0 C . Richard Henriksen, Jr ., #1466 HENRIKSEN & HENRIKSEN, P .C . Attorney for Plaintif f 320 South 500 Eas t Salt Lake City, Utah 84102 Telephone : (801) 521-4145 Facsimile : (801) 355-024 6 Ira M . Press (IP 5313) Kirby McInerney & Squire LLP 830 Third Ave, 10th Floor New York, NY 10022 Telephone : (212) 317-2300 Facsimile : (212) 751-254 0 Counsel for Plaintiff 40 ZAGS 0 T l 7 P 3 . 1 ir• r I ?b ; Y* UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTA H HILLEL HYMAN, individually and On Behalf Of All Others Similarly Situated , Plaintiff s -against- IMERGENT INC . (f/k/s Netgateway Inc .) ; DONALD L . DANKS ; ROBERT LEWIS and GRANT THORNTON LLP, Defendants . CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAW S JURY TRIAL DEMANDE D Judge Dale A . Kimball DECK TYPE : Civi l DATE STAMP : 10/17/2005 @ 15 :17 :01 CASE NUMBER : 2 :05CV00861 DA K Plaintiff alleges the following based upon the investigation of plaintiff' s counsel, which included a review of certain United States Securities and Exchang e Commission ("SEC") filings by Imergent Inc . ("Imergent" or the "Company"), as well as
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C. Richard Henriksen, Jr ., #1466HENRIKSEN & HENRIKSEN, P.C .Attorney for Plaintif f320 South 500 Eas tSalt Lake City, Utah 84102Telephone : (801) 521-4145Facsimile: (801) 355-0246
Ira M . Press (IP 5313)Kirby McInerney & Squire LLP830 Third Ave, 10th FloorNew York, NY 10022Telephone: (212) 317-2300Facsimile : (212) 751-254 0
Counsel for Plaintiff
40
ZAGS 0 T l 7 P 3. 1
ir• r I ?b ; Y*
UNITED STATES DISTRICT COURTFOR THE DISTRICT OF UTA H
HILLEL HYMAN, individually and On BehalfOf All Others Similarly Situated ,
Plaintiffs
-against-
IMERGENT INC. (f/k/s Netgateway Inc .) ;DONALD L. DANKS; ROBERT LEWIS andGRANT THORNTON LLP,
Defendants .
CLASS ACTION COMPLAINT FORVIOLATIONS OF FEDERALSECURITIES LAW S
JURY TRIAL DEMANDE D
Judge Dale A. Kimball
DECK TYPE : Civi l
DATE STAMP : 10/17/2005 @ 15 :17 :01CASE NUMBER : 2 :05CV00861 DAK
Plaintiff alleges the following based upon the investigation of plaintiff' s
counsel, which included a review of certain United States Securities and Exchang e
Commission ("SEC") filings by Imergent Inc . ("Imergent" or the "Company"), as well as
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regulatory filings and reports, securities analysts' reports and advisories about the
Company, press releases and other public statements issued by the Company, and media
reports about the Company . Plaintiff believes that substantial additional evidentiary
support will exist for the allegations set forth herein after a reasonable opportunity for
discovery .
NATURE OF THE ACTIO N
1 . This is a federal securities class action on behalf of all individual and entities,
other than defendants, who purchased Imergent's common stock and still held the stock
through August 19, 2005, between November 26, 2001 and October 7, 2005, inclusive (the
"Class Period") . This action is brought against Imergent and certain of its officers and
directors as well as its auditor, Grant Thornton LLP, for violations of §§ 10(b) and/or 20(a)
the Securities Exchange Act of 1934 (the "Exchange Act" or the "1934 Act") on behalf of
all individual and entities, other than defendants, who purchased Imergent common stock
during the Class Period .
2 . Imergent Inc., an e-services company, offers eCommerce technology,
training , and a variety of Web-based technology services . Its prima ry services include 90-
minute Internet preview training session and Internet training workshops . The company
sells its proprietary StoresOnline so ftware and training services for users to market
products , accept online orders , analyze marketing performance, and manage pricing and
customers . In addition to software , the company offers site development, Web hosting,
marketing , and mentoring products . Imergent distributes its products to entrepreneurs an d
19 . There is a well-defined community of interest in the questions of law and fac t
involved in this case . Questions of law and fact common to the members of the Clas s
which predominate over questions which may affect individual Class members include :
(a) Whether the federal securities laws were violated by defendants' act s
and omissions as alleged herein ;
(b) Whether the 1934 Act was violated by defendants ;
(c) Whether defendants omitted and/or misrepresented material facts ;
(d) Whether defendants' statements omitted material facts necessary to
make the statements made , in light of the circumstances under which they were made, not
misleading;
(e) Whether defendants knew or deliberately disregarded that thei r
statements were false and misleading ;
(f) Whether the price of Imergent common stock was artificially inflate d
as a result of defendants' misrepresentations and/or omissions ; and ;
(g) The extent of damage sustained by Class members and th e
appropriate measure of damages .
20. Plaintiff's claims are typical of those of the Class . Plaintiff and the al l
members of the Class purchased the Imergent 's Common Stock during the Class Perio d
at artificially inflated prices and have sustained damages from defendants' common cours e
of wrongful conduct involving the misreporting and inflation of Imergent's financial results .
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21 . Plaintiff will adequately protect the interests of the Class and has retaine d
counsel who are experienced in class action securities litigation. Plaintiff knows of n o
interests plaintiff has which conflict with those of the Class .
22 . Given the large number of investors with common claims based on the sam e
factual and legal issues, a class action is superior to other available methods for the fai r
and efficient adjudication of this controversy .
IMPROPER ACCOUNTING PRACTICE S
23. As discussed below, Imergent's interim and yearly financial results throughou t
2003-2005 - including the financial results for 2003, 2004 and the first three quarters of
2005 were materially false and misleading when made . Imergent has since admitted as
much. These financial results were materially false and misleading at the time that they
were made because of false revenue recognition related to customer installment contracts .
As such, Imergent will restate its historical revenues, earnings and balance sheets to
reflect cash basis accounting . As a portion of Imergent's software sales are financed, its
historical financial statements using accrual basis accounting reflected a steady stream of
receivables, cash payments and bad debt reserves, which resulted in their overvaluation,
and the corresponding overvaluation of Imergent's reported earnings . The restated
financial statements using cash basis accounting will demonstrate income and loss swings
dependent upon the timing of the receipt of cash payments . Additionally, the previously-
reported financial results were materially false and misleading at the time that they were
made because, contrary to the Company's express representations that its financial result s
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had been prepared "in accordance with generally accepted accounting principles" ,
Imergent's reported financial results were not prepared or presented in accordance wit h
GAAP because they included artificially inflated assets and results of operations, such tha t
the reported results did not accurately reflect Imergent's true operational results an d
financial condition at the time .
MATERIALLY FALSE STATEMENTSDURING THE CLASS PERIO D
24 . Throughout the class period, Imergent issued financial statements that were
materially inaccurate because they overstated revenue and income . These
misrepresentations caused an artificial inflation of Imergent's stock price throughout th e
class period .
25 . On November 26, 2001, Imergent (then known as Netgateway Inc.) issued
a press release titled "Company's Revenues Increase 57% while Posting $2 .3 million
profit", announcing its first quarter ended September 30, 2002 :
Netgateway, Inc . (OTC Bulletin Board : NGWY) announcedtoday its results for the three month period ending September
30, 2001 . Total revenues for the first fiscal quarter, grew to$11,634,043 from $7,425,857 in the comparable quarter of the
prior fiscal year, an increase of 57% . These numbers includethe deferred revenues as described in the company's previousannual report for the period ending June 30, 2001 .
Net income for the first quarter ended September 30, 2001was $2,335,308 or $ .07 a diluted share in earnings as
compared to a loss of $6,680,035 or $ .31 a diluted share lossfor the comparable quarter of the prior fiscal year .
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Commented Netgateway CEO Don Danks, "We are very
pleased with these results especially given that the companyfaced challenges to its business in the weeks following the
terrorist attacks and the fact that we continued to operate in
major restructuring mode for most of the quarter . As we havehad to during this restructuring, the company continues to buildsolid revenues with very lean cash resources and fewer human
resources as we continue to reduce fixed costs and overhead .
And yet despite limitations, the team was able to put togethergreat revenue and profit for the quarter . "
"We have completed almost all of our restructuring effortsand have set our sights on establishing Netgateway as one of
the fastest growing eServices companies dedicated to thesmall business and entrepreneurial marketplace . To that end,we have created a company that is an attractive acquisition
candidate for Category 5 Technologies, as previously
announced. It has been the effort of all at Netgateway over the
past year that has enabled our company to join forces withCategory 5 to establish a leadership position in ourmarketplace . "
26 . On November 20, 2001, Imergent filed its Form 1 OQ with the SEC, statin g
the quarter results ended September 30, 2001 :
Revenues for the three-month period ended September 30, 2001, our firstfiscal quarter of fiscal year 2002, increased to $11,634,043 from $7,425,857in the three month period ended September 30, 2000, an increase of 57% .Operating revenues are from the design and development of Internet websites and related consulting projects, revenues from our Internet trainingworkshops (including attendance at the workshop, rights to activate web sitesand hosting), sales of banner advertising, web traffic building products,mentoring and transaction processing . We expect future operating revenuesto be generated principally from our Internet training workshops following abusiness model similar to the one used in the latter part of fiscal year 2001 .The Internet environment continues to evolve, and we intend to offer future
customers new products as they are developed . We anticipate that ouroffering of products and services will evolve as some products are droppedand are replaced by new and sometimes innovative products intended toassist our customers achieve success with their Internet-related businesses .
