversion price of $2.12 per share, subject to adjustment for stock splits,
recapitalizations, and the like. Any unconverted shares will be subject to
mandatory conversion into the Company's Common Stock on December 31, 2003. The
conversion price of the Series A Preferred Stock was 17% higher than the closing
price of the Company's Common Stock ($1.81) on the last trading day prior to the
execution of the Stock Purchase Agreements. The Series A Preferred Stock will be
entitled to receive a cumulative ten percent (10%) per annum cash dividend,
payable annually on December 31 of each year, commencing December 31, 1999, or,
if earlier, upon conversion of the shares of Series A Preferred Stock. The
Series A Preferred Stock shall have a liquidation preference of $200 per share
plus any accrued and unpaid dividends. Shares of Common Stock into which the
Series A Preferred Stock may be converted were registered for resale in October
31
1999. On September 21, 2000, 2,120 shares Series A Preferred Stock were
converted at the conversion price of $2.12 per share into 200,000 shares of
Common Stock. At December 31, 2002, 7,880 shares of Series A Preferred Stock
remained outstanding. These shares of Series A Preferred Stock are convertible
into 743,396 shares of Common Stock.
Warrants - In 1998, in connection with consulting and recruiting services
provided, the Company issued warrants to purchase up to 362,500 shares of Common
Stock at exercise prices ranging from $1.1875 to $2.15625. The warrants were
valued at $337,113 using the Black-Scholes options pricing model. Of the
warrants issued in 1998, 300,000 may be exercised at any time until December 15,
2003 and 62,500 were cancelled during 2000.
In 1999, in connection with consulting and recruiting services provided,
the Company issued warrants to purchase up to 138,750 shares of Common Stock at
exercise prices ranging from $2.6255 to $3.40625. The warrants were valued at
$288,211 using the Black-Scholes options pricing model. During 2000, 43,750 of
the warrants issued in 1999 expired unexercised and 50,000 of the warrants
issued in 1999 were cancelled. During 2001, 30,000 of the warrants issued in
1999 were cancelled and the remaining 15,000 may be exercised at any time until
November 28, 2004.
In 2000, in connection with the sale by the Company of two Internet domains
for cash consideration of $1.0 million, the Company issued a warrant to purchase
250,000 shares of the Company's Common Stock at an exercise price of $2.00 per
share. This warrant may be exercised at any time until August 10, 2003.
Since 2000, there has been no issuance or cancellation of warrants.
11. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing the net
income (loss), after deducting dividends on cumulative convertible preferred
stock, by the weighted average number of shares of Common Stock outstanding
during the period. Diluted net income (loss) per common share is computed using
the weighted average number of outstanding shares of Common Stock and common
equivalent shares during the period. Common equivalent shares consist of the
incremental shares of Common Stock issuable upon the exercise of stock options,
warrants and other securities convertible into shares of Common Stock. In 2001
and 2002, the exercise of stock options, warrants and other securities
convertible into shares of Common Stock were not assumed in the computation of
dilutive loss per common share, as the effect would have been antidilutive.
The computation of basic net income (loss) applicable to common
shareholders is as follows:
2002 2001
---- ----
Net loss from continuing operations ($ 865,745) ($6,569,581)
Preferred stock dividends (157,600) (157,600)
---------------------------- ----------------------------
Net loss from continuing operations applicable to common (1,023,345)
shareholders (6,727,181)
Income from discontinued operations 1,929,678 1,236,225
---------------------------- ----------------------------
Net income (loss) applicable to common shareholders $906,333 ($5,490,956)
============================ ============================
The reconciliation of the number of shares used in calculating net income
(loss) applicable to common shareholders is as follows:
2002 2001
---- ----
Balance January 1, 7,915,552 8,972,886
Repurchase and cancellation of common stock (203,965)
Cancellation of restricted shares (17,564) (24,255)
Issuance of restricted shares 142,965
--------------------------- ----------------------------
Balance December 31, 7,897,988 8,887,631
=========================== ============================
32
12. SUPPLEMENTARY INFORMATION - SELECTED QUARTERLY DATA (Unaudited)
2002 Quarters
1st 2nd 3rd 4th
