UNITED STATES
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, 2004
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM N/A TO N/A
COMMISSION FILE NUMBER: 000-28675
TRIBEWORKS, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 94-3370795
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
243 FRONT STREET
SAN FRANCISCO, CA 94111
(Address of principal executive offices) (zip code)
Issuer's Telephone Number, Including Area Code: (415) 674-5555
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X NO ___
Check if 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 registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $821,572
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 31, 2005 was approximately $262,941 based upon the
closing price per share of the Common stock of $0.10 on that date.
There were 4,708,657 shares of the registrant's Common Stock issued and
outstanding as of March 31, 2005.
Transitional Small Business Disclosure Format (check one) YES NO X
___ ___
1
TABLE OF CONTENTS
Page
PART I........................................................................3
Item 1. Description of Business..............................................6
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.......................................................................6
Item 5. Market for Common Equity and Related Stockholder Matters.............6
Item 6. Management's Discussion and Analysis or Plan of Operation............7
Item 7. Financial Statements................................................15
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................31
Item 8A. Controls and Procedures.............................................31
PART III.....................................................................31
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...................31
Item 10. Executive Compensation..............................................32
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.....................................33
Item 12. Certain Relationships and Related Transactions......................33
Item 13. Exhibits............................................................34
Item 14. Principal Accountant Fees and Services..............................34
SIGNATURES...................................................................36
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
We sell our software and generate revenues through two main distribution
channels: the graphics software tools business and the enterprise application
development business. Tools customers, usually graphics industry professionals,
license our iShell(R) branded multimedia application authoring tools, iShell or
iShell Mobile, by purchasing the software via our online store or via telephone
with one of our sales representatives. Tools customers either buy our software
with a permanent license or pay an annual subscription fee that includes a
license to use our software and free software upgrades. Kinoma Media Album
(KMA), our first consumer multimedia tool, is sold through three online stores:
Kinoma.com, Handango.com and PalmGear.com.
We first introduced our multimedia authoring tool iShell(R) in January 1999,
as a cross-platform software product to allow developers to create multimedia
applications in a variety of categories, such as sales and business
presentations, informational/catalog titles, training courses and modules for
corporations and/or educational institutions, games, learning aids, enhanced CDs
(audio CDs that also contain videos and other visual digital content), video
yearbooks, and recruitment presentations.
Beginning in 2003, we partnered with Kinoma, Inc. ("Kinoma") to create new
products for the mobile software market, specifically targeting Palm OS devices.
Kinoma makes Kinoma Player, which is a high-resolution, interactive movie player
for handhelds running the Palm OS. To date we have developed two products in
partnership with Kinoma that create Kinoma Player content, iShell Mobile, an
iShell-based application development tool, launched in October 2003, and Kinoma
Media Album, a consumer multimedia management tool, launched in May of 2004.
Kinoma receives a per unit royalty on sales of iShell Mobile and Kinoma Media
Album. In addition to building these two products together, we have utilized
Kinoma as a subcontractor on Enterprise projects.
In our Enterprise business, most of our customers are large corporations
that require development of custom multimedia tools or complex multimedia
applications. Enterprise customers usually pay for consulting services performed
by Tribeworks' employees and subcontractors. Certain Enterprise customers also
license our software, usually for a fixed fee or on a per unit basis. As
evidenced by results for this quarter, we generally anticipate Enterprise
business growth, particularly Enterprise consulting revenues, to be less
predictable and "bumpier" than our Tools business revenues in the foreseeable
future, and this could impact whether or not we will be profitable on a
quarter-to-quarter basis. The primary reason is that our Enterprise business has
a smaller number of customers. The addition of new mobile Enterprise solutions
has expanded the potential customer base and could decrease volatility going
forward. We expect to continue to underwrite the cost of software research and
development with money received from Enterprise customers.
We incorporated in California in August 1998 as California Tribeworks. On
November 2, 1999, we entered into a transaction with Pan World Corporation, a
publicly traded Nevada corporation (Pan World), whereby Pan World agreed to
provide financing in connection with the merger of a newly formed subsidiary of
Pan World into California Tribeworks (the Recapitalization). Prior to the
Recapitalization, Pan World never had any material operations. As a result of
the Recapitalization, shareholders of California Tribeworks exchanged all their
shares in California Tribeworks for Pan World common stock. Subsequent to the
Recapitalization, we reincorporated in Delaware as Tribeworks, Inc. We opened a
wholly owned subsidiary in Japan (Tribeworks Japan) in August 2000, which
engaged in sales and professional services activities primarily in our
Enterprise application development business, until it was closed during the
third quarter of 2004.
We are currently a fully reporting registered company, and our stock is
traded on the OTC Bulletin Board under the symbol TRBW.
PRODUCTS AND SERVICES
TOOLS BUSINESS
Our Tools business is focused on direct sales of licenses and bundled
support services to our proprietary graphical software application, iShell(R),
and complementary products such as software plug-ins and product documentation.
For the year ended December 31, 2004, the Tools business accounted for 37% of
total revenues.
3
iShell is a graphical software application that allows creation of
interactive rich-media applications. Applications can be deployed via the
Internet, a CD-ROM, a kiosk (interactive retail display), or a combination
thereof. iShell offers the ability to reuse common interactive elements in an
expandable, drag-and-drop, object-oriented environment that can save significant
production time for developers. iShell has been released for Windows and
Macintosh operating systems.
iShell Mobile is an object oriented programming tool used to develop
applications for the Palm OS. iShell Mobile allows developers to rapidly design
interactive multimedia rich applications including business presentations,
informational/catalog titles, training courses and modules for corporations
and/or educational institutions. iShell Mobile extends the benefits of iShell to
software application developers working in the Palm OS handheld market.
Kinoma Media Album (KMA), our first consumer multimedia tool, allows
customers to build interactive media albums for viewing on Palm OS devices. KMA
is sold through three online stores: Kinoma.com, Handango.com and PalmGear.com.
We attract new iShell and iShell Mobile customers primarily through our
website, www.tribeworks.com, where iShell and iShell Mobile can be downloaded
for trial use. Potential Tools customers register on our website and provide
contact information which we use to attempt to convert them to paying customers.
As of December 31, 2004, more than 64,000 users had registered at
www.tribeworks.com. We attract new KMA customers via our online store partners.
iShell customers either buy our software with a permanent license or pay an
annual subscription fee that includes a license to use our software and customer
support services. iShell Mobile and Kinoma Media Album customers buy our
software with a permanent license. No subscriptions are currently available for
iShell Mobile or Kinoma Media Album.
ENTERPRISE BUSINESS
Enterprise customers are large companies and other entities that require
development of customized multimedia authoring tools or multimedia applications
or presentations. For the year ended December 31, 2004, the Enterprise business
accounted for 63% of our total revenues.
Enterprise customers pay for professional services, which we provide for a
fixed fee or on a daily rate basis via our employees and outside consultants.
Enterprise customers also license customized versions of our software for a
fixed fee or on a per unit basis. We try to structure our contracts so that we
own some of the work that we create during Enterprise engagements, which helps
to underwrite our research and development costs.
During 2004, one customer accounted for 58% of our Enterprise revenue. Our
relationship with this customer is described below:
- Pioneer Corporation, a consumer electronics company with more
than 30,000 employees and more than $5 billion (USD) in sales,
has been a customer since 2000. Under the contracts that were
active during 2004, we performed software engineering services
for Pioneer for the development of software products that allow
users to create and manage multimedia content for next generation
digital signs.
We do not have a dedicated sales force for our Enterprise business, as our
officers serve the role of salesmen and account managers for prospective and
current Enterprise customers. During 2004, the primary thrust of our Enterprise
sales efforts was to secure new relationships and contracts with mobile device
manufacturers and carriers, which we view as our primary targets for future
Enterprise revenue growth.
PRODUCT DEVELOPMENT
Our products and services enable our customers to save time and cost
building and deploying rich-media applications. We believe that our future
success depends on our ability to enhance existing products and develop and
introduce new products on a timely basis. We maintain an internal staff to
develop the software that we market and sell to customers. A significant portion
of our software is created as a result of work that we perform for our
Enterprise customers. To date, we have structured our contracts with Enterprise
customers so that we retain most intellectual property rights in the software
that we develop for them. Due to the changing technological environment for
computer systems and other electronic devices, we continue to adapt our products
to new hardware and software platforms and to embrace emerging technology
standards. For the years ended December 31, 2004 and 2003, product development
expenditures were $94,387 and $142,692 , respectively.
4
TECHNICAL SUPPORT AND EDUCATION
We provide technical support to purchasers of iShell subscriptions, which
include rapid response to support questions via discussion lists. We are able to
limit expenditures for customer support because subscribers are able to answer
most questions for one another through discussion lists.
We also hold periodic training sessions in San Francisco and in other
locations, where we teach new and existing users about our products and latest
product developments.