Three months ende dSeptember 30, 2001
Revenue $ 11,634,043Cost of revenue 1,589 .569
Gross profit 10,044,474
Operating expenses 53,400
Product development 3,611,796Selling and marketing 2,400,987
General and administrative 151,628Total operating expenses 6,217,811
Operating income (loss) before items shown below 3,826.663
Other income (expense) :Other income (expense) 101,773Interest expense ( 1 .593,128)
Total other expenses (1 .491,355)Income ( loss) from continuing operations 2,335,308
Discontinued operations :Loss from discontinued operations -Net Income (loss) 2,335,308
Basic earnings (loss) per share :Income (loss) from continuing operations $0.07Loss from discontinued operations -Net income (loss) $0 .07
27. On October 15, 2002, Imergent filed Form 10K with the SEC for the yea r
ended June 30, 2002 .
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Year ende dJune 30, 200 2
Revenue $ 37,350,850Cost of revenue 5,531,757Cost of revenue - related party 994,043
Total cost of revenue 6,525,800Gross profit 30 , 825,050
Total operating expenses 27,107,778Net income ( loss) from continuing operations 3,717,272
Other income (expense) 432,184Interest expense (1,950,687)
Total other expenses (1,518,503)Income before discontinued operation s
and extraordina ry items 2 , 198,769Income before extraordina ry items 2 , 198,76 9Net income 2 , 198,769
During the year ended June 30, 2001 the Company changed its productoffering at its Internet training workshops . The date of the change wasOctober 1, 2000, the beginning of our second fiscal quarter of fiscal year2001 . Prior to that time, customers were sold a service consisting of theconstruction of Internet websites for their business, which service was to beprovided at anytime during the 12 months following the sale . Included in theprice paid for this service was one year's hosting beginning when the websitewas published . Revenue from these transactions was deferred at the time ofsale and recognized as the services were rendered or when the right toreceive the services terminated .
Beginning October 1, 2000, we discontinued selling the service and in itsplace sold a new product called the StoresOnline Software ("SOS") . TheSOS is a software product that enables the customer to develop theirInternet website without additional assistance from us . When a customerpurchases a SOS at one of our Internet workshops, he or she receives a CD-ROM containing programs to be used with their computer and a passwordand instructions that allow access to our website where all the necessarytools are present to complete the construction of the customer's website .When completed, the website can be hosted with us or any other provide r
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of such services. If they choose us there is an additional setup and hostingfee (currently $150) for publishing and 12 months of hosting. This fee isdeferred at the time of sale and recognized during the subsequent 12months .
The revenue from the sale of the SOS is recognized when the product isdelivered to the customer . We accept cash and credit cards as methods ofpayment and we offer 24-month installment contracts to customers whoprefer an extended payment term arrangement . We offer these contracts toall workshop attendees not wishing to use a check or credit card providedthey complete a credit application, give us permission to independentlycheck their credit and are willing to make an appropriate down payment .Installment contracts are carried on our books as a receivable and therevenue generated by these installment contracts is recognized when theproduct is delivered to the customer and the contract is signed . This newrevenue recognition policy was in effect for the last three quarters of fiscalyear 2001 and for all of fiscal year 2002 .
SOP 97-2 states that revenue from the sale of software should berecognized when the following four specific criteria are met : 1) persuasiveevidence of an arrangement exists, 2) delivery has occurred, 3) the fee isfixed and determinable and 4) collectibility is probable . All of these criteriaare met when a customer purchases the SOS product . The customer signsone of our order forms and a receipt acknowledging a sale and receipt andacceptance of the product . As is noted on the order and acceptance forms,all sales are final . All fees are fixed and final . Some states require a three-day right to rescind the transaction . Sales in these states are not recognizeduntil the rescission period has expired . We offer customers the option to payfor the SOS with Extended Payment Term Arrangements (EPTAs) . TheEPTAs generally have a twenty-four month term . We have a standard ofusing long-term or installment contracts and have a four-year history ofsuccessfully collecting under the original payment terms without makingconcessions . Over the past four years, we have collected or are collectingapproximately 70% to 80% of all EPTAs issued to customers . Not allcustomers live up to their obligations under the contracts . We make everyeffort to collect on the EPTAs, including the engagement of professionalcollection services . Despite our efforts, approximately 20 percent of allEPTAs are determined to be uncollectible . All uncollectible EPTAs arewritten off against an allowance for doubtful accounts, which allowance isestablished at the time of sale based on our four-year history of extendin g
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EPTAs. As a result, revenue from the sale of the SOS is recognized uponthe delivery of the product .
Years ended June 30, 2002, and 2001 Revenue
Revenues for the year ended June 30, 2002 decreased to $37,350,850 from$43,000,533 in the prior fiscal year, a decrease of 13%. Some revenuesgenerated at our Internet training workshops for fiscal year 2001 were fromthe design and development of Internet web sites and the sale of the SOSproduct as described above, while in fiscal year 2002 revenues from thesame source were from the SOS product only . Other revenues include feescharged to attend the workshop, web traffic building products, mentoring,consulting services, access to credit card transaction processing interfacesand sales of banner advertising. We expect future operating revenue to begenerated principally following a business model similar to the one used infiscal year 2002 . The Internet environment continues to evolve, and weintend to offer future customers new products as they are developed . Weanticipate that our offering of products and services will evolve as someproducts are dropped and are replaced by new and sometimes innovativeproducts intended to assist our customers achieve success with theirInternet-related businesses .
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure :
On February 4, 2002, we engaged Grant Thornton LLP as our independentauditor following our dismissal, effective January 31, 2002, of Eisner LLP(formerly known as Richard A . Eisner & Company, LLP) ("Eisner") . Ourboard of directors approved the engagement of Grant Thornton LLP and thedismissal of Eisner .
Effective February 4, 2002, we engaged Grant Thornton LLP as ourindependent auditors with respect to our fiscal year ending June 30, 2002 .We had previously retained Grant Thornton LLP on an interim basis duringour previous fiscal year, from January 22, 2001 to April 4, 2001 . GrantThornton LLP had reviewed our interim financial statements for the quarterended December 31, 2000, but did not issue any reports thereon. Other thanthis limited engagement, during our most recent fiscal year and throughFebruary 4, 2002, we had not consulted with Grant Thornton LLP regardingeither: (i) the application of accounting principles to a specified transaction,either completed or proposed, or the type of audit opinion that might berendered on our financial statements, and neither a written report was
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provided to us nor was oral advice provided that Grant Thornton LLPconcluded was an important factor considered by us in reaching a decisionas to the accounting, auditing or reporting issue; or (ii) any matter that waseither the subject of a disagreement, as that term is defined in Item304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 ofRegulation S-K, or a reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K .
28. On September 29, 2003, Imergent filed an annual report on Form 10K wit h
the SEC for the fiscal year ended June 30, 2003 . The report contained the following
results :
Year endedJune 30, 2003
Revenue $ 53,225,083Cost of revenue (9,784,368)Cost of revenue - related party (1,118,002)
Total cost of revenue 10,902,370Gross profit 42,322,71 3
Total operating expenses 38,073,524Earnings from continuing operations 4,249,189Other income (expense) 12,358Interest income 813,136Interest expense (40,611 )
Total other income 784,883Income before discontinued operations and extraordinary items 5,034,072
Income before extraordinary items 5,034,072Net income 5,034,072
RevenueOur fiscal year ends on June 30 of each year . Revenues for the fiscal yearended June 30, 2003 ("FY 2003") increased to $53,225,083 from$37,350,850 for the fiscal year ended June 30, 2002 ("FY 2002"), anincrease of 43% . Revenues generated at our Internet training workshops inboth fiscal years were from the sale of the SOS product as described inCritical Accounting Policies and Estimates above, Revenues also includ e
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fees charged to attend the workshop, web traffic building products,mentoring, consulting services, access to credit card transaction processinginterfaces and sales of banner advertising . We expect future operatingrevenues to be generated principally following a business model similar tothe one used in fiscal year 2003 . The Internet environment continues toevolve, and we intend to offer future customers new products as they aredeveloped. We anticipate that our offering of products and services willevolve as some products are dropped and are replaced by new andsometimes innovative products intended to assist our customers achievesuccess with their Internet-related businesses . The increase in revenuesfrom FY 2003 compared to FY 2002 can be attributed to various factors .There was an increase in the number of Internet training workshopsconducted during the current fiscal years . The number increased to 336including 11 that were held outside the United States of America, for thecurrent fiscal year from 253 in FY 2002, nine of which were held outside theUnited States . In addition, the average number of persons attending eachworkshop increased and the average number of "buying units" in attendanceat our workshops during the period increased to 84, compared to 80 in theprior fiscal year . Persons who pay an enrollment fee to attend our workshopsare allowed to bring a guest at no additional charge, and that individual andhis/her guest constitute one buying unit . If the person attends alone thatsingle person also counts as one buying unit . Approximately 32% of thebuying units made a purchase at the workshop in FY 2003 compared to 29%FY 2002. The average revenue per workshop purchase also increased in thecurrent fiscal year ended June 30, 2003 to approximately $4,500 comparedto approximately $4,100 in the fiscal year ended June 30, 2002 . We will seekto continue to hold workshops with a larger number of attendees in futureperiods and we will seek to increase the number of these larger workshopsas well . Revenue during FY 2003 compared to FY 2002 was higher in spiteof the loss of a benefit relating to the recognition of revenue deferred fromhistorical workshop sales at rates greater than the level at which revenue isrequired to be deferred from the current period . During FY 2003, werecognized only $248,150 in net revenue from sales made in prior periodscompared to $5,328,034 recognized from sales made in prior periods duringFY 2002 . This benefit experienced during FY 2002 resulted from a changein the business model and product offering at the workshops as describedin Critical Accounting Policies and Estimates above . This benefit has nowbeen fully realized and we do not expect it to reoccur . We anticipate that inthe future the amount of revenue recognized from earlier periods will beapproximately equal to that deferred into future periods . Effective January 1,2002, we began making our product offerings through our StoresOnlin e
subsidiary rather than our Galaxy Mall subsidiary . This culminated aneighteen month long plan to fully incorporate the SOS throughout theengineering and programming departments, servers and infrastructure andto move away from a mall-based hosting environment . Our services havebeen used for several years by non-mall based merchants, and we believethat the marketing principles taught by us are equally effective for stand-alone websites and websites hosted on an Internet "mall ." Although GalaxyMall remains an active website, all new customers are sold the SOS throughour StoresOnline previews and workshops . We contact all persons whoattend our workshops beginning approximately two weeks after the eventwas held in an attempt to sell them a mentoring program and products thatwill drive traffic to their web site . These contacts are made throughtelemarketing companies that we engage as subcontractors . Thetelemarketing companies are our sales agents and are paid a commissionfrom the revenue they generate . Telemarketing sales, included in totalrevenue described above, increased during FY 2003 to approximately $10 .5million from $9.2 million in FY 2002, an increase of 14% .