------------- -------------- ------------ ------------
Revenues $ - $ - $ - $ -
Operating expenses 385,240 116,880 347,672 251,575
Gain on sale of assets 70,713
Gain on disposition investments 84,926 67,054
---------------- ---------------- ---------------- ---------------
Operating loss from continuing operations (229,601) (116,880) (347,672) (184,363)
Investment and other income 4,837 3,366 2,964 1,604
---------------- ---------------- ---------------- ---------------
Net loss from continuing operations (224,764) (113,514) (344,708) (182,759)
Gain from discontinued operations 474,334 497,045 569,568 388,731
Net income $ 249,570 $ 383,531 $ 224,860 $ 205,972
================ ================ ================ ===============
Basic and dilutive income (loss) per common share:
Continuing operations $ (0.03) $ (0.02) $ (0.05) $ (0.03)
Discontinued operations $ 0.06 $ 0.06 $ 0.07 $ 0.05
---------------- ---------------- ---------------- ---------------
Net income per share $ 0.03 $ 0.04 $ 0.02 $ 0.02
================ ================ ================ ===============
Average number of common shares used in
in computing loss per common share 7,927,485 7,894,552 7,894,552 7,894,552
2001 Quarters
1st 2nd 3rd 4th
------------- -------------- ------------ ------------
Revenues $ - $ - $ - $ -
Operating expenses 1,107,306 798,951 571,022 657,329
Gain on sale of assets - - 20,355 -
Impairment of investment - - (2,678,546) (851,722)
---------------- ----------------- --------------- ---------------
Operating loss (1,107,306) (798,951) (3,229,213) (1,509,051)
Investment and other income 52,419 15,855 19,214 7,808
---------------- ---------------- ---------------- ---------------
Net loss from continuing operations (1,054,887) (783,096) (3,209,999) (1,521,599)
Gain (loss) from discontinued operations (600,283) (1,554,513) 2,482,247 908,774
Net loss $ (1,655,170) $ (2,337,609) $ (727,752) $ (612,825)
================ ================ ================ ===============
Basic and dilutive income (loss) per common share:
Continuing operations $ (0.12) $ (0.09) $ (0.37) $ (0.19)
Discontinued operations $ (0.07) $ (0.17) $ 0.28 $ 0.11
---------------- ---------------- ---------------- ---------------
Net loss per share $ (0.19) $ (0.26) $ (0.09) $ (0.08)
================ ================ ================ ===============
Average number of common shares used in
in computing loss per common share 8,972,672 9,093,775 8,909,661 8,380,657
The above tables have been reclassified for the effects of SFAS No. 144 on
discontinued operations.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE ISSUER.
As of May 9, 2003, the Company's directors and executive officers and their
ages and positions are as follows:
Name Age Position
---- --- --------
Jonathan L. Steinberg 38 Chairman of the Board
and Chief Executive Officer
S. Christopher Meigher III 56 Director
E. Drake Mosier 35 Director
Peter M. Ziemba 45 Director
Jonathan L. Steinberg founded the Company and has served as Chairman of the
Board of Directors and Chief Executive Officer since October 1988. From August
1986 to August 1988, Mr. Steinberg was employed as an analyst in the Mergers and
Acquisitions Department of Bear, Stearns & Co. Inc., an investment banking firm.
S. Christopher Meigher III has served as a director of the Company since
June 1998. Mr. Meigher has served as Chairman and Chief Executive Officer of
Quest Media, LLC, a magazine publisher, since March 2000. From November 1992
until February 2000, Mr. Meigher served as Chairman, Chief Executive Officer and
General Partner of Meigher Communications, L.P., a magazine publisher. Prior
thereto, Mr. Meigher was employed by Time Inc. for 23 years and served in
numerous senior management positions, including serving as President of Time
Inc.'s New York Magazine Division from 1990 to 1992.
E. Drake Mosier has served as a director of the Company since December
1999. In January 1995, Mr. Mosier founded 401k Forum, Inc., the predecessor to
mPower, Inc., which provides online, institutional quality investment advice for
non-high net worth retail investors. From August 1995 until November 1999, Mr.
Mosier served as Chairman of the Board of Directors and Chief Executive Officer
and since November 1999 has served as Vice Chairman of mPower, Inc. From
November 1999 to July 2001, Mr. Mosier served as Chairman of the Board and Chief
Executive Officer of mPower Europe, Ltd. Prior to founding mPower, Mr. Mosier
worked at Salomon Smith Barney, Inc. designing and managing institutional 401(k)
plans. Since July 2001, Mr. Mosier has been a private equity investor.
Peter M. Ziemba has served as a director of the Company since June 1996.