COMPETITION
We compete in markets that are new, intensely competitive, highly
fragmented, and rapidly changing. We have experienced increased competition from
current and potential competitors, many of which are larger and more profitable
and as a result have greater technical, marketing, and other resources. We
expect the competition will continue, and we will compete with the major
graphics and multimedia software tools companies, as well as service companies
building custom multimedia applications for corporate clients. We believe that
the primary competitive factors in providing multimedia software applications to
businesses and educational institutions are ease of use, price, quality of
service, availability of customer support, reliability, technical expertise, and
experience. Our success will depend on our ability to provide quality
development tools and value-added services, including:
- Augmenting the ability of the software application to function on
different hardware platforms and operating systems, such as
Windows and Macintosh environments;
- Delivery of our software to new devices such as mobile phones and
personal digital assistants (PDA's);
- Providing flexibility in the degree and level of customization of
software applications;
- Increasing product functionality and system performance;
- Improving quality of product;
- Reducing total cost of product development;
- Improving sales and distribution efficiency;
- Improving brand name recognition; and
- Providing high quality professional support services.
We experience competition in each area of our business. Companies in the
graphics software tools area include Macromedia, Adobe Systems, and Autodesk.
These companies market a variety of products addressing our target markets,
including software tools for authoring and delivering interactive information
targeted to computer-based training specialists and educators, as well as
multimedia professionals. They also offer graphics and publishing products for
online publishing as well as print-based publishing. In addition, competitors
also provide extensive product training to support their products.
Most of our current and potential competitors in the Internet services and
graphics and multimedia industries have longer operating histories, greater name
recognition, and larger existing customer bases than we have. These competitors
may be able to respond faster to new or emerging technologies and changes in
customer requirements. Accordingly, there can be no assurance that we will be
able to compete successfully.
GOVERNMENT REGULATION
Laws relating to the Internet are constantly changing. Federal, state, local
and foreign governments are considering a number of new legislative and
regulatory proposals relating to Internet commerce. As a result, a number of
laws or regulations may be adopted regarding Internet user privacy, security,
taxation, pricing, quality of products and services, and intellectual property
ownership, which may also be applicable to us. How existing laws will be applied
to the Internet, in areas such as property ownership, copyrights, trademarks,
trade secrets, and obscene or indecent communications, is uncertain.
PROPRIETARY RIGHTS
We rely on a combination of copyright laws, trademark laws, contract laws,
and other intellectual property protection methods to protect our technology,
including our logo and the names "Tribeworks" and "iShell" in the United States
and other countries. We believe that our trademarks and the use of material in
our website are protected under current provisions of copyright law, although
legal rights to Internet content and commerce are not clearly settled by law. We
were granted trademarks to "Tribeworks", the Tribeworks faces logo, and "iShell"
in 2000.
5
In November 1999, we entered into a software agreement (Keepsake Software
Agreement) with Keepsake SPRL (Keepsake) and Gilbert Amar (one of our
co-founders) pursuant to which we acquired the right, title, and interest to
iShell, our lead product.
In April 2001, we jointly filed a United States patent application with
Pioneer Electric Corporation in the area of interactive display technology.
EMPLOYEES
As of December 31, 2004, we had a total of 5 employees and 2 consultants
working on a full-time basis.
ITEM 2. DESCRIPTION OF PROPERTY.
We lease approximately 900 square feet in San Francisco, California for our
sales, engineering, and administrative offices. The current annual rent for the
San Francisco facility is approximately $23,400 and the lease expires in
December 2006. The leased facility is in satisfactory condition for its purpose.
ITEM 3. LEGAL PROCEEDINGS.
We are not aware of any legal proceedings (either presently engaged in or
contemplated) by any government authority or other party involving our Company,
our properties or our products.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2004.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Tribeworks, Inc. common stock is traded on the OTC bulletin board under the
symbol TRBW. The following table sets forth the range of closing high and low
bid quotes for each period indicated as reported by stockwatch.com and reflects
all stock splits effected by the Company:
_______________________________________
2004 2003
_______________________________________
HIGH LOW HIGH LOW
__________________________________________________________
First quarter $0.300 $0.120 $0.240 $0.080
__________________________________________________________
Second quarter $0.300 $0.120 $0.320 $0.080
__________________________________________________________
Third quarter $0.200 $0.100 $0.280 $0.060
__________________________________________________________
Fourth quarter $0.150 $0.100 $1.400 $0.120
__________________________________________________________
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
We had approximately 304 stockholders of record as of March 31, 2005. We
have not declared or paid any cash dividends on our common stock and presently
intend to retain our future earnings, if any, to fund the development and growth
of our business and, therefore, do not anticipate paying any cash dividends in
the foreseeable future.
We established our 1999 Stock Option Plan (the "1999 Plan") on November 2,
1999 with 400,000 shares approved for issuance. We established our 2001 Stock
Plan ("2001 Plan") on August 16, 2001 and reserved 750,000 shares. We
established our 2004 Employee Stock Incentive Plan ("2004 Plan") on March 24,
2004 and reserved the total number of shares equal to 25% of our outstanding
common stock, as determined from time to time, an amount which equaled 1,177,164
shares at December 31, 2004 . The purpose of the 1999 Plan is to grant stock and
options to purchase our common stock to our employees and key consultants, the
purpose of the 2001 Plan is to grant stock and warrants to purchase our common
stock to employees and key consultants for outstanding cash payments due, and
the purpose of the 2004 Plan is to grant stock options to purchase our common
stock, restricted stock, and stock bonuses to employees, officers and key
consultants. The total amount of shares subject to the three Plans as of
December 31, 2004 is 2,327,164 shares. Included in the Equity Compensation Plan
line items listed below, but outside of the scope of the 1999 Plan, 2001 Plan,
and 2004 Plan, is a warrant to purchase 45,000 shares of our common stock issued
to an officer and director.
6
Number of securities
Number of securities to Weighted-average exercise remaining available
be issued upon exercise price of outstanding for future issuance
of outstanding options, options, warrants and under equity
Plan Category warrants and rights rights compensation plans
__________________________________________________________________________________________________________
Equity Compensation Plans 248,500 $1.42 1,282,738
approved by security holders.
Equity Compensation Plans 45,000 $1.50 381,689
not approved by security
holders.
__________________________________________________________________________________________________________
TOTAL 293,500 $1.43 1,664,427
We made no sales of our unregistered common stock during the quarter ended
December 31, 2004.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD LOOKING STATEMENTS
The following discussion contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that are subject to risks and uncertainties.
These forward-looking statements are based on our management's beliefs as well
as assumptions and information currently available to us. When used in this
report, the words "believe," "expect," "anticipate," "estimate" and similar
expressions are intended to identify forward-looking statements. There are
several important factors that could cause actual results to differ materially
from historical results and percentages and results anticipated by the
forward-looking statements, such as, but not limited to:
o whether or not our products are accepted by the marketplace and the
pace of any such acceptance,
o our ability to continue to grow our Tools and Enterprise businesses,
o improvements in the technologies of our competitors,
o changing economic conditions, and
o other factors, some of which will be outside of our control.
We have sought to identify most risks to our business but cannot predict
whether or to what extent any of such risks may be realized. There can be no
assurance that we have identified all possible risks that might arise. Investors
should carefully consider all such risks before making an investment decision
with respect to our common stock. We caution you not to place undue reliance on
any forward-looking statements, all of which speak only as of the date of this
report. You should refer to and carefully review the information in future
documents we file with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
We witnessed an unprofitable year in 2004, with net loss of $194,005. This
was our first unprofitable year since recording two consecutive profitable years
in 2003 and 2002. Our financial success relies on steady or growing revenues in
our Tools business, and the attainment of sustainable key contracts in our
Enterprise business. Both the Tools and the Enterprise businesses witnessed
significant declines during 2004, which had a negative impact on our
profitability. In addition, having significantly reduced our cost structure
during 2002 and 2003, during 2004 we began to accrue salaries for our key
officers and employees, who were being paid under-market wages. These salary
accruals also had a negative impact on our profitability. The future success of
our business is not assured, and our financial condition has weakened. Based on
the uncertainties in our business, and in light of our financial condition, on
March 30, 2005, we announced a plan of reorganization, which is described in
NOTE L - SUBSEQUENT EVENTS to our financial statements.
We have not yet filed our 2003 tax returns, but plan to file them during
2005.
7
REVENUES
Total revenues were $821,572 for the year ended December 31, 2004, a
decrease of 31% compared to total revenues of $1,194,792 for the year ended
December 31, 2003. The Tools Business, which primarily includes sales of
commercial or educational use of our iShell software, sales of books and third
party plug-ins, and a small amount of sales of iShell Mobile and Kinoma Media
Album, decreased by 17% to $300,799 for 2004, compared to $363,972 for 2003. The
decrease in Tools revenues was due primarily to a 20% decrease in iShell
revenues, which we believe is the result of a shrinking marketplace for
interactive CD-ROM authoring tools. The decrease in iShell sales was partially
offset by the introduction during 2004 of our consumer tool Kinoma Media Album.
The Enterprise business decreased in 2004 by 37% to $520,773, compared with
$830,820 for 2003. Enterprise revenues for 2004 consisted of $514,687 in
professional services revenues and $6,086 in licensing revenues, compared with
$757,720 in professional services revenues and $73,099 in licensing revenues for
2003. The decrease in Enterprise revenues is due primarily to a decrease in
revenues associated with our ongoing relationship with Pioneer Corporation. This
decrease was partially offset by an increase in revenues associated with our
professional services related to building software applications and
presentations for mobile devices. International revenues, which consist of sales
to foreign customers, represented 53% of revenues for 2004, compared to 63% of
revenues for 2003. Revenues from Japanese customers decreased to 37% of total
revenues for 2004, from 52% for 2003. The decrease in Japanese revenues in the
Enterprise business was based on the reduction of revenues associated with our
Pioneer work.
