PROSPECTUS
IVP TECHNOLOGY CORPORATION
131,886,552 SHARES OF COMMON STOCK
IVP Technology Corporation operates under the trade name ActiveCore
Technologies Inc. This prospectus relates to the sale of up to 131,886,552
shares of ActiveCore's common stock by certain persons who are, or will become,
stockholders of ActiveCore. Please refer to "Selling Stockholders" beginning on
page 13. All costs associated with this registration will be borne by
ActiveCore.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over-the-Counter Bulletin Board during
the term of this offering. On December 1, 2003 the last reported sale price of
our common stock was $0.032 per share. Our common stock is quoted on the
Over-the-Counter Bulletin Board under the symbol "TALL." These prices will
fluctuate based on the demand for the shares of common stock.
Cornell Capital Partners, L.P. is an "underwriter" within the meaning of
the Securities Act of 1933 in connection with the sale of common stock under the
Equity Line of Credit Agreement.
Brokers or dealers effecting transactions in these shares should confirm
that the shares are registered under the applicable state law or that an
exemption from registration is available.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 5.
With the exception of Cornell Capital Partners, L.P., which is an
"underwriter" within the meaning of the Securities Act of 1933, no other
underwriter or person has been engaged to facilitate the sale of shares of
common stock in this offering. This offering will terminate 24 months after the
accompanying registration statement is declared effective by the Securities and
Exchange Commission. None of the proceeds from the sale of stock by the selling
stockholders will be placed in escrow, trust or any similar account.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is December 19, 2003.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
THE OFFERING...................................................................2
RISK FACTORS...................................................................5
FORWARD-LOOKING STATEMENTS....................................................11
SELLING STOCKHOLDERS..........................................................12
USE OF PROCEEDS...............................................................16
DILUTION......................................................................17
EQUITY LINE OF CREDIT.........................................................18
PLAN OF DISTRIBUTION..........................................................20
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.....................22
DESCRIPTION OF BUSINESS.......................................................35
MANAGEMENT....................................................................46
DESCRIPTION OF PROPERTY.......................................................50
LEGAL PROCEEDINGS.............................................................50
PRINCIPAL STOCKHOLDERS........................................................51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................52
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS.................................54
DESCRIPTION OF SECURITIES.....................................................60
EXPERTS.......................................................................62
LEGAL MATTERS.................................................................62
HOW TO GET MORE INFORMATION...................................................62
FINANCIAL STATEMENTS.........................................................F-1
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Our audited financial statements for the fiscal year ended December 31,
2002, were contained in our Annual Report on Form 10-KSB.
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PROSPECTUS SUMMARY
ActiveCore is a Toronto-based commercial and consumer software developer,
licensor, publisher, marketer, and distributor. We concentrate on providing
consumers and enterprises with mobile device and web software and provide
information technology services to businesses. We operate through two divisions,
enterprise and consumer. We have operations in the United Kingdom, Canada and
the United States. In the enterprise division, we develop, market and distribute
mobile device, web based and other software products and provide services
primarily in the healthcare and insurance markets. In the consumer division, we
develop, license, market, publish and distribute mobile device and web based
entertainment software primarily in Europe and North America to wireless
carriers and through web portals.
Since July 1, 2002, ActiveCore has been concentrating on expanding its
customer base and its distribution capacity in both the consumer and enterprise
segments. In the consumer division, we are continuing to develop our own, and
are searching for additional third party mobile game titles to fill our release
schedule for publication and distribution for 2004 and 2005. This may entail
completing strategic alliances with or acquiring development companies, as well
as licensing completed products/titles for publication and distribution rights
in certain geographical territories or for certain mobile hardware platforms. In
the enterprise division, we also continue to develop our own software products
as well as search for additional distribution rights for third party software
products to round out our software offerings for our clients, as well as to add
more information technology service personnel and obtain new information
technology service contracts.
In addition to the foregoing, we have also made an equity investment in
one other company. The investment is a 5% equity stake in e-pocket Inc., which
is a private company headquartered in Canada. e-Pocket has developed a digital
cash software solution for banks, merchants and consumers for web based
purchasers primarily for micro-payments, defined as payments under $10.00.
e-Pocket is a development stage company that expects to have its first trial
operation commence in November 2003 between a number of merchants and several
banks. E-Pocket and ActiveCore have also signed a development agreement whereby
ActiveCore will develop the code for e-pocket's micro-payments software based on
mobile phones.
GOING CONCERN
As reflected in our unaudited condensed consolidated financial statements
as of and for the nine months ended September 30, 2003, our loss from continuing
operations of $2,599,919, negative cash flows from operations of $1,722,712,
stockholders' deficiency of $773,956 and our working capital deficiency of
$1,387,826 raise doubt about our ability to continue as a going concern. Our
ability to continue as a going concern is dependent on our ability to raise
additional short term and long-term debt and capital including the ability to
raise capital under the equity line of credit and implement our business plan.
The condensed consolidated financial statements do not include any adjustments
that might be necessary if we are unable to continue as a going concern.
We have entered into various software distribution and licensing
agreements, acquired two operating businesses, have obtained committed term debt
facilities and intend to raise additional equity capital, project/development
finance debt and acquisition debt in order to expand our business operations.
Management believes that actions presently being taken to obtain additional
funding and to operate and expand its existing business operations provide the
ability to continue as a going concern.
ABOUT US
ActiveCore's principal office is located at 2275 Lakeshore Blvd. West,
Suite 401, Toronto, Ontario M8V 3Y3 Canada. Its telephone number is (416)
252-6200. ActiveCore also conducts business under several trade names including
MDI Solutions which conducts a software product sales and data integration
business for health care in both the U.S. and Canada; SilverBirch Studios which
develops and sells mobile games worldwide and RecessGames.com which operates a
themed destination web portal for the school age demographic group.
1
THE OFFERING
This offering relates to the sale of common stock by certain persons who
are, or will become, stockholders of ours. The selling stockholders consist of:
o Cornell Capital Partners, who intends to sell up to 30,168,889 shares
of common stock.
o Other selling stockholders, who intend to sell up to 101,717,663
shares of common stock.
Pursuant to the Equity Line of Credit, we may, at our discretion,
periodically issue and sell to Cornell Capital Partners, L.P. shares of common
stock for a total purchase price of $10 million. The amount of each advance is
subject to an aggregate monthly maximum advance amount of $425,000 in any
thirty-day period. Cornell Capital Partners will pay us 92% of the lowest
closing bid price of the common stock during the five consecutive trading days
immediately following the notice date. We have paid Cornell Capital Partners a
one-time commitment fee in the amount of 3,032,000 shares of common stock,
168,889 shares as a penalty for late approval of our February 14, 2003 SB-2
filing and warrants to purchase 265,000 shares of common stock, of which 15,000
shares have an exercise price of $0.50 per share and 250,000 shares have an
exercise price of $0.099 per share. In addition, Cornell Capital Partners will
be entitled to retain 3% of each advance under the Equity Line of Credit.
Cornell Capital Partners intends to sell any shares purchased under the Equity
Line of Credit at the then prevailing market price. Among other things, this
prospectus relates to the shares of common stock to be issued under the Equity
Line of Credit. Maintenance of the Cornell Capital Partners Equity Line of
Credit is a condition of our $2,000,000 term loan facility provided to our
Canadian subsidiary ActiveCore Technologies Limited.
We have engaged Westrock Advisors, Inc., a registered broker-dealer, to
advise us in connection with the Equity Line of Credit. Westrock Advisors, Inc.
was paid a fee of 100,000 shares of IVP Technology's common stock. Westrock
Advisors, Inc. is not participating as an underwriter in this offering.
COMMON STOCK OFFERED 131,886,552 shares by selling stockholders
OFFERING PRICE Market price
COMMON STOCK OUTSTANDING
BEFORE THE OFFERING(1) 297,921,703 shares
USE OF PROCEEDS We will not receive any proceeds from the shares
offered by the selling stockholders. Any proceeds
we receive from the sale of common stock under
the Equity Line of Credit will be used for
general working capital purposes. See "Use of
Proceeds."
RISK FACTORS The securities offered hereby involve a high
degree of risk and immediate substantial
dilution. See "Risk Factors" and "Dilution."
OVER-THE-COUNTER BULLETIN
BOARD SYMBOL TALL
- ----------
(1) Excludes warrants to purchase 265,000 shares of common stock, and up to
29,735,000 shares of common stock to be issued under the Equity Line of
Credit.
2
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary financial information set forth below is derived from and
should be read in conjunction with our consolidated financial statements,
including the notes thereto, appearing elsewhere in this prospectus.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ---------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
INCOME STATEMENTS (UNAUDITED) (UNAUDITED)
- ----------------------------------------- ------------------------------ ---------------------------
Revenues, Net $ 124,767 $ 167,070 $ 355,776 $ 257,070
Gross Profit (Loss) 10,822 (155,663) (45,289) (971,991)
Loss from Operations (709,792) (4,113,164) (2,348,508) (6,187,763)
Other Income (Expenses) (44,852) 918,556 (251,411) 948,787
Loss from Continuing Operations (754,644) (3,194,608) (2,599,919) (5,238,976)
Gain (Loss) from Discontinued Operations -- (915,876) 1,662,886 (1,127,835)
------------- ------------- ------------- -------------
Net Loss $ (754,644) $(4,110,484) $ (937,033) $(6,366,811)
============= ============= ============= =============
Loss Per Common Share from Continuing
Operations - Basic and Diluted $ (0.00) $ (0.03) $ (0.02) $ (0.06)
============= ============= ============= =============
Gain (Loss) Per Common Share from
Discontinued Operations - Basic $ (0.00) $ (0.01) $ 0.01 $ (0.01)
============= ============= ============= =============
Net income (Loss) Per Common Share-
Basic and Diluted $ (0.00) $ (0.03) $ (0.01) $ (0.07)
============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding -
Basic and Diluted 262,456,836 118,299,435 159,960,377 95,218,392
============= ============= ============= =============
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YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001
-------------- --------------
Revenues, Net $ 3,210,595 $ 67,358
Gross Loss $ (1,452,530) $ (192,479)
Loss from Operations $ (22,148,667) $ (1,188,807)
Other Income (Expenses) $ 835,377 $ (98,341)
Net Loss $ (21,313,290) $ (1,287,148)
Net Loss Per Common Share -
Basic and Diluted $ (0.32) $ (0.03)
Weighted Average Shares Outstanding -
Basic and Diluted 66,013,725 44,855,321
SEPTEMBER 30,
2003 DECEMBER 31,
BALANCE SHEETS (UNAUDITED) 2002
- ------------------------------------- -------------- --------------
Total Assets $ 1,426,041 $ 1,926,616
Total Liabilities $ 2,199,997 $ 16,346,382
Stockholders' Deficiency $ (773,956) $(14,419,766)
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RISK FACTORS
WE ARE SUBJECT TO VARIOUS RISKS THAT MAY MATERIALLY HARM OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. YOU SHOULD CAREFULLY CONSIDER THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS FILING
BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE
Since our inception we have not been profitable and have lost money on
both a cash and non-cash basis. For the nine months ended September 30, 2003 and
the year ended December 31, 2002, we lost $937,033 and $21,313,290,
respectively. The majority of these losses were related to the impairment of our
goodwill and intangible assets and the cost of the issuance of 30,000,000 common
shares at a value of $5,500,000 as "stock-based compensation" provided to
management as a result of ActiveCore achieving three revenue milestones (see
Summary or Management Discussion and Analysis), as well as for costs associated
with financial advisory and legal expenses. ActiveCore has not been profitable
since inception. Our accumulated deficit was $36,185,595 at September 30, 2003.
Future losses may occur, as we are dependent on spending money to pay for
development of mobile games, enterprise software and spending money on marketing
of our enterprise software products prior to making sales and collecting
revenues.
During the 2003 fiscal year we divested ourselves of Ignition
Entertainment, which was acquired in 2002, and have eliminated the financial
burden associated with the development of PC and game console video games.
However, our need for cash to finance software development and maintain adequate
amounts of working capital is an ongoing factor in our operations. Our current
plans are to have cash operating costs (excluding "stock-based compensation")
associated with sales, administrative and development staff, overhead, legal,
accounting and public company expenses of approximately $2,000,000 in 2003. No
assurances can be given that we will be successful in reaching or maintaining
profitable operations. Accordingly, we may experience liquidity and cash flow
problems despite having acquired several operating entities and despite earning
revenue.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL AND DEBT FUNDING TO SUSTAIN OPERATIONS
In addition to selling software products and operating integration
services under the business trade name of MDI Solutions , ActiveCore is a
software developer, publisher, licensor and distributor. In the course of our
daily operations we spend money on computer programmers and other skilled
technical personnel to develop products over a development timeline and on other
resources, such as third party developers, or licensing firms, to obtain
concepts or brands prior to commercialization of such products. This means that
there are considerable time gaps between the point in time that we conceive of a
product and the point in time when we are successful in selling it and the time
we collect revenue.
To the extent that we cannot obtain cash in advance or dedicated financing
for our development projects and products and generate sufficient profits on
sales, we are reliant on either term debt financing or sale of equity to obtain
cash to pay our employees and suppliers. Thus unless we can become profitable
with the existing sources of funds we have available and products that we have
acquired, we will require additional capital to sustain operations and we may
need access to additional capital or additional debt financing to grow our
sales.
Since inception in 1994 we have relied on external financing to fund the
costs of maintaining a public listing and other aspects of our operations. Such
financing has historically come from a combination of borrowings and the sale of
common stock to third parties. We cannot assure you that financing whether from
external sources or related parties will be available if needed or on favorable
terms. Our inability to obtain adequate financing will result in the need to
scale back our business operations. Any of these events could be materially
harmful to our business and may result in a lower stock price. We will need to
raise additional capital from either the equity market or from debt sources to
fund our anticipated future expansion. Among other things, external financing
may be required to cover our operating costs, to develop, license and publish
mobile device games, to fund additional development of games for various mobile
devices and web portals and to acquire businesses, which may or may not have
revenue in place from existing products at the time of acquisition. We view
acquisitions as an integral part of growing our business especially in regard to
the enterprise division and we are actively searching for acquisitions to
provide additional critical mass to our operations.
5
WE HAVE BEEN THE SUBJECT OF A GOING CONCERN OPINION AS OF DECEMBER 31, 2002 AND
DECEMBER 31, 2001 FROM OUR INDEPENDENT AUDITORS, WHICH MEANS THAT WE MAY NOT BE
ABLE TO CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING
Our independent auditors have added an explanatory paragraph to their
audit opinions issued in connection with our consolidated financial statements
for the years ended December 31, 2002 and 2001, which states that our ability to
continue as a going concern depends upon our ability to secure financing,
increase ownership equity and attain profitable operations. Our ability to
obtain additional funding will determine our ability to continue as a going
concern. Our consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. Based on our current
budget assessment, and excluding any acquisitions which may occur in 2003, we
believe that we may need to obtain approximately $2,000,000 in additional debt
or equity capital from one or more sources to fund operations for the next 12
months. These funds are expected to be obtained from the sale of securities,
including the sale of stock under the equity line of credit and from our
$2,000,000 term debt facility.
WE ARE SUBJECT TO A WORKING CAPITAL DEFICIT, WHICH MEANS THAT OUR CURRENT ASSETS
ON SEPTEMBER 30, 2003 WERE NOT SUFFICIENT TO SATISFY OUR CURRENT LIABILITIES
We had a working capital deficit of $1,387,826 at September 30, 2003,
which means that our current liabilities as of that date exceeded our current
assets on September 30, 2003 by $1,387,826. Current assets are assets that are
expected to be converted to cash within one year and, therefore, may be used to
pay current liabilities as they become due. Our working capital deficit means
that our current assets on September 30, 2003 were not sufficient to satisfy all
of our current liabilities on that date. If our ongoing operations do not begin
to provide sufficient profitability to offset the working capital deficit we may
have to raise capital or debt to fund the deficit or alternatively reach
agreement with some of our creditors to convert debt to equity as has taken
place in the past. Alternatively we may be able to reach agreement with some of
our creditors to convert short-term liabilities to long term liabilities or
restructure to permit payables over an extended period of time.
OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE
SIGNIFICANTLY
Prior to this offering, there has been a limited public market for our
common stock and there can be no assurance that a more active trading market for
our common stock will develop. An absence of an active trading market could
adversely affect our shareholders' ability to sell our common stock in short
time periods, or possibly at all. Our common stock has experienced, and is
likely to experience in the future, significant price and volume fluctuations,
which could adversely affect the market price of our common stock without regard
to our operating performance. In addition, we believe that factors such as
quarterly fluctuations in our financial results and changes in the overall
economy or the condition of the financial markets could cause the price of our
common stock to fluctuate substantially. These fluctuations may also cause short
sellers to enter the market from time to time in the belief that we will have
poor results in the future. We cannot predict the actions of market participants
and, therefore, can offer no assurances that the market for our stock will be
stable or appreciate over time.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT
FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS
Our common stock is deemed to be "penny stock" as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline. Penny stocks are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the NASDAQ automated quotation system
(NASDAQ listed stock must still have a price of not less than $5.00
per share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$10.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last three
years.
6
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor.
WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL
Our success largely depends on the efforts and abilities of key executives
and consultants, including Brian MacDonald, our Chairman of the Board of
Directors and Chief Executive Officer and Mr. Peter Hamilton, President. The
loss of the services of Mr. MacDonald or Mr. Hamilton could materially harm our
business because of the cost and time necessary to replace and train a
replacement. Such a loss would also divert management attention away from
operational issues. We do not presently maintain key-man life insurance policies
on Mr. MacDonald or Mr. Hamilton. We also have a number of key employees that
manage our enterprise and consumer division and if we were to lose their
services, senior management would be required to expend time and energy to
replace and train replacements. In addition we need to attract additional high
quality sales and consulting personnel. To the extent that we are smaller than
our competitors and have fewer resources we may not be able to attract the
sufficient number and quality of staff.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT OR IMPOSSIBLE TO EVALUATE OUR
PERFORMANCE AND MAKE PREDICTIONS ABOUT OUR FUTURE
ActiveCore commenced its current multi-product enterprise division
operations in December 2001 when it obtained an agreement to distribute the
Classifier software product and new management and a new Board of Directors
assumed their duties. Since December 2001 we also acquired Ignition
Entertainment Limited in the United Kingdom in May 2002 and opened a sales and
distribution office in Chicago in July 2002. Subsequently both of these
operations were sold as we were unable to obtain access to our equity line of
credit quickly enough to allow us to create and deliver products in the planned
time frame. We also acquired Springboard Technology Solutions Inc. in Canada, in
July 2002, subsequently renamed ActiveCore Technologies Limited, which has added
more depth to the enterprise division especially in the area of outsourced IT
services for health care in Canada. In September 2003 we acquired certain assets
of the data integration division of SCI Healthcare Group in the United States
and have recently created a new wholly owned subsidiary in the United Kingdom to
sell mobile applications and web based services. The process of integrating
these businesses, and the potential that we may acquire other businesses in both
divisions makes an evaluation of our future prospects difficult. ActiveCore will
continue to encounter the types of risks, uncertainties and difficulties
frequently encountered by companies that pursue both organic as well as growth
through acquisitions, including the ability to control overhead costs and
professional expenses, and to maintain adequate liquid resources as sales
revenues increase. Many of these risks and uncertainties are described in more
detail elsewhere in this "Risk Factors" section. If ActiveCore's management does
not successfully address these risks, then its future business prospects will be
significantly impeded and a process of reversing investment in certain areas may
have to be undertaken.
THE GROWTH OF OUR CONSUMER DIVISION DEPENDS UPON OUR DEVELOPMENT AND ACQUISITION
OF MARKETABLE GAME PRODUCTS FOR CELL PHONE AND OTHER MOBILE DEVICES
Currently our products in the consumer division are concentrated on games
that work on a number of cell phones produced by Nokia, Motorola and other
manufacturers. These games are distributed by Tira Wireless, a third party
distributor, to wireless carriers such as Verizon, Rogers AT&T, O2 and others.