Mr. Ziemba is an attorney and has been a partner of the law firm Graubard Miller
for more than five years and has been employed there since 1982. Graubard Miller
is our outside general counsel.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who beneficially own more than ten
percent of a registered class of the Company's equity securities ("ten-percent
stockholders") to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and ten-percent
stockholders also are required to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
furnished to it, and written representations that no other reports were
required, the Company believes that during its fiscal year ended December 31,
2002, all its officers, directors and ten-percent stockholders complied with the
34
Section 16(a) reporting requirements, except that S. Christopher Meigher III
filed one Form 4 late, which Form 4 reported one transaction.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the compensation for the three fiscal years
ended December 31, 2002, 2001 and 2000, for the Company's Chief Executive
Officer and each other executive officers whose compensation exceeded $100,000
for the fiscal year ended December 31, 2002.
----------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
--------------------------------------- ------- --------------------------- ------------------------------------------
Name and Principal Position Year Annual Compensation Long-Term Compensation
--------------------------------------- ------- --------------------------- ------------------- ----------------------
Salary ($) Bonus ($) Number of All Other
Options (#) Compensation ($)
--------------------------------------- ------- --------------- ----------- ------------------- ----------------------
Jonathan L. Steinberg 2002 68,240(1) - 3,604,292(1) -
Chairman of the Board and Chief 2001 230,000 - 420,000 -
Executive Officer 2000 230,000 - - -
--------------------------------------- ------- --------------- ----------- ------------------- ----------------------
Gregory E. Barton 2002 159,338 - -
Former President, Chief Financial 2001 200,000 62,500(2) 50,000 -
Officer, General Counsel and 2000 200,000 62,500(2) 325,000 -
Secretary -
--------------------------------------- ------- --------------- ----------- ------------------- ----------------------
(1) In April 2002, the Company's board of directors and Mr. Steinberg agreed
that between April 16, 2002 and December 31, 2002, Mr. Steinberg would
receive no cash salary and instead would be granted a ten-year option to
purchase the Company's Common Stock at an exercise price of $0.05 per share
(the fair market value of the Common Stock on the date of the grant). The
option had a Black-Scholes value (calculated on the April 2002 grant date)
equal to the amount of cash salary that Mr. Steinberg otherwise would have
received.
(2) In 2000, Mr. Barton was awarded a bonus of $125,000 for services performed
for the Company and as an incentive for continued employment. One-half of
the bonus was paid in 2000 and one-half was earned and paid in April 2001.
Compensation Arrangements for Current Executive Officers
Jonathan L. Steinberg does not have a written employment agreement and
since 1997, with the exception noted below, he has received an annual base
salary of $230,000. In April 2002, the Company's board of directors and Mr.
Steinberg agreed that between April 16, 2002 and December 31, 2002, Mr.
Steinberg would receive no cash salary and instead would be granted a ten-year
option to purchase the Company's Common Stock at an exercise price of $0.05 per
share (the fair market value of the Common Stock on the date of the grant),
vesting in bimonthly installments, each installment of which would have a
Black-Scholes value (calculated on the April 2002 grant date) equal to the
amount of cash salary that Mr. Steinberg otherwise would have received. Pursuant
to that agreement, in April 2002 Mr. Steinberg was granted such an option for an
aggregate of approximately 3.6 million shares, vesting bimonthly between April
30, 2002 and December 31, 2002, in installments of between approximately
208,000-216,000 shares. The average consideration per option the Company
received (i.e., the amount of salary the Company saved) by granting the option
was slightly above $0.045. In the event that any such option is exercised, the
average consideration per share the Company will receive would be slightly above
$0.095 (the sum of the approximately $0.045 in saved salary, plus the $0.05
35
exercise price the Company would receive) - an amount that is more than 90%
greater than the fair market value of the Common Stock on the date of grant.
The Company employed Gregory E. Barton pursuant to a written employment
agreement, which did not have a specific term of employment, and which provided
for an annual base salary of $200,000. In November 2002, Mr. Barton terminated
his employment and accepted employment with an unrelated third party.
Director Compensation
Directors receive no cash compensation for their services to the Company as
directors, but are reimbursed for all reasonable costs incurred in attending
meetings of the board of directors. Pursuant to the 1996 Plan (defined below),
directors who are not employees of the Company receive automatic grants of stock
options upon their election or appointment as a director and upon each
re-election as a director. Each stock option is for 30,000 shares of Common
Stock and vests at the rate of 10,000 shares of Common Stock per year after an
equal period of service, and once vested, remain exercisable until the tenth
anniversary of the date of grant unless the director ceases to be a director for
reason other than death, in which case a shorter exercise period may apply. Each
option is exercisable per share at the fair market value per share on the date
of grant. Notwithstanding the foregoing, if the director eligible for an award
of a stock option is re-elected as a director and has not yet served as a
director of the Company for a term of three full years, the award of the stock
option will be modified as follows: (A) the number of shares of Common Stock
that may be acquired under the stock option will be reduced to (1) 20,000 shares
of Common Stock if the director has served as a director more than two years,
but less than three years, (2) 10,000 shares of Common Stock if the director has
served as a director more than one year, but less than two years, and (3) if the
director has served less than one year as a director, no stock option will be
awarded; and (B) the stock option will be exercisable by the director as to
10,000 shares of Common Stock on each of the second and third anniversaries of
his re-election or re-appointment as a director if the stock option represents
the right to acquire 20,000 shares of Common Stock and the stock option will be
exercisable by the director as to 10,000 shares of Common Stock on the third
anniversary of his re-election or re-appointment as a director if the stock
option represents the right to acquire 10,000 shares of Common Stock. In 1999,
the shares of Common Stock reserved under the 1996 Plan were fully utilized and
the Company continued this compensation structure outside of the 1996 Plan in
connection with the appointment of E. Drake Mosier as a director.