Revenue RecognitionDuring the fiscal year ended June 30, 2001 the Company changed itsproduct offering at its Internet training workshops . The date of the changewas October 1, 2000, the beginning of our second fiscal quarter of fiscal year2001 . Prior to that time, customers were sold a service consisting of thecustom construction of Internet websites for their business, which servicewas to be provided at any time during the 12 months following the sale .Included in the price paid for this service was one year's hosting beginningwhen the website was published . Revenue from these transactions wasdeferred at the time of sale and recognized as the services were renderedor when the right to receive the services terminated .
Beginning October 1, 2000, we discontinued selling the service and in itsplace sold a license to use a new product called the StoresOnline Software("SOS") . The SOS is a web-based software product that enables thecustomer to develop their Internet website without additional assistance fromus . When a customer purchases a SOS license at one of our Internet trainingworkshops, he or she receives a CD-ROM containing programs to be usedwith their computer and a password and instructions that allow access to ourwebsite where all the necessary tools are present to complete theconstruction of the customer's website . If they choose to host with us thereis an additional setup and hosting fee (currently $150) for publishing and 12months of hosting . This fee is deferred at the time it is paid and recognize d
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during the subsequent 12 months . A separate computer file is provided tothe purchaser at the time of purchase and can be used if the customerdecides to create their website on their own completely without access to ourwebsite and host their site with another hosting service .
The revenue from the sale of the SOS license is recognized when theproduct is delivered to the customer . We accept cash and credit cards asmethods of payment and we offer 24-month installment contracts tocustomers who prefer an extended payment term arrangement . We offerthese contracts to all workshop attendees not wishing to use a check orcredit card provided they complete a credit application, give us permissionto independently check their credit and are willing to make an appropriatedown payment . Installment contracts are carried on our books as areceivable and the revenue generated by these installment contracts isrecognized when the product is delivered to the customer and the contractis signed . At that same time an allowance for doubtful accounts isestablished . This procedure was in effect for all of fiscal year 2002 and 2003 .
The American Institute of Certified Public Accountants Statement of Position97-2 ("SOP 97-2") states that revenue from the sale of software should berecognized when the following four specific criteria are met : 1) persuasiveevidence of an arrangement exists, 2) delivery has occurred, 3) the fee isfixed and determinable and 4) collectibility is probable . All of these criteriaare met when a customer purchases the SOS product . The customer signsan order form and a receipt acknowledging acceptance of the product . As isnoted on the order and acceptance forms, all sales are final . All fees arefixed and final . Some states require a three-day right to rescind thetransaction and we are currently evaluating whether to extend that right tocustomers generally . Sales in those states where we offer such a right arenot recognized until the rescission period has expired . We offer customersthe option to pay for the SOS license with Extended Payment TermArrangements ("EPTAs") . The EPTAs generally have a twenty-four monthterm. We have offered our customers the payment option of a long-terminstallment contract for more than five years and have a history ofsuccessfully collecting under the original payment terms without makingconcessions . As of June 30, 2003, the percentage of total EPTAs originatedduring FY 2003 that have either been collected or are still active was 74% .During the previous four fiscal years, we collected approximately 70% of allEPTAs issued to customers . Not all customers live up to their obligationsunder the contracts . We make every effort to collect on the EPTAs, includingthe engagement of professional collection services . Despite our collectio n
efforts, we estimate that approximately 47% of the gross amount of allEPTAs that we enter into, both sold to finance companies and retained byus, will ultimately be determined to be uncollectible . The contracts that aresold to finance companies may under certain circumstances be recoursedback to us. Approximately 2% of the gross amount of sold contracts arereturned to us under the buyer's recourse rights . Uncollectible EPTAs arewritten off against an allowance for doubtful accounts . The allowance isestablished at the time of sale based on our recent experience with EPTAs .
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure :
On February 4, 2002, we engaged Grant Thornton LLP as our independentauditor following our dismissal, effective January 31, 2002, of Eisner LLP(formerly known as Richard A. Eisner & Company, LLP) ("Eisner") . Ourboard of directors approved the engagement of Grant Thornton LLP and thedismissal of Eisner .
Effective February 4, 2002, we engaged Grant Thornton LLP as ourindependent auditors with respect to our fiscal year ending June 30, 2002 .We had previously retained Grant Thornton LLP on an interim basis duringour previous fiscal year, from January 22, 2001 to April 4, 2001 . GrantThornton LLP had reviewed our interim financial statements for the quarterended December 31, 2000, but did not issue any reports thereon . Other thanthis limited engagement, during our fiscal year ended June 30, 2001 andthrough February 4, 2002, we had not consulted with Grant Thornton LLPregarding either: (i) the application of accounting principles to a specifiedtransaction, either completed or proposed, or the type of audit opinion thatmight be rendered on our financial statements, and neither a written reportwas provided to us nor was oral advice provided that Grant Thornton LLPconcluded was an important factor considered by us in reaching a decisionas to the accounting, auditing or reporting issue ; or (ii) any matter that waseither the subject of a disagreement, as that term is defined in Item304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 ofRegulation S-K, or a reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K .
29. On September 10, 2004, lmergent filed Imergent filed an annual report o n
Form 10K with the SEC for the fiscal year ended June 30, 2004. The report contained th e
June 30. 2004Revenue $ 81,027,51 7Cost of revenue ( 18,746,270)Cost of revenue - related party -
Total cost of revenue (18,746,270Gross profit 62,281,247
Total operating expenses 54,323,35 1Operating earnings before income taxes 7,957,896Other income (expense) (40,035 )Interest income 1,725,776Interest expense (43,359)
Total other income 1,642,382Earnings before income taxes 9,600,278Income tax benefit 12,292,87 1Net earnings 21,893,149
Revenue
Our fiscal year ends on June 30 of each year, Revenues for the fiscal yearended June 30, 2004 ("FY 2004") increased to $81,027,517 from
$46,470,678 for the fiscal year ended June 30, 2003 ("FY 2003"), anincrease of 74% . Revenues generated at our Internet training workshops inboth fiscal years were from the sale of the SOS product as described in
Critical Accounting Policies and Estimates above . Revenues also includefees charged to attend the workshop, web traffic building products,mentoring, consulting services, access to credit card transaction processinginterfaces and sales of banner advertising . We expect future operatingrevenues to be generated principally following a business model similar tothe one used in fiscal year 2004 . The Internet environment continues toevolve, and we intend to offer future customers new products as they aredeveloped. We anticipate that our offering of products and services will
evolve as some products are dropped and are replaced by new andsometimes innovative products intended to assist our customers achievesuccess with their Internet-related businesses . We also intend to expand ourproduct offerings to locations outside the United States of America .
The increase in revenues from FY 2004 compared to FY 2003 can beattributed to various factors . There was an increase in the number of Internettraining workshops conducted during the current fiscal years . The numberincreased to 544 including 58 that were held outside the United States of
America, for the current fiscal year from 336 in FY 2003, 11 of which wereheld outside the United States . In addition, the average number of personsattending each workshop increased and the average number of "buyingunits" in attendance at our workshops during the period increased to 89,compared to 84 in the prior fiscal year . Persons who pay an enrollment feeto attend our workshops are allowed to bring a guest at no additional charge,and that individual and his/her guest constitute one buying unit . If the personattends alone that single person also counts as one buying unit .Approximately 35% of the buying units made a purchase at the workshop inFY 2004 compared to 32% FY 2003 . The average revenue per workshoppurchase decreased in the current fiscal year ended June 30, 2004 to
approximately $4,300 compared to approximately $4,500 in the fiscal yearended June 30, 2003. We contact all persons who attend our workshops
beginning approximately two weeks after the event was held in an attempt
to sell them a mentoring program and products that will drive traffic to theirweb site . These contacts are made through telemarketing companies that weengage as subcontractors . The Company receives a commission andrecognizes this revenue net of the selling and marketing costs . Telemarketingsales, included in total revenue described above, increased during FY 2004 toapproximately $6 .5 million from $3 .7 million in FY 2003, an increase of 73% ,
Revenue Recognition
On October 1, 2000, the Company started selling a license to use a newproduct called the StoresOnline Software ("SOS") . The SOS is a web basedsoftware product that enables the customer to develop their Internet websitewithout additional assistance from the Company . When a customerpurchases a SOS license at one of the Company's Internet workshops, heor she receives a CD-ROM containing programs to be used with theircomputer and a password and instructions that allow access to theCompany's website where all the necessary tools are located to complete theconstruction of the customer's website . When completed, the website can b e
hosted with the Company or any other provider of such services . If theychoose to host with the Company there is an additional setup and hostingfee (currently $150) for publishing and 12 months of hosting. This fee isdeferred at the time it is paid and recognized during the subsequent 12months. A separate file is available and can be used if the customer decidesto create their website on their own completely without access to theCompany website and host their site with another hosting service .