COST OF SALES
Cost of sales includes royalties paid to third parties for licensed
technology, costs associated with order fulfillment, credit card fees, web
hosting fees, and costs associated with consulting services, including salaries,
subcontractor fees, and out-of-pocket expenses. Cost of sales was $328,862 for
the year ended December 31, 2004, down from $406,926 for the year ended December
31, 2003. The decrease in cost of sales was due to a decrease in sales volume.
Gross margins decreased on a percentage basis to 60% for 2004 from 66% for 2003,
primarily to lower gross margins associated with our Pioneer work.
OPERATING EXPENSES
Product support expenses consist mainly of compensation, benefits and
consulting fees paid to product support personnel. Product support expenses were
$40,377 and $50,987 for the years ended December 31, 2004 and 2003,
respectively. As a percentage of Tools sales, product support expenses were 13%
and 14% for 2004 and 2003, respectively.
Product development expenses consist primarily of compensation and benefits
to support product development. Product development expenses were $94,387 and
$142,692 for the years ended December 31, 2004 and 2003, respectively. This
decrease primarily reflects higher expenses in 2003 due to the development
iShell Mobile and Kinoma Media Album during 2003.
Sales and marketing expenses consist primarily of compensation and benefits
and other public relations and marketing costs. Sales and marketing expenses
were $200,488 and $232,002 for the years ended December 31, 2004 and 2003,
respectively.
General and administrative expenses consist primarily of compensation and
benefits, fees for professional services, and overhead. General and
administrative expenses were $350,671 and $321,751 for the years ended December
31, 2004 and 2003, respectively. This increase was due primarily to an increase
in expenses associated with new compensation arrangements with our principal
executives, as described in NOTE J - RELATED PARTY TRANSACTIONS to the financial
statements. This increase was partially offset by lower overhead expenses during
2004.
OTHER INCOME (EXPENSE)
Other expense was $792 for the year ended December 31, 2004, consisting of
$792 of interest expense, compared to Other income of $384 for the year ended
December 31, 20034, consisting of $8,110 of other income, and $7,726 of interest
expense.
PROVISION FOR INCOME TAXES
We recorded no income tax provision for the years ended December 31, 2004
and 2003.
8
NET INCOME
Net loss was $194,005 for the year ended December 31, 2004, compared to net
income of $40,818 for the year ended December 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, we had cash of $43,729 compared to $39,772 at December
31, 2003.
Since inception, we have financed our operations through issuance of stock
and revenues derived from our Tools and Enterprise businesses. Through December
31, 2004, we had raised $2,672,656 from the sale of stock. At December 31, 2004,
our principal source of liquidity was $43,729 of cash. We were unprofitable in
2004. Given our financial condition, on March 30, 2005, we announced a plan of
reorganization that is described in NOTE L - SUBSEQUENT EVENTS to our financial
statements.
For the years ended December 31, 2004 and 2003, cash provided by operating
activities was $3,957 in 2004 and cash used by operating activities was $59,184
in 2003.
Cash used in investing activities for the year ended December 31, 2004 and
2003 was $0 and $3,967, respectively. We made no equipment purchases in 2004.
Cash used by financing activities for the year ended December 31, 2004 and
2003 was $00 and $40,500, respectively.
Our capital requirements depend on numerous factors, including market
acceptance of our products, resources we devote to developing, marketing,
selling and supporting our products, timing of our operations, extent and timing
of investments, potential acquisition of other concerns, and other factors. We
expect to devote substantial capital resources to hire and expand our sales,
support, marketing and product development organizations, to expand marketing
programs, and for other general corporate activities.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are described in NOTE B - BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of the Notes to our
financial statements. Our discussion and analysis of financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of the financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate the
estimates that we have made. These estimates have been based upon historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. We believe the following critical
accounting policies affect our more significant judgments and estimates used in
the preparation of our consolidated financial statements.
Allowance for Doubtful Accounts. The Company maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments, which is included in bad debt expense.
Management determines the adequacy of this allowance by regularly reviewing our
accounts receivable aging and evaluating individual customer receivables,
considering customers' financial condition, credit history and current economic
conditions. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Percentage-of-Completion Accounting/Revenue Recognition. Revenue is
generally recognized when all contractual or transfer obligations have been
satisfied and collection of the resulting receivable is probable. Revenues from
membership subscriptions are recognized proportionally over the membership
period, usually one year. Revenues and estimated profits on custom development
services are generally recognized under the percentage-of-completion method of
accounting using an input measurement methodology; profit estimates are revised
periodically based on changes in facts; any losses on contracts are recognized
immediately. Revenue from the sale of licenses are recognized when all the
following criteria are met: persuasive evidence of an agreement exists, delivery
has occurred, the fee is fixed or determinable and collectability is probable.
If all aspects but the last have been met or if post contract customer support
could be material, revenue is recognized as payments from customers are
received.
9
Income Taxes. We account for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Significant judgment is required in determining
our provision for income taxes. We assess the likelihood that our deferred tax
asset will be recovered from future taxable income, and to the extent we believe
that recovery is not likely, we establish a valuation allowance. We consider
future taxable income projections, historical results and ongoing tax planning
strategies in assessing the recoverability of deferred tax assets. However,
adjustments could be required in the future if we determine that the amount to
be realized is less or greater than the amount that we recorded. Such
adjustments, if any, could have a material impact on our results of our
operations.
RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY AND THERE IS A GREAT DEGREE OF
UNCERTAINTY AS TO OUR FUTURE RESULTS. WE HAVE EXPERIENCED MINIMAL PROFITS
RECENTLY AND MAY NEVER ACHIEVE SUSTAINED PROFITABILITY.
We have a limited operating history upon which an evaluation of our business
and prospects can be based. Our prospects must be evaluated with a view to the
risks encountered by a company in an early stage of development, particularly in
light of the uncertainties relating to the new and evolving markets in which we
intend to operate and in light of the uncertainty as to market acceptance of our
business model. We will be incurring costs in marketing our products and
services to customers and in building and developing an administrative
organization. To the extent that revenues do not match these expenses, our
business, results of operations, and financial conditions will be materially
adversely affected. There can be no assurance that we will be able to generate
sufficient revenues from the Tools business or Enterprise business to maintain
profitability on a quarterly or annual basis in the future. We may not be able
to sustain or increase profitability on a quarterly basis or achieve
profitability on an annual basis.
WE EXPECT HIGH VARIABILITY AND UNCERTAINTY AS TO OUR FUTURE OPERATIONS AND
FINANCIAL RESULTS.
Failure to continue to operate profitably on an annual basis may adversely
affect the market price of our common stock and our ability to raise capital and
continue operations. We expect high variability and uncertainty as to our future
operations and financial results. As we continue to develop and market our
business, our quarterly operating results may fluctuate as a result of a variety
of factors. Many of these factors are outside our control, including demand for
the development of rich-media applications, the introduction of new products and
services by our competitors, price competition or pricing changes in the
industry, technical difficulties or system downtime, general economic
conditions, and economic conditions specific to the Internet and related media.
Due to these factors, among others, our operating results may fall below our
expectations and the expectations of investors.
OUR PRODUCTS AND SERVICES MAY NOT BE ACCEPTED BY THE INDUSTRIES THAT USE
RICH-MEDIA APPLICATIONS.
Our future success depends on our ability to create and deliver
sophisticated rich-media tools and applications. If our products and related
services are not widely accepted, our ability to make sales in the Tools
business and Enterprise business will be hampered. There can be no assurance
that our products and tools will be attractive to a sufficient number of users
to generate significant revenues. If we are unable to evolve our present
products and to develop new products that allow us to attract, retain, and
expand a loyal membership base, our business, results of operations, and
financial condition will be materially adversely affected.
THE RICH-MEDIA MARKET IS INTENSELY COMPETITIVE. WE CANNOT ASSURE YOU THAT WE
WILL BE ABLE TO ACHIEVE MARKET ACCEPTANCE.
The rich-media market is intensely competitive. We expect the competition to
increase as new competitors enter the market. Many of our competitors may have
greater technical, marketing, and other resources. We believe the primary
competitive factors in providing rich-media application services and tools to
development organizations and large corporations are value-added services, ease
of use, price, quality of service, availability of customer support,
reliability, technical expertise, and experience. To the extent that we are not
able to attract sources of revenues from the Tools business and the Enterprise
business, our business, results of operations, and financial condition will be
materially adversely affected.
10
A number of companies currently offer services or products that compete
directly or indirectly with our current products and service offerings. These
companies include Macromedia and Adobe Systems. These companies market a variety
of products addressing our target markets, including software tools for
authoring multimedia content. If we are unable to introduce competitive products
with competitive training and consulting services, our business, results of
operations, and financial condition will be materially adversely affected.
Most of our current and potential significant competitors in the Internet
services, graphics, and multimedia industries have longer operating histories,
greater name recognition, and larger existing customer bases than us. These
competitors may be able to respond faster to new or emerging technologies and
changes in customer requirements. Because of their greater resources, they will
be able to make more responsive changes to market conditions. Accordingly, there
can be no assurance that we will be able to compete successfully in these
industries.