In May 2001, the board of directors approved a special, one time grant to
the Company's non-employee directors. Options to purchase 30,000 shares, vesting
in three equal installments of 10,000 shares on May 14 in 2001, 2002 and 2003
were granted to Messrs. Meigher, Mosier, Sokoloff and Ziemba. Additional options
to purchase 10,000 shares vesting immediately were granted to Mr. Meigher. The
exercise price of all of these options were equal to the fair market value per
share on the date of grant.
36
Option Grants
The following table sets forth the stock options granted in the last fiscal
year to the Company's executive officers identified in the Summary Compensation
Table above.
-----------------------------------------------------------------------------------------------------------
OPTIONS GRANTED IN LAST FISCAL YEAR
------------------------------- ------------------ ---------------- ------------------- -------------------
Number of Total
Securities Options
Underlying Granted to
Options Granted Employees in Exercise Price Expiration
Name of Executive (#) Fiscal Year (%) Per Share ($) Date
------------------------------- ------------------ ---------------- ------------------- -------------------
Jonathan L. Steinberg 3,604,292 93.3 0.05 4/2/12
------------------------------- ------------------ ---------------- ------------------- -------------------
Gregory E. Barton 50,000 1.3 0.07 3/31/05
------------------------------- ------------------ ---------------- ------------------- -------------------
The following table sets forth the fiscal year end option values of
outstanding options at December 31, 2002 and the dollar value of unexercised,
in-the-money options for our executive officers identified in the Summary
Compensation table above.
----------------------------------------------------------------------------------------------------------------------
AGGREGATED FISCAL YEAR END OPTION VALUES
----------------------------------------------------------------------------------------------------------------------
Name Number of Securities Underlying Dollar Value of Unexercised in-the-Money
Unexercised Options at Fiscal Year End Options at Fiscal Year End(1)
---------------------------- --------------------- ---------------------- --------------------- ----------------------
Exercisable (#) Unexercisable (#) Exercisable ($) Unexercisable ($)
---------------------------- --------------------- ---------------------- --------------------- ----------------------
Jonathan L. Steinberg 4,389,292 315,000 288,343 0
---------------------------- --------------------- ---------------------- --------------------- ----------------------
Gregory E. Barton 25,000 25,000 1,500 1,500
---------------------------- --------------------- ---------------------- --------------------- ----------------------
(1) These values are based on the difference between the closing sale price of
the Common Stock on December 31, 2002 ($0.13) and the exercise prices of
the options.
Stock Option Plans
1991 Stock Option Plan
In 1991, the Company adopted the 1991 Stock Option Plan ("1991 Plan")
covering 200,000 shares of Common Stock pursuant to which the Company's
officers, directors and key employees are eligible to receive incentive or
non-qualified stock options. The 1991 Plan, which expired in October 2001 (and
therefore no further options may be granted under this plan), is administered by
our stock option committee pursuant to the powers delegated to it by the board
of directors. To the extent permitted under the express provisions of the 1991
Plan, the stock option committee has authority to determine the selection of
participants, allotment of shares, price, and other conditions of purchase of
options and administration of the 1991 Plan in order to attract and retain
persons instrumental to our success.
1993 Stock Option Plan
In 1993, the Company adopted the 1993 Stock Option Plan ("1993 Plan")
covering 500,000 shares of Common Stock pursuant to which the Company's
officers, directors, key employees and consultants are eligible to receive
37
incentive or non-qualified stock options, stock appreciation rights, restricted
stock awards, deferred stock, stock reload options and other stock based awards.