Our ultimate success will depend upon the number of games that we are able to
produce, the number of games we are able to license from other developers, the
quality and playability of the games that we either produce or license, the
growth in consumer adoption of new generation mobile phones and the uptake of
games on to these phones. There are many other success factors such as product
quality, graphics, price, commercial availability and marketing which impact
revenue opportunities for game products. Within the global marketplace for cell
phone games our consumer division also depends upon continued interest and
expansion of mobile games as a form of entertainment. While the new generation
cell phone industry is currently in its formative stages economic factors such
as product, platform and infrastructure costs which are beyond our control may
restrict the growth rate of the industry.
IF WE FAIL TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY
STANDARDS, OUR ENTERPRISE PRODUCTS COULD BECOME LESS COMPETITIVE OR OBSOLETE
The market for mobile device and data integration software is
characterized by rapidly changing technology, evolving industry standards,
changes in customer needs, intense competition and frequent new product
introductions. If we fail to source distribution agreements for saleable
products or modify or improve our own enterprise products in response to changes
7
in technology or industry standards, our enterprise software product offerings
could rapidly become less competitive or obsolete. A portion of our future
success will depend, in part, on our ability to:
o enhance and adapt current software products and develop new products
that meet changing customer needs;
o adjust the prices of mobile software applications to increase
customer demand;
o successfully advertise and market our products; and
o influence and respond to emerging industry standards and other
technological changes.
Although we do not intend to expend a great deal of money on development
of our own products for the enterprise division we need to respond to changing
technology and industry standards in a reasonably timely and cost-effective
manner. We may not be successful in effectively using new technologies,
developing new products or enhancing our existing product lineup on a timely
basis. Our pursuit of necessary technology may require time and expense. We may
need to license new technologies to respond to technological change. These
licenses may not be available to us on terms that give us a profit margin with
which to actively pursue reselling these products. Finally, we may not succeed
in adapting various products to new technologies as they emerge.
WE COULD BE SUBJECT TO CLAIMS OF INFRINGEMENT OF THIRD-PARTY INTELLECTUAL
PROPERTY, WHICH COULD RESULT IN SIGNIFICANT EXPENSE AND LOSS OF INTELLECTUAL
PROPERTY RIGHTS
Both the consumer and the enterprise software industry is characterized by
uncertain and conflicting intellectual property claims and frequent intellectual
property litigation, especially regarding copyright, patent and distribution
rights. From time to time, third parties may assert patent, copyright, trademark
and other intellectual property rights to technologies that are important to our
business. We may receive notices of claims that our products infringe or may
infringe these rights. Any litigation to determine the validity of these claims,
including claims arising through our contractual indemnification of our clients,
regardless of their merit or resolution, would likely be costly and time
consuming and divert the efforts and attention of our management and technical
personnel. We cannot provide any assurances that we would prevail in any such
litigation given the complex technical issues and inherent uncertainties in
intellectual property litigation. If this litigation resulted in an adverse
ruling, we could be required to:
o pay substantial damages;
o cease the manufacture, use or sale of infringing products;
o discontinue the use of certain technology; or
o obtain a license under the intellectual property rights of the third
party claiming infringement, which license may not be available on
reasonable terms, or at all.
Although software development companies that we contract with as
distributors of their products agree to indemnify us against infringement by
their developers of the intellectual property rights of others, it is unlikely
that all suppliers will have sufficient funds to completely indemnify us if such
a need should arise. Consequently, if it is determined that the software that we
distribute infringes upon the intellectual property rights of others, we may be
required to withdraw the product from distribution or to spend significant
resources to satisfy any such claims, which may not be available at the time of
any such determination. Any determination that our software suppliers products
infringe upon another's proprietary intellectual property rights may have a
material negative impact on our business and results of operations and may
require us to cease marketing the infringing products.
RISKS RELATED TO THIS OFFERING
FUTURE SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR
ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 297,921,703 shares of common stock shown as outstanding as of December 1,
8
2003, 101,886,552 shares are, or will be, freely tradable without restriction,
unless held by our "affiliates." The remaining 196,035,151 shares of common
stock which will be held by existing stockholders, including the officers and
directors, are "restricted securities" and may be resold in the public market
only if registered or pursuant to an exemption from registration. Some of these
shares may be resold under Rule 144.
In addition, we have issued warrants to purchase 265,000 shares of common
stock to Cornell Capital and warrants to purchase 500,000 shares of common stock
to the International Brotherhood of Electrical workers in respect of the first
tranche of our planned $2,000,000 term debt financing.
EXISTING SHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF
SHARES UNDER THE EQUITY LINE OF CREDIT
The sale of shares pursuant to the Equity Line of Credit will have a
dilutive impact on our stockholders. For example, at September 30, 2003, at an
assumed offering price of $0.03 per share, the new stockholders would have
experienced an immediate dilution in the net tangible book value of $0.0270 per
share. Dilution per share at prices of $0.0225, $0.0150 and $0.0075 per share
would be $0.0181, $0.0098 and $0.0015, respectively.
As a result, our net income per share could decrease in future periods,
and the market price of our common stock could decline. In addition, the lower
our stock price, the more shares of common stock we will have to issue under the
Equity Line of Credit to draw down the full amount. If our stock price is lower,
then our existing stockholders would experience greater dilution.
CORNELL CAPITAL PARTNERS UNDER THE LINE OF CREDIT WILL PAY LESS THAN THE
THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK
The common stock to be issued under the Equity Line of Credit will be
issued at a 8% discount to the lowest closing bid price for the 5 days
immediately following the notice date of an advance. These discounted sales
could cause the price of our common stock to decline.
THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE
MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE
The selling stockholders intend to sell in the public market the shares of
common stock being registered in this offering subject to rule 144 restrictions
to affiliates and insiders. That means that up to 131,886,552 shares of common
stock may be sold subject to various rules such as 144 and insider trading
restrictions. Such sales may cause our stock price to decline. The officers and
directors of the company and those shareholders who are significant shareholders
as defined by the SEC will continue to be subject to the provisions of various
insider trading and rule 144 regulations.
THE SALE OF OUR STOCK UNDER OUR EQUITY LINE COULD ENCOURAGE SHORT SALES BY THIRD
PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE DECLINE OF OUR STOCK PRICE
In many circumstances the provision of an equity line of credit for
companies that are traded on the OTCBB has the potential to cause a significant
downward pressure on the price of common stock. This is especially the case if
the shares being placed into the market exceed the market's ability to take up
the increased stock or if the company has not performed in such a manner to show
that the equity funds raised will be used to grow the company. Such an event
could place further downward pressure on the price of common stock. Under the
terms of our equity line ActiveCore may request numerous draw downs pursuant to
the terms of the equity line. Even if ActiveCore uses the equity line to grow
its revenues and profits or invest in assets which are materially beneficial to
ActiveCore the opportunity exists for short sellers and others to contribute to
the future decline of our stock price. If there are significant short sales of
stock, the price decline that would result from this activity will cause the
share price to decline more so which in turn may cause long holders of the stock
to sell their shares thereby contributing to sales of stock in the market. If
there is an imbalance on the sell side of the market for the stock the price
will decline.
It is not possible to predict if the circumstances whereby a short sales
could materialize or to what level the share price could drop. In some companies
that have been subjected to short sales the stock price has dropped to near
zero. This could happen to ActiveCore Technologies.
9
THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE AND MAY BE HIGHER OR LOWER
THAN THE PRICES PAID BY OTHER PEOPLE PARTICIPATING IN THIS OFFERING
The price in this offering will fluctuate based on the prevailing market
price of the common stock on the Over-the-Counter Bulletin Board. Accordingly,
the price you pay in this offering may be higher or lower than the prices paid
by other people participating in this offering.
WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE EQUITY LINE OF CREDIT
WHEN NEEDED
We are to a great extent dependent on external financing to fund our
operations. Our financing needs may be partially provided from the Equity Line
of Credit. No assurances can be given that such financing will be available in
sufficient amounts or at all when needed, in part, because we are limited to a
maximum draw down of $425,000 in any thirty-day period.
10
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus may
contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans and (e) our anticipated needs for working capital. These
statements may be found under "Management's Discussion and Analysis or Plan of
Operations" and "Business," as well as in this prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including, without limitation, the
risks outlined under "Risk Factors" and matters described in this prospectus
generally. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this prospectus will in fact
occur.
11
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. The selling shareholders are categorized in groups based on their
relationship to ActiveCore. The groups consist of selling shareholders (i) who
have assisted in or provided financing to ActiveCore, (ii) officers and
directors of ActiveCore or those who were shareholders of acquired companies,
and (iii) consultants and professionals. A description of each selling
shareholder's relationship to ActiveCore and how each selling shareholder
acquired the shares to be sold in this offering is detailed in the information
immediately following this table.
PERCENTAGE PERCENTAGE
OF SHARES TO OF PERCENTAGE
OUTSTANDING BE OUTSTANDING OF
SHARES SHARES ACQUIRED SHARES TO SHARES
BENEFICIALLY BENEFICIALLY UNDER THE BE ACQUIRED SHARES TO BENEFICIALLY
OWNED OWNED EQUITY UNDER THE BE SOLD OWNED
SELLING BEFORE BEFORE LINE OF EQUITY LINE IN THE AFTER
STOCKHOLDER OFFERING OFFERING(1) CREDIT OF CREDIT OFFERING OFFERING(1)
-------------- --------------- --------------- ------------ --------------- -------------- -------------
SHARES ACQUIRED IN FINANCING TRANSACTIONS WITH ACTIVECORE TECHNOLOGIES, INC.
Cornell Capital
Partners, L.P. 433,889 * 29,735,000 9.1% 30,168,889(2) 0.0%
Westrock
Advisors, Inc. 100,000 * -- -- 100,000 0.0%
Revelate Limited 5,000,000 1.7% -- -- 5,000,000 0.0%
Neil Fishenden 180,000 * -- -- 180,000 0.0%
SHARES ACQUIRED AS A RESULT OF ACQUISITION/DIVESTITURE ACTIVITIES
Barnoose Limited
3,676,271 1.2% -- -- 3,676,271 0.0%
SCI Healthcare
Group 6,472,492 2.2% -- -- 6,472,492 0.0%
E-Pocket Inc. 10,000,000 3.4% -- -- 10,000,000 0.0%
Karora
Technologies Inc. 800,000 * -- -- 800,000 0.0%
OFFICERS AND DIRECTORS
Brian MacDonald 23,179,449 7.8% -- -- 23,179,449 0.0%
Peter Hamilton 23,879,449 8.0% -- -- 23,879,449 0.0%
Kevin Birch 12,037,173 4.0% -- -- 12,037,173 0.0%
Geno Villella 4,278,421 1.4% -- -- 4,278,421 0.0%
J. Steven Smith 2,000,000(3) * -- -- 2,000,000 0.0%
Stephen Lewis 2,000,000(4) * -- -- 2,000,000 0.0%
EMPLOYEES, CONSULTANTS AND PROFESSIONALS
Sonny Goldstein 1,000,000 * -- -- 1,000,000 0.0%
Snider Financial
Group Inc. 2,000,000 * -- -- 2,000,000 0.0%
Hawk Associates
Inc 2,000,000 * -- -- 2,000,000 0.0%
Danson Partners
LLC 3,114,408 1.05% -- -- 3,114,408 0.0%
----------- ----------- ----------- ------------ ----------- ---------
TOTAL 102,151,552 29,735,000 9.1% 131,886,552 0.0%
=========== =========== ============ =========== =========
- ----------
* Less than 1%.
(1) Applicable percentage of ownership is based on 297,921,703 shares of
common stock outstanding as of December 1, 2003 together with securities
exercisable or convertible into shares of common stock within 60 days of
December 1, 2003, for each stockholder. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock subject to securities exercisable or convertible
into shares of common stock that are currently exercisable or exercisable
within 60 days of December 1, 2003 are deemed to be beneficially owned by
the person holding such securities for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other person.
Note that affiliates are subject to Rule 144 and Insider trading
12
regulations - percentage computation is for form purposes only.
(2) Consists of 168,889 shares of common stock, 265,000 shares of common stock
underlying a warrant with 15,000 shares having an exercise price of $0.50
per share and 250,000 shares having an exercise price of $0.099 per share
and 29,735,000 shares of common stock to be issued under the Equity Line
of Credit.
(3) Of that total, 500,000 shares were issued on December 31, 2002, 500,000 on
June 24, 2003 and 1,000,000 shares will vest on November 1, 2003.
(4) Of that total, 1,000,000 shares were issued on June 24, 2003, and
1,000,000 will vest on November 1, 2003.
The following information contains a description of each selling
shareholder's relationship to ActiveCore Technologies and how each selling
shareholder acquired the shares to be sold in this offering is detailed below.
None of the selling stockholders have held a position or office, or had any
other material relationship, with ActiveCore, except as follows:
SHARES ACQUIRED IN FINANCING TRANSACTIONS WITH ACTIVECORE
o CORNELL CAPITAL PARTNERS, L.P. Cornell Capital Partners, L.P. is the
investor under the Equity Line of Credit and former holder of
convertible debentures. All investment decisions of Cornell Capital
Partners are made by its general partner, Yorkville Advisors, LLC.
Mark Angelo, the managing member of Yorkville Advisors, makes the
investment decisions on behalf of Yorkville Advisors. Cornell Capital
Partners acquired all shares being registered in this offering in
financing transactions with ActiveCore Technology. That transaction
is explained below:
EQUITY LINE OF CREDIT. In April 2002, we entered into an Equity Line
of Credit with Cornell Capital Partners, L.P. Pursuant to the Equity
Line of Credit, we may, at our discretion, periodically sell to
Cornell Capital Partners shares of common stock for a total purchase
price of up to $10.0 million. For each share of common stock
purchased under the Equity Line of Credit, Cornell Capital Partners
will pay ActiveCore 92% of the lowest closing bid price of our common
stock on the Over-the-Counter Bulletin Board or other principal
market on which our common stock is traded for the 5 days immediately
following the notice date. Further, Cornell Capital Partners will
retain a fee of 3% of each advance under the Equity Line of Credit.
In connection with the Equity Line of Credit, Cornell Capital
Partners received 3,032,000 shares of common stock, 168,889 shares as
a penalty for the late approval of ActiveCore's February 14, 2003
SB-2 filing and warrants to purchase 265,000 shares of common stock
as a commitment fee. We are registering 29,735,000 shares in this
offering which may be issued under the Equity Line of Credit.
THERE ARE CERTAIN RISKS RELATED TO SALES BY CORNELL CAPITAL PARTNERS
Thereare certain risks related to sales by Cornell Capital Partners,
including:
o The outstanding shares are issued based on discount to the market
rate. As a result, the lower the stock price around the time Cornell
is issued shares, the greater chance that Cornell gets more shares.
This could result in substantial dilution to the interests of other
holders of common stock.
o To the extent Cornell sells its common stock, the common stock price
may decrease due to the additional shares in the market. This could
allow Cornell to sell greater amounts of common stock, the sales of
which would further depress the stock price.
o The significant downward pressure on the price of the common stock as
Cornell sells material amounts of common stocks could encourage short
sales by Cornell or others. This could place further downward
pressure on the price of the common stock.
o WESTROCK ADVISORS, INC. Westrock Advisors, Inc. is an unaffiliated
registered broker-dealer that has been retained by us. Greg Martino,
Westrock Advisors, Inc.'s President, makes the investment decisions
on behalf of Westrock Advisors. For its services in connection with
the Equity Line of Credit, Westrock Advisors, Inc. received a fee of
100,000 shares of common stock. These shares are being registered in
this offering.
o REVELATE LIMITED. Shabir Randeree makes the investment decisions for
Revelate Limited. Under the terms of our acquisition of Ignition
Entertainment, Revelate was to receive 5,000,000 shares for providing
a committed Letter of Credit and Factoring facility for Ignition. The
facility was in place until ActiveCore divested of Ignition
Entertainment with effect from March 31, 2003.
13
o NEIL FISHENDEN. Mr. Fishenden was paid 180,000 shares of ActiveCore
as a premium payment on a note for 80,000 pounds that was provided to
Ignition Entertainment in December 2002.
SHARES ACQUIRED AS A RESULT OF ACQUISITION ACTIVITIES
o BARNOOSE LIMITED. The investment decisions for Barnoose are made by
Martin Monnickedam. Barnoose was one of the original shareholders of
Ignition at the time it was purchased by ActiveCore in May 2002.
o SCI HEALTHCARE GROUP. In September 2003, SCI Healthcare sold its data
integration division to ActiveCore for consideration of $200,000 cash
and $6,472,492 shares of ActiveCore's common stock. Messrs. Peterson,
Roher and Cudmolinsky make the investment decisions for SCI
healthcare.
o E-POCKET INC. In June 2003, ActiveCore purchased 5% of the equity of
e-Pocket in exchange for the issuance of 10,000,000 shares of
ActiveCore's Common Stock. Mr. Peter Turk makes the investment
decisions for e-Pocket.
o KARORA TECHNOLOGIES INC. In March 2003 and in August 2003 two
separate transactions were entered in to by ActiveCore to obtain
first the exclusive healthcare rights to XML connector then
subsequently the full source code and exclusive ownership of XML
connector. Consideration was 500,000 shares valued at $12,500 and
$87,644 in cash for the rights to the healthcare followed by another
300,000 shares and valued at $8,400 and $7,139 in cash for the full
source code ownership. Messrs. Gavin Terrill and Mr. Peter McBride
make the investment decisions for Karora.
OFFICERS AND DIRECTORS
o BRIAN MACDONALD, PETER HAMILTON, KEVIN BIRCH AND GENO VILLELLA. Mr.
MacDonald and Mr. Hamilton are officers and directors of our Company.
Mr. Birch is an officer of our Company and Mr. Villella is an
employee of our Company. A portion of the shares being registered in
this offering on behalf of Messrs. MacDonald, Hamilton, Birch and
Villella were issued in connection with the stock purchase agreement
between ActiveCore and International Technology Marketing, Inc. As
explained elsewhere in this prospectus the reason for acquiring ITM
was to obtain the management services of Messrs. MacDonald, Hamilton,
Birch, and Villella. Of the 50,000,000 shares provided in
consideration for the acquisition of ITM, 20,000,000 were issued in
the quarter ended September 30, 2002; 10,000,000 were issued in the
quarter ended December 31, 2002 and the remaining 20,000,000 were
issued in the quarter ended June 30, 2003. International Technology
Marketing Inc. and ActiveCore Technologies completed a stock purchase
agreement on September 17, 2001, which was subsequently ratified by a
resolution passed at the annual shareholders' meeting held on
November 16, 2001. In negotiating the agreement between ITM and
ActiveCore it was originally agreed that the 50,000,000 shares would
be released upon achievement of milestones for revenue achievement.
30,000,000 of the shares were released in accordance with the
original milestone agreement and recorded as "compensation shares"
and valued at market as at the last trading day of the quarter in
which they were released. In the quarter ended September 30, 2002,
20,000,000 shares became eligible for release and in the quarter
ended December 31, 2002, 10,000,000 shares became eligible for
release, the shares were valued at the closing price of the shares as
at September 30, 2002 and December 31, 2002, respectively, and
totaled $5,500,000. This value was recorded as an expense in the
financial statements for the year ended December 31, 2002 which
greatly increased our operating loss for the fiscal year on a
non-cash basis. Following the end of the fiscal year it became
apparent to the board of directors that the arrangement whereby
milestone attainment would result in additional shares being released
at progressively higher share prices actually worked against the
interests of shareholders as greater expenses would have been
incurred thereby resulting in reduced profits and thereby reduced
share prices. The board of directors decided to amend the agreement
dated August 17, 2001 to remove the requirement for milestone
attainment. In total, Messrs. MacDonald, Hamilton and Birch each
received 14,973,913 shares of common stock and Mr. Villella received
4,278,261 shares of common stock in connection with the ITM stock
purchase agreement. All of these shares are being registered in this
offering.