The revenue from the sale of the SOS license is recognized when theproduct is delivered to the customer and the three-day rescission periodexpires. The Company accepts cash and credit cards as methods ofpayment and the Company offers 24-month installment contracts tocustomers who prefer an Extended Payment Term Arrangement (EPTA) .The Company offers these contracts to all workshop attendees not wishingto use a check or credit card provided they complete a credit application,give permission for the Company to independently check their credit and arewilling to make an appropriate down payment . EPTAs were either sold tothird party financial institutions, generally with recourse, for cash on adiscounted basis, or carried on the Company's books as a receivable .Beginning in May 2004, the Company no longer sells EPTAs with recourse .
The EPTAs generally have a twenty-four month term . For more than fiveyears the Company has offered its customers the payment option of a long-term installment contract and has a history of successfully collecting underthe original payment terms without making concessions . During fiscal yearsended June 30, 1999 through 2004, the Company has collected or iscollecting approximately 70% of all EPTAs issued to customers . Not allcustomers live up to their obligations under the contracts . The Companymakes every effort to collect on the EPTAs, including the engagement ofprofessional collection services . Despite reasonable efforts, approximately47% of all EPTAs not sold to third party financial institutions becomeuncollectible during the life of the contract. All uncollectible EPTAs arewritten off against an allowance for doubtful accounts . The allowance isestablished at the time of sale based on our five-year history of extendingEPTAs and revised periodically based on current experience andinformation. The revenue generated by sales to EPTA customers isrecognized when the product is delivered to the customer, the contract issigned and the rescission period expires . At that same time an allowance fordoubtful accounts is established . This procedure has been in effect for allyears presented .
The American Institute of Certified Public Accountants Statement of Position97-2 ("SOP 97-2") states that revenue from the sale of software should b e
E :1Se rver_FVit IraPresslimargent complaint FINALwpd 22
recognized when the following four specific criteria are met : 1) persuasiveevidence of an arrangement exists, 2) delivery has occurred, 3) the fee isfixed and determinable and 4) collectibility is probable . All of these criteriaare met when a customer purchases the SOS product and the three-dayrescission period expires . The customer signs one of the Company's orderforms and a receipt acknowledging receipt and acceptance of the product .As is noted on the order and acceptance forms the customer has three daysto rescind the order . Once the rescission period expires, all sales are finaland all fees are fixed and final .
The Company also offers its customers, through telemarketing salesfollowing a workshop, certain products intended to assist the customer inbeing successful with their business . These products include a live chatcapability for the customer's own website and web traffic building services .Revenues from these products are recognized when delivery of the producthas occurred . The Company receives a commission and recognizes thisrevenue net of the selling and marketing costs .
During the quarter ended March 31, 2004, the Company implemented EITF99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent".The Company has restated certain items within its statements of earnings foreach quarter since the quarter ended June 30, 2001 . The change requiredthe Company to net certain sales and marketing expenses against revenue .The change had no effect on the Company's net earnings, earnings pershare, financial position or cash flows for any period .
Critical Accounting Policies and Estimate s
Our consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America("US GAAP") and form the basis for the following discussion and analysis oncritical accounting policies and estimates . The preparation of these financialstatements requires us to make estimates and assumptions that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities . On a regular basis we evaluateour estimates and assumptions . We base our estimates on historicalexperience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources . Actual results may differ from theseestimates under different assumptions or conditions . Senior managemen t
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has discussed the development, selection and disclosure of these estimateswith the Board of Directors and its Audit Committee . There are currently fivemembers of the Board of Directors, three of whom make up the AuditCommittee. The Board of Directors has determined that each member of theAudit Committee qualifies as an independent director and that the chairmanof the Audit Committee qualifies as an "audit committee financial expert" asdefined under the rules adopted by the SEC .
A summary of our significant accounting policies is set out in Note 2 to ourFinancial Statements. We believe the critical accounting policies describedbelow reflect our more significant estimates and assumptions used in thepreparation of our consolidated financial statements . The impact and anyassociated risks on our business that are related to these policies are alsodiscussed throughout this Management's Discussion and Analysis ofFinancial Condition and Results of Operations where such policies affectreported and expected financial results .
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMSigned by Grant Thorton LLP :
We have audited the accompanying consolidated balance sheets ofImergent, Inc . and Subsidiaries (the Company) as of June 30, 2004 and2003, and the related consolidated statements of earnings, stockholders'equity (accumulated deficit), and cash flows for each of the three years in theperiod ended June 30, 2004 . In connection with our audits of theconsolidated financial statements, we have audited the financial statementschedule for the years ended June 30, 2004, 2003 and 2002 . These financialstatements and schedule are the responsibility of the Company'smanagement . Our responsibility is to express an opinion on these financialstatements and schedule based on our audits .
We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States) . Those standardsrequire that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement . Anaudit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements . An audit also includes assessingthe accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation . We believe that our audits provide a reasonable basis for ouropinion .
In our opinion, the financial statements referred to above present fairly, in al l
material respects, the consolidated financial position of Imergent, Inc . andSubsidiaries as of June 30, 2004 and 2003, and the consolidated results oftheir operations and their consolidated cash flows for each of the three yearsin the period ended June 30, 2004, in conformity with accounting principlesgenerally accepted in the United States of America . Also in our opinion, thefinancial statement schedule, when considered in relation to the consolidatedfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein .
30. On November 5, 2004, Imergent filed Form 100 with the SEC for the quarte r
ended September 30, 2004, which set forth the following results :
QuarterSeptember 30. 2004
Revenue $ 23,708,737Cost of revenue (6,575,276)
Gross profit 17,133,46 1Total operating expenses 15,123,777Earnings from operations 2,009,684Other income (expense) 18,726Interest income 786,330Interest expense (16,962)
Total other income 788,094Earnings before income taxes 2,797,778Income tax provision (1,058,053)Net earnings 1,739,725
Critical Accounting Policies and Estimate s
Our consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America("US GAAP") as applicable to interim financial statements and form the basisfor the following discussion and analysis on critical accounting policies andestimates . The preparation of these financial statements requires us to makeestimates and assumptions that affect the reported amounts of assets,liabilities , revenues and expenses , and related disclosure of contingentassets and liabilities. On a regular basis we evaluate our estimates andassumptions . We base our estimates on historical experience and on variou s
other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimatesunder different assumptions or conditions . Senior management hasdiscussed the development, selection and disclosure of these estimates withthe Board of Directors and its Audit Committee. There are currently fivemembers of the Board of Directors, three of whom make up the AuditCommittee. The Board of Directors has determined that each member of theAudit Committee qualifies as an independent director and that the chairmanof the Audit Committee qualifies as an "audit committee financial expert" asdefined under the rules adopted by the SEC .
A summary of our significant accounting policies is set out in Note 2 to ourConsolidated Financial Statements as found in our Form 10-K for the yearended June 30, 2004. We believe the critical accounting policies describedbelow reflect our more significant estimates and assumptions used in thepreparation of our consolidated financial statements. The impact and anyassociated risks on our business that are related to these policies are alsodiscussed throughout this Management's Discussion and Analysis ofFinancial Condition and Results of Operations where such policies affectreported and expected financial results .
RESULTS OF OPERATION S
Three-month period ended September 30, 2004 compared to the three-month period ended September 30, 2003 .
Revenue
Our fiscal year ends on June 30 of each year . Revenues for the three-monthperiod ended September 30, 2004 increased to $23,708,737 from$18,839,683 in the three-month period ended September 30, 2003, anincrease of 26% . Revenues generated at our Internet training workshops forthe periods in both fiscal years were from the sale of the SOS product asdescribed in Critical Accounting Policies and Estimates above . Revenuesalso include fees charged to attend the workshop, web traffic buildingproducts, mentoring, consulting services and access to credit cardtransaction processing interfaces . We expect future, operating revenue to begenerated principally following a business model similar to the one used inour fiscal year that ended June 30, 2004 . The Internet environmentcontinues to evolve, and we intend to offer future customers new productsas they are developed . We anticipate that our offering of products andservices will evolve as some products are dropped and are replaced by ne w
and sometimes innovative products intended to assist ourcustomers achievesuccess with their Internet-related businesses .