OUR SOFTWARE DEPENDS ON APPLE'S QUICKTIME TECHNOLOGY TO FUNCTION PROPERLY.
WE CANNOT ASSURE YOU THAT APPLE WILL CONTINUE TO DEVELOP THE QUICKTIME
TECHNOLOGY OR DISTRIBUTE IT FREE OF CHARGE, OR WILL NOT DEVELOP SOFTWARE
APPLICATIONS WHICH COMPETE DIRECTLY WITH TRIBEWORKS iSHELL PRODUCT.
Our iShell product line currently requires installation of Apple Computer's
QuickTime software in order to function properly on both Windows and Macintosh
systems. We have no control over whether, and cannot assure that, Apple's
QuickTime will maintain or enlarge its current market share against competitive
technologies. In addition, although Apple's QuickTime technology has been under
development for more than nine years, we cannot assure that Apple will continue
to develop the technology or distribute it free of charge to consumers. Apple
may also substantially alter its business or licensing strategy with QuickTime
in a way that could adversely impact our business, resulting in increases in our
development costs. In addition, Apple has increased its graphic software
development efforts and may decide to compete directly in the multimedia
authoring tool market.
WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO ESTABLISH AND MAINTAIN THE
TRIBEWORKS BRAND, WHICH IS CRITICAL TO OUR EFFORTS TO ATTRACT AND EXPAND OUR
MARKET.
We believe that establishing and maintaining the Tribeworks brand is a
critical aspect of our efforts to attract and expand our Internet audience. The
importance of brand recognition will increase due to the growing number of
Internet sites and the relative lack of significant barriers to entry in
providing Internet services, tools, products, and content. If we fail to promote
and maintain our brand, or if we incur excessive expenses in an attempt to
promote and maintain our brand, our business, financial condition and operating
results will be materially adversely affected.
OUR SUCCESS DEPENDS ON OUR ABILITY TO ADDRESS POTENTIAL MARKET OPPORTUNITIES
WHILE MANAGING OUR EXPENSES. IF WE ARE UNABLE TO MANAGE OUR EXPENSES, OUR
BUSINESS AND FINANCIAL CONDITIONS WILL BE MATERIALLY ADVERSELY AFFECTED.
Our success depends upon our ability to address market opportunities while
managing our expenses to match our ability to finance our operations. Our need
to manage expenses will place a strain on our management and operational
resources. If we are unable to manage our expenses effectively, our business,
financial condition, and operating results will be materially adversely
affected. We have experienced an unprofitable year during 2004, and we expect
increased expenses in future quarters as we begin to comply with the
requirements of the Sarbanes-Oxley Act of 2002.
OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL AND THE CONSULTING SERVICES
PROVIDED BY KEEPSAKE. WE MAY BE UNABLE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES
AND MAY NOT BE ABLE TO RETAIN THE SERVICES OF KEEPSAKE AFTER THE EXPIRATION OF
THE KEEPSAKE SOFTWARE AGREEMENT.
Our performance and success depend substantially on the services of Duncan
Kennedy, President of our operating subsidiary Tribeworks Development
Corporation, Robert Davidorf, our Chief Financial Officer, and J. Glenn Pogue,
our CEO, as well as on our ability to recruit, retain and motivate our other
officers and key employees.
We do not have employment contracts with key officers or employees, and
their relationships with us are terminable at-will. Our success also depends on
our ability to attract and retain additional qualified employees in the San
Francisco Bay Area. Competition for qualified personnel in the San Francisco Bay
Area and Tokyo is intense and there are a limited number of persons with
knowledge of and experience in our field of business. There can be no assurance
that we will be able to attract and retain key personnel. The loss of one or
11
more key employees or of our key service providers could have a material adverse
effect on the Company.
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP SERVICES THAT MEET OUR
CUSTOMERS' REQUIREMENTS. WE MAY NOT BE ABLE TO MEET THOSE REQUIREMENTS IF WE ARE
UNABLE TO KEEP PACE WITH TECHNOLOGY TRENDS AND THE EVOLVING RICH-MEDIA INDUSTRY
STANDARDS.
Our success depends on our ability to develop and provide new services that
meet our customers' changing requirements. The Internet is characterized by
rapidly changing technology, evolving industry standards, changes in customer
needs and frequent new service and product innovations. Our success will depend,
in part, on our ability to assess and effectively use unproven technologies and
unproven standards. We must evaluate and utilize technical standards developed
by industry committees. We must also evaluate and use proprietary multimedia
development software provided by companies such as Apple, Microsoft, and
RealNetworks to continue to develop our technological expertise, enhance our
current services, develop new services that meet changing customer needs, and
influence and respond to emerging industry standards and other technological
changes on a timely and cost-effective basis. If we fail to adequately assess or
utilize these standards or proprietary technologies at the appropriate time in
the marketplace, the competitive advantages of our products and services and our
business, financial condition, and operating results could be materially
adversely affected.
INCREASING GOVERNMENTAL REGULATION ON ELECTRONIC COMMERCE AND LEGAL
UNCERTAINTIES COULD LIMIT OUR GROWTH.
The adoption of new laws or the adaptation of existing laws to the Internet
may decrease the growth in the use of the Internet, which could in turn decrease
the demand for our services, increase our cost of doing business or otherwise
harm our business. Federal, state, local and foreign governments are considering
a number of legislative and regulatory proposals relating to Internet commerce.
As a result, a number of laws or regulations may be adopted regarding Internet
user privacy, security, taxation, pricing, quality of products and services, and
intellectual property ownership, which may also be applicable to us. How
existing laws will be applied to the Internet, in areas such as property
ownership, copyrights, trademarks, trade secrets, and obscene or indecent
communications, is uncertain.
CAPACITY CONSTRAINTS AND SYSTEM DISRUPTIONS COULD SUBSTANTIALLY REDUCE THE
PRODUCTS WE SELL AND UNDERMINE OUR REPUTATION FOR RELIABILITY AMONG OUR
CUSTOMERS AND POTENTIAL CUSTOMERS.
The satisfactory performance, reliability and availability of our Internet
sites and our network infrastructure are critical to attracting Internet users
and maintaining relationships with subscribing customers. System interruptions
that result in the unavailability of our Internet sites and slower response
times for users could reduce the number of products and multi-media services we
deliver and reduce the attractiveness of our services to Members and
subscribers. Any disruption of our services would materially adversely affect
our business, financial condition and results of operations.
OUR INTERNET OPERATIONS ARE LOCATED IN A SINGLE FACILITY, WHICH IS LOCATED
IN THE SAN FRANCISCO BAY AREA IN CALIFORNIA. A NATURAL DISASTER IS POSSIBLE AND
COULD RESULT IN PROLONGED INTERRUPTION OF OUR BUSINESS.
Our Internet operations are located in the San Francisco Bay Area. This area
is seismically active. With our operations centralized in a single facility, a
natural disaster, such as an earthquake, fire, or flood, could substantially
disrupt our manufacturing operations or destroy our facilities. This could cause
delays and cause us to incur additional expenses and adversely affect our
reputation with our customers. In addition, since the real estate market in the
San Francisco Bay Area is extremely competitive and is likely to remain
competitive, an alternative facility may not be available on commercially
reasonable terms if we suffer a catastrophic loss from a natural disaster.
WE ARE SUSCEPTIBLE TO PARTIES WHO MAY COMPROMISE OUR SECURITY MEASURES,
WHICH COULD CAUSE US TO EXPEND CAPITAL AND MATERIALLY ADVERSELY AFFECT OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Hackers may be able to circumvent our security measures and could
misappropriate proprietary information or cause interruptions in our Internet
operations. In the past, computer viruses or software programs that disable or
impair computers have been distributed and have rapidly spread over the
Internet. Computer viruses could be introduced into our systems or those of our
users, which could disrupt our network or make our systems inaccessible to
users. Any of these events could damage our reputation among our customers and
12
potential customers and substantially harm our business. We may be required to
expend capital and resources to protect against the threat of security breaches
or to alleviate problems caused by these breaches. Consumer concern over
Internet security has been, and could continue to be, a barrier to commercial
activities requiring consumers to send their credit card information over the
Internet. Computer viruses, break-ins, or other security problems could lead to
misappropriation of proprietary information and interruptions, delays or
cessation in service to our customers. Moreover, until more comprehensive
security technologies are developed, the security and privacy concerns of
existing and potential customers may inhibit the growth of the Internet as a
merchandising medium. Further, our business is subject to the effects of war and
acts of terrorism.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OR WE MAY
INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH MAY RESULT IN
LAWSUITS AND PREVENT US FROM SELLING OUR PRODUCTS.
We rely on copyright, patent, and trade secret laws to protect our
trademarks, content, and proprietary technologies and information. However,
there can be no assurance that such laws will provide sufficient protection to
us, other parties will not develop technologies that are similar or superior to
ours, or, given the availability of our products' source-code, other parties
will not copy or otherwise obtain and use our content or technologies without
authorization.
There are no pending lawsuits against us regarding infringement of any
existing patents or other intellectual property rights or any material notices
that we are infringing the intellectual property rights of others. However,
there can be no assurance that third parties will not assert infringement claims
in the future. If any claims are asserted and determined to be valid, there can
be no assurance that we will be able to obtain licenses of the intellectual
property rights in question or obtain licenses on commercially reasonable terms.