In addition to the 50,000,000 shares referenced above as a result of
the ITM acquisition, ActiveCore is registering 2,000 shares of common
stock issued in connection with the acquisition of Springboard
Technology Solutions now renamed ActiveCore Technologies Limited our
Canadian subsidiary. These shares were issued to Messrs. MacDonald,
Hamilton, Birch, Villella and Ms. Bullock in connection with that
14
acquisition, which was consummated on July 1, 2002. The cost of the
acquisition was accounted for as $260 which was the market value of
the shares at issue date. Messrs. MacDonald, Hamilton and Birch each
received 560 shares of common stock. Mr. Villella and Ms. Bullock
each received 160 shares of common stock. All of these shares are
being registered in this offering.
In the quarter ended June 30, 2003 Messrs. MacDonald and Hamilton
converted debts owed to them by ActiveCore into shares and each was
provided with 17,084,976 shares representing conversion of debts at
the rate of $0.025 per share. In the quarter ended September 30,
2003, Mr. Birch also converted amounts owed to him by Active Core and
received 1,562,700 shares converted at the rate of $0.025 per share.
o J. STEVEN SMITH. J. Steven Smith is an independent director of
ActiveCore and is the President and CEO of ROH Inc., an Alexandria,
Virginia based IT software and services company. As compensation for
serving as a director, 1,000,000 shares of common stock vested on the
first anniversary of his election to the board of directors and an
additional 1,000,000 shares will vest on November 1, 2003. Mr. Smith
was elected on November 16, 2001. Mr. Smith does not receive any
other consideration for his time and attention to ActiveCore
Technologies. These shares are being registered in this offering.
o STEPHEN LEWIS. Stephen Lewis is an independent director of ActiveCore
and is a self employed consultant and former business owner. As
compensation for serving as a director, 1,000,000 shares of common
stock vested on first becoming a director of ActiveCore and a second
1,000,000 shares will vest on November 1, 2003. Mr. Lewis was named
to the board on June 23 2003. Mr. Lewis is the independent financial
expert on our board.
CONSULTANTS AND PROFESSIONALS
o SONNY GOLDSTEIN. Mr. Goldstein has been employed by ActiveCore as a
consultant in relation to strategic planning and finance. Mr.
Goldstein provides ActiveCore with advice on its dealings with
various investors and prospective investor groups including the
International Brotherhood of Electrical Workers who have provided
ActiveCore with a term loan at the subsidiary level. Mr. Goldstein
was issued 1,000,000 shares for his services.
o SNIDER FINANCIAL GROUP INC. Snider financial in addition to acting as
an agent in several financings also assisted ActiveCore in locating
and negotiating brand name properties for game development such as
Zorro. The shares being registered in this filing are related to fees
earned for negotiating brand name properties. Mr. Ted Snider makes
the investment decisions for Snider Financial Group Inc.
o HAWK ASSOCIATES INC. In April 2003 ActiveCore entered into an
Investor Relations support agreement with Hawk Associates. Mr. Frank
Hawkins makes the financial and investment decisions for Hawk
Associates.
o DANSON PARTNERS LLC. Wayne Danson makes the investment decisions on
behalf of Danson Partners LLC. Danson Partners LLC was a consultant
to ActiveCore Technologies and provided consulting services in
connection with various financial and accounting matters. In
connection with its services, Danson Partners LLC was paid a fee of
$200,000. Of that total, $75,000 was paid in cash with the balance
paid by the issuance of 1,125,397 shares of common stock in relation
to ActiveCore's Equity Line of Credit with Cornell Capital. Over the
course of the year in which Danson Partners was engaged by ActiveCore
an additional 1,000,000 shares were provided to him as a bonus and
2,000,000 shares were provided to him on the basis that he convert
his outstanding fees to equity. This was accomplished on October
15th. These shares are being registered in this offering.
15
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by certain selling stockholders. There will be no
proceeds to us from the sale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners, L.P. under the Equity Line of Credit. The purchase
price of the shares purchased under the Equity Line of Credit will be equal to
92% of the lowest closing bid price of our common stock on the Over-the-Counter
Bulletin Board for the 5 days immediately following the notice date. ActiveCore
Technologies will pay Cornell Capital 3% of each advance as an additional fee.
ActiveCore is registering 29,735,000 shares of common stock for issuance
under the Equity Line of Credit. At a recent price of $0.03 per share,
ActiveCore would receive gross proceeds of $892,050.
For illustrative purposes, we have set forth below our intended use of
proceeds for the range of net proceeds indicated below to be received under the
Equity Line of Credit. The table assumes estimated offering expenses of $50,000
plus 3% retainage payable to Cornell Capital Partners.
GROSS PROCEEDS $892,050
NET PROCEEDS $815,288
USE OF PROCEEDS: AMOUNT
- --------------------------------------------------------------------------------
Repayment of Loans $129,000
Sales and Marketing 100,000
Administrative Expenses, Including Salaries 300,000
General Working Capital 286,288
----------------
TOTAL $815,288
================
In addition to the net proceeds described above, Cornell Capital Partners
holds warrants to purchase 265,000 shares of common stock, which shares are
being registered in this offering. Of that total, warrants to purchase 15,000
shares have an exercise price of $0.50 per share and warrants to purchase
250,000 shares have an exercise price of $0.099 per share. If all warrants were
exercised, then ActiveCore would receive net proceeds of $32,250 from such
exercise. Any proceeds received upon issuance of outstanding warrants will be
used for general working capital purposes.
16
DILUTION
The net tangible book value of our Company as of September 30, 2003 was
($1,800,712) or ($0.0065) per share of common stock. Net tangible book value per
share is determined by dividing the tangible book value of our Company (total
tangible assets less total liabilities) by the number of outstanding shares of
our common stock. Since this offering is being made solely by the selling
stockholders and none of the proceeds will be paid to our Company, our net
tangible book value will be unaffected by this offering. Our net tangible book
value, however, will be impacted by the common stock to be issued under the
Equity Line of Credit. The amount of dilution will depend on the offering price
and number of shares to be issued under the Equity Line of Credit. The following
example shows the dilution to new investors at an offering price of $0.03 per
share which is in the range of the recent share price.
If we assume that our Company had issued 29,735,000 shares of common stock
under the Equity Line of Credit at an assumed offering price of $0.03 per share
(I.E., the number of shares registered in this offering under the Equity Line of
Credit), less retention fees of $26,762 and offering expenses of $50,000, our
net tangible book value as of September 30, 2003 would have been ($0.0035) per
share. Note that at an offering price of $0.03 per share, ActiveCore
Technologies would receive gross proceeds of $892,050. Such an offering would
represent an immediate increase in net tangible book value to existing
stockholders of $0.0032 per share and an immediate dilution to new stockholders
of $0.0270 per share. The following table illustrates the per share dilution:
Assumed public offering price per share $ 0.0300
Net tangible book value per share before this offering ($ 0.0065)
Increase attributable to new investors $ 0.0035
----------
Net tangible book value per share after this offering ($0.0030)
---------
Dilution per share to new stockholders $ 0.0270
=========
The offering price of our common stock is based on the then-existing
market price. In order to give prospective investors an idea of the dilution per
share they may experience, we have prepared the following table showing the
dilution per share at various assumed offering prices:
DILUTION PER
ASSUMED NO. OF SHARES SHARE TO NEW
OFFERING PRICE TO BE ISSUED(1) INVESTORS
-------------- --------------- ------------
$0.0300 29,735,000 $0.0270
$0.0225 29,735,000 $0.0181
$0.0150 29,735,000 $0.0098
$0.0075 29,735,000 $0.0015
(1) This represents the maximum number of shares of common stock that will be
registered under the Equity Line of Credit.
17
EQUITY LINE OF CREDIT
SUMMARY. In April 2002, we entered into an Equity Line of Credit with
Cornell Capital Partners, L.P. Pursuant to the Equity Line of Credit, we may, at
our discretion, periodically sell to Cornell Capital Partners shares of common
stock for a total purchase price of up to $10.0 million. For each share of
common stock purchased under the Equity Line of Credit, Cornell Capital Partners
will pay 92% of the lowest closing bid price of our common stock on the
Over-the-Counter Bulletin Board or other principal market on which our common
stock is traded for the 5 days immediately following the notice date. Cornell
Capital Partners is a private limited partnership whose business operations are
conducted through its general partner, Yorkville Advisors, LLC. Further, Cornell
Capital Partners will retain a fee of 3% of each advance under the Equity Line
of Credit. In addition, we engaged Westrock Advisors, Inc., a registered
broker-dealer, to advise us in connection with the Equity Line of Credit. For
its services, Westrock Advisors, Inc. received 100,000 shares of our common
stock. On February 14, 2003, the SB-2 Registration Statement that was filed by
ActiveCore was declared effective. To date, ActiveCore has received $1.1 million
in exchange for the issuance of 29,000,000 shares of common stock under the
Equity line of Credit. The Company is registering an additional 29,735,000
shares of common stock for the Equity line of Credit pursuant to this
registration statement. The costs associated with this registration will be
borne by us. There are no other significant closing conditions to draws under
the equity line.
EQUITY LINE OF CREDIT EXPLAINED. Pursuant to the Equity Line of Credit, we
may periodically sell shares of common stock to Cornell Capital Partners, L.P.
to raise capital to fund our working capital needs. The periodic sale of shares
is known as an advance. We may request an advance every 10 trading days. A
closing will be held 7 trading days after such written notice at which time we
will deliver shares of common stock and Cornell Capital Partners, L.P. will pay
the advance amount. There are no closing conditions for any of the draws other
than the written notice and associated correspondence.
We may request advances under the Equity Line of Credit once the
underlying shares are registered with the Securities and Exchange Commission.
Thereafter, we may continue to request advances until Cornell Capital Partners
has advanced $10.0 million or 24 months after the effective date of the
accompanying registration statement, whichever occurs first.
The amount of each advance is limited to a maximum draw down of $425,000
in any thirty-day period. The amount available under the Equity Line of Credit
is not dependent on the price or volume of our common stock. Our ability to
request advances is conditioned upon us registering the shares of common stock
with the SEC. In addition, we may request advances if the shares to be issued in
connection with such advances would result in Cornell Capital Partners owning
more than 9.9% of our outstanding common stock. We do not have any agreements
with Cornell Capital Partners regarding the distribution of such stock, although
Cornell Capital Partners has indicated that intends to promptly sell any stock
received under the equity line of credit.
We cannot predict the actual number of shares of common stock that will be
issued pursuant to the Equity Line of Credit, in part, because the purchase
price of the shares will fluctuate based on prevailing market conditions and we
have not determined the total amount of advances we intend to draw. Nonetheless,
we can estimate the number of shares of our common stock that will be issued
using certain assumptions. Assuming we issued the number of shares of common
stock being registered in the accompanying registration statement at a recent
price of $0.03 per share, we would issue 29,735,000 shares of common stock to
Cornell Capital Partners, L.P. for gross proceeds of $892,050. These shares
would represent less than 9.1% of our outstanding common stock upon issuance. We
are registering 29,735,000 shares of common stock for the sale under the Equity
Line of Credit. Accordingly, we would need to register additional shares of
common stock in order to fully utilize the $10.0 million available under the
Equity Line of Credit at the current price of $0.03 per share. Put another way
we do not have sufficient common shares available to draw down the entire
$10,000,000 available under the equity line at current share prices.
There is an inverse relationship between our stock price and the number of
shares to be issued under the Equity Line of Credit. That is, as our stock price
declines, we would be required to issue a greater number of shares under the
Equity Line of Credit for a given advance. This inverse relationship is
demonstrated by the following table, which shows the number of shares to be
issued under the Equity Line of Credit at a recent price of $0.03 per share and
25%, 50% and 75% discounts to the recent price.
18
Purchase Price $0.0075 $0.0150 $0.0225 $0.0300
No. of Shares(1): 29,735,000 29,735,000 29,735,000 29,735,000
Total Outstanding (2): 327,656,703 327,656,703 327,656,703 327,656,703
Percent Outstanding (3): 9.1% 9.1% 9.1% 9.1%
(1) Represents the maximum number of shares of common stock being registered
herewith.
(2) Represents the total number of shares of common stock outstanding after
the issuance of the shares to Cornell Capital Partners.
(3) Represents the shares of common stock to be issued as a percentage of the
total number shares outstanding.
Proceeds used under the Equity Line of Credit will be used in the manner
set forth in the "Use of Proceeds" section of this prospectus. We cannot predict
the total amount of proceeds to be raised in this transaction because we have
not determined the total amount of the advances we intend to draw.
We expect to incur expenses of approximately $50,000 in connection with
this registration, consisting primarily of professional fees. In connection with
the Equity Line of Credit, we paid Cornell Capital Partners a one-time
commitment fee payable in 3,032,000 shares of common stock, 168,889 shares of
common stock as a penalty for late approval by the SEC of the February 14, 2003
SB-2 and warrants to purchase 265,000 shares of common stock, of which 15,000
shares have an exercise price of $0.50 per share and 250,000 shares have an
exercise price of $0.099 per share. In addition, we issued 100,000 shares of
common stock to Westrock Advisors, Inc., an unaffiliated registered
broker-dealer, as a placement agent fee and 1,040,000 shares of common stock to
Danson Partners, LLC as a consulting fee.
19
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution of
our common stock owned by the selling stockholders may be effected directly to
purchasers by the selling stockholders or by pledgees, transferees or other
successors in interest, as principals or through one or more underwriters,
brokers, dealers or agents from time to time in one or more transactions (which
may involve crosses or block transactions) (i) on the over-the-counter market or
in any other market on which the price of our shares of common stock are quoted
or (ii) in transactions otherwise than on the over-the-counter market or in any
other market on which the price of our shares of common stock are quoted. Any of
such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at varying prices
determined at the time of sale or at negotiated or fixed prices, in each case as
determined by the selling stockholders or by agreement between the selling
stockholders and underwriters, brokers, dealers or agents, or purchasers. If the
selling stockholders effect such transactions by selling their shares of common
stock to or through underwriters, brokers, dealers or agents, such underwriters,
brokers, dealers or agents may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders or commissions from
purchasers of common stock for whom they may act as agent (which discounts,
concessions or commissions as to particular underwriters, brokers, dealers or
agents may be in excess of those customary in the types of transactions
involved). The selling stockholders and any brokers, dealers or agents that
participate in the distribution of the common stock may be deemed to be
underwriters, and any profit on the sale of common stock by them and any
discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Equity Line of Credit. Cornell Capital Partners will pay us 92% of the lowest
closing bid price of our common stock on the Over-the-Counter Bulletin Board or
other principal trading market on which our common stock is traded for the 5
days immediately following the advance date. In addition, Cornell Capital
Partners will retain 3% of the proceeds received by us under the Equity Line of
Credit, and received a one-time commitment fee of 3,032,000 shares of our common
stock and warrants to purchase 265,000 shares of common stock, of which 15,000
shares have an exercise price of $0.50 per share and 250,000 shares have an
exercise price of $0.099 per share. The 8% discount, the 3% retention and the
one-time commitment fee are underwriting discounts. In addition, we engaged
Westrock Advisors, Inc., an unaffiliated registered broker-dealer, to advise us
in connection with the Equity Line of Credit. For its services, Westrock
Advisors, Inc. received 100,000 shares of our common stock.
Cornell Capital Partners, L.P. was formed in February 2000 as a Delaware
limited partnership. Cornell Capital Partners is a domestic hedge fund in the
business of investing in and financing public companies. Cornell Capital
Partners does not intend to make a market in our stock or to otherwise engage in
stabilizing or other transactions intended to help support the stock price.
Prospective investors should take these factors into consideration before
purchasing our common stock.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain states the shares of common stock may not be sold unless the shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
have agreed to indemnify Cornell Capital Partners and its controlling persons
against certain liabilities, including liabilities under the Securities Act. We
estimate that the expenses of the offering to be borne by us will be
approximately $50,000. For its services, Westrock Advisors, Inc. received
100,000 shares of our common stock. The offering expenses consist of: a SEC
registration fee of $331, printing expenses of $2,500, accounting fees of
$15,000, legal fees of $15,000 and miscellaneous expenses of $17,169. We will
not receive any proceeds from the sale of any of the shares of common stock by
the selling stockholders. We will, however, receive proceeds from the sale of
common stock under the Equity Line of Credit.
20
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Registration M, the selling stockholders or their agents
may not bid for, purchase, or attempt to induce any person to bid for or
purchase, shares of our common stock while such selling stockholders are
distributing shares covered by this prospectus. Accordingly, except as noted
below, the selling stockholders are not permitted to cover short sales by
purchasing shares while the distribution is taking place. Cornell Capital
Partners can cover any short positions only with shares received from us under
the Equity Line of Credit. The selling stockholders are advised that if a
particular offer of common stock is to be made on terms constituting a material
change from the information set forth above with respect to the Plan of
Distribution, then, to the extent required, a post-effective amendment to the
accompanying registration statement must be filed with the Securities and
Exchange Commission.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following information should be read in conjunction with the
consolidated financial statements of IVP Technology operating under the
registered name ActiveCore Technologies Inc. and the notes thereto appearing
elsewhere in this filing. Statements in this Management's Discussion and
Analysis or Plan of Operation and elsewhere in this prospectus that are not
statements of historical or current fact constitute "forward-looking
statements." For an overview of the company please see the section entitled
Description of the Business which follows this section.
BUSINESS OVERVIEW
ActiveCore operates its business under the name ActiveCore Technologies,
Inc. ActiveCore is a Toronto-based commercial and consumer software developer,
licensor, publisher, marketer, and distributor. We concentrate on providing
consumers and enterprises with mobile device and web software and provide
information technology services to businesses. We operate through two divisions,
enterprise and consumer. We have operations in the United Kingdom, Canada and
the United States. In the enterprise division, we develop, market and distribute
mobile device, web based and other software products and provide services
primarily in the healthcare and insurance markets. In the consumer division, we
develop, license, market, publish and distribute mobile device and web based
entertainment software primarily in Europe and North America to wireless
carriers and through web portals.
Since July 1, 2002, ActiveCore has been concentrating on expanding its
customer base and its distribution capacity in both the consumer and enterprise
segments. In the consumer division, we are continuing to develop our own, and
are searching for additional third party mobile game titles to fill our release
schedule for publication and distribution for 2004 and 2005. This may entail
completing strategic alliances with or acquiring development companies, as well
as licensing completed products/titles for publication and distribution rights
in certain geographical territories or for certain mobile hardware platforms. In
the enterprise division, we also continue to develop our own software products
as well as search for additional distribution rights for third party software
products to round out our software offerings for our clients, as well as to add
more information technology service personnel and obtain new information
technology service contracts. To accelerate this growth, ActiveCore recently
acquired the former medical data integration clients of Toledo based SCI
Healthcare group, Inc.
In addition to the foregoing, we have also made an equity investment in
one other Company. The investment is a 5% equity stake in e-pocket Inc., which
is a private Company headquartered in Canada. e-Pocket has developed a digital
cash software solution for banks, merchants and consumers for web based
purchasers primarily for micro-payments, defined as payments under $10.00.
e-Pocket is a development stage Company that expects to have its first trial
operation commence by year-end between a number of merchants and several banks.
E-Pocket and ActiveCore have also signed a development agreement whereby
ActiveCore will develop the code for e-pocket's micro-payments software based on
mobile phones.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
REVENUES. During the nine months ended September 30, 2003, we generated
$355,776 in revenue in comparison to revenue of $257,070 in the corresponding
period ended September 30, 2002. From a revenue source perspective in the nine
months ended September 30, 2003, $246,015 of revenue was generated by ActiveCore
Technologies Limited (formerly Springboard) from service work and product
installation, chiefly by ActiveCore's Medical Data Integration (MDI) division.