The 1993 Plan will terminate at such time as no further awards may be granted
and awards granted are no longer outstanding, provided that incentive options
may only be granted until February 16, 2003. The 1993 Plan is administered by
the stock option committee pursuant to the powers delegated to it by the board
of directors. To the extent permitted under the provisions of the 1993 Plan, the
stock option committee has authority to determine the selection of participants,
allotment of shares, price, and other conditions of purchase of awards and
administration of the 1993 Plan in order to attract and retain persons
instrumental to the Company's success.
1996 Performance Equity Plan
In 1996, the Company adopted the 1996 Performance Equity Plan ("1996 Plan")
covering 1,000,000 shares of Common Stock, which is similar to the 1993 Plan,
except that incentive options may only be granted until March 18, 2006. The 1996
Plan is administered by the stock option committee pursuant to the powers
delegated to it by the board of directors.
1996 Management Incentive Plan
In 1996, the Company adopted the 1996 Management Incentive Plan covering
500,000 shares of Common Stock, pursuant to which the Company's executives or
those of the Company's subsidiaries are eligible to receive incentive or
non-qualified stock options, stock appreciation rights, restricted stock awards,
deferred stock, stock related options and other stock based awards. The
Management Incentive Plan will terminate at such time as no further awards may
be granted and awards granted are no longer outstanding, provided that incentive
options may only be granted until November 4, 2006. The board of directors
administers the Management Incentive Plan.
2000 Performance Equity Plan
In 2000, the Company adopted the 2000 Performance Equity Plan ("2000 Plan")
covering 1,000,000 shares of Common Stock, which is similar to the 1993 and 1996
Plans, except that incentive options may only be granted until June 21, 2010.
The 2000 Plan is administered by the stock option committee pursuant to the
powers delegated to it by the board of directors.
2001 Performance Equity Plan
In April 2001, the Company adopted the 2001 Performance Equity Plan ("2001
Plan"). The 2001 Plan covers 1,000,000 shares of Common Stock, and is similar to
our 1993, 1996 and 2000 Plans, except that incentive options may not be granted
since shareholder approval for the 2001 Plan was not obtained within one year of
its adoption. The 2001 Plan is administered by the stock option committee
pursuant to the powers delegated to it by the board of directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information as of June 19, 2003,
with respect to the Common Stock ownership of (i) those persons or groups known
to beneficially own more than 5% of the Company's voting securities, (ii) each
director and director-nominee of the Company, (iii) each current executive
officer whose compensation exceeded $100,000 in the 2002 fiscal year, and (iv)
all current directors and executive officers of the Company as a group.
38
Amount and Nature of Percent of Class
Name of Beneficial Owner Beneficial Ownership(1) of Voting Securities
------------------------ ------------------------ ------------------------
Jonathan L. Steinberg 5,339,302(2) 43.0%
American Financial Group, Inc. 743,396(3) 8.6%
Reliance Insurance Company 666,666(4) 8.4%
Saul P. Steinberg 621,424(5) 7.9%
S. Christopher Meigher III 90,000(6) 1.1%
Peter M. Ziemba 80,000(7) 1.0%
E. Drake Mosier 60,000(8) *
Gregory E. Barton 50,000 (9) *
All directors and executive 5,569,302(10) 44.1%
officers as a group (4 persons)
---------------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934. The information concerning the
stockholders is based upon information furnished to the Company by such
stockholders. Except as otherwise indicated, all of the shares of Common
Stock are owned of record and beneficially and the persons identified have
sole voting and investment power with respect thereto.
(2) Includes 4,494,292 shares of Common Stock issuable upon the exercise of
presently exercisable options. Does not include 210,000 shares of Common
Stock issuable upon exercise of options that are not currently exercisable
and that will not become exercisable within the next 60 days. The business
address of Jonathan L. Steinberg is 125 Broad Street, 14th Floor, New York,
New York 10004.
(3) Represents 7,880 shares of 10% Series A Preferred Stock that is convertible
into 743,396 shares of the Company's Common Stock for which American
Financial Group, Inc. shares investment power with Carl H. Lindner, Carl H.
Lindner III, S. Craig Lindner and Keith E. Lindner. The business address of
American Financial Group, Inc. is One East Fourth Street, Cincinnati, Ohio
45202. Information is derived from a Schedule 13G filed with the Securities
and Exchange Commission on January 27, 2003.
(4) Represents 666,666 shares of Common Stock owned by Reliance Insurance
Company. According to an Amendment to Schedule 13D filed on March 28, 2000,
Reliance Financial Services Corporation ("Reliance Financial") is the
direct parent company of Reliance Insurance Company, and in turn is a
wholly-owned subsidiary of Reliance Group Holdings, Inc. ("Reliance
Group"), and Reliance Financial has sole voting and investment power over
these shares. This Amendment states that the business address of Reliance
Financial is 55 East 52nd Street, New York, New York 10055. However, the
Company is aware that Reliance Insurance Company currently is in
liquidation by an agency of the Commonwealth of Pennsylvania and it
presumes that the liquidator has sole voting and investment power over the
shares held by Reliance Insurance Company.