Our involvement in any patent dispute or other intellectual property dispute or
action to protect proprietary rights may have a material adverse effect on our
business, operating results, and financial condition. Adverse determinations in
any litigation may subject us to liabilities, require us to seek licenses from
third parties, and prevent us from marketing and selling our products. Any of
these situations can have a material adverse effect on our business, operating
results, and financial condition.
Effective trademark, copyright, and other intellectual property protection
may not be available in every country in which our technology is distributed or
made available through the Internet. There can be no assurance that our means of
protecting our proprietary rights in the United States or abroad will be
adequate or that competitors will not independently develop similar technology.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT CUSTOMERS FROM OUTSIDE
THE UNITED STATES. JURISDICTIONS OUTSIDE THE UNITED STATES MAY IMPOSE TAX AND
REGULATORY BURDENS ON OUR BUSINESS, WHICH COULD HAVE A MATERIAL ADVERSE AFFECT
ON OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS.
Our future success will be affected by our ability to attract customers and
subscribers from countries outside the United States. We believe that the growth
of the Internet in foreign countries will outpace growth of the Internet in the
United States in the next decade. Foreign countries could impose withholding
taxes or otherwise tax our foreign income, impose tariffs, embargoes or exchange
controls, or adopt other restrictions on foreign trade or restrictions relating
to use or access of or distribution of software through electronic means. The
laws of certain countries also do not protect our intellectual property rights
to the same extent as the laws of the United States. In addition, we are subject
to the United States export control regulations that may restrict our ability to
market and sell our products to certain countries outside of the United States.
Failure in successfully marketing our products in international markets could
have a material adverse effect on our business, operating results and financial
conditions.
WE EXPECT QUARTERLY REVENUE AND OPERATING RESULTS TO VARY IN FUTURE PERIODS,
WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE.
Our limited operating results have varied widely in the past, and we expect
they will continue to vary from quarter to quarter as we attempt to
commercialize our product. Our quarterly results may fluctuate for many reasons,
including:
- Limited operating history
- Dependence on a limited number of customers for a significant
portion of our revenue; and
- Dependence on membership fees to provide future revenue.
13
As a result of these fluctuations and uncertainties in our operating
results, we believe quarter-to-quarter or annual comparisons of our operating
results are not a good indication of our future performance. In addition, at
some point in the future, these fluctuations may likely cause us to perform
below the expectations of public market analysts or investors. If our results
fall below market expectations, the price of our common stock will be adversely
affected.
OUR STOCK PRICE IS VOLATILE AND, AS A RESULT, YOU COULD LOSE SOME OR ALL OF
YOUR MONEY.
We believe that various factors may cause the market price of our common
stock to fluctuate, including announcements of:
- New products by us or our competitors;
- Developments or disputes concerning intellectual property
proprietary rights; - Our failing to achieve our operational
milestones; and - Changes in our financial conditions or securities
analysts' recommendations.
The stock markets, in general, and the shares of Internet companies, in
particular, have experienced extreme price fluctuations. These broad market and
industry fluctuations may cause the market price of our common stock to decline.
In addition, the low trading volume of our stock will accentuate price swings of
our stock.
14
ITEM 7. FINANCIAL STATEMENTS.
TRIBEWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
15
TRIBEWORKS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Report of Independent Registered Public Accounting Firm......................17
Consolidated Balance Sheet...................................................18
Consolidated Statements of Income (Loss).....................................19
Consolidated Statements of Cash Flows........................................20
Consolidated Statements of Stockholders' Deficit.............................22
Notes to Consolidated Financial Statements...................................23
16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Tribeworks, Inc.
We have audited the accompanying consolidated balance sheet of Tribeworks, Inc.
and subsidiaries as of December 31, 2004, and the related consolidated
statements of income (loss), cash flows, and stockholders' deficit for the years
ended December 31, 2004 and 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tribeworks, Inc. and
subsidiaries as of December 31, 2004, and the results of their operations and
their cash flows for the years ended December 31, 2004 and 2003 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note C to the
financial statements, the Company's financial position and limited capital
resources raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Notes C and L. The financial statements do not include any adjustments that
might result form the outcome of this uncertainty.
/s/ TAUBER & Balser, P.C.
_________________________
Tauber & Balser, P.C.
Atlanta, Georgia
March 30, 2005
17
TRIBEWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
Current Assets
Cash $ 43,729
Accounts receivable, net of allowance for doubtful
accounts of $1,500 32,641
Prepaid expenses 31,292
___________
TOTAL CURRENT ASSETS 107,662
Other Assets
Equipment, net of accumulated depreciation of $50,602 1,691
___________
TOTAL ASSETS $ 109,353
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 247,703
Accrued expenses 134,887
Due to shareholders 6,232
Billings in excess of costs and estimated earnings
on uncompleted contracts 53,240
Note payable 83,701
Deferred revenue 61,971
___________
TOTAL CURRENT LIABILITIES 587,734
___________
Stockholders' Deficit
Preferred stock: 10,000,000 shares authorized, none issued -
Common stock: $.0004 par value, 200,000,000 shares authorized,
4,708,657 shares issued and outstanding 1,883
Additional paid-in capital 3,035,725
Accumulated deficit (3,515,989)
___________
TOTAL STOCKHOLDERS' DEFICIT (478,381)
___________
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 109,353
===========
The accompanying notes are an integral part of these consolidated financial
statements
18
TRIBEWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
__________ __________
REVENUES $ 821,572 $1,194,792
COST OF SALES 328,862 406,926
__________ __________
GROSS PROFIT 492,710 787,866
__________ __________
OPERATING EXPENSES
Product support 40,377 50,987
Product development 94,387 142,692
Sales and marketing 200,488 232,002
General and administrative 350,671 321,751
__________ __________
685,923 747,432
__________ __________
INCOME (LOSS) FROM OPERATIONS (193,213) 40,434
OTHER INCOME (EXPENSE)
Interest expense (792) (7,726)
Other income - 8,110
__________ __________
(792) 384
__________ __________
INCOME (LOSS) BEFORE INCOME TAXES (194,005) 40,818
INCOME TAXES - -
__________ __________
NET INCOME (LOSS) $ (194,005) $ 40,818
========== ==========
EARNINGS (LOSS) PER COMMON SHARE,
BASIC AND DILUTED $ (0.04) $ 0.01
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, BASIC AND DILUTED 4,708,657 4,660,575
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements
19
TRIBEWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
__________ __________
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (194,005) $ 40,818
__________ __________
Adjustments:
Depreciation 1,232 4,362
Amortization of unearned compensation 3,369 7,306
Gain on extinguishment of accounts
payable - (8,110)
Changes in:
Accounts receivable 133,777 (133,973)
Costs and estimated earnings in
excess of billings on uncompleted
contracts 23,643 (23,643)
Prepaid expenses 26,582 (19,820)
Accounts payable (1,167) 34,476
Accrued expenses 116,534 (12,999)
Deferred revenue and billings in
excess of costs and estimated
earnings on uncompleted contracts (106,008) 52,399
__________ __________
Total adjustments 197,962 (100,002)
__________ __________
Net cash provided (used) by operating
activities 3,957 (59,184)
__________ __________
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment - (3,697)
__________ __________
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payment of note payable - (40,500)
__________ __________
NET INCREASE (DECREASE) IN CASH 3,957 (103,381)
CASH, BEGINNING OF PERIOD 39,772 143,153
__________ __________
CASH, END OF PERIOD $ 43,729 $ 39,772
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements
20
TRIBEWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
____ _______
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $792 $ 7,726
==== =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Capitalization of prior year accrued interest into
note payable $ - $20,000
==== =======
Stock issued in extinguishment of accounts payable $ - $26,000
==== =======
The accompanying notes are an integral part of these consolidated financial
statements
21
TRIBEWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2004 AND 2003
Common Stock Additional
____________________ Paid In Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
_________ ______ __________ ____________ ___________ _________
Balances at January 1, 2003 4,658,657 $1,883 $3,009,745 $(10,675) $(3,362,802) $(361,869)
Stock issued in extinguishment of accounts
payable 50,000 20 25,980 - - 26,000
Amortization of unearned compensation - - - 7,306 - 7,306
Net income - - - - 40,818 40,818
_________ ______ __________ ____________ ___________ _________
Balances at December 31, 2003 4,708,657 1,883 3,035,725 (3,369) (3,321,984) (287,745)
Amortization of unearned compensation - - - 3,369 - 3,369
Net income (loss) - - - - (194,005) (194,005)
_________ ______ __________ ____________ ___________ _________
Balances at December 31, 2004 4,708,657 $1,883 $3,035,725 $ - $(3,515,989) $(478,381)
========= ====== ========== ============ =========== =========
The accompanying notes are an integral part of these consolidated financial
statements
22
TRIBEWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE A - NATURE OF BUSINESS
The Company's business activity results from a technology that provides
tools for creating and delivering multimedia applications. Internet media
developers use the technology for creation and deployment of electronic content
that utilizes interactive features combining graphics, video, and audio content.