The increase in revenues from our first fiscal quarter ended September 30,2004 compared to the three-month period ended September 30, 2003 canbe attributed to various factors . There was an increase in the number ofInternet training workshops conducted during the current fiscal quarter. Thenumber increased to 169 (including 29 that were held outside the UnitedStates of America) for the first quarter of the current fiscal year ("FY 2005")from 118 (none were held outside the United States of America) in the firstquarter of FY 2004 . The average number of "buying units" in attendance atour workshops during the period decreased to 80 from 92 in the comparableperiod in the prior fiscal year. Persons who pay an enrollment fee to attendour workshops are allowed to bring a guest at no additional charge, and thatindividual and his/her guest constitute one buying unit . If the person attendsalone that single person also counts as one buying unit . Approximately 33%of the buying units made a purchase at the workshops in the first quarter ofFY 2005 compared to 37% in the first quarter of FY 2004 . The averagerevenue per workshop purchase increased to $4,467 during the first quarterof FY 2005 compared to $4,231 during the comparable quarter of the priorfiscal year . We will seek to increase the number of workshops held in thefuture including English speaking countries outside of the United States ofAmerica .
31 . On January 28, 2004, Imergent filed Form 10Q with the SEC for the quarte r
ended December 31, 2004, which set fo rth the following results :
Quarte rDecember 31, 2004
Revenue $ 31,393,754Cost of revenue (8,440,067)
Gross profit 22,953,687Total operating expenses 19,006,79 1Earnings from operations 3,946,896Other income (expense) 121,753Interest income 869,630Interest expense (38,784)
Total other income 952,599
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Earnings before income taxes 4 ,899,495Income tax provision (1,847,522)
Net earnings 3,051,973
Revenue
Our fiscal year ends on June 30 of each year. We historically haveexperienced seasonality in our business . Revenues from our core businessduring the first and second fiscal quarters historically have tended to belower than revenues in our third and fourth quarters . We believe this to beattributable to summer vacations and the Thanksgiving and Decemberholiday seasons that occur during our first and second quarters . During thequarter ended December 31, 2004, we attempted to offset this seasonality
trend by holding multiple workshops in foreign markets that were originallyscheduled for our fiscal third quarter. As a result, revenues for the six-monthperiod ended December 31, 2004 increased to $55,102,491 from$36,495,597 in the six-month period ended December 31, 2003, an increaseof 51 %. Revenues generated at our internet training workshops for theperiods in both fiscal years were from the sale of the SOS and other
products as described in Critical Accounting Policies and Estimates above .Revenues also include fees charged to attend workshops, web traffic
building products, mentoring, consulting services and access to credit cardtransaction processing interfaces . We expect future operating revenue to begenerated principally following a business model similar to the one used inour fiscal year that ended June 30, 2004 . The internet environment continuesto evolve, and we intend to offer future customers new products as they aredeveloped . We anticipate that our offering of products and services willevolve as some products are dropped and are replaced by new andsometimes innovative products intended to assist our customers achievesuccess with their Internet-related businesses .
The increase in revenues during the six months ended December 31, 2004
compared to the six-month period ended December 31, 2003 can beattributed to various factors . There was an increase in the number of internettraining workshops conducted during the current fiscal quarter . The numberincreased to 346 (including 80 that were held outside the United States of
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America) for the first half of the current fiscal year ("FY 2005") from 234 (13
of which were held outside the United States of America) in the first half offiscal year 2004 ("FY 2004.") The average number of "buying units" inattendance at our workshops was 88 during the first two quarters of FY 2005compared to 94 during the comparable period in the prior fiscal year .Persons who pay an enrollment fee to attend our workshops are allowed tobring a guest at no additional charge, and that individual and his/her guestconstitute one buying unit . If the person attends alone that single person alsocounts as one buying unit . Approximately 32% of the buying units made apurchase at the workshops in the first half of FY 2005 compared to 35% inthe first half of FY 2004 . The average revenue per workshop purchase
increased to $4,773 during the first two quarters of FY 2005 compared to$4,162 during the comparable period of the prior fiscal year . The increase inaverage revenue per workshop purchase is attributable to the introductionof additional products that were sold at the workshop . We will seek toincrease the number of workshops held in the future including English-speaking countries outside of the United States of America .
Critical Accounting Policies and EstimatesOur consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America("US GAAP") and form the basis for the following discussion and analysis oncritical accounting policies and estimates . The preparation of these financialstatements requires us to make estimates and assumptions that affect thereported amounts of assets , liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities . On a regular basis we evaluateour estimates and assumptions . We base our estimates on historicalexperience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources . Actual results may differ from theseestimates under different assumptions or conditions . Senior managementhas discussed the development, selection and disclosure of these estimateswith the Board of Directors and its Audit Committee . There are currently fivemembers of the Board of Directors, three of whom make up the AuditCommittee. The Board of Directors has determined that each member of theAudit Committee qualifies as an independent director and that the chairmanof the Audit Committee qualifies as an "audit committee financial expert" a s
A summary of our significant accounting policies is set out in Note 2 to ourConsolidated Financial Statements as found in our Form 10-K for the yearended June 30, 2004. We believe the critical accounting policies describedbelow reflect our more significant estimates and assumptions used in thepreparation of our consolidated financial statements . The impact and anyassociated risks on our business that are related to these policies are alsodiscussed throughout this Management's Discussion and Analysis ofFinancial Condition and Results of Operations where such policies affectreported and expected financial results .
Revenue Recognitio n
On October 1, 2000, the Company started selling a license to use a newproduct called the StoresOnline Software ("SOS") . The SOS is a webbased software product that enables the customer to develop theirInternet website without additional assistance from the Company . When acustomer purchases a SOS license at one of the Company's Internetworkshops, he or she receives a CD-ROM containing programs to beused with their computer and a password and instructions that allowimmediate access to the Company's website where all the necessarysoftware programs and tools are located to complete the construction ofthe customer's website . When completed, the website can be hosted withthe Company or any other provider of such services . If they choose tohost with the Company there is an additional setup and hosting fee(currently $150) for publishing and 12 months of hosting . This fee isdeferred at the time it is paid and recognized during the subsequent 12months . A separate file is available and can be used if the customerdecides to create their website on their own completely without access tothe Company website and host their site with another hosting service .
The revenue from the sale of the SOS license is recognized when theproduct is delivered to the customer and the three-day rescission periodexpires. The Company accepts cash and credit cards as methods ofpayment and the Company offers 24-month installment contracts tocustomers who prefer an Extended Payment Term Arrangement (EPTA) .The Company offers these contracts to all workshop attendees notwishing to use a check or credit card provided they complete a creditapplication, give permission for the Company to independently check theircredit and are willing to make an appropriate down payment . EPTAs wereeither sold to third party financial institutions, generally with recourse, forcash on a discounted basis, or carried on the Company's books as a
receivable . Beginning in May 2004 the Company stopped selling EPTA'swith recourse .
The EPTAs generally have a twenty-four month term . For more than sixyears the Company has offered its customers the payment option of along-term installment contract and has a history of successfully collectingunder the original payment terms without making concessions . Duringfiscal years ended June 30, 1999 through 2004, the Company hascollected or is collecting approximately 70% of all EPTAs issued tocustomers . Not all customers live up to their obligations under thecontracts . The Company makes every effort to collect on the EPTAs,including the engagement of professional collection services . Despitereasonable efforts, approximately 47% of all EPTAs not sold to third partyfinancial institutions become uncollectible during the life of the contract .All uncollectible EPTAs are written off against an allowance for doubtfulaccounts . The allowance is established at the time of sale based on oursix-year history of extending EPTAs and revised periodically based oncurrent experience and information . The revenue generated by sales toEPTA customers is recognized when the product is delivered to thecustomer, the contract is signed and any rescission period lapses . At thatsame time an allowance for doubtful accounts is established . Thisprocedure has been in effect for all periods presented .
The American Institute of Certified Public Accountants Statement ofPosition 97-2 ("SOP 97-2") states that revenue from the sale of softwareshould be recognized when the following four specific criteria are met : 1)persuasive evidence of an arrangement exists, 2) delivery has occurred,3) the fee is fixed and determinable and 4) collectibility is probable . All ofthese criteria are met when a customer purchases the SOS product andthe three-day rescission period expires . The customer signs one of theCompany's order forms, and a receipt acknowledging receipt andacceptance of the product. As is noted on the order and acceptance formsthe customer has three days to rescind the order. Once the rescissionperiod expires, all sales are final and all fees are fixed and determinable .The Company also offers its customers, through telemarketing salesfollowing the workshop, certain products intended to assist the customerin being successful with their business . These products include legal andtax advice, a live chat capability for the customer's own website, and webtraffic building services . Revenues from these products are recognizedwhen delivery of the product has occurred . The Company receives acommission and recognizes this revenue net of the selling and marketingcosts .
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During fiscal 2005 the Company completed its certification as an eBaysolution provider . Consequently, the Company began selling on-lineauction training workshops designed to instruct participants onsuccessfully selling through on-line auctions and the utilization of the on-line auction functionality of the StoresOnline software . Revenues from thesale of these workshops are recognized when the workshops are held .