ActiveCore did not acquire Springboard Technology Solutions Inc. until July 1,
2002. Consequently this is the first quarter in which comparative revenues for
2002 include the Canadian operation. A small additional contribution to MDI
revenues came from the September 20th acquisition of the client contracts of SCI
Health Group in the United States. A further $103,051 was derived from
distribution of third party console games developed for the US market. This
market contributed $200,000 in game distribution revenues in the nine months
ended September 30, 2002. The Company is no longer active in this arena due to
the subsequent divestment of Ignition Entertainment. The Company accounted for
the divestment of Ignition Entertainment as discontinued operations with effect
from April 1, 2003. Therefore there is no revenue from Ignition UK included in
the results for the nine months ended September 30 of either year.
COST OF SALES. Cost of sales was $401,065 for the nine months ended
September 30, 2003 versus $1,229,061 for the nine months ended September 30,
2002. The principal cost of sales in the current fiscal year consisted of
amortization of the third party software licenses of $279,172, and other
purchased resale items amounting to $30,818. A sum of $91,075 was additionally
attributable to the direct labor costs of fulfillment in the period. The
principal cost of sales in the nine months ended September 30, 2002 was video
22
game distribution costs in the United States, in addition to the amortization of
the third party software license. The result of the cost of sales components
elaborated above led to a negative gross margin of $45,289 in the nine months
ended September 30, 2003 versus a negative gross margin of $971,991 in the nine
months ended September 30, 2002.
OPERATING EXPENSES. Total operating expenses for the nine months ended
September 30, 2003 were $2,303,219 versus $5,215,772 in the nine months ended
September 30, 2002. These expenses resulted in losses from operations of
$2,348,508 in the current period and $6,187,763 for the nine months ended
September 30, 2002.
The largest components of operating expenses in both years were related to
stock based compensation, salaries and wages, consulting fees and general and
administration expenses, with financial advisory fees playing a significant role
in 2002. These expenses are discussed below.
ActiveCore's Canadian operations accounted for $506,069 of salaries and
wages which represented the cost of developers, data management staff,
administration and sales and marketing staff. A further $13,598 represents the
ten days of operations by the US division of MDI Solutions. Salaries and wages
include costs of all group insurance and various government payroll taxes. In
the period ended September 30, 2002 salaries and wages were $54,124, entirely
within the Canadian operation. The increase in current year expense reflects a
full nine months of Canadian operations versus only three in the prior year (the
latter was acquired on July 1st, 2002). Additional staff have also been added at
the operations level to facilitate the development of the RecessGames portal,
the Zorro property and other games, and the maintenance and refinement of XML
based products for the enterprise division. The Company additionally paid an
aggregate of $38,000 in performance and signing bonuses to certain key personnel
in the current year.
Stock based compensation of $618,080 in the nine months ended September
30, 2003 represents amortization of deferred directors' remuneration and the
final release of shares earned under the ITM purchase agreement, in the amount
of $540,000. In the third quarter of 2002, $3,800,000 in stock based
compensation was recorded as the managers of ActiveCore had met the first
milestone payment on the ITM compensation shares. Under the original ITM
purchase agreement, stock was to be released to the managers of ITM as sales
revenue targets were met - at the time the original agreement was made it was
anticipated by both the former directors of IVP and the owners of ITM that the
stock issued in exchange for the ITM acquisition would have been valued as at
the date of the agreement and accounted for as a large goodwill value on the
balance sheet. However during ActiveCore's prolonged Form SB-2 approval process
it was determined that the common stock was required to be accounted for at
closing share price values as at the quarter end in the each of the quarters
where the original sales revenue targets were achieved.
General and Administrative expenses were $562,907 for the nine months
ended September 30, 2003 versus $153,889 for the same period of 2002. In the
current period the largest components of G & A are the write down of commitment
fees on the equity line of credit ($154,050); occupancy and office costs at
ActiveCore's main facility in Toronto; travel and promotion expenditures; and
costs associated with the retention of Hawk Associates, the annual general
meeting, and other investor relations expenditures. Hawk has been retained as
ActiveCore's Investor Relations advisor at a rate of $7,000 per month in
addition to a one-time grant of 2,000,000 shares of unregistered stock. The
significantly smaller figure for 2002 results from ActiveCore having been
largely inactive prior to the May 28 and July 1 subsidiary acquisitions.
Consulting fees for the nine months ending September 30, 2003 were
$212,974 versus $452,815 in the nine months ended September 30, 2002. The fees
to the end of September 30, 2003 reflect the amortization of several small
marketing agreements as well as the $50,000 paid to the consultant who
facilitated the Zorro license agreement. They also include external directors'
fees. In the nine months ended September 30, 2002, the costs reflected the value
of various financial and marketing consultants who were assisting ActiveCore in
relation to the Form SB-2 filing and expanding its product set and sales
opportunities.
Legal and accounting expenses were $214,209 in the nine months ended
September 30, 2003 versus $252,166 in the nine-month period ended September 30,
2002. The increase between the two most current quarters (primarily due to legal
fees incurred in the process of acquiring certain intangible assets and human
resources from SCI Health Group) is offset in the year to date numbers by the
impact of higher 2002 expenditures relative to acquisitions in the second
quarter of 2002 and the Form SB-2 preparation costs.
Management fees and financial advisory fees in the period ended September
30, 2003 were $120,688 and $39,914 respectively, versus $81,107 and $150,000
respectively for the nine months ended September 30, 2002. The current financial
23
advisory charges represent amortization of a consulting agreement for the
purpose of establishing a new term loan for $2,000,000 to assist with working
capital, versus the 2002 expense that related to placing the Equity Financing
arrangement with Cornell Capital Partners. Management fees have increased
overall partly due to the improved value of the Canadian dollar vis-a-vis
Toronto based personnel.
For the nine months ended September 30, 2003 ActiveCore incurred
amortization and depreciation charges of $28,378 versus $271,671 in the nine
months ended September 30, 2002. The current charges were primarily related to
computer equipment in use in ActiveCore's offices. The 2002 expense additionally
reflects the cumulative adjustment resulting from the renegotiation of the TiG
software license.
OTHER INCOME/EXPENSE
For the nine months ended September 30, 2002 ActiveCore realized a gain of
$924,904 on the early extinguishment of debt related to the aforementioned TiG
accounts payable balance, and $96,334 in respect of amounts due to DcD Holdings.
In the nine months ended September 30, 2003 there was no corresponding event.
Interest income from cash on deposit was $6,497 for the nine months ended
September 30, 2003 versus $5,126 for the nine months ended September 30, 2002.
Interest expense was significantly higher for the nine months ended
September 30, 2003, at $315,803, than in the comparative period ended September
30, 2002 that was $77,577. In the current year ActiveCore incurred interest
charges related to the recently negotiated first $500,000 tranche of a planned
$2,000,000 long term debt financing; interest penalties on the early retirement
of the convertible debenture; penalties for late filing of the SB-2 in
connection with the Equity Financing; commission charged on the Equity
Financing; and interest costs on the Berra term loan, whereas in the period
ended September 30, 2002 the interest expense was related principally to the
Berra note and the aforementioned convertible debenture, obtained from an
unrelated party.
The Company recorded a foreign exchange gain of $57,895 for the nine
months ended September 30, 2003 as a result of the decline of the US dollar in
relation to the Canadian Dollar. In the period ended September 30, 2002,
ActiveCore had no foreign exchange adjustment due to the relative stability of
the two currencies subsequent to the June quarter, there being no foreign
subsidiary prior to that date.
LOSS FROM CONTINUING OPERATIONS. As a result of the items specified above,
ActiveCore incurred a loss from continuing operations of $2,599,919 or $0.02 per
share for the nine months ended September 30, 2003, versus a loss of $5,238,976
or $0.06 per share for the nine months of 2002.
DISCONTINUED OPERATIONS
The Company recorded a net gain on discontinued operations from the sale
of Ignition Entertainment Limited of $2,396,009 for the nine months ended
September 30, 2003 versus a loss on discontinued operations of $1,127,835 for
the nine months ended September 30, 2002. As a result of the divestiture of
Ignition, ActiveCore had a net loss of $937,033, or $0.01 per share, for the
nine months ended September 30, 2003 compared to a net loss of $6,366,811, or
$0.07 per share, for the comparable period in the prior year.
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
REVENUES. During the three months ended September 30, 2003, we generated
$124,767 in revenue in comparison to revenue of $167,070 in the corresponding
period ended September 30, 2002. From a revenue source perspective in the third
quarter of fiscal year 2003, $118,057 of revenue was generated by ActiveCore
Technologies Limited from service work and product installation, chiefly by
ActiveCore's Medical Data Integration (MDI) division. The Company accounted for
the divestiture of Ignition Entertainment as discontinued operations with effect
from April 1, 2003. Therefore there is no revenue from Ignition UK included in
the results for the three months ended September 30 of either year. ActiveCore
did not acquire Springboard, now ActiveCore Technologies Limited, until July 1,
2002. Consequently this is the first quarter in which comparative revenues for
2002 include the Canadian operation. The third quarter results from 2002
comprise $57,070 from Springboard's contribution, with the balance being from
distribution of third party console games in the US. During the third quarter of
2003 revenue from the MDI division was still affected by the SARS outbreak in
Toronto which constrained revenue earning opportunities within the existing
hospital contracts and in terms of expanding our operations to other health care
units in the US and Canada. A small additional contribution to MDI revenues came
from the September 20th acquisition of the client contracts of SCI Health Group
in the United States.
24
COST OF SALES. Cost of sales was $113,945 for the three months ended
September 30, 2003 versus $322,733 for the three months ended September 30,
2002. The principal cost of sales items in the third quarter 2003 consisted of
amortization of the Classifier software license of $89,202 while the principal
cost of sales in the third quarter ended September 30, 2002 was video game
distribution costs, in the United States, in addition to the amortization of the
classifier license. The Company recorded amortization of prepaid licenses of
$92,983 related to IVP's Classifier(TM) and I-Bos(TM) distribution and license
agreements in the third quarter of both 2003 and 2002. The result of the cost of
sales components elaborated above led to a gross profit of $10,822 for the three
months ended September 30, 2003 versus a negative gross profit of $155,663 for
the three months ended September 30, 2002.
OPERATING EXPENSES. Total operating expenses for the three months ended
September 30, 2003 were $720,614 versus $3,957,501 for the three months ended
September 30, 2002. These expenses resulted in a loss from operations of
$709,792 in the most recent quarter and $4,113,164 in the quarter ended
September 30, 2002.
The largest components of third quarter fiscal year 2003 operating
expenses were related to stock based compensation, salaries and wages,
consulting fees and general and administration expenses. These expenses are
discussed below.
ActiveCore's Canadian operations accounted for $256,497 of salaries and
wages which represented the cost of developers, data management staff,
administration and sales and marketing staff. Additional staff have been added
throughout the year, at the operations level, to facilitate the development of
the RecessGames portal, the Zorro property and other games, and the maintenance
and refinement of XML based products for the enterprise division. A further
$13,598 represents the ten days of operations by the US division of MDI
Solutions. Salaries and wages include costs of all group insurance and various
government payroll taxes. For the period ended September 30, 2002 salaries and
wages were only $54,124, entirely within the Canadian operation, which at that
point had not begun developing consumer products.
Stock based compensation of $44,346 for the third quarter ended September
30, 2003 represents amortization of directors' remuneration. In the third
quarter of 2002, $3,800,000 in stock based compensation was recorded as the
managers of ActiveCore had met the first milestone payment on the ITM
compensation shares. Under the original ITM purchase agreement, stock was to be
released to the managers of ITM as sales revenue targets were met - at the time
the original agreement was made it was anticipated by both the former directors
of IVP and the owners of ITM that the stock issued in exchange for the ITM
acquisition would have been valued as at the date of the agreement and accounted
for as a large goodwill value on the balance sheet. However during ActiveCore's
prolonged Form SB-2 approval process it was determined that the common stock was
required to be accounted for at closing share price values as at the quarter end
in the each of the quarters where the original sales revenue targets were
achieved.
General and Administrative expenses were $170,540 for the quarter ended
September 30, 2003 versus $(170,872) in the quarter ended September 30, 2002.
For the most current quarter the largest component of G & A was the write down
of commitment fees on the equity line of credit and the cost associated with the
retention of Hawk Associates as ActiveCore's Investor Relations firm. Hawk has
been retained at a rate of $7,000 per month in addition to a one time 2,000,000
unregistered stock grant. The negative figure for 2002 results from the
restatement of infrastructure and management fees previously billed to the IVP
parent by Springboard Technology Solutions, prior to its acquisition by IVP.
Consulting fees for the three months ended September 30, 2003 were
$119,044 versus $102,835 for the quarter ended September 30, 2002. The fees for
the quarter ended September 30, 2003 reflect the amortization of several small
marketing agreements as well as the $50,000 paid to the consultant who
facilitated the Zorro license agreement. For the third quarter ended September
30, 2002, the costs reflected the value of various financial and marketing
consultants who were assisting ActiveCore in relation to the Form SB-2 filing
and expanding its product set and sales opportunities.
Legal and accounting expenses were $60,335 for the three months ended
September 30, 2003 versus $40,192 for the three month period ended September 30,
2002. The increase between the periods was primarily due to legal fees incurred
in the process of acquiring certain intangible assets and human resources from
SCI Health Group.
Management fees and financial advisory fees for the three months ended
September 30, 2003 were $44,346 and $9,098 respectively, versus $23,301 and $0
respectively for the quarter ended September 30, 2002. The financial advisory
charges represent amortization of a consulting agreement for the purpose of
establishing a new term loan for $2,000,000 to assist with working capital.
For the quarter ended September 30, 2003 ActiveCore incurred amortization
and depreciation charges of $9,656 versus $107,921 for the quarter ended
September 30, 2002. The current charges were primarily related to computer
25
equipment in use in ActiveCore's offices. The 2002 expense additionally reflects
the cumulative adjustment resulting from the renegotiation of the TiG software
license.
OTHER INCOME/EXPENSE
For the quarter ended September 30, 2002 ActiveCore realized a gain of
$924,904 on the early extinguishment of debt related to the aforementioned TiG
accounts payable balance. For the quarter ended September 30, 2003 there was no
corresponding event.
Interest income from cash on deposit was $0 for the quarter ended
September 30, 2003 versus $5,084 for the quarter ended September 30, 2002.
Interest expense was significantly higher for the quarter ended September
30, 2003, at $88,673, than in the comparative period ended September 30, 2002
which was $11,432. For the current quarter ActiveCore incurred interest charges
related to the recently negotiated first $500,000 tranche of a planned
$2,000,000 long term debt financing and interest costs on the Berra term loan in
addition to accruing interest arising from the expiry of the grace period on the
Equity line of credit. For the quarter ended September 30, 2002 the interest
expense was related principally to the Berra note and a convertible debenture
obtained from an unrelated party.
The Company recorded a foreign exchange gain of $43,821 for the three
months ended September 30, 2003 as a result of the decline of the US dollar in
relation to the Canadian Dollar. For the quarter ended September 30, 2002,
ActiveCore had no foreign exchange adjustment due to the relative stability of
the two currencies subsequent to the June quarter.
LOSS FROM CONTINUING OPERATIONS. As a result of the items specified above,
ActiveCore incurred a loss from continuing operations of $754,644 or $0.00 per
share versus a loss of $3,194,608 or $0.03 per share for the third quarter of
2002.
NET INCOME (LOSS)
DISCONTINUED OPERATIONS
For the three months ended September 30, 2003 there was no effect on
operations relating to the discontinued operations of Ignition Entertainment
Limited. For the three months ended September 30, 2003 ActiveCore had a net loss
from the discontinued operations of Ignition Entertainment Limited of $915,876
or $(0.01) per share.
TWELVE MONTHS ENDED DECEMBER 31, 2002 COMPARED WITH THE TWELVE MONTHS
ENDED DECEMBER 31, 2001
REVENUES. During the twelve months ended December 31, 2002, we generated
$3,210,595 in revenue in comparison to revenue of only $67,358 in the 2001
fiscal year. From a revenue source perspective in 2002, $3,093,481 of revenue
was generated from the sale of video game entertainment products and $117,114
resulted from the sale of data solution products and services. In terms of
entertainment products $2,896,532 and $196,949 respectively, were generated by
Ignition Entertainment Limited and IVP Technology (now ActiveCore) d.b.a as
Ignition USA. Ignition Entertainment Limited was formed in December 2001 and
commenced operations in April 2002, when it made several acquisitions of
operating companies and other assets. ActiveCore acquired Ignition on May 28,
2002. ActiveCore acquired Springboard on July 1, 2002. Accordingly, ActiveCore
had no revenue from either Ignition Entertainment Limited or Springboard in the
comparable period in the prior year. All revenue for the comparative period
ended December 31, 2001 was from one installment sale of the PowerAudit software
program in the year 2000, during the fiscal year 2001 the account receivable
related to the installment sale was written off to bad debts. In fiscal 2002,
IVP elected to terminate the distribution license for PowerAudit as management
determined that it could not run a profitable business based on the product.
COST OF SALES. Cost of sales was $4,663,125 for the twelve months ended
December 31, 2002 versus $259,837 in 2001. The principal cost of sales items in
2002 consisted of video entertainment product cost of goods sold of $2,702,472
in the UK subsidiary coupled with publisher's fees and production and sales cost
in the US operation of $26,985 and purchases of third party hardware and
software of $41,130 in Springboard Technology. In addition, the company recorded
amortization of prepaid licences of $1,358,899 related to ActiveCore's
Classifier(TM) and I-Bos(TM) distribution and license agreement, and product
development costs of $251,796 incurred in Ignition Entertainment Limited for
game development. The remaining component of cost of sales related to carriage
and duty charges of $30,047. In 2001 ActiveCore recognized cost of sales of
26
$259,837 related to the amortization of the PowerAudit distribution agreement.
The result of the cost of sales components elaborated above led to a negative
gross margin of $1,452,530 in 2002 of which $1,640,742 represented non-cash
items. In the fiscal year 2001 the negative gross margin was $192,479.
OPERATING EXPENSES. Total operating expenses for the twelve months ended
December 31, 2002 were $20,696,137 versus $996,328 in the fiscal year ended
December 31, 2001.
The largest components of fiscal year 2002 operating expenses related to
two non-cash items, namely, a charge of $11,086,863 related to the write off of
the excess of the purchase price of Ignition and Springboard over the net assets
acquired and a charge for $5,500,000 related to "stock based compensation". In
the case of the first item it was determined by management that it would not be
possible to determine an inexpensive methodology to conservatively address the
regulatory requirements to value the intellectual property assets acquired with
the acquisitions of Ignition Entertainment and Springboard Technology. Company
management determined that the only appropriate course of action was to write
off the excess of purchase price, primarily intellectual property assets. The
size of the write off of the Ignition assets was increased as a result of the
process leading to the approval of ActiveCore's SB-2 when it was determined that
the purchase price of Ignition was required to be increased to comply with rules
related to the pricing of ActiveCore's shares three days before and after
closing date. The second largest component of operating expenses arose as a
result of the accounting treatment of shares issued to complete the purchase of
ITM. Rather than recognizing a large goodwill amount on the acquisition of ITM,
which company had little in the way of tangible assets, it was decided to
recognize the value of the shares issued for the stock purchase agreement, on
the books of ActiveCore only, as "earned" by management as its revenue
milestones were achieved and value the shares as at the stock price on the last
day of the quarter in which the milestones are achieved. Specifically as shares
to the former shareholders of International Technology Marketing, Inc. were
issued from the escrow as revenue milestones are met, the issued shares were
priced at the end of quarter share price and expensed on the income statement at
that value. There were no comparable expenses in the 2001 fiscal year.