The Company exploits its software primarily through the licensing of its
software tools to multimedia and software developers and through building
customized licensed versions that include professional engineering to meet
contract requirements.
NOTE B - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF CONSOLIDATION
The financial statements of the Company are presented on a consolidated
basis and include the Company and its wholly owned subsidiaries, Tribeworks
Development Corporation and Tribeworks Japan Limited, through the third quarter
of 2004, the date of the termination of Tribeworks Japan Limited. All material
intercompany transactions have been eliminated.
During the quarter ended September 30, 2004, the Company officially
terminated its Tribeworks Japan subsidiary and office in Japan. The costs of
closure were not material. The Company has continued to conduct its business
operations in Japan through the use of consultants.
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 and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
and assumptions are reviewed periodically and the effects of revisions are
reflected in the consolidated financial statements in the period they are
determined.
Significant estimates used in preparing these financial statements include
those used in computing profit percentages under the percentage-of-completion
revenue recognition method. It is at least reasonably possible that these
significant estimates used will change within the next year.
ACCOUNTS RECEIVABLE
Accounts receivable are reported at the amount management expects to
collect on balances outstanding at year-end. The amount of the accounting loss
that the Company is at risk for these unsecured accounts receivable is limited
to their carrying value, which was $32,641 at December 31, 2004. The Company
provides an allowance for doubtful accounts and records bad debts based on a
periodic review of accounts receivable to consider the collectibility of each
account.
CUSTOMER CONCENTRATIONS
In 2004 three customers accounted for 36%, 14% and 7% of total revenues,
respectively. In 2003 three customers accounted for 51%, 7% and 4% of total
revenues, respectively. At December 31, 2004, accounts receivable from these
major customers totaled $17,000.
Revenues from international customers were approximately 53% and 63% of
total revenues in 2004 and 2003, respectively. Revenues are paid in U.S. dollars
and Japanese yen. Approximately 37% and 52% of revenues in 2004 and 2003,
respectively, were generated from Japanese customers. At December 31, 2004,
accounts receivable from all international customers totaled approximately
$7,000.
23
TRIBEWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE B - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
TECHNOLOGY LICENSE
The Company's principal business activity focuses on the commercialization
of iShell, which was developed by an officer and director of the Company and an
affiliate of the Company. In November 1999 the Company purchased all rights,
title and interest in iShell in exchange for $100,000 and warrants to purchase
75,758 shares of common stock at an exercise price of $1.32 per share, valued at
$30,000. The $130,000 cost was fully amortized at December 31, 2002.
REVENUE RECOGNITION
Revenue is generally recognized when all contractual or transfer
obligations have been satisfied and collection of the resulting receivable is
probable.
Revenues from membership subscriptions are recognized proportionally over
the membership period, usually one year. Revenues and estimated profits on
custom development services are generally recognized under the
percentage-of-completion method of accounting using cost-to-cost methodology;
profit estimates are revised periodically based on changes in facts; any losses
on contracts are recognized immediately. Revenue from the sale of licenses are
recognized when all the following criteria are met: persuasive evidence of an
agreement exists, delivery has occurred, the fee is fixed or determinable and
collectability is probable. If all aspects but the last have been met, revenue
is recognized as payments from customers are received.
PRODUCT DEVELOPMENT COSTS
The Company expenses all product development costs in the period the costs
are incurred.
STOCK-BASED AWARDS
The Company accounts for stock based awards to employees under its "Equity
Incentive Plan" as compensatory in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). The Company
also issues stock based awards for services performed by consultants and other
non-employees and accounts for them in accordance with Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123").
Financial Accounting Standards Board Statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure ("SFAS 148"), requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for all awards had been determined in accordance
with the fair value based method prescribed in SFAS 123 as follows:
24
TRIBEWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE B - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
STOCK-BASED AWARDS (CONTINUED)
2004 2003
_________ ________
Net income (loss), as reported $(194,005) $ 40,818
Add: Stock-based compensation expense
included in net income, no tax effect 3,369 7,306
Deduct: Total stock-based compensation
expense determined under fair value method
for all awards, no tax effect (3,969) (20,141)
_________ ________
Pro forma net income (loss) $(194,605) $ 27,983
========= ========
Since the difference between the reported and pro forma net income (loss)
available to common shareholders is insignificant, there is no effect on the net
earnings (loss) per common share.
The Company estimates the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model, however, no options were
granted during 2004 and 2003.
FOREIGN CURRENCY TRANSLATION
Prior to its closure, Tribeworks Japan prepared its financial statements in
a currency other than U.S. dollars. Results of operations and cash flows are
translated at average exchange rates during the period, and assets and
liabilities are translated at end-of-period exchange rates. The Company
determined that the foreign currency translation effect was immaterial and,
therefore, translation adjustments were not included as a separate component of
accumulated other comprehensive income (loss) in stockholders' equity (deficit).
EARNINGS PER COMMON SHARE
Basic earnings per share ("EPS") is computed based on net income (loss)
divided by the weighted average number of common shares outstanding. Diluted EPS
is computed based on net income (loss) divided by the weighted average number of
common shares and potential common share equivalents outstanding. Potential
common share equivalents are those related to stock options and warrants.
However, such potential common share equivalents would have no effect on diluted
earnings per share in 2004 and 2003. Therefore, basic and diluted earnings per
share is the same in 2004 and 2003.
NOTE C - GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate the
continuation of the Company as a going concern. Although the Company reported
net income during 2003, it reported a net loss during 2004, and had a working
capital deficiency of $480,072 and an equity deficiency of $478,381 at December
31, 2004. The Company is also in default on its note payable and has deferred
payment of certain accounts payable and accrued expenses.
In light of the Company's financial condition, on March 30, 2005, the
Company announced a plan of reorganization, which is described in NOTE L -
SUBSEQUENT EVENTS.
In view of the matters described, there is substantial doubt about the
Company's ability to continue as a going concern. The recoverability of the
recorded assets and satisfaction of the liabilities reflected in the
accompanying balance sheet is dependent upon continued operation of the Company,
which is in turn dependent upon the Company's ability to meet its cash
25
TRIBEWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE C - GOING CONCERN (CONTINUED)
flow requirements on a continuing basis and to succeed in its future operations.
There can be no assurance that management will be successful in implementing its
plans. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
NOTE D - COSTS, ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED CONTRACTS
At December 31, 2003, there were no costs and estimated earnings in excess
of billings on uncompleted contracts. At December 31, 2004, billings in excess
of costs and estimated earnings on uncompleted contracts, which was comprised of
two jobs in progress, consisted of $148,000 of billings, less $46,000 of costs
and $49,000 of estimated earnings.
NOTE E - NOTE PAYABLE
On January 21, 2001, the Company borrowed $100,000 under a Private Placement
Agreement. Under the terms of the agreement the lender, upon the closing of a
"Qualified Financing" (as that term is defined in the agreement), could convert
the loan to common stock of the Company. Such conversion never took place, and
on June 12, 2003, the Company and the creditor restructured this note. The
original terms for the $100,000 note accrued simple interest at 10%, with all
principal and accrued interest due on demand. The restructured note accrues
interest at 4% and was increased by $20,000 for previously accrued interest. The
new note is nonconvertible, and calls for an initial payment of $30,000, which
was made during June 2003, and then monthly payments of $3,500 through February
2005, with a final payment of $24,201 in March 2005. If the Company makes all
note payments timely in accordance with the note agreement, the creditor will
forgive $20,000 of the final payment. In accordance with Statement of Financial
Accounting Standards No. 15, ACCOUNTING BY DEBTORS AND CREDITORS FOR TROUBLED
DEBT RESTRUCTURINGS ("SFAS 15"), the carrying value of the debt, including
accrued interest, is equal to the total amount of future payments under the new
note. Consequently, all future debt payments will reduce the principal balance
and no interest expense will be recorded for this note.
The Company failed to make the scheduled note payments after September 2003
and has received notification of default from the lender. As such, the note was
due in full on September 30, 2004 and is accruing default interest at a rate of
4% on the outstanding payment amounts of the note.
NOTE F - INCOME TAXES
Deferred income tax assets and the related valuation allowances result
principally from the potential tax benefits of net operating loss carryforwards.
The Company has recorded a valuation allowance to reflect the uncertainty of the
ultimate utilization of the deferred income tax assets as follows:
2004 2003
___________ ___________
Deferred income tax assets $ 1,391,000 $ 1,365,000
Less valuation allowance (1,391,000) (1,365,000)
___________ ___________
Net deferred income tax assets $ - $ -
=========== ===========
At December 31, 2002, the valuation allowance for deferred income tax
assets was 1,288,000.
26
TRIBEWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE F - INCOME TAXES (CONTINUED)
The following is a reconciliation of the applicable U.S. federal income tax
rate to the effective tax rate included in the consolidated statements of income
(loss):
2004 2003
______ ______
U.S. federal income tax rate (34.0)% (15.0)%
State income tax rate, net of federal rate (5.8) (7.5)
Valuation allowance 39.8 22.5
____ _____
0.0% 0.0%
==== =====
At December 31, 2004, the Company had available net operating loss
carryforwards for income tax reporting purposes of approximately $3,400,000
which will expire in various periods through 2024. At April 15, 2004, the
Company had not filed its 2003 federal and state income tax returns.