39
(5) Share information is derived from an Amendment to Schedule 13D filed with
the Securities and Exchange Commission on March 28, 2000. The business
address of Saul P. Steinberg is 200 East 62nd Street, New York, New York
10021.
(6) Represents 90,000 shares of Common Stock issuable upon the exercise of
presently exercisable options. Does not include 10,000 shares of Common
Stock issuable upon exercise of options that are not currently exercisable
and that will not become exercisable within the next 60 days.
(7) Represents 80,000 shares of Common Stock issuable upon the exercise of
presently exercisable options. (8) Represents 60,000 shares of Common Stock
issuable upon the exercise of presently exercisable options. (9) Represents
50,000 shares of Common Stock issuable upon the exercise of presently
exercisable options. (10) Includes 4,724,292 shares of Common Stock
issuable upon the exercise of options presently exercisable or exercisable
within the next 60 days. Does not include 230,000 shares of Common Stock
issuable upon exercise of options, which are not exercisable within the
next 60 days.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information at December 31, 2002
with respect to our equity compensation plans that provide for the issuance of
options, warrants or rights to purchase our securities.
-------------------------- ---------------------------- -------------------------- ------------------------------------
Number of Securities Remaining
Number of Securities to be Weighted-Average Available for Future Issuance
Issued upon Exercise of Exercise Price of under Equity Compensation Plans
Outstanding Options, Outstanding Options, (excluding securities reflected in
Plan Category Warrants and Rights Warrants and Rights the first column)
-------------------------- ---------------------------- -------------------------- ------------------------------------
Equity Compensation 968,193 $0.63 1,380,655
Plans Approved by
Security Holders
-------------------------- ---------------------------- -------------------------- ------------------------------------
Equity Compensation 4,689,292 $0.39 870,000
Plans Not Approved by
Security Holders (1)-(8)
-------------------------- ---------------------------- -------------------------- ------------------------------------
(1) On April 7, 1994, the Company granted to its Chief Executive Officer, in
connection with his ongoing employment, 500,000 ten-year options outside of
the Company's stockholder-approved equity compensation plans, 250,000 of
which had an exercise price of $4.9375 per share, 125,000 of which had an
exercise price of $6.65 per share and 125,000 of which had an exercise
price of $7.50 per share. The exercise price of all of these options was
amended in November 1998 to be $1.25 per share. No portion of these options
had been exercised as of December 31, 2001.
(2) On June 23, 1995, the Company granted to its Chief Executive Officer,
then-President and then-Chief Financial Officer, in connection with their
ongoing employment, ten-year options outside of the Company's
stockholder-approved equity compensation plans, of which there were
outstanding at December 31, 2001 183,334 options with an exercise price of
$5.75 per share. As a result of subsequent agreements between the company
and the optionees, 103,334 of these options expired in September 2002 and
the exercise price of 80,000 of these options was amended in November 1998
to be $1.25 per share.
40
(3) On December 15, 1998, the Company granted to its then-financial advisor, in
connection with its provision of financial advisory services, a five-year
warrant to purchase 300,000 shares of the Company's common stock at an
exercise price of $2.15625 per share. No portion of this warrant had been
exercised as of December 31, 2001.
(4) On December 23, 1998, the Company granted to one of its non-employee
directors in connection with his services as a director an option expiring
in June 2005 for 30,000 shares with an exercise price of $2.00 per share,
in exchange for cancellation of an existing 30,000 share option held by
such director. No portion of this option had been exercised as of December
31, 2001.
(5) On November 29, 1999, the Company granted to its then-financial advisor, in
connection with its provision of financial advisory services, a five-year
warrant to purchase 15,000 shares of the Company's common stock at an
exercise price of $2.91875 per share. No portion of this warrant had been
exercised as of December 31, 2001.
(6) On December 14, 1999, the Company granted to one of its non-employee
directors in connection with his services as a director a ten-year option
for 30,000 shares with an exercise price of $4.4375 per share. No portion
of this option had been exercised as of December 31, 2001.
(7) On May 14, 2001, the Company granted to its non-employee directors in
connection with their services as directors ten-year options for an
aggregate of 130,000 shares (30,000 for each of three such directors and
40,000 for one such director) with an exercise price of $0.45 per share. No
portion of these options had been exercised as of December 31, 2001, but an
option to purchase 10,000 shares to one director has been forfeited upon
the resignation of such director in March 2003.