In 2002 ActiveCore expensed $1,176,084 in salary and wage costs versus
none in 2001. On January 1, 2002 the company became active and moved out of the
development stage. The breakdown of salaries and wages consisted of $46,025 in
ActiveCore's Chicago sales office, $175,110 in Springboard Technology in Toronto
and $954,948 in Ignition's offices in London and Banbury UK. Salaries and wages
include costs of all group insurance and government payroll taxes. The Company
had a high cost base in its UK operation in relation to salaries in the US and
Canadian operations. There were no salary and wage costs in 2001 as there were
no active operations in 2001.
Consulting fees for the year ending December 31, 2002 and December 31,
2001 were $1,000,876 and $420,694 respectively. Consulting fees in 2002
consisted of $312,641 for Ignition Entertainment - primarily the cost of certain
people employed in that operation, $46,543 for the former Springboard Technology
also for certain staff employed in operating capacities who bill as consultants,
and $641,692 at the parent company level of which $250,000 related to the share
conversion value of Devonshire's strategic marketing contract, and $161,158
represented payments of cash and shares to ActiveCore's officers and directors
specifically $60,933 to Brian MacDonald, the President and CEO, in the form of
cash; $15,226 to Peter Hamilton, the then SVP Corporate Development, in the form
of cash and $85,000 which was represented by 500,000 shares valued at .17 cents
as stock based compensation to J. Stephen Smith, our independent director. In
the case of Messrs. MacDonald and Hamilton the bulk of the salaries listed above
had been accrued, and was subsequently paid to them in 2003 through the issuance
of restricted shares of ActiveCore's common stock. In 2001 consultancy fees were
primarily related to the cost of caretaker management and finders fees related
to locating the ITM management team to take over operations at ActiveCore
Technologies.
Legal and accounting expenses were $523,063 in the fiscal year 2002 and
$119,773 in the fiscal year 2001. The significant rise in these expenses was due
to ActiveCore's filing of an SB-2 and the attendant requirements to upgrade its
accounting treatments from prior years, the cost of acquisitions of both
Springboard and Ignition and the cost of ongoing operations such as contract
creation and review. At the parent level ActiveCore spent $399,714, while the
former Springboard expensed $21,065 and Ignition expensed $102,282. In 2001 the
expenses were primarily for legal filing requirements, the annual shareholders'
meeting and ActiveCore's audits. We anticipate spending approximately the same
amount in 2003 as we did in 2002 as the requirements of the Sarbanes Oxley Act
have greatly increased the cost of remaining a public company.
Research and development expenses were $110,112 for the fiscal year 2002
in ActiveCore and $37,800 in the year ended 2001. The bulk of the money spent in
2002 related to work done to create Vaayu and several other enterprise products
as expenses related to platform games was included in cost of sales. In 2001,
$37,800 was related to the PowerAudit distribution agreement and consisted of
development support expenses.
27
In 2002, ActiveCore expensed $220,523 in management fees which consisted
of $53,040 at the parent level and $167,483 at Ignition Entertainment Limited.
At ActiveCore Technologies the fee was paid as salary to the other managers
Kevin Birch, Geno Villella and Sherry Bullock. The Ignition expenses were
payments to Montpelier which was the management company which received payments
for Vijay Chadha, Ajay Chadha and Martin Monnickendam for management services.
In 2001 management fees consisted of $59,500.
Amortization and depreciation in 2002 was $92,447 versus none in 2001.
Amortization in 2002 consisted primarily of fixed asset depreciation of $75,572
in Ignition, $16,012 in the former Springboard and $863 in the parent company.
In 2001 ActiveCore had no fixed assets. We will fully amortize the remaining
$356,806 on the balance sheet for the Classifier and I-Bos distribution license
in 2003 as our distribution agreement will expire at the end of December 2003.
We believe that this distribution agreement will probably be renewed for a
further period without cost.
In 2002, ActiveCore also expensed $166,275 in financial advisory fees of
which $165,000 pertained to fees earned by Danson Partners for assistance in the
registration process and $1,275 in fees to the company's stock transfer agent,
Pacific Stock Transfer. The Danson contract ran from March 2003 to February
2003.
In 2002, ActiveCore incurred general and administrative expenses of
$819,894 in the fiscal year end December 31, 2002 and $358,561 in the period
ended December 31, 2001. At the IVP level, the company expensed $340,387 of
which the largest components consisted of the following: $133,795 in finance
commitment fees, $63,235 in fees and licences, $28,481 in rental and
infrastructure charges, $87,530 in travel and lodging primarily as a result
multiple locations in the UK and the USA, $5,286 for investor relations
including press releases and $4,178 for website expenses. The Chicago office
cost the company $15,689 in general rent and other expenses including travel.
The Springboard Technology operation cost the company $38,212 in total including
all rent, taxes, communication and business promotion. The Ignition
Entertainment operations in London and Banbury incurred $441,297 in expenses
related to rents and other overheads. In Ignition the largest components were
rent, taxes, utilities, and insurance of $153,167; printing, advertising and
telephone of $87,009; travel and motor vehicle expenses were $80,143 and other
overhead items such as factoring costs, equipment running costs, subscriptions
and equipment rental costs came to $120,978.
Initially, ActiveCore expected general and administrative expenses to be
higher in fiscal 2003 as a result of owning both the Canadian and UK
subsidiaries for a full year rather than for the 6 and 7 month periods incurred
in 2002, respectively. However with the subsequent divestiture of the Ignition
subsidiary this will not be the case.
OTHER INCOME/EXPENSES
The most salient item in Other Income/(Expenses) consisted of a non-cash
gain from the re-negotiation of ActiveCore's distribution license for Classifier
and I-Bos with The Innovation Group Plc. The Company recognized a gain of
$1,021,238 as a result of renegotiating the license agreement to remove the
remaining cost of the distribution agreement following the first installment in
early 2002. There was no corresponding amount in the previous fiscal year ended
December 31, 2001.
Interest income from cash on deposit was $9,287 and incurred interest
expense of $111,623 which was up slightly from the $98,341 incurred in the
previous fiscal year. There was no interest income in the fiscal 2001 year.
The Company recorded a foreign exchange loss of $83,525 for the year as a
result of the decline of the US dollar in relation to both the UK Pound and the
Canadian Dollar in 2002. There was no corresponding gain or loss in the previous
fiscal year as the company was not carrying on operations.
NET LOSS. As a result of the items specified above, ActiveCore incurred a
net loss of $21,313,290 versus a loss of $1,287,148 in the previous fiscal year.
The loss on a per share basis was $0.32 versus a loss of $0.03 in the previous
year based on a weighted average of 66,013,725 and 44,855,321 shares
outstanding, respectively. As is shown in ActiveCore's cash flow statement,
discussed below, the majority of our losses resulted from the accounting
treatment of various share issuances and the write downs of goodwill, and
amortization.
LIQUIDITY AND CAPITAL RESOURCES
Prior to December 31, 2001 ActiveCore financed its operations through a
combination of convertible securities and the private placement of shares. In
the fiscal year ended December 31, 2002 ActiveCore entered into several
financing arrangements. These included an equity line of credit with Cornell
Capital Partners LP for $10,000,000 and factoring and letter of credit
facilities with DcD Group to assist in providing working capital for Ignition
Entertainment Limited. This latter arrangement has since been cancelled in
28
conjunction with the sale of Ignition Entertainment Limited. In the third
quarter of 2003, ActiveCore obtained the first $500,000 tranche of a planned
$2,000,000 term debt offering. With the divestiture of Ignition our need for
cash to fund operations has been reduced substantially with most of the need to
repay extended payables and to fund day-to-day operations until our product
sales and service revenues increase sufficiently to meet operating costs and the
costs of remaining a public Company.
As of September 30, 2003, our need for cash included satisfying $1,691,394
of current liabilities which consisted of accounts payable of $681,763, which
includes $72,851 owing to Danson Partners and which was satisfied by the
issuance of shares subsequent to the quarter end, and an amount of $226,824
recorded as owing to Orchestral, which is in dispute; $80,775 of accrued
liabilities; taxes payable of $187,527; other current liabilities of $2,683,
accrued interest of $58,110; the current portion of leases payable of $22,013;
amounts payable to related parties, consisting of management, of $97,637; and
notes payable of $542,886, which includes outstanding amounts to Berra, Cornell,
and SCI Health Group. As indicated in the liquidity section above, ActiveCore
entered in to a $500,000 term loan in July 2003 which is the first tranche of a
planned $2,000,000 term debt offering. In the quarter ended September 30, 2003
this $500,000 tranche and the extended portion of leases payable of $8,603, were
the only components of long-term debt. The Company substantially reduced its
short term and long term debt from the fiscal period ended December 31, 2002
through the issuance of the common shares that were due to the original
shareholders of Ignition Entertainment and also from the conversion of
shareholders loans, accrued expenses and unpaid salaries to several directors
and officers. In the quarter ended September 30, 2003 Mr. Kevin Birch converted
$39,068 of amounts due to him by ActiveCore, into 1,562,700 shares of common
stock.
The Company's condensed consolidated financial statements have been
presented on the basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has a net loss of $937,033 and a negative cash flow
from operations of $1,722,712 for the nine months ended September 30, 2003 and
has a working capital deficit of $1,387,826 and a stockholders deficiency of
$773,956 at September 30, 2003. Our ability to continue as a going concern is
dependent on our ability to raise additional bank or non-bank term and operating
credit, convertible debt, equity capital or to access capital under the equity
line and implement our business plan to market and sell our various enterprise
software and services and our various consumer software titles through our
wholly owned subsidiaries. Subsequent to the quarter end ActiveCore began
negotiations to purchase an equity interest in another Company to the extent of
$10,000,000. As part of the capital financing being negotiated with regard to
that investment, ActiveCore plans to raise additional funds which will assist
ActiveCore's working capital position.
At September 30, 2003 ActiveCore had cash on hand of $65,066 versus
$63,162 at the commencement of the year. In addition, as at the quarter end,
certain shareholders have also supported ActiveCore to the extent of $97,637 and
while there is no legal commitment for them to do so ActiveCore believes that
certain shareholders will continue to support ActiveCore in a similar manner.
These advances are shown in current liabilities and they have no fixed terms for
repayment. Subsequent to the end of the quarter certain shareholders have
assisted ActiveCore to the extent of an additional $150,000.
During February 2003, upon ActiveCore's SB-2 registration becoming
effective, ActiveCore received $970,000 proceeds from the issuance of a $1
million promissory note, net of a 3% cash fee of $30,000, which yields an
effective interest rate of approximately 12% per annum. The promissory note is
non-interest bearing and is to be paid in full within 95 calendar days. The
Company has the discretion to repay the note either through cash received from
the issuance of stock under the Equity Line of Credit Agreement or by cash from
other sources. If this note is not fully paid when due, the outstanding
principal balance owed will be payable in full together with interest at the
rate of 24% per annum or the highest rate permitted by law, if lower. To date,
ActiveCore has repaid $788,089 of this note. Since the note is now past due,
interest has been accrued, in accordance with the terms of the agreement, in an
aggregate amount of $34,707 to the end of the current quarter.
In April 2002, ActiveCore entered into an Equity Line of Credit Agreement
with Cornell Capital Partners, L.P. Under this agreement, ActiveCore may issue
and sell to Cornell Capital Partners common stock for a total purchase price of
up to $10 million. Subject to certain conditions, ActiveCore will be entitled to
commence drawing down on the Equity Line of Credit when the common stock to be
issued under the Equity Line of Credit. On February 14, 2003 a Form SB-2 that
was filed by ActiveCore was declared effective by the SEC. Under the terms of
the equity line of credit ActiveCore may provide notice to Cornell and Cornell
will purchase from ActiveCore shares equal to 92% of the market price, which is
defined as the lowest closing bid price of the common stock during the five
trading days following the notice date. The amount of each advance is subject to
an aggregate maximum advance amount of $425,000 in any thirty-day period Cornell
Capital Partners is entitled to retain 3.0% of each advance. In April 2002,
ActiveCore paid Cornell a one-time fee equal to $330,000, paid in the form of
3,032,000 shares of common stock. In addition, ActiveCore entered into a
placement agent agreement with Westrock Advisors, Inc., a registered
broker-dealer. Pursuant to the placement agent agreement, ActiveCore paid a
one-time placement agent fee of 100,000 shares of common stock, which were
valued at $0.20 per share, or an aggregate of $20,000, on the date of issuance.
29
ActiveCore agreed to pay Danson Partners, LLC, a consultant, a one-time fee of
$200,000 for its work in connection with consulting ActiveCore on various
financial matters. Of the fee, $75,000 was paid in cash with the balance paid in
1,040,000 shares of common stock. To the end of September 2003, ActiveCore has
received $1,000,000 under the Equity Line of Credit and in exchange for
25,508,380 shares of common stock. The Company received an additional advance of
$125,000, in exchange for 3,491,620 shares. Except for the Equity Line of
Credit, ActiveCore has no commitments for equity capital although management
continues to explore other funding alternatives in an effort to broaden its
capital sources.
The Company anticipates that its cash needs over the next 12 months will
consist of general working capital needs of $2,000,000, which would include the
satisfaction of current liabilities of $1,691,394. As of September 30, 2003,
ActiveCore had a working capital deficiency of $1,387,826. The Company
anticipates that its cash needs over the next 12 months will come primarily from
a combination of operating credit lines, term loans, which may or may not be
secured by assets, or contain conversion features which may lead to additional
shares being issued, or the sale of equity under the equity line of credit. Draw
downs on the equity line of credit may cause the share price to decline in value
unless buyers are present to take up the supply of new shares entering the
market.
If ActiveCore is unable to obtain additional funding through our Equity
Line of Credit facility or from other sources of debt and equity capital, then
the failure to obtain this funding will have a material adverse effect on our
business and this may force us to re-organize, reduce our investment in, or
otherwise divest of one or more of our operations, or to reduce the cost of all
operations to a lower level of expenditure which may have the effect of reducing
our expected revenues and potentially increasing our net loss in 2003 and 2004.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following chart sets forth IVP's contractual obligations and
commercial commitments as of September 30, 2003 and the time frames for which
such commitments and obligations come due.
PAYMENTS DUE BY PERIOD
TOTAL
LESS THAN AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
---------- ---------- --------- ---------
Current Obligations $1,028,858 $1,028,858 $ -- $ -- $ --
Leases Payable 30,616 22,013 8,603 -- --
Due to Related Parties 97,637 97,637 -- -- --
Notes Payable 1,042,886 542,886 375,000 125,000 --
---------- ---------- --------- --------- -------
Total Contractual Cash
Obligations $2,199,997 $1,656,688 $ 383,603 $125,000 $ --
========== ========== ========= ========= =======
Of the total of $1,042,886 of notes payable, $200,000 was incurred in
connection with the purchase of SCI Healthcare. This amount is past due.
ActiveCore is attempting to negotiate an extension of this notes payable.
CAPITAL RESOURCES
Pursuant to the Equity Line of Credit, ActiveCore may periodically sell
shares of common stock to Cornell Capital Partners, L.P. to raise capital to
fund its working capital needs. The periodic sale of shares is known as an
advance. The Company may request an advance every 5 trading days. A closing will
be held 7 trading days after such written notice at which time ActiveCore will
deliver shares of common stock and Cornell Capital Partners, L.P. will pay the
advance amount, less the 3% retention. The Company may request advances under
the Equity Line of Credit once the underlying shares are registered with the
Securities and Exchange Commission. Thereafter, ActiveCore may continue to
request advances until Cornell Capital Partners has advanced $10.0 million or
two years after the effective date of the registration statement, whichever
occurs first. The amount of each advance is subject to an aggregate maximum
advance amount of $425,000 in any thirty-day period. The amount available under
the Equity Line of Credit is not dependent on the price or volume of our common
stock.
The Company registered 30,000,000 shares of common stock in connection
with the Equity Line of Credit and upon conversion of the debentures. The
Company cannot predict the actual number of shares of common stock that will be
issued pursuant to the Equity Line of Credit, in part, because the purchase
price of the shares will fluctuate based on prevailing market conditions and
ActiveCore has not determined the total amount of advances ActiveCore intends to
draw.
30
Nonetheless, if ActiveCore issued all 30,000,000 shares of common stock at
a recent price of $0.04 per share (which assumes that no shares would need to be
issued upon conversion of debentures), then ActiveCore would receive $1,200,000
under the Equity Line of Credit (after deducting a 3% retention payable to
Cornell). This is $8,800,000 less than is available under the Equity Line of
Credit. The Company's stock price would have to rise substantially for us to
have access to the full amount available under the Equity Line of Credit. These
shares would represent 20% of our outstanding common stock upon issuance.
Accordingly, ActiveCore would need to register additional shares of common stock
in order to fully utilize the $10 million available under the Equity Line of
Credit at the current price of $0.04 per share. At a recent price of $0.04 per
share, ActiveCore would be required to issue 250,000,000 shares of common stock
in order to fully utilize the $10.0 million available.
CONSOLIDATED STATEMENT OF CASH FLOWS
Cash on the condensed consolidated balance sheet of ActiveCore increased
from $63,162 at December 2002 to $65,066 on September 30, 2003.
NET CASH USED IN OPERATING ACTIVITIES
Net cash used in operating activities was $1,722,712 for the nine months
ended September 30, 2003 and $1,044,490 for the nine months ended September 30,
2002. Cash used in operating activities consisted primarily of a net loss of
$937,033, a gain on sale of Ignition Entertainment of $2,396,009, an increase in
accounts receivable of $112,679, an increase in prepaid expenses of $150,669 and
a decrease in accrued liabilities of $172,929. These items were partially offset
by non-cash charges of amortization of $564,198, stock based compensation and
fees of $768,301, a decrease in inventory of $304,783 and an increase in taxes
payable of $203,370.
NET CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities of $104,089 related primarily to the
purchase of software rights.
NET CASH PROVIDED BY FINANCING ACTIVITIES
During the nine months ended September 30, 2003, ActiveCore raised net
cash of $1,890,052 from financing activities. These consisted primarily of
proceeds from notes payable of $1,674,146, related parties of $299,878, factors
of $116,503 and the issuance of stock of $898,088. These items were partially
offset by the repayment of $1,073,089 of notes payable.
CRITICAL ACCOUNTING POLICIES
ORGANIZATION
The consolidated financial statements of IVP Technology Corporation d.b.a.
ActiveCore Technologies (formally Mountain Chef, Inc.) and consolidated
subsidiaries (the "Company") include the accounts of the parent, IVP Technology
Corporation, incorporated in the State of Nevada on February 11, 1994, and its
subsidiaries: Springboard Technology Solutions, Inc. d.b.a. ActiveCore
Technologies ("Springboard"), a Canadian Company; and Erebus Corporation, an
inactive Company. The Company was granted an extra-provincial license by the
Province of Ontario on June 20, 1995 to carry on business in Ontario, Canada.
Prior to 1998, ActiveCore was involved with various unsuccessful activities
relating to the sale of technology products before becoming inactive by the end
of 1997. The Company began negotiations with a third party in 1998 to become an
exclusive distributor of software and therefore is considered to have re-entered
the development stage on January 1, 1998. Activities from inception of
development stage included raising capital and negotiations and acquisition of
software distribution licenses. On January 1, 2002, ActiveCore began operations
and emerged from the development stage.
The Company operates two units, enterprise and consumer. The enterprise
unit develops, markets, licenses, installs and services data solutions. The
consumer unit develops and publishes interactive software games designed for
mobile phones, other handheld devices, web-sites, personal computers and video
game consoles. The consumer unit also distributes games, hardware and
accessories developed or manufactured by third parties.
31
REVENUE RECOGNITION
RISK AND UNCERTAINTIES
A portion of ActiveCore's net sales are derived from software publishing
and distribution activities, which are subject to increasing competition, rapid
technological change and evolving consumer preferences, often resulting in the
frequent introduction of new products and short product lifecycles. Accordingly,
ActiveCore's profitability and growth prospects depend upon its ability to
continually acquire, develop and market new, commercially successful software
products and obtain adequate financing. If ActiveCore is unable to continue to
acquire, develop and market commercially successful software products, its
operating results and financial condition could be materially adversely affected
in the near future.