NOTE G - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and receivables for which
the Company believes that the fair value approximates their carrying amounts. It
was impracticable to estimate the fair value of the other financial instruments
because of the financial position and results of operations of the Company.
NOTE H - STOCK OPTIONS AND STOCK WARRANTS
STOCK OPTIONS
The Company maintains a 1999 Equity Incentive Plan for the issuance of stock
options to employees, directors and consultants. The exercise price is generally
the estimated fair market value at the grant date as determined by the Company's
Board of Directors. The options vest over a period up to four years. At December
31, 2004, there were 400,000 shares reserved for issuance under the 1999 Equity
Incentive Plan.
The Company also maintains a 2004 Employee Stock Incentive Plan for the
issuance of stock options, common stock, restricted stock, and stock bonuses to
employees, officers and key consultants. At December 31, 2004, there were
1,177,164 shares reserved for issuance under the 2004 Employee Stock Incentive
Plan, however, no awards had been issued from the plan as of December 31, 2004.
A summary of the Company's stock options as of December 31, 2004 and 2003
and changes during the years ending on those dates is presented below:
2004 2003
___________________________ ___________________________
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
________ ______________ _______ ______________
Outstanding at beginning of year 351,979 $1.64 351,979 $1.64
Granted - - - -
Cancelled (103,479) 2.21 - -
________ _____ _______ _____
Outstanding at end of year 248,500 $1.42 351,979 $1.64
======== ===== ======= =====
Options exercisable at end of year 248,500 $1.42 328,333 $1.80
======== ===== ======= =====
Weighted-average fair value of options
granted during the year $ - $ -
===== =====
27
TRIBEWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE H - STOCK OPTIONS AND STOCK WARRANTS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 2004:
Options Outstanding Options Exercisable
___________________ ___________________
Weighted Weighted Weighted
Options Average Average Options Average
Outstanding Remaining Life Exercise Price Exercisable Exercise Price
___________ ______________ ______________ ___________ ______________
5,000 4.50 years $0.20 5,000 $0.20
6,250 5.40 years 11.20 6,250 11.20
7,500 5.55 years 12.36 7,500 12.36
6,000 5.65 years 10.00 6,000 10.00
5,000 5.88 years 4.00 5,000 4.00
45,000 6.01 years 1.50 45,000 1.50
7,500 6.22 years 1.00 7,500 1.00
97,500 6.61 years 0.24 97,500 0.24
50,000 7.47 years 0.14 50,000 0.14
18,750 7.78 years 0.16 18,750 0.16
_______ _______
248,500 248,500
======= =======
STOCK WARRANTS
The Company has issued stock warrants in conjunction with the issuance of
common stock, debt, and the settlement of debt and for services. Activity
related to stock warrants was as follows:
Weighted Average
Warrants Exercise Price
_________ ________________
Outstanding at December 31, 2002 613,853 $0.98
Expired (558,853) 0.98
_______
Outstanding at December 31, 2003 55,000 1.25
=======
Expired (10,000) 0.14
_______
Outstanding at December 31, 2004 45,000 1.50
=======
No warrants were granted during the years ended December 31, 2003 and 2004.
The following table summarizes information about stock warrants outstanding
at December 31, 2004:
Warrants Outstanding Warrants Exercisable
____________________ ____________________
Weighted
Warrants Average Warrants
Outstanding Remaining Life Exercise Price Exercisable Exercise Price
___________ ______________ ______________ ___________ ______________
45,000 1.01 years $1.50 45,000 $1.50
NOTE I - COMMITMENTS
LEASES
On December 16, 2004, the Company entered into a two-year lease agreement
for its principal office space. The monthly rent is approximately $1,950 per
month. Total rent expense for the years ended December 31, 2004 and 2003 was
$40,000 and $59,000, respectively.
28
TRIBEWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE J - RELATED PARTY TRANSACTIONS
OFFICER AND DIRECTOR OPTIONS AND WARRANTS
At December 31, 2004, the Company had outstanding the following qualified
and nonqualified stock options granted to officers and directors which are
included in Note H:
Common Shares Exercise Expiration
Under Option Price Date
_____________ ________ ________________
22,500 $0.24 June 30, 2009
45,000 1.50 January 11, 2011
75,000 0.24 March 26, 2011
_______
142,500
Of the total outstanding options granted to officers and directors as
discussed above, all are exercisable at December 31, 2004.
At December 31, 2004, the Company had outstanding the following warrants to
officers and directors which are included in Note H:
Common Shares Exercise Expiration
Under Warrant Price Date
_____________ _________ _______________
45,000 $1.50 January 1, 2006
Of the total outstanding warrants granted to officers and directors as
discussed above, all are exercisable at December 31, 2004.
DUE TO SHAREHOLDERS
The $6,232 due to shareholders at December 31, 2004 is non-interest bearing
and due on demand.
ACCRUED PAYROLL
Effective July 1, 2004, the Company entered into one-year compensation
arrangements with two of its executive officers. The arrangements provide for
annualized salaries of $120,000 and $110,000 for the Company's Chief Executive
Officer, Duncan Kennedy, and Chief Financial Officer, Robert Davidorf,
respectively. As part of the arrangement, any of this compensation accrued but
not paid can be converted, at the option of the executive officers, into common
shares of the Company at any time through June 30, 2007. The conversion rate is
equal to the accrued amount divided by the average closing bid of the Company's
common stock for the 20 trading days previous to the election date. As part of
the arrangement, the Company will hold any issued shares in escrow for one year
following the date of conversion. Termination of employment during the one-year
period shall cause the issued stock to be forfeited and returned to the Company
and, as such, the outstanding salary underlying the forfeited stock shall not be
owed. At December 31, 2004, the Company had accrued payroll balances of $35,208
to Duncan Kennedy, and $51,890 to Robert Davidorf. Note that Duncan Kennedy
resigned as CEO on March 29, 2005. For additional information, see NOTE L -
SUBSQUENT EVENTS.
In addition, the Company had an accrued payroll balance of $34,437 to
current Chairman and CEO, J. Glenn Pogue, based on his services as an employee
during 2004.
NOTE K - REVERSE STOCK SPLIT
On March 24, 2004, the Board of Directors authorized a one-for-four reverse
stock split of the Company's common stock. The reverse split became effective on
June 4, 2004, thereby reducing the number of common shares outstanding by 75%
and increasing the par value to $0.0004. All references in the accompanying
consolidated financial statements to the number of common shares, number and
exercise price of stock options and stock warrants, and per share amounts for
the periods prior to the reverse stock split have been restated to reflect the
reverse stock split.
29
TRIBEWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE L - SUBSEQUENT EVENTS
PLAN OF REORGANIZATION
On March 30, 2005, the Company announced a plan of reorganization, intended
to allow the Company to maintain its public reporting requirements, reduce its
debt, and explore new business directions. The plan of reorganization includes
the transfer of most assets and liabilities to the registrant's operating
subsidiary, Tribeworks Development Corporation, and possible sale of the
subsidiary to current management or others.
After further development, the plan is expected to be submitted to
shareholders for a vote. A Note in an amount of up to $100,000 was entered into
as of March 29, 2005 to help cover reorganization costs, which were estimated as
of March 30, 2005 to be the following: Accounting Fees: $30,000, Temporary
Accountant: $5,000, Tribeworks Development Corp. Valuation: $15,000, Sell-off
Administrative Costs: $7,000, Attorney Fees: $20,000, Annual General Meeting:
$5,000. The funds received under the note are being held in escrow and will be
released from escrow only as applicable expenses are incurred. There can be no
assurance that management will be successful in implementing its plans.
CHANGE OF MANAGEMENT
Effective March 29, 2005, Duncan Kennedy and Patrick Soquet voluntarily
resigned as Directors of the Company. Duncan Kennedy also resigned as the CEO
and President of the registrant effective as of the same date, although he will
continue to serve as President of the registrant's wholly owned operating
subsidiary, Tribeworks Development Corporation.
Effective March 29, 2005, J. Glenn Pogue was appointed by the Board of
Directors as CEO of the registrant and was also brought onto the Board of
Directors as Chairman. Mr. Pogue was formerly an employee of the Company.
30
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES.
The Chief Executive Officer and the Chief Financial Officer of the
Registrant have concluded, based on their evaluation as of the end of the period
covered by this Report, that the Registrant's disclosure controls and procedures
are effective to ensure that information required to be disclosed by the
Registrant in the reports filed or submitted by it under the Securities Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and include controls and procedures designed to ensure that information
required to be disclosed by the Registrant in such reports is accumulated and
communicated to the Registrant's management, including the Chief Executive
Officer, as appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of such evaluation.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file certain reports regarding ownership
of, and transactions in, the Company's securities with the Securities and
Exchange Commission (the "SEC"). Such officers, directors and 10% stockholders
are also required by SEC rules to furnish the Company with copies of all Section
16(a) forms that they file.
Based solely on its review of copies of Forms 3 and 4 and amendments thereto
furnished to the Company pursuant to Rule 16(a) - (e) and Forms 5 and amendments
thereto furnished to the Company with respect to the last fiscal year, and any
written representations referred to in Item 405(b)(2)(i) of Regulation S-B
stating that no Forms 5 were applicable to the Company's officers, directors and
10% stockholders were complied with.