(8) On April 2, 2002, the Company granted to its Chief Executive Officer, in
lieu of salary, a ten-year option for 3,604,292 shares with an exercise
price of $0.05 per share. No portion of this option had been exercised at
December 31, 2002.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
41
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following financial statements of the Issuer are filed as part of this
report:
Independent Auditors' Report;
Consolidated Balance Sheets as of December 31, 2002;
Consolidated Statements of Operations for the Years Ended December 31, 2002 and
2001;
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 2002 and 2001;
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002 and
2001; and
Notes to Consolidated Financial Statements
(a) (3) Exhibits
Exhibit No. Description Method of Filing
----------- ----------- ----------------
3.1 Amended and Restated Certificate of Incorporation of Incorporated by reference to Exhibit 3.2 to the
the Issuer, as amended through June 22, 1999 Form 10-Q for the quarter ended June 30, 1999 (the
"6/99 Form 10-Q")
3.1.1 Amended and Restated Certificate of Incorporation of Incorporated by reference to Exhibit 3.2 to the
the Issuer, as amended through June 18, 2002 Form 10-Q for the quarter ended June 30, 2002 (the
"6/02 Form 10-Q")
3.1.2 Certificate of Amendment to the Amended and Restated Incorporated by reference to Exhibit 3.1 to the
Certificate of Incorporation of the Issuer 6/02 Form 10-Q
3.2 Bylaws of the Issuer amended through April 27, 1999 Incorporated by reference to Exhibit 3.3 to the
6/99 Form 10-Q
4.1 Specimen Certificate for Common Stock of the Issuer Incorporated by reference to Exhibit 4.1 to the
Issuer's Registration Statement on Form S-18 (File
No. 33-43551-NY) (the "Form S-18")
4.2 Certificate of Designations, Preferences and Other Incorporated by reference to Exhibit 10.1 to the
Rights and Qualifications of Series A Preferred Issuer's Form 8-K filed December 14, 1998 (the
"12/14/98 Form 8-K")
10.1+ Indemnification Agreement dated as of August 19, 1991, Incorporated by reference to Exhibit 10.3 to the
between the Issuer and Jonathan L. Steinberg Form S-18
10.2+ Indemnification Agreement dated as of June 19, 1996, Incorporated by reference to Exhibit 10.4 to the
between the Issuer and Peter M. Ziemba Form 10-K for the year ended December 31, 1998
(the "1998 Form 10-K")
42
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.3+ Indemnification Agreement dated as of June 17, 1998, Incorporated by reference to Exhibit 10.1 to the
between the Issuer and S. Christopher Meigher III Form 10-Q for the quarter ended March 31, 1999
10.4+ Indemnification Agreement dated as of December 15, Incorporated by reference to Exhibit 10.2 to the
1999, between the Issuer and E. Drake Mosier Form 10-Q for the quarter ended March 31, 2000
10.5+ Form of 1991 Stock Option Plan of the Issuer Incorporated by reference to Exhibit 10.13 to the
Form S-18
10.6+ Form of 1993 Stock Option Plan of the Issuer Incorporated by reference to Exhibit 4.2 to the
Issuer's Registration Statement on Form S-8 (File
No. 33-72266)
10.7+ Form of 1996 Performance Equity Plan of the Issuer Incorporated by reference to Exhibit 10.43 to the
Form 10-KSB for the year ended December 31, 1995
("1995 Form 10-KSB")
10.8+ Form of 1996 Management Incentive Plan of the Issuer Incorporated by reference to Exhibit 4.10 to the
Issuer's Registration Statement on Form S-8 (File
No. 333-17697)
10.9+ Form of 2000 Performance Equity Plan of the Issuer Incorporated by reference to Appendix A to
definitive Proxy Statement dated May 17, 2000
10.10+ Form of 2001 Performance Equity Plan of the Issuer Filed herewith.
10.11+ Form of Stock Option Agreement dated as of May 9, 1997 Incorporated by reference to Exhibit 10.4 to the
between the Issuer and each of Jonathan Steinberg, Form 10-QSB for the quarter ended June 30, 1997
Robert Schmidt, Scot Rosenblum, and Michael Kaplan
10.12+ Agreement dated as of November 19, 1998 between Incorporated by reference to Exhibit 10.21 to the
Jonathan Steinberg and the Issuer 1998 Form 10-K
10.13+ Stock Option Agreement dated as of January 3, 2001 Incorporated by reference to Exhibit 10.23 to the
between the Issuer and Jonathan L. Steinberg Form 10-KSB for the year ended December 31, 2001.