REVENUE RECOGNITION
Publishing revenue is derived from the sale of internally developed
software or from the sale of software licensed from third-party developers.
Publishing revenue amounted to $6,995 and NIL for the nine months ended
September 30, 2003 and 2002, respectively. Distribution revenue is derived from
the sale of third-party interactive software titles, accessories and hardware.
Distribution revenue amounted to $109,761 and $200,000 for the nine months
ended September 30, 2003 and 2002, respectively.
Revenues from Services and Commercial Software sold under licenses were
$239,020 and $57,070 in the nine months ended September 30, 2003 and 2002,
respectively. The Company recognizes revenue in accordance with Statement of
Position ("SOP") 97-2 "Software Revenue Recognition", as amended by SOP 98-9
"Modification of SOP 97-2 Software Revenue Recognition with respect to Certain
Transactions." SOP 97-2 provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. SOP 98-9
deals with the determination of vendor specific objective evidence ("VSOE") of
fair value in multiple element arrangements, such as maintenance agreements sold
in conjunction with software packages. The Company's consumer software
transactions generally include only one element, the interactive software game
or commercial software under license. The Company recognizes revenue when the
price is fixed and determinable; there is persuasive evidence of an arrangement,
the fulfillment of its obligations under any such arrangement and determination
that collection is probable. Accordingly, revenue is recognized when title and
all risks of loss are transferred to the customer, which is generally upon
receipt by customer. The Company's payment arrangements with its customers
provide primarily 30 day terms and to a limited extent with certain customers,
60 day terms. The Company does not have any multi-element arrangements that
would require it to establish VSOE for each element, nor does ActiveCore have
any sales activity that requires the contract method of accounting.
Revenue from product sales is recognized when title passes to the
customer, provided that: there are no uncertainties regarding customer
acceptance; persuasive evidence of an arrangement exists; the sales price is
fixed or determinable; and collectability is deemed probable. The Company
provides for estimated product returns at the time of the product shipment, if
necessary. In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, which establishes guidance in applying generally accepted accounting
principles to revenue recognition in financial statements and is effective
beginning with the fourth quarter of the year ended December 31, 2000. The
Company has determined that its existing revenue recognition practices comply
with the requirements of SAB 101 for all periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue 00-21, addressing how to account for arrangements that
involve the delivery or performance of multiple products, services, and /or
rights to use assets. Revenue arrangements with multiple deliverables are
divided into separate units of accounting if the deliverables in the arrangement
meet the following criteria: (1) the delivered item has value to the customer on
a stand-alone basis; (2) there is objective and reliable evidence of the fair
value of undelivered items; and (3) delivery of any undelivered items is
probable. Arrangement consideration should be allocated among the separate units
of accounting based on their relative fair values, with the amount allocated to
the delivered item being limited to the amount that is not contingent on the
delivery of additional items or meeting other specified performance conditions.
The final consensus will be applicable to agreements entered into in fiscal
periods beginning after June 15, 2003 with early adoption permitted.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
32
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". The
changes in SFAS No. 149 improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. This statement is
effective for contracts entered into or modified after June 30, 2003 and all of
its provisions should be applied prospectively.
In May 2003, FASB issued SFAS No. 150, "Accounting For Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
changes the accounting for certain financial instruments with characteristics of
both liabilities and equity that, under previous pronouncements, issuers could
account for as equity. The new accounting guidance contained in SFAS No. 150
requires that those instruments be classified as liabilities in the balance
sheet.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatorily redeemable shares,
which the issuing Company is obligated to buy back in exchange for cash or other
assets. A second type includes put options and forward purchase contracts, which
involves instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets. The third type of instruments that
are liabilities under this Statement is obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or predominantly to a
variable such as a market index, or varies inversely with the value of the
issuers' shares. SFAS No. 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety.
Most of the provisions of Statement 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of this Statement are consistent
with the FASB's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own
shares. This Statement shall be effective for financial instruments entered into
or modified after May 31, 2003 and otherwise shall be effective at the beginning
of the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of a non-public entity, as to which
the effective date is for fiscal periods beginning after December 15, 2003.
In January 2003, The FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", an interpretation of Accounting Research Bulletin
("ARB") No. 51, "Consolidated Financial Statements". Interpretation No. 46
addresses consolidation by business enterprises of variable interest entities,
which have one or both of the following characteristics: (i) the equity
investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated support from other parties, which is
provided through other interest that will absorb some or all of the expected
losses of the entity; (ii) the equity investors lack one or more of the
following essential characteristics of a controlling financial interest: the
direct or indirect ability to make decisions about the entities activities
through voting rights or similar rights; or the obligation to absorb the
expected losses of the entity if they occur, which makes it possible for the
entity to finance its activities; the right to receive the expected residual
returns of the entity if they occur, which is the compensation for the risk of
absorbing the expected losses.
Interpretation No. 46 also requires expanded disclosures by the primary
beneficiary (as defined) of a variable interest entity and by an enterprise that
holds a significant variable interest in a variable interest entity but is not
the primary beneficiary. Interpretation No. 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. Interpretation No. 46 may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the first
year restated.
In June 2003, the FASB issued an Exposure Draft for proposed SFAS entitled
"Qualifying Special Purpose Entities ("QSPE") and Isolation of transferred
Assets", an amendment of SFAS No. 140 ("The Exposure Draft"). The Exposure Draft
is a proposal that is subject to change and as such, is not yet authoritative.
If the proposal is enacted in its current form, it will amend and clarify SFAS
140. The Exposure Draft would prohibit an entity from being a QSPE if it enters
into an agreement that obliged a transferor of financial assets, its affiliates,
or its agents to deliver additional cash or other assets to fulfill the
special-purposes entity's obligation to beneficial interest holders.
ActiveCore believes that the adoption of the above pronouncements will not
have a material effect on ActiveCore's condensed consolidated financial position
or results of operations.
33
ANNUAL SHAREHOLDERS' MEETING
On May 28, 2003, ActiveCore held its 2002 annual shareholders' meeting. At
the meeting, Brian MacDonald, Peter Hamilton and J. Stephen Smith were elected
to the board of directors. In addition, the shareholders voted to increase
ActiveCore's authorized common stock to 500,000,000 shares. In connection with
the re-election of the directors, there were 73,111,302 shares voted in favor of
the directors, no votes against and 130,830 abstentions. In connection with the
increase in authorized common stock there were 71,390,374 shares voted in favor,
1,847,758 votes against and 4,000 abstentions.
34
DESCRIPTION OF BUSINESS
ActiveCore conducts operations under the trade name ActiveCore
Technologies, Inc. ActiveCore is based in Toronto and has operations in the
U.S., Canada and the United Kingdom. ActiveCore operates two divisions, Consumer
and Enterprise. The consumer division currently consists of a fairly distinct
group that does business under the SilverBirch Studios and RecessGames.com
business styles. The Enterprise division currently operates under the name of
ActiveCore Technologies as well as a registered trade name of MDI Solutions in
Canada and in the United States. The two divisions variously: develop, market,
license, publish and distribute software and provide, in the case of the
Enterprise division, outsourced IT services. A review of each of the divisions
and their respective products follows.
ENTERPRISE DIVISION
ActiveCore's enterprise division currently provides specialty data
integration services to the healthcare and financial services market with
healthcare services being marketed under the registered trade name of MDI
Solutions in both Canada and the United States. The website for ActiveCore is
www.activecore.com and the website for MDI is www.mdisolutions.com. These
websites do not constitute part of this prospectus.
The enterprise division currently markets general and industry specific
data management products and IT services. Our data management products, which
are a combination of our own and third party products, are either stand alone or
are middleware which link other products/applications together. ActiveCore
believes that the data solutions products it represents can provide enterprises
with increased economy, efficiency and effectiveness when enterprises are faced
with the necessity of obtaining data from the field, wherever that may be, and
moving it into processes that take place in the front and back office
environment through to business decision making levels. Although we have not
represented these products for sufficient time to build up a large stable of
clients using these products, the vendors or other resellers that also sell
these products have represented to us that the products that we represent are
already in use in a number of enterprises such as insurance companies, banks,
governments and manufacturing industries. Generally sales cycles are long in the
data management and enterprise marketplace. The division markets software
products through its services staff assisted by senior management and product
managers.
A description of ActiveCore's Enterprise Division software products
follows. Development of third party products has been completed by their
respective owners while our products are subject to improvement as our customers
dictate. ActiveCore expects that all of the products we sell will be subject to
upgrades as technology changes. At this time, ActiveCore cannot predict when
upgrades will be required or available. As a result, ActiveCore cannot predict
if and when it will earn revenues for such upgrades.
CLASSIFIER. ActiveCore has entered into a two-year, non-exclusive
licensing agreement to distribute the CLASSIFIER software program, developed by
The Innovation Group, PLC. ActiveCore received a non-exclusive right to sell
such software in the United States, Mexican and Canadian territory and latterly
the United Kingdom. We expect to renew the license to sell Classifier upon the
expiry of our license in December 2003.
DESCRIPTION OF CLASSIFIER. The CLASSIFIER product is a sophisticated
business intelligence solution that provides data analysis benchmarking and
which can monitor on-going improvements on business activities, such as specific
products, lines of business or other information within a business operation.
CLASSIFIER was designed to create and broadcast business intelligence knowledge
views direct to decision makers over corporate Intranets and the Internet.
CLASSIFIER turns a database into a web site, enabling more people to access data
with a web-browser. CLASSIFIER incorporates a high-performance and powerful data
analysis server, a web-report publishing facility, versatile data transformation
features and the ability to connect and extract data from multiple back office
data sources.
MARKET FOR CLASSIFIER. The market for Classifier is almost exclusively
centered on larger facilities where polling multiple databases for changes in
volumes, makeup and conditions and other decision-making components could have a
material impact on the way operations are managed. The product can be adapted to
various industry sectors.
I-BOS(TM). ActiveCore obtained the license to distribute I-Bos as part of
a re-negotiation of the Classifier product. ActiveCore has entered into a
two-year, non-exclusive licensing agreement to distribute the I-BOS operating
system, developed by The Innovation Group, PLC. ActiveCore received a
non-exclusive right to sell such software in the United States, Mexican and
Canadian territory and latterly the United Kingdom.
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DESCRIPTION OF I-BOS. I-Bos is an application development environment for
business analysts. It is process and rule centric and allows analysts to build
complete business applications for specific vertical markets without any
programming knowledge in a language that is understood by that business sector.
MARKET FOR I-BOS. ActiveCore intends to take the I-Bos product to several
health care environments where authorization for drug administration or other
high value processes are currently subject to significant manual intervention or
where other processes need to be automated for surety of performance. We expect
to renew the license to sell Classifier upon the expiry of our license in
December 2003.
VAAYU. On June 27, 2002, ActiveCore announced the release of Vaayu.
Subsequently, leading up to and with completion following the acquisition of XML
Connector, described below, we integrated the Vaayu product into the XML
Connector product as the remote data transmission function of ActiveLink.
ACTIVELINK (XML CONNECTOR). In two transactions in July and September 2003
ActiveCore acquired sole ownership of the source code to XMLConnector from
Karora Technologies Inc. In July 2003 we paid the equivalent of $87,644 and
500,000 shares to acquire the source code for the healthcare vertical and in
September we paid an additional $7,139 and an additional 300,000 shares for
complete title to the product.
DESCRIPTION OF ACTIVELINK. ActiveLink is comprehensive, custom software
typically used to extend or integrate existing applications. Disparate
applications such as legacy, workflow, line of business, ERP, accounts
receivable, and accounts payable can all work together with ActiveLink.
ActiveLink consists of two main modules: Studio and Solution Server. The Studio
is the graphical design tool employed to build integration solutions using the
ActiveLink components: Resources, Tasks, and Events. In the studio solutions are
quickly and efficiently constructed, debugged, and stored in XML files. These
files use an XML Schema that conforms to industry standards (OAG, ACCORD, FIXML,
and more). The resulting XML files afford solutions that are simple to deploy,
update, and transport. ActiveCore is in the process of repackaging the software
product for specific industries with predetermined modules. As indicated under
the Vaayu description above we have integrated the Vaayu functionality - remote
access and transmission - into the ActiveLink product.
MARKET FOR ACTIVELINK. ActiveLink is currently being sold by our service
personnel in MDI Solutions and ActiveCore to our hospital and insurance clients
and re-marketed to several insurance software product companies who will be able
to use the product to link their applications to legacy systems.
OTHER SOFTWARE. ActiveCore is engaged in a process whereby additional
enterprise software specifically oriented towards mobile applications will be
represented in North America and Europe. We believe that the additional software
will be completely synergistic to our current operations. An announcement will
be made upon contract finalization.
SERVICES
ActiveCore under its own name as well as under its MDI Solutions banner
operates as a supplier of highly trained personnel for specific data management
and integration services on an outsourced basis. Under MDI, for example, the
company has been successful in obtaining ongoing services work for a number of
Canadian hospital and health care providers. With the acquisition of certain
assets of the integration group of SCI Healthcare Group, ActiveCore has
commenced performing these services in the United States as well. Our network
services personnel are also engaged in outsourced delivery of network support.
In all cases we bill clients on an hourly, daily or monthly basis and in many
cases with monthly retainers. Generally, we enter into service agreements with
our clients, which agreements specify the rate and the nature of the contracted
services to be provided.
MARKET FOR PRODUCTS AND SERVICES
To date, ActiveCore has sold relatively few licenses for enterprise
software products. ActiveCore believes that the market for enterprise software
has slowed considerably over the past several years. ActiveCore also believes
that the market is usually characterized by long selling cycles and competition
from numerous vendors. Based on the experience of its managers, ActiveCore
believes that the trend in commercial software has moved towards systems
integration of various products into existing IT environment and service
providers such as IBM, CGI and various other integration companies often have an
edge over strictly stand alone software product developers. Thus many times the
key to success in selling software products into a customer location is to
operate as a systems integration company or a services company to a particular
industry segment. To that end, ActiveCore has identified health care as a market
segment that it intends to focus its initial sales efforts. ActiveCore believes
that hospitals and others in the health care area have a need for enterprise
software products. ActiveCore has 25 healthcare facility clients in the US and
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Canada with several of the hospitals with ActiveCore products installed and in
operation. We view this process of gradually gaining product acceptance as a
normal state in the sales development process. We anticipate that it will take
us several years to make a solid and profitable business out of distributing
data management solutions without the addition of mobile applications as a front
end to "back office" systems. ActiveCore is currently addressing this gap in its
end to end product offerings and will be announcing solutions to this issue in
the near future.
OUTLOOK - ENTERPRISE PRODUCT LINE
The growth of the internet together with a proliferation of various other
IT configurations including radio frequency, wireless telephone, and satellite
using various communication protocols, has become an important way for
corporations to communicate with field employees and for professionals to access
personal and business information, download new applications, access new
services and interface with organizational data and topical information.
ActiveCore believes that inter-party interfaces over the internet, as well as
wireless access to internet content and enterprise data will make small personal
computers and converged cell phones/PDA's and other data enabled communication
devices increasingly valuable to users. Moreover with the continued expansion of
mobile capabilities, networks and hardware and the expansion of mobile usage
additional software products will be developed which will meet the needs of
workers who will be able to conduct regular business activities over mobile
devices.
ActiveCore competes within the global market for software applications.
These applications are developed for handheld/portable/cell phone devices,
client server/networked installations and ASP configurations. The market for
these applications is evolving rapidly and is highly competitive. Competitors
include (i) Microsoft, as the developer of the handheld personal computer
Windows CE operating system and the ".net" development platform, which also
develops software applications for devices that run on Windows CE and on Smart
Phones, (ii) the community of developers that has developed products for the
palm operating system; (iii) the community of developers that has emerged since
the introduction of these devices that creates applications for Linux, Sun, and
other operating system platforms; and (iv) the host of developers that are
developing entertainment and enterprise applications on other handheld devices
including telephones, personal entertainment devices and other communication
devices. Nearly all of ActiveCore's competitors or potential competitors have
significantly greater financial, technical and marketing resources than we do.
These competitors may be able to respond more rapidly than us to new or emerging
technologies or changes in customer requirements. They may also devote greater
resources to the development, promotion and sale of their products than does
ActiveCore.
ActiveCore believes that systems integrators are in the best position to
market software to their existing clients. Therefore we do not intend to compete
directly against any of the larger software creators and marketing companies in
the promotion of software that competes directly with any specific software
product. One of the key ways in which we market is directly to our growing list
of clients for which we provide outsourced data integration and network
services. Our ongoing investment in this area will in the long run outpace our
investment in the Consumer Division as ActiveCore does not have sufficient
financial resources to compete as strictly a consumer/entertainment software
creator. Rather it is our intention to grow the Enterprise division as
opportunities for profitable growth present themselves.
CONSUMER DIVISION
ActiveCore's consumer division specializes in the development, licensing,
publishing, marketing and distribution of mobile device entertainment programs,
generically, cell phone games.
ActiveCore's main focus is the creation, acquisition and publishing of
games for mobile phones and its own themed destination portal for the school age
demographic group called Recessgames.com. Game concepts are either developed in
house, acquired from third party developers or other distributors or are
developed in conjunction with branded properties such as Zorro(R).
DEVELOPMENT
ActiveCore currently has a development department in its Toronto office
and has contractors/employees in Finland and Columbia and occasionally uses
contractors in India and the United Kingdom to assist in development efforts. To
date in 2003 ActiveCore has completed development on six cell phone games,
opened up its www.silverbirchstudios.com web site for game sales and is nearing
completion of its Recessgames.com portal. This website does not constitute a
part of this prospectus.
37
To date ActiveCore has completed development on 6 games and is working on
10 additional games which will be released over the next 12 months. The games
that have been completed are: Zorro- The Blade of Zorro; Tycoon Cribbage, Free
Cellblock, El Presidente, Covert Solitaire and Animal Snap. Of these games the
last five are being distributed by Tira Wireless through some of their wireless
carriers. ActiveCore has not yet signed a distribution agreement for Zorro(R).
LICENSING, PUBLISHING AND DISTRIBUTION
ActiveCore has signed a distribution agreement with Tira Wireless to allow
Tira to distribute certain of its cell phone games to Tira's wireless carrier
partners and its portal partners. To date relatively little revenue has been
generated from this source due to the lag time between product completion,
multiple phone platform conversion, integration of the games into the wireless
carriers' catalogs (decks) and subsequent sale to cell phone users and
subsequent reporting through the channel back to ActiveCore. We anticipate that
it will well into 2004 before and substantial revenues are earned from these
games.
MARKETING
ActiveCore depends upon the wireless publisher and distributor and the
wireless carriers to market its games on various wireless carrier catalogs. For
its Recessgames.com site ActiveCore has engaged the services of Strategic
Objectives Inc. to plan and execute the launch of the Recessgames portal in
either the fourth quarter or 2003 or the first quarter of 2004. Strategic
Objectives will be tasked with both Marcom (marketing communications) and PR
(public relations) in relation to the Recessgames.com site. The first structures
the audience message and positions the marketing and advertising related to the
portal site. Typically the Marcom function is related to the 2-3 months
preceding the introduction to the market while public relations is an ongoing
function which has as its aim the promoting the Recessgames site in relation to
its customers and its competitors by creating opportunities in press and other
media.
MARKET POSITIONING FOR ACTIVECORE'S CONSUMER DIVISION
ActiveCore markets and positions its two consumer division "business
names" separately. SilverBirch Studios has been positioned as a high quality
games development studio while Recessgames is being positioned as a destination
site for the school age demographic and will feature not only games but ring
tones and the playability of the destination site itself.