31
ITEM 10. EXECUTIVE COMPENSATION.
DIRECTOR COMPENSATION
Directors do not receive any compensation for their services as members
of the Board of Directors, although this is subject to change during 2005.
Directors are reimbursed for expenses in connection with attendance at Board of
Directors and committee meetings. Directors are eligible to participate as
optionees under our compensatory equity plans.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation of our Chief Executive Officer. No other executive officer received
annual salary and bonus in excess of $100,000 for the year ended December 31,
2003.
___________________________________________________________________________________________________________________
ANNUAL COMPENSATION LONG TERM COMPENSATION
_______________________________ _______________________________________________
AWARDS PAYOUTS
________________________ ____________________
Other Restricted All Other
Annual Stock Securities LTIP Compen-
Name and Principal Salary Bonus Compensation Awards Underlying Payout sation
Position Year ($) ($) ($) ($) Options/SARs ($) ($)
___________________________________________________________________________________________________________________
Duncan J. Kennedy, 2004 68,794 0 35,208 0 0 0 0
Chief Executive
Officer, President and
Director
_________________________________________________________________________________________
2003 127,449 0 0 0 0 0 0
_________________________________________________________________________________________
2002 55,335 0 0 0 0 0 0
___________________________________________________________________________________________________________________
OPTION GRANTS IN LAST FISCAL YEAR
There were no grants of stock options or warrants to any of the executive
officers named in the compensation table above during fiscal year 2004.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth information concerning option and warrant
exercises in 2004 and exercisable and unexercisable stock options and warrants
held by the executive officers named in the summary compensation table at
December 31, 2004. The value of unexercised in-the-money options and warrants is
based on a value of $0.16 per share, the fair market value of our common stock
as of December 31, 2004, as determined by our board of directors minus the
actual per share exercise prices, multiplied by the number of shares underlying
the option or warrant. The listed options and warrants were granted under the
1999 Stock Option Plan.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE OPTIONS AT F-Y END
NAME AND PRINCIPAL ON REALIZED F-Y END ($)
_____________________________ _____________________________
POSITION EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
_____________________ ________ ________ ___________ _____________ ___________ _____________
Duncan Kennedy, Chief -- -- 22,500 -- -- --
Executive Officer,
President and
Director
32
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth information regarding the beneficial
ownership of our common stock at April 15, 2004, by (i) each of our directors
and named executive officers; (ii) all of our directors and executive officers
as a group, and (iii) each person or group known to us to own beneficially more
than 5% of the outstanding common stock.
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER(1) OWNERSHIP CLASS
___________________ __________ ___________
Duncan J. Kennedy 430,940 9.15%
J. Glenn Pogue 0 0.00%
Robert C. Davidorf (3) 205,025 4.35%
All Directors and Officers 13.50%
As a Group (3 persons) (4)
Gilbert Amar 658,509 13.99%
Patrick Soquet (5) 870,167 18.48%
(1) Unless otherwise noted, the address of each of the named directors,
officers and individuals is: c/o Tribeworks, Inc., 243 Front Street, San
Francisco, CA 94111.
(2) Includes 22,500 shares issuable upon the exercise of options and warrants
that are exercisable within 60 days of April 15, 2005.
(3) Includes 165,000 shares issuable upon the exercise of options and warrants
that are exercisable within 60 days of April 15, 2005.
(4) Effective March 29, 2005, Duncan Kennedy and Patrick Soquet voluntarily
resigned as Directors of the Company. Duncan Kennedy also resigned as the
CEO and President of the registrant effective as of the same date, although
he will continue to serve as President of the registrant's wholly owned
operating subsidiary, Tribeworks Development Corporation. Effective March
29, 2005, J. Glenn Pogue was appointed by the Board of Directors as CEO of
the registrant and was also brought onto the Board of Directors as
Chairman. Mr. Pogue was formerly an employee of the Company.
(5) All of the shares are owned of record by Keepsake, a Belgian entity owned
by Mr. Soquet.
The information required by Item 201(d) of Regulation S-B is contained
herein in Item 5 - Market for Common Equity and Related Stockholder Matters.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 1, 2005, our wholly owned subsidiary Tribeworks Development
Corporation entered into a contract with a Canadian company wholly owned by our
former CEO, Chairman, and President, Duncan Kennedy, to provide the services of
Mr. Kennedy to continue to serve as President of Tribeworks Development
Corporation.
On January 1, 2004, we entered into a consulting contract with a Belgian
software company that is wholly owned by the brother of Patrick Soquet, a former
Director and beneficial owner of more than 5% of our common stock. Under the
contract, the Belgian company will perform software engineering services for us.
As of April 15, 2005, we have not entered into any other contractual
arrangements with related parties. There is not any other currently proposed
transaction, or series of the same, to which we are a party, in which the amount
involved exceeds $60,000 and in which, to our knowledge, any director, executive
officer, nominee, 5% Shareholder or any member of the immediate family of the
foregoing persons, have or will have a direct or indirect material interest.
33
ITEM 13. EXHIBITS
(a) The following is a list of exhibits, some of which are incorporated by
reference:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
2.1 Agreement of Merger between Tribeworks, Inc., a California
corporation, and Tribeworks Acquisition Corporation, dated
November 2, 1999 (Incorporated by reference to Exhibit 2.1 to
the Registrant's Form 10-SB/A filed July 10, 2000)
3.1 Certificate of Incorporation of Tribeworks, Inc., a Delaware
Corporation (Incorporated by reference to Exhibit 3.1 to the
Registrant's Form 10-SB/A filed July 10, 2000 and Exhibit A to
the Registrant's Proxy Statement on Schedule 14A filed April
14, 2004)
3.2 Bylaws of Tribeworks, Inc., a Delaware Corporation
(Incorporated by reference to Exhibit 3.2 to the Registrant's
Form 10-SB/A filed July 10, 2000)
10.1 Pan World Corporation 1999 Stock Option Plan (incorporated
by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 filed September 26, 2001)
10.2 Tribeworks, Inc. 2001 Stock Plan (incorporated by reference
to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-8 filed September 26, 2001)
10.3 Tribeworks, Inc. 2004 Employee Stock Incentive Plan
(incorporated by reference to Exhibit B to the Registrant's
Proxy Statement on Schedule 14A filed April 14, 2004)
21.1 Subsidiaries of the Issuer
24.1 Power of Attorney (appears on the signature page of this
report)
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) and 15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) and 15(d)-14(a)
32.1 Certification of Chief Executive Officer Pursuant to Section
1350 of Title 18 of the United States Code
32.2 Certification of Chief Financial Officer Pursuant to Section
1350 of Title 18 of the United States Code
99.1 Asset and Liability Assignment and Indemnification Agreement,
dated March 29, 2005 (incorporated by reference to Exhibit 99.2
to the Registrant's Current Report on Form 8-K filed on March
31, 2005)
99.2 Promissory Note, dated March 29, 2005 (incorporated by
reference to Exhibit 99.3 to the Registrant's Current Report on
Form 8-K filed on March 31, 2005)
(b) The following reports on Form 8-K were filed during the quarter ended
December 31, 2004:
None
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Tauber & Balser, P.C. billed or is expected to bill the Company the
following fees for services provided during the years ended December 31, 2004
and 2003:
FEES FOR THE YEAR ENDED
___________________________________
DECEMBER 31, DECEMBER 31,
(IN THOUSANDS) 2004 2003
____________ ____________
Audit fees (1) $35,000 $34,000
Audit-related fees (2) - 575
Tax fees (3) - 2,720
All other fees (4) - 1,325
_______ _______
Total fees for services $35,000 $38,620
======= =======
(1) Audit fees are the fees billed for professional services rendered for
the audit of our annual financial statements and reviews of quarterly
financial statements. For 2004 the figure is an estimate, as no bills
have yet been issued for the audit. This category also includes fees
for statutory audits required domestically and internationally, comfort
34
letters, consents, assistance with and review of documents filed with
the SEC, attest services, work done by tax professionals in connection
with the audit or quarterly reviews, and accounting consultations and
research work necessary to comply with generally accepted auditing
standards.
(2) Audit Related fees are the fees billed for assurance and related
services by the principal accountant that are reasonably related to the
performance of the audit or review and are not reported as audit fees.
(3) Tax fees are the fees billed for professional services rendered for tax
compliance, tax advice and tax planning, except those provided in
connection with the audit or quarterly reviews.
(4) All other fees include fees billed for professional services not
covered by (1) through (3) above.
The Board of Directors, acting as the Audit Committee, pre-approves all
audit and permitted non-audit services (including the fees and terms thereof) to
be performed for the Company by its independent auditor.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRIBEWORKS, INC.
By: /s/ ROBERT C. DAVIDORF
_____________________________
Robert C. Davidorf
Chief Financial Officer
Date: APRIL 15, 2005
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert C. Davidorf and J. Glenn Pogue,
jointly and severally, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-KSB, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ J. GLENN POGUE CHIEF EXECUTIVE OFFICER AND DIRECTOR April 15, 2005
__________________ (Principal Executive Officer)
J. Glenn Pogue
/s/ ROBERT C. DAVIDORF CHIEF FINANCIAL OFFICER AND DIRECTOR April 15, 2005
__________________ (Principal Financial and Accounting
Robert C. Davidorf Officer)
36