10.14 Office sublease dated as of January 1996 Incorporated by reference to Exhibit 10.42 to the
between the Issuer and VCH Publishers, Inc. 1995 Form 10-KSB
43
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.15 Lease dated as of November 30, 1998 between the Issuer Incorporated by reference to Exhibit 10.31 to the
and 125 Broad Unit C LLC 1998 Form 10-K
10.16 Office Lease dated as of January 10, 1994 between the Incorporated by reference to Exhibit 10.22 to the
Issuer and 333 7th Ave. Realty Co. Form 10-KSB for the year ended December 31, 1993
10.17 Form of Warrant dated as of December 16, 1998 Incorporated by reference to Exhibit 10.1 to the
6/99 Form 10-Q
10.18 Stock Purchase Agreement dated as of November 30, 1998 Incorporated by reference to Exhibit 10.1 to the
between the Issuer and Great American Insurance Company 12/14/98 Form 8-K
10.19 Stock Purchase Agreement dated as of November 30, 1998 Incorporated by reference to Exhibit 10.2 to the
between the Issuer and Great American Life Insurance 12/14/98 Form 8-K
Company
10.20 Letter dated as of April 28, 1999 between the Issuer, Incorporated by reference to Exhibit 10.2 to the
Great American Life Insurance Company and Great 6/99 Form 10-Q
American Insurance Company
10.21 Agreement dated as of July 9, 2001 between Issuer and Incorporated by reference to Exhibit 4.1 to the
The Kiplinger Washington Editors, Inc. ("Kiplinger") Form 8-K filed July 19, 2001
10.22 Form of Warrant dated as of August 11, 2000 Filed herewith.
21 Subsidiaries of the Issuer Filed herewith
23.1 Consent of Independent Auditors-Deloitte & Touche LLP Filed herewith
99 Risk Factors Filed herewith
+ Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Form 10-KSB.
(b) Reports on Form 8-K
None.
44
ITEM 14. CONTROLS AND PROCEDURES
Based upon the evaluation conducted by the Company's Chief Executive
Officer (who now is also the Company's principal financial officer), as of a
date within 90 days of the filing date of this annual report, of the
effectiveness of the Company's disclosure controls and procedures, he concluded
that, except as set forth below, (1) there were no significant deficiencies or
material weaknesses in the Company's disclosure controls and procedures, (2)
there were no significant changes in internal controls or other factors that
could significantly affect internal controls subsequent to the evaluation date
and (3) no corrective actions were required to be taken. The Company currently
employs three persons and its accounting functions are performed by a former
employee on a part-time, consulting basis. Accordingly, the Company does not
have sufficient personnel to be able to maintain accounting systems and controls
that typically would be desired and maintained by larger business organizations
to ensure that all accounting entries are appropriately recorded. As a result,
the Company relies upon the personal integrity of the former employee that is
performing accounting services for the Company. The Company's Chief Executive
Officer has no reason to doubt the personal integrity of this person.
45
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
Issuer caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INDEX DEVELOPMENT PARTNERS, INC.
Date: June 30, 2003
By: /s/ Jonathan L. Steinberg
------------------------------------
Jonathan L. Steinberg
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Issuer and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jonathan L. Steinberg Chief Executive Officer June 30, 2003
------------------------------ and Director (and Principal
Jonathan L. Steinberg Financial and Accounting
Officer)
/s/ S. Christopher Meigher III Director June 30, 2003
------------------------------
S. Christopher Meigher III
/s/ E. Drake Mosier Director June 30, 2003
------------------------------
E. Drake Mosier
/s/ Peter M. Ziemba Director June 30, 2003
------------------------------
Peter M. Ziemba
46
SECTION 302 CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Index Development Partners, Inc.
(the "Company") on Form 10-KSB for the period ended December 31, 2002 as filed
with the Securities and Exchange Commission (the "Report"), the undersigned, in
the capacities and on the date indicated below, hereby certifies pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1. the Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
Dated: June 30, 2003 /s/ Jonathan L. Steinberg
------------------------------------
Jonathan L. Steinberg
Chief Executive Officer and Director
(and principal financial officer)
47
CERTIFICATION
PURSUANT TO RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Jonathan L. Steinberg, certify that:
1. I have reviewed this annual report on Form 10-KSB of Index Development
Partners, Inc.;
2. based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. the registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 30, 2003 /s/ Jonathan L. Steinberg
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Name: Jonathan L. Steinberg
Title: Chief Executive Officer and
Director (and principal financial
officer)
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