32, On April 29, 2005, Imergent filed Form 10Q with the SEC for the quarte r
ended March 31, 2005, which set forth the following results :
QuarterMarch 31, 2005
Revenue $ 30,781,896
Cost of revenue (6,553,940)Gross profit 24,227,956
Total operating expenses 19,415,120Earnings from operations 4,812,836Other income (expense) 241,828Interest income 937,660Interest expense (22,221 )
Total other income 1,157,267Earnings before income taxes 5,970,103Income tax provision (2,000,139 )Net earnings 3,969,964
Revenue
Our fiscal year ends on June 30 of each year . We historically haveexperienced seasonality in our business . Revenues from our corebusiness during the first and second fiscal quarters historically havetended to be lower than revenues in our third and fourth quarters . Webelieve this to be attributable to summer vacations and the Thanksgivingand December holiday seasons that occur during our first and secondquarters . During the quarter ended December 31, 2004, we attempted tooffset this seasonality trend by holding multiple workshops in foreignmarkets that were originally scheduled for our fiscal third quarter .Revenues for the nine-month period ended March 31, 2005 increased to$85,884,388 from $56,060,551 in the nine-month period ended March 31,2004, an increase of 53% . Revenues generated at our internet trainin g
workshops for the periods in both fiscal years were from the sale of theSOS and other products as described in Critical Accounting Policies andEstimates above. Revenues also include fees charged to atten dworkshops, web traffic building products, mentoring, consulting servicesand access to credit card transaction processing interfaces . We expectfuture operating revenue to be generated principally following a businessmodel similar to the one used in our fiscal year that ended June 30, 2004 .The internet environment continues to evolve, and we intend to offerfuture customers new products as they are developed. We anticipate thatour offering of products and services will evolve as some products aredropped and are replaced by new and sometimes innovative products,intended to assist our customers achieve success with their Internet-related businesses.
The increase in revenues during the nine months ended March 31, 2005compared to the nine-month period ended March 31, 2004 can beattributed to various factors . There was an increase in the number ofinternet training workshops conducted during the current fiscal period . Thenumber increased to 530 (including 112 that were held outside the UnitedStates of America) for the first nine months of the current fiscal year ("FY2005") from 380 (21 of which were held outside the United States ofAmerica) in the first nine months of fiscal year 2004 ("FY 2004") . Theaverage revenue per workshop purchase increased during the first threequarters of FY 2005 compared to the comparable period of the prior fiscalyear. The increase in average revenue per workshop purchase isattributable to the introduction of additional products that were sold at theworkshop. We will seek to increase the number of workshops held in thefuture including English-speaking countries outside of the United States ofAmerica .
Critical Accounting Policies and Estimate s
Our consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States ofAmerica ("US GAAP") and form the basis for the following discussion andanalysis on critical accounting policies and estimates . The preparation ofthese financial statements requires us to make estimates andassumptions that affect the reported amounts of assets , liabilities,revenues and expenses , and related disclosure of contingent assets andliabilities . On a regular basis we evaluate our estimates and assumptions .We base our estimates on historical experience and on various othe r
assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates underdifferent assumptions or conditions . Senior management has discussedthe development, selection and disclosure of these estimates with theBoard of Directors and its Audit Committee . There are currently fivemembers of the Board of Directors, three of whom make up the AuditCommittee. The Board of Directors has determined that each member ofthe Audit Committee qualifies as an independent director and that thechairman of the Audit Committee qualifies as an "audit committeefinancial expert" as defined under the rules adopted by the SEC .
A summary of our significant accounting policies is set out in Note 2 to ourConsolidated Financial Statements as found in our Form 10-K for the yearended June 30, 2004. We believe the critical accounting policiesdescribed below reflect our more significant estimates and assumptionsused in the preparation of our consolidated financial statements . Theimpact and any associated risks on our business that are related to thesepolicies are also discussed throughout this Management's Discussion andAnalysis of Financial Condition and Results of Operations where suchpolicies affect reported and expected financial results .
Revenue Recognitio n
On October 1, 2000, the Company started selling a license to use a newproduct called the StoresOnline Software ("SOS") . The SOS is a webbased software product that enables the customer to develop theirInternet website without additional assistance from the Company . When acustomer purchases a SOS license at one of the Company's Internetworkshops, he or she receives a CD-ROM containing programs to beused with their computer and a password and instructions that allowimmediate access to the Company's website where all the necessarysoftware programs and tools are located to complete the construction ofthe customer's website . When completed, the website can be hosted withthe Company or any other provider of such services . If they choose tohost with the Company there is an additional setup and hosting fee(currently $150) for publishing and 12 months of hosting . Hosting isdeferred at the time it is paid and recognized during the subsequent 12months. A separate file is available and can be used if the customerdecides to create their website on their own completely without access tothe Company website and host their site with another hosting service .
The revenue from the sale of the SOS license is recognized when theproduct is delivered to the customer and the three-day rescission periodexpires . The Company accepts cash and credit cards as methods ofpayment and the Company offers 24-month installment contracts tocustomers who prefer an Extended Payment Term Arrangement (EPTA) .The Company offers these contracts to all workshop attendees notwishing to use a check or credit card provided they complete a creditapplication , give permission for the Company to independently check theircredit and are willing to make an appropriate down payment . EPTAs wereeither sold to third party financial institutions , generally with recourse, forcash on a discounted basis, or carried on the Company ' s books as areceivable . Beginning in May 2004 , the Company stopped selling EPTAswith recourse .
The EPTAs have a twenty-four month term . For more than six years theCompany has offered its customers the payment option of a long-terminstallment contract and has a history of successfully collecting under theoriginal payment terms without making concessions . During fiscal yearsended June 30, 1999 through 2004, the Company has collected or iscollecting approximately 70% of all EPTAs issued to customers . Not allcustomers live up to their obligations under the contracts . The Companymakes every effort to collect on the EPTAs, including the engagement ofprofessional collection services . Despite reasonable efforts, approximately47% of all EPTAs not sold to third party financial institutions becomeuncollectible during the life of the contract . All uncollectible EPTAs arewritten off against an allowance for doubtful accounts . The allowance isestablished at the time of sale based on our six-year history of offeringEPTAs and revised periodically based on current experience andinformation . The revenue generated by sales to EPTA customers isrecognized when the product is delivered to the customer, the contract issigned and the rescission period expires. At that same time an allowancefor doubtful accounts is established . This procedure has been in effect forall years presented .
The American Institute of Certified Public Accountants Statement ofPosition 97-2 ("SOP 97-2") states that revenue from the sale of softwareshould be recognized when the following four specific criteria are met : 1)persuasive evidence of an arrangement exists, 2) delivery has occurred,3) the fee is fixed and determinable and 4) collectibility is probable . All ofthese criteria are met when a customer purchases the SOS product andthe three-day rescission period expires . The customer signs one of theCompany's order forms and a receipt acknowledging receipt an d
acceptance of the product . As is noted on the order and acceptance formsthe customer has three days to rescind the order. Once the rescissionperiod expires, all sales are final and all fees are fixed and determinable .
Through third-party telemarketing sales following a workshop, certainproducts intended to assist the customer in being successful with theirbusiness are offered . These products are fulfilled by third-parties andinclude mentoring, coaching, professional services, a live chat capabilityfor the customer's own website and web traffic building services . TheCompany receives a commission from these third-parties and recognizesthis commission revenue when delivery of the product has occurred .
During fiscal 2005, the Company completed its certification as an eBaysolution provider . Consequently, the Company began selling on-lineauction training workshops designed to instruct participants onsuccessfully selling through on-line auctions and the utilization of the on-line auction functionality of the StoresOnline software . Revenues from thesale of these workshops are recognized when the workshops occur .
THE TRUTH BEGINS TO EMERG E
33 . On August 19, 2005, Imergent issued a press release in which it admitted
that its previously-issued financial statements and financial results for the fiscal years an d
interim periods between 2002 and 2005 were materially false and will be restated :
iMergent, Inc. (AMEX: IIG), a leading provider of eCommerce and softwarefor small businesses and entrepreneurs, announced today that it will correctits historical revenue recognition policy to cash basis from accrual basis forfiscal years 2002, 2003, 2004 and the first three quarters of fiscal 2005 inorder to comply with generally accepted accounting principals (GAAP) .
Donald Danks, chairman and chief executive officer, stated, "Afterconsultation with our independent registered public accountants GrantThornton, on August 18th management concluded, with the concurrence ofthe Audit Committee of the Board of Directors to correct accounting practicesrelated to customer installment contracts . As such, we will restate ourhistorical revenues, earnings and balance sheets to reflect cash basisaccounting . This change does not have an impact on our operations, and ourpreviously reported cash flows will remain approximately the same . "
Robert Lewis, chief financial officer, stated, "As a portion of iMergent' s
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software sales are financed, our historical financial statements using accrualbasis accounting reflected a steady stream of receivables, cash paymentsand bad debt reserves . The restated financial statements using cash basisaccounting will be more volatile demonstrating income and loss swingsdependent upon the timing of the receipt of cash payments . "
Lewis continued, "On August 10th, iMergent announced the sale of itsdomestic trade receivables portfolio, the receipt of a Letter of Intent for thesale of its international receivables portfolio, and entered into an agreementfor the ongoing sale of its domestic installment contracts . As a result of theagreement for the ongoing sale of the domestic installment contracts, thesecontracts will be converted to cash on a current basis . We are evaluating theimpact of these agreements on revenue recognition . "
iMergent intends to submit its amended filing immediately following the auditby the company's independent registered public accounting firm . Followingthat the company will announce its financial results for the fiscal fourthquarter and year ended June 30, 2005, which management believes will bein September. On the call, management expects to discuss its businessmodel and fiscal 2006 guidance .
In reaction to this news, shares of Imergent fell from $9 .18 to $8.11 on August 19, a 12%
drop.
34 . On September 29, 2005, Imergent revealed the extent to which its financia l
results had been misstated throughout the class period :
iMergent , Inc. (AMEX : IIG), a leading provider of eCommerce and softwarefor small businesses and entrepreneurs , today announced estimated rangesof its unaudited, restated financial results for fiscal years 2002, 2003, 2004and 2005 . The company believes it will be able to announce its preliminaryunaudited summary financial results for the fiscal years ended June 30,2002, 2003, 2004 and 2005 are expected to be provided by October 30,2005. The company believes it will be able to announce the audited fiscal2005 results and file its Securities Exchange and Commission (SEC) Form10-K by January 31, 2006 .