INDUSTRY SIZE AND THE RELATIONSHIP BETWEEN HARDWARE AND SOFTWARE
ActiveCore believes that the next five years mobile phone use by consumers
will rise substantially as the devices become more than a means of
communication. Already over one billion cell phones are in use in the world but
many of these are first and second generation models. As carriers upgrade to 3G
and 4G network infrastructures and as the screens and memory capacities of cell
phones improve there will be increased abilities for applications to work on the
devices. Many commentators believe that the cell phone will become virtually a
hand held computer in terms of functionality and effectiveness within the next
few years. The current market for cell phone games is relatively young as many
games are built for specific phones and the absolute numbers of specific phones
vary.
COMPETITION
There are several hundred cell phone game developers and several thousand
games in production however each wireless carrier usually maintains a catalog of
less than 50 games. The bulk of cell phone games are currently distributed by
way of games portals such as Jamba, 9Squared, end2End, handy.de. There are few
games portal companies that are publicly traded therefore there is little
publicly available information on the revenue and profitability of these games
portals. We believe that we have an opportunity to gain a market advantage by
joining a destination, demographically specific site with the sale of games.
Offsetting the relatively few games sold via wireless carriers with the large
number sold on portals is the economic reality that wireless carriers will have
larger marketing budgets and inevitably more control over what game gets placed
onto a consumers cell phone. Thus top line games tend to go to wireless carriers
where the combination of carrier marketing and consumer purchasing power can be
focused. There are no statistics available at this point in time which indicate
which companies, games or mechanisms for distribution are the most profitable.
38
EMPLOYEES AND CONSULTANTS
ActiveCore has 25 employees based in Toronto with an additional 5
employees in the United States. In addition the company has 3 contract employees
in Finland and 4 employees in the UK these staff are augmented with contract
personnel as needed. ActiveCore has entered into several consulting
relationships, which are described below.
o In September 2003, ActiveCore entered into a consulting agreement
with Sonny Goldstein to facilitate new term debt financing
arrangements. ActiveCore paid 1,000,000 shares with a value of
$29,000 for these services to continue to August 2004.
o In August 2003, ActiveCore paid Mr. Yvan Coessens 150,000 shares of
ActiveCore to act as an investor relations person in Europe. Mr.
Coessens is located in Belgium and provides services to ActiveCore
continental European shareholders. Mr. Coessens' shares were recorded
as stock issued for services and were valued at $4,950.
o In July 2003, ActiveCore issued 2,000,000 shares to Snider Financial
Group Inc. for services rendered in respect of brand licensing on an
ongoing basis throughout 2003-04. Snider Financial's shares were
recorded as stock issued for services and were valued at $50,000.
o In July 2003 ActiveCore entered into a consulting contract with
Gerald Campbell and paid the consultant 4,000,000 common shares of
ActiveCore. Mr. Campbell consults for ActiveCore in the area of
medical data integration. Mr. Campbell's shares were recorded as
stock issued for current and deferred consulting services and were
valued at $100,000.
o In June 2003, ActiveCore entered into a contract with Hawk Associates
for investor relations services. Under the terms of the contract
ActiveCore issued to Hawk 2,000,000 common shares recorded in the
June 30, 2003 consolidated financial statements as current and
deferred consulting services. In addition to the stock grant, Hawk
Associates is paid a fee of $6,600 per month.
o In June 2003, ActiveCore entered into a consulting contract with
Rodger Cowan and paid the consultant 5,000,000 common shares of
ActiveCore. Mr. Cowan consults for ActiveCore in the area of
entertainment software distribution. Mr. Cowan's shares were recorded
as stock issued for compensation on the June 30, 2003 financial
statements.
o In August 2001, International Technology Marketing entered into
employment/consulting agreements with Brian MacDonald and Peter J.
Hamilton. Mr. MacDonald is employed as Chairman and CEO formerly
President and Treasurer and Mr. Hamilton is employed as President
formerly Vice President, Sales or other duties as determined by the
CEO. Each of these agreements has a term of three years and
thereafter will continue for one year terms unless either party
terminates the agreement at least 90 days prior to the end of any
term. Each of Mr. MacDonald and Mr. Hamilton has a salary of CAD
$96,000 per year, plus 6% of sales revenue. As ITM is a dormant
corporation following its acquisition by ActiveCore it has no sales
revenue and therefore ActiveCore is not liable to pay any portion of
its sales revenues to Mr. MacDonald or Mr. Hamilton. ActiveCore
guarantees the payments under these employment contracts. Neither Mr.
MacDonald nor Mr. Hamilton receives any further compensation for
service as an officer or director of ActiveCore.
SIGNIFICANT CONTRACTS
CLASSIFIER AND I-BOS. On December 28, 2001, ActiveCore Technology entered
into a two-year, non-exclusive licensing agreement to distribute the Classifier
software program, developed by The Innovation Group, Plc. ActiveCore Technology
received a non-exclusive right to sell such software in the United States,
Mexican and Canadian territory. Subsequently, on September 30, 2002 we
renegotiated the agreement with The Innovation Group, Plc. to add another
product, "i-Bos", and relinquished the financial services industry vertical back
to The Innovation Group Plc. In the course of our contract renegotiation we also
obtained the right, on a non-exclusive basis, to distribute both the Classifier
and the i-Bos product into the UK market. Meanwhile we retained the right to
sell such software in the United States, Mexican and Canadian markets.
39
Pursuant to the terms of this agreement, ActiveCore Technologies was
obligated to pay The Innovation Group $3,620,268 by December 31, 2002.
ActiveCore Technologies has paid The Innovation Group (pound)500,000 or
approximately $714,000 in connection with the license. The remaining payments
have been waived as part of the September 30, 2002 amendment. On February 16,
2002, ActiveCore Technologies borrowed $864,180 from DcD Limited that was used,
in part, to pay the March 31, 2002 installment to the Innovation Group. The
agreement with The Innovation Group allows ActiveCore to retain 50% of the gross
revenue from any sale originated by ActiveCore.
MOBILE SOFTWARE PUBLISHER CONTRACTS. ActiveCore has a distribution
agreement with Tira Wireless inc. with respect to certain cell phone games
distributed by Tira. Under the terms of the contracts Tira may receive exclusive
rights to certain ActiveCore games pending agreed levels of performance in terms
of placement of ActiveCore games on certain wireless carriers otherwise the
distribution is on a non-exclusive basis.
CORPORATE HISTORY OF ACTIVECORE TECHNOLOGIES FORMERLY IVP TECHNOLOGY CORPORATION
ActiveCore is a Toronto headquartered commercial and consumer software
developer, licensor, publisher, marketer, and distributor that has operations in
the United Kingdom, Canada and the United States. ActiveCore also provides
information technology services to corporations and institutions. We operate
through two divisions, Consumer and Enterprise.
LEGAL AND CORPORATE EVOLUTION
Prior to March 2000 and from inception in 1994, ActiveCore went through
various "reorganizations" including reverse share splits and several control
changes. In March 2000, ActiveCore engaged in a recapitalization transaction
whereby through the services of TPG Capital Corporation, ActiveCore paid 350,000
shares worth $500,000 and $200,000 in cash to TPG Capital Corporation to merge
with a non-active reporting entity, Erebus Corporation, whose sole shareholder
was TPG Capital Corporation to become a reporting issuer with the SEC and
thereby retain its status as a listed company on the OTCBB. A rule change at the
OTCBB was the motive for the transaction as failure to remain a listed company
on the OTC BB would have relegated the shares to the pink sheets. Management and
the board of directors at that time viewed such a development as a detriment to
stockholders and other investors. In addition to the payment of the cash and
shares there exists a reset provision in the contract between TPG Capital and
ActiveCore which obligated, on a contractual basis, ActiveCore to provide TPG
Capital with shares sufficient to "make up" the difference between the share
price value for 350,000 shares as at the date of the merger of Erebus and
ActiveCore, and at a point one year later. Based on the relative share prices in
the market in March 2000 and in March 2001 it would appear that ActiveCore owes
TPG Capital an additional 3,028,378 shares. ActiveCore does not intend to pay
these shares over to TPG Capital as James Cassidy reached a settlement agreement
with the SEC related to various practices associated with merging non-active
shell reporting entities with OTCBB companies that had not achieved reporting
status with the SEC prior to the rule change on the OTCBB.
In September 2001, ActiveCore, represented by its then corporate counsel,
the then board members and executives who are not in any way connected to our
current management team or the current board of directors, negotiated and
entered into, on a arms length basis, an agreement with the five founders of
International Technology Marketing Inc., a newly formed company, to gain the
management services of the ITM founders for the benefit of ActiveCore. The
founders of ITM were and are experienced finance, marketing and technology
persons. The legal mechanism chosen for obtaining the services of the new
management team was accomplished by the two companies (ActiveCore and ITM)
entering into a stock purchase agreement which was dated August 17, 2001. This
agreement provided for the "acquisition" of shares of ITM and the issuance of up
to 50,000,000 shares of ActiveCore to be released to the individual founders of
ITM, who would be performing the management duties at ActiveCore. The trigger
mechanism for releasing tranches of shares to the ITM founders was achievement
of certain revenue milestones for ActiveCore that the ITM founders performing
the management services would achieve through application of their management
expertise.
The sole purpose and motive of the ITM "acquisition" was to secure the
future management services of the shareholders of ITM. ITM had no operations and
no sales at the time of the "acquisition," however its founders had experience
in consumer and enterprise software development, distribution and marketing. The
founding shareholders of ITM were Brian MacDonald, Peter Hamilton, Kevin Birch,
Geno Villella and Sherry Bullock who, except for Sherry Bullock who has
resigned, remain managers of ActiveCore. At the time of the acquisition,
ActiveCore believed that retaining an experienced management team would
facilitate the implementation of its business plan. In particular, Messrs.
MacDonald and Hamilton had been employed by Softkey Software International
and/or Insight Business Consultants Inc., a software company that grew sales
from $10 million in 1989 to $3 billion in 1997. During that time, Messrs.
MacDonald and Hamilton gained experience with enterprise, entertainment and
business software, which ActiveCore believed could increase their market
opportunities in obtaining distribution arrangements, reseller networks and
other distribution channels. The resumes of the principals were disclosed to the
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shareholders of ActiveCore prior to a shareholder vote approving the transaction
- - the ITM shareholders and ActiveCore's current management did not have any
influence on the outcome of the shareholder vote and did not have a right to
vote on the transaction. A resolution of the acquisition of ITM was included in
a proxy statement sent to the registered shareholders of ActiveCore which was,
at the properly constituted annual general meeting of ActiveCore held on
November 16, 2001, approved by a majority of shareholders. .
Concurrent with the approval of the acquisition of ITM, the ActiveCore
shareholders voted to increase the number of authorized shares of ActiveCore
from 50,000,000 to 150,000,000 common and created a new class of 50,000,000
"blank check" preferred, which, in part, was intended to permit ActiveCore to
issue sufficient shares to pay for the management services obtained through the
stock purchase agreement between of ITM and ActiveCore, and, in part, to provide
sufficient shares to acquire additional assets, entities and financing. The
issuance of the 50,000,000 shares for ITM was accomplished in three stages and
has been fully accounted as share based compensation. In the third quarter ended
September 30, 2002, the founders of ITM were eligible to receive 20,000,000
shares and these shares were recorded as "compensation shares" and valued as at
the close of business on September 30, 2002. At the end of the fourth quarter of
2002, the founders of ITM were eligible to receive an additional 10,000,000
shares and the shares were likewise valued at the share price as that date.
Finally, in the end of the second quarter of 2003 the final 20,000,000 shares
were issued and accounted for as share based compensation.
In the case of the June 2003 issuance of 20,000,000 shares the board of
directors of ActiveCore decided to amend the agreement between ITM and
ActiveCore to enable the stock in ActiveCore to be granted to the ITM founders
without achievement of the milestones. The Board of Directors decided that the
accounting treatment of the share milestones was not beneficial to the
shareholders of ActiveCore as any milestone achievement would result in a large
charge to the company's income statement thereby perpetuating losses and an
attendant loss of share value.
TECHNOLOGY AND MARKET POSITIONING EVOLUTION
From ActiveCore's creation in 1994 until mid 1999, ActiveCore was dormant
from a revenue generating perspective as the thrust of the business was that it
was engaged in the search for active businesses or technology opportunities to
exploit.
In 1999, ActiveCore concluded an agreement with Orchestral Corporation, a
small Ontario based software developer, to distribute, on an exclusive basis for
certain countries, a software product under the name PowerAudit and to pay for
additional development work on that product. From March 1999 and until December
28, 2001, ActiveCore was solely engaged in operating as the exclusive
distributor of the PowerAudit product for the United States and Europe.
ActiveCore attempted to market the product as a "wireless" solution for remote
field employees. During the three year period that PowerAudit was purportedly
being distributed by ActiveCore only one sale was made for less than $150,000.
From December 31, 2001 onward no sales were made of the PowerAudit program.
Upon assuming their offices in December 2001, the new management team
commenced a review of the business of ActiveCore and also began to search for
attractive revenue and profit producing entities and reseller licenses that
could be acquired. On December 28, 2001, ActiveCore concluded its first
distribution/reseller agreement with a supplier of software other than
Orchestral to augment the enterprise software business.
On June 13, 2002, ActiveCore gave notice to Orchestral that it was
terminating the 1999 software distribution agreement between Orchestral
Corporation and ActiveCore for the PowerAudit product. The business reasons for
terminating the PowerAudit distribution agreement was based on three factors.
First, ActiveCore did not own or possess access to the source code and the right
to modify the software source code to maintain its attractiveness in the face of
technology evolution without using the Orchestral company's assistance. To
purchase the source code would have been very costly to ActiveCore even though
Power Audit had not been a commercial success for ActiveCore in the time since
it acquired the distribution rights in 1999. Second, the PowerAudit distribution
agreement was set to expire in May 2003. In the case of the later factor, it was
determined by the board of directors that if ActiveCore expended marketing
efforts and funds creating a brand or sales channel for the Power Audit product,
it would have been in effect creating conditions for a more expensive renewal of
the distribution agreement. This was particularly the case as Orchestral
Corporation had tied in ActiveCore to a support agreement whereby it was to be
obligated to pay approximately $4,300 per month even without clients. Despite
being the exclusive distributor for two large markets, the USA and Europe,
ActiveCore was not successful in generating revenue. In fact only one sale of
PowerAudit was ever concluded by the company and that was with the assistance of
Orchestral Corporation. The customer subsequently had financial difficulties and
the receivable that had been recorded for the sale was subsequently written off
as a bad debt on the books of ActiveCore. As the cost of extending the
PowerAudit distribution agreement was not specified at the time the original
agreement was executed, any improvements in the sales channel or customer base
for PowerAudit would have eventually increased the cost to ActiveCore of
renewing the distribution license. ActiveCore has recorded the amount payable
41
under the contract with Orchestral however just recently it has engaged in a
process whereby it is disputing the amount payable as a result of the onerous
and seemingly unusual circumstances under which the contact was completed.
As a result of the termination of the PowerAudit license and the
acquisition and subsequent divestiture of Ignition Entertainment, business has
evolved from being solely focused on the distribution of enterprise products,
such as PowerAudit, to include consumer software products, such as mobile phone
games and other entertainment products. ActiveCore is seeking to expand its
product offerings in the mobile application arena for both enterprise and
consumer lines by attempting to develop, license or acquire such product
offerings, although it has no current agreements to license or acquire any new
offerings at this time.
ACQUISITIONS AND DISPOSITIONS
ACQUISITION OF INTERNATIONAL TECHNOLOGY MARKETING, INC.
On September 17, 2001, ActiveCore entered into a stock purchase agreement
with International Technology Marketing, Inc. Pursuant to this agreement,
ActiveCore agreed to issue 50 million shares of restricted common stock to the
shareholders of International Technology Marketing, who include Messrs.
MacDonald, Hamilton, Birch and Villella, the members of our current management
team, and to Ms. Bullock, a former member of our management team, in exchange
for all of International Technology Marketing's common stock. On March 25, 2002,
we "issued" the 50 million shares of common stock to the former shareholders of
International Technology Marketing. The shares were valued at approximately $6.8
million based on the average trading price of the common stock for the 60 days
prior to the acquisition.
The accounting treatment in 2002 and 2003 has been to account for the
"issuance" of the shares against earnings on a non-cash basis at the quarter end
that revenue milestones are reached for the market value of the shares being
released from safekeeping. For example, in the quarter ended September 30, 2002
the company reached the first and second revenue milestones of over $1,000,000
in revenue on a cumulative basis. On this basis the former ITM shareholders were
eligible to receive 20,000,000 shares which were valued for accounting purposes
at $0.19 per share or $3,800,000 at the quarter ended September 30, 2002. The
former shareholders of ITM are entitled to vote the ActiveCore shares held in
escrow pending satisfaction of the performance goals.
The performance goals were as follows:
o 10,000,000 shares to be disbursed upon aggregate sales of $500,000.
o 10,000,000 shares to be disbursed upon aggregate sales of $1,000,000.
o 10,000,000 shares to be disbursed upon aggregate sales of $2,000,000.
o 10,000,000 shares to be disbursed upon aggregate sales of $6,000,000.
o 10,000,000 shares to be disbursed upon aggregate sales of
$16,200,000.
The acquisition of International Technologies Marketing did not have a
significant impact on ActiveCore's revenues because ITM did not have any
revenues prior to acquisition. The acquisition increased ActiveCore's cost
structure by approximately $210,000 per year, consisting primarily of the
salaries of Messrs. MacDonald, Hamilton, Birch and Villella.
ACQUISITION OF IGNITION ENTERTAINMENT LIMITED
On May 28, 2002, ActiveCore acquired all of the shares Ignition
Entertainment Limited, which had been formed in late 2001, only a few months
prior to ActiveCore's acquisition of the company. Ignition was made up of
several existing companies and individuals with considerable expertise and
products in the games industry. Ignition is an United Kingdom based video game
developer, licensor, publisher, marketer and distributor and its prospects for
rapid growth in sales revenues. The purchase was done for the equivalent of
50,000,000 common shares of ActiveCore and was accounted for in the second
quarter of fiscal year 2002. Pursuant to this agreement, ActiveCore agreed to
issue 15,000,000 shares of ActiveCore's common stock and 3,500,000 shares of
convertible preferred shares of ActiveCore over approximately the next two
years. Upon conversion of the preferred stock, these payments would equal 50
million shares of ActiveCore common stock. These shares were to be held in
escrow until disbursed in accordance with the escrow agreement. The shares were
42
valued at approximately $6.8 million based on the average trading price of the
common stock for the 60 days prior to the acquisition however the acquisition
cost was much higher following the application of certain accounting rules based
on the value of shares just prior to and just following the effective date of
acquisition. The acquisition of Ignition facilitated the entry of ActiveCore
into the Consumer games market. Ignition's website is at www.ignitionent.com.
With the advent of the acquisition of Ignition Entertainment ActiveCore began to
fully operate two "divisions" namely enterprise and consumer.
ActiveCore also agreed to offer incentive payments to certain parties in
connection with the Ignition acquisition. Revelate Limited received 5,000,000
shares of ActiveCore's common stock 90 to 180 days after May 28, 2002 for
maintaining adequate factoring and letter of credit lines for Ignition. The
Ignition management team and employees were also to have the opportunity to earn
an additional 1,500,000 shares of preferred stock over three years, which are
also convertible into 15,000,000 shares of common stock. These shares were
subject to revenue and profit milestones which were set in arms length
negotiation with the shareholders of Ignition prior to ActiveCore purchasing the
company.
PAYMENT SCHEDULE FOR ACQUISITION
OF IGNITION ENTERTAINMENT LIMITED AND INCENTIVE PAYMENTS
AFTER THE
PRECEDING
AFTER THE TIME
BETWEEN PRECEDING PERIOD AND AFTER THE
WITHIN 91 AND 180 TIME SIX MONTHS PRECEDING
90 DAYS OF DAYS AFTER PERIOD TO TO TIME AND ON
TIME PERIOD: CLOSING MAY 28, 2002 MAY 28, 2003 MAY 28, 2003 MAY 28, 2004 MAY 29, 2004
- ----------------------------- ---------- ------------ ------------ ------------ ------------ ------------
GOALS: -- -- -- $13,000,000 $26,000,000 $45,000,000
Gross Revenues (in U.S.