The company is continuing its review of the appropriate interpretation andapplication of generally accepted accounting principals (GAAP) related t o
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I
revenue recognition. The company expects to complete its review of GAAPshortly. Upon suggestion by the company's auditor, Grant Thornton, thecompany has hired a third-party consultant, AlixPartners, to assist indetermining the appropriate interpretation and application of GAAP relatedto revenue recognition . After iMergent completes the preparation of itsfinancial statements, the company's auditor will require additional time tocomplete its audit of iMergent's financial statements . The company believesit will be able to file its SEC Form 10-K by January 31, 2006 based upon thecompany's current understanding of the estimated time for completion of theaudit .
Estimated, Unaudited Restated Fiscal 2005 and Prior Period FinancialResults
Estimated ranges for unaudited restated fiscal 2005 and prior periodsummary financial results are included below . Although the company is ableto determine the collectibility of its receivables, management believes GAAPrequires revenue to be recognized as customer payments are received orduring the service period if collection of such payments is not reasonablyassured. Certain revenues are also deferred and recognized during theservice period . The financial statements have been corrected primarily torecognize revenue as customer payments are received and/or during theservice period and not at the time of sale . Additionally, if the companysubsequently sells the receivables on a non-recourse basis, GAAP requiresthe related revenue to be recognized as the customer makes payments tothe third-party purchaser of the receivables . Also, certain costs may berequired to be recognized at the time of sale and not when incurred . As aresult of these corrections and due to the company's growth over the pastseveral years, reported revenue and earnings are lower on a restated basisand bad debt expense is no longer recorded .
Summary Financial Informatio n
Final treatment under GAAP of revenue deferral has not yet beendetermined , and the variances in financial presentation below are primarilyattributable to the extent and period to which revenue is being deferred andthe extent to which costs may be accrued .
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(Dollars inmillions, exceptper shareamounts) For the twelve months ended June 30 :
(1) In the fiscal 2004, management decided to reverse the valuationallowance against its deferred tax assets and recognize the non-cash taxbenefit of approximately $13 .5 million .
The company expects to provide reconciliation detail in the SEC10-K filing .
Delay of Form 10-K and Anticipated Delays in Reporting Quarterly Result s
The delay in filing the 10-K is the result of management's review of theappropriate interpretation and application of GAAP related to revenuerecognition . Based upon management's review, iMergent has prepared itsfinancial statements with what management believes to be the appropriateinterpretation and application of GAAP related to revenue recognition . As aresult, iMergent will file its June 30, 2005 Form 10-K as soon as practicallypossible, which is anticipated to be by January 31, 2006 . Fiscal first quarter2006 results for the quarter ending September 30, 2005 will not beannounced until after the company completes its 2005 audit and files its SECForm 10-K for fiscal 2005 . The SEC Form 10-Q for periods endin g
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subsequent to the fiscal year-end will be filed as soon as possible after thefiscal 2005 10-K is filed .
In reaction to this news, shares of Imergent fell from $6 .50 to $6 .02 on September 29 ,
2005, a 7 .4% drop .
35. Further, on October 6, after the close of the stock market, Imergen t
announced that it had received potential delisting notification from the American Stock
Exchange as the Company had not filed its Form 10K for the fiscal year ended June 30,
2005, due to management's continuing review of the appropriate interpretation and
application of GAAP related to revenue recognition . In reaction to this news, shares of
Imergent fell from $5 .40 to $4.69 on October 7, 2005, representing a 13% drop .
36. After the close of the stock market on October 7, Imergent issued a press
release announcing the dismissal of its independent accounting firm Grant Thornto n
On October 7, 2005, Imergent issued a press release announcing the
dismissal of its independent accounting firm Grant Thornton :
iMergent, Inc . (AMEX:IIG), a leading provider of eCommerce and softwarefor small businesses and entrepreneurs, today announced on October 7,2005, the Audit Committee of iMergent, Inc . dismissed Grant Thornton LLP(G-T) as the independent registered public accounting firm for the company .Effective October 7, 2005, the company's Audit Committee, appointedTanner LC (Tanner) as the company's independent registered publicaccounting firm . Tanner was not consulted by the company on any matterdescribed in Item 304(a)(2) of Regulation S-K prior to the company'sappointment .
G-T's reports at the time of the financial statements of the company for thetwo most recent fiscal years ended June 30, 2004 and June 30, 2003contained no adverse opinion or disclaimer of opinion and were not qualifiedor modified as to uncertainty, audit scope or accounting principle .
E :wServer_FUit\IraPress'imergent complaint FINAL.wpd 41
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At the time of the company's two most recent fiscal years ended June 30,2004 and June 30, 2003 and through the date of this Current Report onForm 8-K, there were no disagreements with G-T on any matter ofaccounting principles or practices, financial statement disclosure or auditingscope or procedure, which disagreement(s), if not resolved to the satisfactionof G-T, would have caused G-T to make reference to the subject matter ofthe disagreement(s) in G-T reports . (As announced earlier, due to thecorrection of historical revenue recognition policy the opinions are no longerto be relied on) .
Shares of Imergent fell another 20 cents to close at $4 .50 on October 10, 2005 . Withi n
days, the stock prices fell below $4 per share .
Improper Financial Reporting
37. The Financial Accounting Standards Board Statement of Concepts # 6
("FASCON 6") provides at paragraph 79 that "revenues represent actual or expected cas h
inflows (or the equivalent) that have occurred or will eventuate as a result of the entity' s
ongoing major or central operations " . Paragraph 139 of FASCON 6 adds that the "financial
effects on an entity of transactions and other events and circumstances that have cas h
consequences for that entity" should be recorded "in the periods in which thos e
transactions, events and circumstances occur rather than only in the periods in which cas h
is received or paid by the entity" .
38. The Financial Accounting Standards Board has also issued FASB No . 5 ,
which states in paragraph 17 that "contingencies that might result in gains usually are not
reflected in the accounts since to do so might be to recognize revenue prior to it s
E:+Samer_FllitllraP re sstirnergent corriaint FINAL.wpd 42
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realization" . Similarly, FASCON 5, which sets forth the "guidance for recognizing revenues
and gains based on their being", states that "revenues and gains are generally not
recognized as components of earnings until realized or realizable" and "revenues are not
recognized until earned . Revenues are considered to have been earned when the entity
has substantially accomplished what it must do to be entitled to the benefits represented
by the revenues" .
39 . The foregoing makes clear that Imergent violated GAAP when it recognize d
revenues prematurely . Indeed, it was the Company's admission of the impropriety of its
accounting practices that caused the eventual restatement of Imergent's previously
reported earnings for fiscal years 2002, 2003, 2004 and the first three quarters of 2005
(because under GAAP, restatements are employed for the sole purpose of correcting
errors in the prior reporting) .
40 . As set forth in Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Concepts ("Concepts Statement") No . 1, Objectives of Financial
Reporting, by Business Enterprises (November 1978), one of the fundamental objectives
of financial reporting is that it provide accurate and reliable information concerning an
entity's financial performance during the period being presented . Concepts Statement No.
I, paragraph 42, states :
Financial reporting should provide information about anenterprise's financial performance during a period . Investorsand creditors often use information about the past to help inassessing the prospects of an enterprise . Thus, althoughinvestment and credit decisions reflect investors' and creditors '
E :1Server_FVitllraPresstimergent complaint FINAL.wpd 43
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expectations about future enterprise performance, thoseexpectations are commonly based at least partly onevaluations of past enterprise performance .
41 . The fact that Imergent will restate its financial statements for fiscal year s
2002-2005 is an admission that the financial statements originally issued were materially
false. The sheer size of the restatement and its sharp severity also evidence materiality .
(a) As set forth in SEC Rule 4-01(a) of SEC Regulation S-X, "[f]inancial
statements filed with the [SEC] which are not prepared in accordance with [GAAP] will b e
presumed to be misleading or inaccurate ." 17 C.F.R. § 210 .4-01(a)(I) . Regulation S-X
requires that interim financial statements must also comply with GAAP, with the exceptio n
that interim financial statements need not include disclosure which would be duplicative o f
42. Management is responsible for preparing financial statements that conform
to GAAP. As noted by the American Institute of Certified Public Accountants ("AICPA")
Codification of Statements on Auditing Standards § 110 .03:
The financial statements are management's responsibility . . . .Management is responsible for adopting sound accountingpolicies and for establishing and maintaining internal controlthat will, among other things, initiate, record, process, addreport transactions (as well as events and conditions)consistent with management's assertions embodied m thefinancial statements. The entity's transactions and the relatedassets, liabilities and equity are within the direct knowledgeand control of management . . . . Thus, the fair presentation offinancial statements in conformity with generally acceptedaccounting principles is an implicit and integral part ofmanagement's responsibility .
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43 . At all relevant times during the Class Period, defendants represented that
Imergent's financial statements, when issued, were prepared in conformity with GAAP,
which are recognized by the accounting profession and the SEC as the uniform rules,
conventions and procedures necessary to define accepted accounting practices at a
particular time. However, the Company used
improper accounting practices, in violation of GAAP and SEC reporting requirements, that
overvalued Imergent's revenue recognition and thereby falsely inflated Imergent's reported
financial statements throughout the Class Period .
44. Imergent's financial results and financial statements were presented prior to
and throughout the Class Period in a manner that violated GAAP . Among others ,
Defendants violated each of the following fundamental accounting principles :
(a) The principle that interim financial reporting should be based upon th e
same accounting principles and practices used to prepare annual financial statement s
(APB No. 28, 110);
(b) The principle that financial reporting should provide information that
is useful to present and potential investors and creditors and other users in making rationa l
investment, credit and similar decisions (FASB Statement of Concepts No . 1, 134) ;
(c) The principle that financial repo rting should provide information abou t
the economic resources of an enterprise, the claims to those resources, and effects of
transactions, events and circumstances that change resources and claims to thos e
resources (FASB Statement of Concepts No . 1, ¶ 40) ;
E :\Se rver_F'Jit\IraPresslirr ip rgent complaint FINAL.wpd 45
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(d) The principle that financial reporting should provide information about
how management of an enterprise has discharged its stewardship responsibility to owners
(stockholders) for the use of enterprise resources entrusted to it - to the extent that
management offers securities of the enterprise to the public, it voluntarily accepts wider
responsibilities for accountability to prospective investors and to the public in general
(FASB Statement of Concepts No . 1, 1 50) ;
(e) The principle that financial reporting should provide information abou t
an enterprise's financial performance during a period - investors and creditors often use
information about the past to help in assessing the prospects of am enterprise . Thus,
although investment and credit decisions reflect investors' expectations about future
enterprise performance, those expectations are commonly based at least partly on
evaluations of past enterprise performance (FASB Statement of Concepts No . 1, ¶ 42) ;
(f) The principle that financial repo rting should be reliable in that i t
represents what it purports to represent - that information should be reliable as well a s
relevant is a notion that is central to accounting FASB Statement of Concepts No . 2, % 58-
59) ;
(g) The principle of completeness , which means that nothing is left out o f
the information that may be necessary to insure that it validly represents underlying events
and conditions (FASB Statement of Concepts No . 2, ¶ 79) ; and
(h) The principle that conservatism be used as a prudent reaction t o
uncertainty to try to ensure that uncertainties and risks inherent in business situations ar e
- Grant Thornton attended Audit Committee meetings and answered theCommittee's questions about the Company' s financial statements andinternal controls .
51 . In separate reports, Grant Thornton issued unqualified audit opinion letter s
which stated that Imergent's fiscal 2003, 2004 and 2005 financial statements, respectively,
were presented in accordance with GAAP . The "clean" audit opinion letters were false and
misleading when issued . Grant Thornton knew or recklessly disregarded numerous facts
which indicated that Imergent's fiscal 2003, 2004 and 2005 financial statements were not
presented in conformity with GAAP and that the net income and earnings per share as
presented in those financial statements were materially overstated . As particularized
herein, Grant Thornton persistently refused to see the obvious, to investigate the doubtful,
and its accounting judgments were such that no reasonable accountant would have made
the same decisions if confronted with the same facts . This was not a mere misapplicatio n
of accounting principles . Grant Thornton's audit work on Imergent's fiscal 2003, 2004 and
2005 financial statements were so deficient that it amounted to no audit at all .
52. Grant Thornton continuously served as Imergent's auditor from at least a s
early as 2003 until October 7, 2005, when public revelations concerning the scope of
Imergent's accounting improprieties and concerns about its own exposure to legal liability
compelled Imergent to dismiss Grant Thornton . Imergent had retained Grant Thornton to
audit its annual financial statements throughout the Class Period, as well as to review its
Ira M . Press (IP 5313 )Kirby McInerney & Squire LLP830 Third Ave, 10th FloorNew York, NY 10022Telephone: (212) 317-2300Facsimile : (212) 751-2540
Counsel for Plaintiff
F :W^arver_FUit\IraPresslimergent complaint FINAL.wpd 62
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CER.T1F (CATION OF NAMED PLAINTIFF1U UAN _TTOFEDERAL SECUR1TtE5 LAWS
l-lillel Hyman ("plaintiff') declares, as to the claims asserted under the federal securitie s
laws, than
1 . Plaintiff has reviewed the attached complaint against Emergent Inc . ("Isnergent"), and
has authorized the filing of a similar complaint on my behalf Plaintiff retains Kirby McInerney &
Squire, LLP and such co-counsel as it deems appropriate to associate with to pursue such action on a
contingent fee basis .
2 . Plaintiff did not purchase Imergeiit stock at the direction of plaintiffs cou nsel or in
order to participate in this private action.
;. Plaintiff is willing to serve as a representative party on behalf of the class, includin g
providing testimony at deposition and trial, if necessary .
4. Plaintiff' s transactions is lmergent stock during the class period set forth in the
complaint are set forth below on the attached Schedule A .
5. During, the three years prior to the date of this certification, plaintiff has not served o r
sought to serve as a representative party for a class in any action filed under the federal securities laws,
except as listed below :
6. Plaintiff will not accept any payment for serving as a represewazive party on behal f
of the class beyond the plaintiffs pro rata share of any class recovery, except as ordered or approved b y
the Court.
I declare under penalty of perjury that the foregoing is true and correct . Executed thi s
day of 0042Ap,r , 2005Mml
By.pl ea V
zoo/zoo In 1 12~00r VSZOSSLZLZL XYd G L 9OQZ/UR/OL
SCHEDULE A
Symbol: 11G
Type: All
Date Range : All date s
' :4r --. ., :; .
._-• . --:, ..: , ., ._
; .3r,+ rzr ;S OV
f{1;,M Is #k 1{. ~` ~.T
.-. ,, . . a,..9,.. , . -a.-_ip,, . . .lt : .'r -r .. .. •w- _ .'u!`i13` .:Il' . Y'r _._ . a r,. w z' §~'- :~ t Y u ~<rlati! ~y r4_rr ,<ll T.yl 6 ky ElmtP. r ate, t : s Q et : ,PCPceed_.
fhe )S 44 civil cover sheet and the information contained herein neither replace lament the filing and service ofpleadings or ofby local rules of court . This form. approved by the Judicial Conference of the United Slates in September 1974, is required for the usethe civil docket sheet. (SEE INSTRUCTIONS ON THE REVERSE OF THE FOR1-1.)
I . (a) PLAINTIFFSHillel Hyman, Individually and On the Behalf of Himself and All othersSimilarly Situated.
(b) County of Residence of First Listed Plaintiff Bergen County NJ
(EXCEPT IN U.S. PLAINTIFF CASES)
bylaw except as provided"Wurpose or initialin g
DEFENDANTS U .- '"
Imergent, Inc., Donald L. Danks C Q, all c~ nt Thornton,LLP i.c
County of Residence of First Listed Defendant r
(IN U .S . PLAINI rSLS`ONLY )
NOTE : INLAND CONDEMNATION CASES . USE THE LO~I le Ob`TuELAND INVOLVED. RK
(c) Attorney's (Finn Name, Address. and Telephone Number) Attorneys I If Known )
C. Richard Henriksen, of Henriksen & Henriksen PC, 320 South 500 East Erik A . Christiansen, of Parsons Behle & Latimer, 201 s . Main ST .
Salt Lake Ci , UT 84102 Suite 1800, P.O. Box 45898, Salt Lake City, UT 84145
11 . BASIS OF JURISDICTION (Place on "X" in Onc Box On€y) III, CITIZENSHIP OF PRINCIPAL PARTIES(Place an ,•x• in One Box rar Plaintiff(For Diversity Cases Only) and One Bas for Defendant )
13 1 U.S, Government 3 Fcdcra€ Question PTF DEF PTP DEFPlaintiff (U.S . Government Not a Party) Citizen of This State 01 C) 1 Incorporated ar Principal Place 0 4 114
of Business In This Stat e
r> 2 U.S. Government 0 4 DiversityDefendant (indicate citizenship of Parties in Item Ill)
Citizen of Another State 0 2 0 2 tncnrpnratcd arrd ( rincipal Place 0 5 0 5of Businrss In Another S4n n
Citizen or Subject of a 03 0 3 Forcign Natian O 6 10 6
CIVIL COVER SHEET
O 110 Insurance
0 120 Marin e13 130 Millcr Ac tO 140 Negotiable Instrumen tO 150 Recovery of Ovcs7myment
& Enforcement of JudgmentO 151 Medicare Acto 152 Recovery of Defaulted
12 USC 341 0O 890 Other Statuto ry Actions0 891 Agricultural Acts0 $92 Ecomtmic Stabil ization ActCI 693 Environmental Ma tt ersCi 894 Energy Allocation Actto 895 Freedom of Information
tic the U .g 1 Sta n cr ich t rc filin r iD pt ~ilc uri ct toues Isiir r ty,section 1(1 anc~tt `~a D le Act, t15 €~'~ .C . et ~i ,atat aS ana c~ u~e ~i~ - . 17 C .t . K . sec 240 1 0 b 5
VI. CAUSE OF AC I ION Brief desc ri ption of cause :Securites Class Action
VII . REQUESTED IN 0 CHOCK IF THIS IS A CLASS A CTION DEMAND S CHECK YES only if demanded in complaint :
COMPLAINT: UNDER F .A.C .P. 23 J URY DEMAND : Cpl Yes 0 No
VIII . RELATED CASE(S)IF ANY (See
instructions): JUDGE E) Benson I DOCKET NUMBER 0SCV 00204A% f
10/17/2005
RECEIPT ." AMOUNT APPLYING IFP
Judge Dale A . KimballDECK TYPE : CivilDATE STAMP : 10/17/ 2005 @ 15 :17 :01CASE NUMBER: 2 :05CV00861 DAIS