Dollars)
Net Income (in U.S. Dollars) -- -- -- $1,000,000 $5,000,000 $15,000,000
PAYMENTS: -- 5,000,000 -- if reach if reach if reach both
Incentive Payments of to both above both above goals
ActiveCore common and Revelate goals above 500,000
preferred shares Limited 500,000 goals shares of
shares of 500,000 convertible
convertible shares of preferred
preferred convertible stock
stock preferred
stock
Release of 50 Million Shares -- 15,000,000 1,000,000 1,000,000 1,000,000 500,000
of ActiveCore common stock shares of shares of shares of shares of shares of
(upon conversion of all common preferred preferred preferred preferred
preferred stock issued) stock stock stock stock stock
(convertible (convertible (convertible (convertible
to to to to 5,000,000
10,000,000 10,000,000 10,000,000 shares of
shares of shares of shares of common stock)
common common common
stock) stock) stock)
The acquisition of Ignition Entertainment had a significant impact on
ActiveCore's revenues and costs. In addition, the acquisition of Ignition
increased ActiveCore's cost structure by approximately $4,000,000 per year,
consisting primarily of research and development, rent, salaries, marketing,
advertising, depreciation and amortization expenses.
ACQUISITION OF SPRINGBOARD TECHNOLOGY SOLUTIONS INC.
On July 1, 2002, ActiveCore acquired all the outstanding shares of
Springboard Technology Solutions Inc. (since renamed ActiveCore Technologies
Ltd.) for consideration of 2,000 common shares on the basis of a one for one
exchange which was governed by a purchase and sale agreement. Springboard
Technology Solutions Inc. was owned by Brian MacDonald, Peter Hamilton, Kevin
Birch, Geno Villella, and Sherry Bullock all of whom were officers of ActiveCore
at the time. Since January 2001, Springboard had provided the physical
infrastructure for ActiveCore. Springboard Technology is a data solutions
company that provides network solutions, web and software development and data
interface and integration services. The company was in operation for three years
prior to the ActiveCore acquisition. At the time of acquisition, Springboard
Technology had 10 full-time employees and consultants excluding the management
of ActiveCore (formerly IVP).
ActiveCore Technologies' acquisition of Springboard was not considered a
"significant" acquisition because Springboard's net assets and results of
operations are less than 10% of ActiveCore's consolidated net assets. ActiveCore
accounted for the Springboard acquisition under the purchase method of
accounting in the third quarter of fiscal 2002.
The purchase price for Springboard was the issuance of 2,000 shares of
common stock on a one for one basis resulting in a cost of approximately $260
which was accounted for in the quarter ended September 30, 2002. Concurrent with
43
the acquisition of Springboard Technology ActiveCore also obtained ownership of
Springboard's Vaayu software product, which augments the other enterprise
software sold by ActiveCore's enterprise division.
Since July 1, 2002, ActiveCore has been concentrating on expanding its
customer base in both the consumer and enterprise divisions. ActiveCore will be
developing or acquiring additional distribution capacity in both the enterprise
and in the consumer divisions. Specifically ActiveCore is searching for
additional 3rd party game titles to fill out its release schedule for
publication and distribution for 2003 and 2004. As well ActiveCore is searching
for potential acquisition candidates amongst development houses or distribution
operations in Europe, North America and the Pacific Rim in order to grow its
revenue levels as fast as possible.
DISPOSITION OF IGNITION ENTERTAINMENT LIMITED
During the period from May 28, 2002 to February 14, 2003 ActiveCore was
engaged in a process to obtain approval of an SB-2 Registration Statement. The
primary purpose of the SB-2 was to approve the $10,000,000 Equity Line of Credit
from Cornell Capital Partners, details of which are included elsewhere in this
prospectus. During this time period the managers of ActiveCore and Ignition were
engaged in a process of spending money and incurring debts to purchase
equipment, fund sales and develop new video game products in addition to paying
for the legal and accounting fees required for SB-2 approval. As the SB-2
process wore on ActiveCore's overall access to trade debt dried up such that the
company's sales revenues began dropping rather than increasing and the output of
game titles was delayed due to forced reductions in manpower as a result of cash
shortfalls. Despite considerable funding provided by principals of ActiveCore
and other individuals the delay in the SB-2 approval created the perception by
outside parties that there was something inherently wrong with the public status
of the company and we were not able to overcome this perception.
By May 2003, although ActiveCore had drawn down its first tranche under
the Equity Line of Credit it was apparent that irreparable harm had been done to
the entire games production and sales operation at Ignition Entertainment such
that debts had climbed beyond the capacity of ActiveCore to draw down on the
Cornell Equity Line of Credit without undue pressure on the company's stock
price. That is, increased draw downs would have placed the stock price at less
that 1 cent thereby negating any ability to draw down on the equity line to fund
sales and production.
Given that the sales and production processes at Ignition were slowed to
such an extent the board of directors determined that there was no alternative
but to divest of the Ignition subsidiary to a buyer. Several groups were
approached and it was determined that a group, some of which were original
shareholders of Ignition at the time of ActiveCore's acquisition of Ignition in
May 2003, presented the best economic value for ActiveCore.
Effective April 1, 2003, ActiveCore sold 100% of the issued shares and all
assets and liabilities of Ignition Entertainment, Ltd. for the return of
11,000,000 shares of ActiveCore's common stock. The transaction resulted in a
gain of $2,396,009, which has been included in the condensed consolidated
statements of operations for the three and six months ended June 30, 2003, as a
gain on sale of discontinued operations.
Upon execution of the sale agreement in June 2003, ActiveCore issued
50,000,000 shares of its common stock to the former shareholders of Ignition
Entertainment Ltd. in accordance with the original May 28, 2002 purchase
agreement. Based upon the terms of the sale agreement, ActiveCore converted all
of the 3,500,000 shares of preferred stock to be issued, into 35,000,000 shares
of common stock and accelerated the issuance of 15,000,000 shares of common
stock to be issued. The issuance of the 50,000,000 shares of common stock in
June 2003 relieved ActiveCore's obligation as of April 1, 2003, to issue
$11,949,156 in preferred and common stock under the original May 28, 2003
purchase agreement. The 50,000,000 shares were delivered, in trust, to an
independent third party upon the execution of the sale agreement and will be
distributed to the former owners. Immediately following the issuance of the
50,000,000 shares of ActiveCore's common stock, the former shareholders will
return 11,000,000 shares of common stock to ActiveCore as proceeds for the sale
of Ignition Entertainment Ltd. The 11,000,000 shares were valued at $770,000
based upon the fair market value of the stock on April 1, 2003, the effective
date of the sale agreement.
In connection with the sale agreement, ActiveCore will retain rights to
certain intellectual property and receive a source code licensing agreement for
certain interactive software games developed by Ignition Entertainment Ltd. In
addition to the source code licensing agreement, ActiveCore will also receive a
distribution agreement to distribute the interactive software games on a
worldwide basis for a period of three years, renewable annually thereafter. The
Company will pay Ignition Entertainment Ltd. a royalty fee of 30% of all gross
revenues, less direct costs, from the sale, distribution or marketing of those
game titles used by ActiveCore. As of June 30, 2003, ActiveCore did not assign
any value to the acquired intellectual property due to the uncertainty of
obtaining financing to fund the conversion of acquired intellectual property
into saleable products and uncertainty over the eventual sales revenues from any
games that result from the intellectual property.
44
Following is a summary of net liabilities of Ignition Entertainment Ltd.
as of April 1, 2003 and December 31, 2002:
AS OF AS OF
APRIL 1, DECEMBER 31,
2003 2002
------------ ------------
Cash $ 160 $ 213,923
Accounts receivable, net 212,741 149,676
Inventory 78,955 383,738
Prepaid expenses 113,044 99,488
Property, plant and equipment, net 417,727 442,674
Other assets 24,963 -
------------ ------------
Total Assets $ 847,590 $ 1,289,499
------------ ------------
Accounts payable 1,044,294 1,182,423
Accrued liabilities 134,058 240,833
Due to factor 211,249 94,746
Taxes payable 436,513 388,520
Translation adjustment 93,790 -
Notes payable 129,366 80,220
Due to related parties 424,329 720,376
------------ ------------
Total Liabilities 2,473,599 2,707,118
------------ ------------
Net Liabilities of Discontinued
Operations $ 1,626,009 $ 1,417,619
============ ============
ACQUISITION OF DATA INTEGRATION ASSETS OF SCI HEALTHCARE GROUP INC.
On September 19, 2003 ActiveCore completed the acquisition of some of the
data integration staff of SCI Healthcare Group Inc. of Ohio for consideration
consisting of a promissory note for $200,000 and the issuance of 6,472,492
shares of common stock (valued at $200,000). SCI Healthcare Group conveyed 6
employees, 18 existing hospital and healthcare facility data integration
contracts, its customer list of over 100 institutions, and certain software that
were useful in managing the operation. Ms. Rhonda Lindsay has been named by
ActiveCore to be the Vice President US operations. The group will operate under
the MDI Solutions trade name. The promissory note was due on October 7, 2003 or
within two business days of the release of certain liens on the purchased
assets. ActiveCore is in default on this note and is attempting to negotiate an
extension of the due date. The number of shares issued to SCI Healthcare is
subject to an increase or reduction based on the gross revenue of the
Integration Services Division for the one-year period following the acquisition.
If gross revenue is less than $900,000 during such one-year period, then the
shares will be reduced as follows:
REVENUE REDUCTION IN SHARES
------- -------------------
$800,000 to 10%
$899,999
$700,000 to 20%
$799,999
$699,999 or less 30%
If gross revenue is greater than $900,000 during such one-year period,
then the shares will be increased as follows:
REVENUE INCREASE IN SHARES
------- ------------------
$900,001 to $1,000,000 10%
$1,00,001 to $1,100,000 20%
$1,100,001 or greater 30%
45
MANAGEMENT
Our directors and officers are as follow:
NAME AND ADDRESS AGE POSITION
- ----------------------------------------- ---- ----------------------------
Brian MacDonald 54 CEO & Chairman of the Board
16 Wetherfield Place Director
Toronto, Ontario M3B 2E1
Canada
Peter Hamilton 55 President
2261 Rockingham Drive Director
Oakville, Ontario L6H 7J4
Canada
Graham Lowman 64 Chief Financial Officer
1788 Westcreek Drive
Pickering, Ontario L5N7T4
Canada
Kevin Birch 32 Senior VP & Chief Technology
6860 Meadowvale Town Centre Circle Officer
Mississauga, Ontario L5N7T4
Canada
Stephen Lewis 45 Director
461 Bedford Park Avenue
Toronto, Ontario M5M 1K2
Canada
J. Stephen Smith 64 Director
11614 Holly Briar Lane
Great Falls, VA 22066
United States
Below are biographies of our executive officers as of December 31, 2002:
BRIAN MACDONALD, CEO & CHAIRMAN OF THE BOARD. Brian MacDonald, IVP's CEO
as appointed to the board in November 2001 and elected Chairman of the Board in
December 2001. Prior to his position with IVP, Mr. MacDonald co-founded and was
President and CEO of Springboard Technology Solutions Inc., a Toronto-based
information technology and software development company. In 1995, he co-founded
(with Mr. Peter Hamilton) and served as the Executive VP Corporate Development
and CFO of Lava Systems Inc., a multinational software company that provided
document management, imaging and work flow software services, based in Toronto,
Chicago, London, and Australia. During this time, he assisted Lava Systems in
raising over CAD $36 million, and co-led the company to public status with a
listing on the Toronto Stock Exchange. Also, during his tenure with Lava Systems
Inc., Mr. MacDonald assisted in the acquisition of 4 companies in the United
Kingdom and Australia. Mr. MacDonald graduated from the University of Alberta in
1974 with an honors BA in Political Science, and received his Masters of Arts in
Public Policy and Political Science from the University of British Columbia in
1979. He holds a Fellow of the Institute of Canadian Bankers designation. Mr.
MacDonald has served in managerial capacities with The Toronto Dominion Bank,
Banque Nationale de Paris, Confederation Life Insurance Company and ABN Amro
Bank.
PETER HAMILTON, PRESIDENT. Peter Hamilton, IVP's President was appointed a
Director in November 2001. Mr. Hamilton oversees product development,
distribution activities and sales for ActiveCore. In 1999, he co-founded with
Mr. MacDonald, Springboard Technology Solutions Inc. and has served as the VP
Sales and Consulting. Prior to his position with Springboard, in 1995, Mr.
Hamilton co-founded (with Mr. MacDonald) and served as President and CEO of Lava
Systems Inc., a multinational software company that provided document
management, imaging and work flow software services, based in Toronto, Chicago,
46
London, and Australia. During this time, Mr. Hamilton was responsible for
overseeing Lava's expansion of its operations into Europe, Australia, U.S. and
Canada and developed business partners in South America, South Africa, the
Middle East and Scandinavia. He also assisted Lava in raising over CAD $36
million, and co-led the company to public status with a listing on the Toronto
Stock Exchange. Prior to this, Mr. Hamilton served as Senior VP of Operations
for SoftKey Software International, a publicly traded company on the New York
Stock Exchange. He was responsible for SoftKey's day-to-day operations,
including manufacturing, product distribution, information systems, finance,
customer support, technical support and product data management and marketing.
In addition, Mr. Hamilton integrated 18 new businesses into SoftKey's
operations, during his tenure and was instrumental in the growth of the company
from $2,000,000 in sales in 1989 to $300,000,000 in 1995.
GRAHAM LOWMAN, CHIEF FINANCIAL OFFICER. Mr. Lowman joined ActiveCore in
July 2002. Mr. Lowman was Administrator of The Boys Home in Toronto, Canada from
February Lowman 1997 to June 2003. Before emigrating to Canada in the mid 70s he
has held senior accounting positions in the UK with United Artists and Readers
Digest, respectively. After two years with an Ontario Crown Agency, Mr. Lowman
became the Controller of the Canadian arm of a major division of W.R. Grace &
Co. Since then he has held progressively senior positions as - VP Finance with a
manufacturing operation in Ontario; CFO of a national accounting partnership;
Financial Administrator for a major resort property; and Administrator of a
substantial child welfare organization in Toronto. He joined ActiveCore in July
2002, and continues to manage the day-to-day financial and administrative
functions of both the parent company and its Canadian subsidiary. Mr. Lowman is
a certified management accountant and a Chartered Secretary.
KEVIN BIRCH, SENIOR VP AND CHIEF TECHNOLOGY OFFICER. Kevin Birch has
served as ActiveCore's Senior VP and Chief Technology Officer since November
2001. Mr. Birch is responsible for product development activities in both the
enterprise and consumer divisions. His background includes architecting,
developing and managing many complex software development projects in sectors as
diverse as financial services, leisure products, health care and non-profit
organizations in Canada and the United States. In 1999, Mr. Birch was the VP of
Multimedia and Software Development for Springboard Technology Solutions Inc, a
Toronto-based network solutions web and software application developer, that
creates processes that enhance business productivity and profitability. Prior to
this, he spent several years as an Interface Architect with HealthLink Clinical
Data Network, Inc., where he was responsible for the development and support of
information system interfaces in and between major health care facilities across
Canada.
J. STEPHEN SMITH, DIRECTOR. J. Stephen Smith has served as a Director of
ActiveCore since November 2001. Mr. Smith has over 30 years experience in
planning, directing and managing major projects in such diverse fields as radar
system development, electronic intelligence system design, installation and
operation, ship design and acquisition and Document Management System
development and applied solutions. He has served as Vice-President Operations
for CDI Marine, the nation's largest marine engineering firm and has held the
positions of Director of Engineering, Vice-President and President of ROH, a
diverse professional services company specializing in DMS solutions, web site
development and applications and a broad range of support for the US Navy ship
acquisition program. Mr. Smith graduated with a BBA from the University of Notre
Dame and received his Masters in Science and Electronics Engineering from the
U.S. Naval Postgraduate School.
STEPHEN LEWIS, DIRECTOR. Mr. Lewis has served as a Director of ActiveCore
since July 2003. Stephen Lewis has extensive financial, corporate governance and
legal experience in large corporate environments and in fast growing
entrepreneurial settings. Mr. Lewis is a seasoned executive and was CFO of the
Lehndorff Group of companies from 1976 to 1994. The Lehndorff Group was a North
American/European real estate investment and property management organization
with assets and offices located across Canada and into the United States. Over a
number of years Lewis rose within the organization to become executive vice
president and chief financial officer, responsible for all facets of the group's
finance, accounting, administration, M.I.S and human resources. He was also a
member of the board of directors of numerous Lehndorff management companies and
acted as chief liaison between management and the independent boards and
committees that made up the Lehndorff Group. Mr. Lewis sold his franchise
operations in 2002 and is currently acting in a consulting capacity on a number
of different business ventures. Mr. Lewis is also a member of the board of
directors of the Children's Aid Society of Toronto ("CAST"), one of the largest
child welfare organizations in the World. Lewis was recently awarded a Queen's
Jubilee Medal, an award granted to individuals whose achievements have benefited
their fellow citizens, community and country.
COMPENSATION OF NON-EMPLOYEE DIRECTORS. J. Steven Smith and Stephen Lewis
will be paid 1,000,000 shares of common stock for each year of service on the
board. There is no separate compensation for directors who are also a part of
management for their services as a director of ActiveCore. All directors will be
reimbursed for all of their out-of-pocket expenses incurred in connection with
the rendering of services as a director.
47
There are no family relationships among directors, executive officers or
persons nominated to become directors of executive officers.
COMMITTEES OF THE BOARD OF DIRECTORS
During a Board of Directors meeting held on March 19, 2002, an audit
committee was established. The audit committee will report to the Board of
Directors regarding the appointment of our independent public accountants, the
scope and results of our annual audits, compliance with our accounting and
financial policies and management's procedures and policies relative to the
adequacy of our internal accounting controls. The audit committee is comprised
of Messrs. MacDonald, Lewis and Smith.
During a Board of Directors meeting held on June 24 2003 a compensation
committed was established to review compensation levels and agreements for
senior management of ActiveCore. The committee consists of Messrs. Lewis, Smith
and Hamilton.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following summary compensation table shows
certain compensation information for services rendered in all capacities for the
years ended December 31, 2002, 2001 and 2000. Other than as set forth herein, no
executive officer's cash salary and bonus exceeded $100,000 in any of the
applicable years. The following information includes the dollar value of base
salaries, bonus awards, the value of restricted shares issued in lieu of cash
compensation and certain other compensation, if any, whether paid or deferred:
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- ---------------------------------------------------
RESTRICTED
NAME & OTHER STOCK
PRINCIPAL ACCRUED AWARDS IN LTIP ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION US$ OPTIONS/SARS PAYOUTS COMPENSATION
- ------------- ---- ------- ----- ------------ --------- ------------ ------- ------------
Brian
MacDonald(4) 2002 $60,933 -- -- -- -- -- --
2001 $7,440 -- -- -- -- -- --
John Maxwell 2002 -- -- -- $25,000 -- -- --
Pres. (2)(3) 2001 -- -- -- -- -- -- --
2000 -- -- -- 150,000 (1) -- -- --
John Trainor, 2002 -- -- -- $25,000 -- -- --
Sec'y.(2)(3) 2001 -- -- -- -- -- -- --
2000 -- -- -- 144,000 (1) -- -- --
- ----------
(1) Messrs. Maxwell and Trainor each received 200,000 shares of restricted common stock valued at $.75 and
$.72 per share, respectively, in lieu of cash compensation.
(2) Effective December 15, 2001, Messrs. Maxwell and Trainor resigned as officers and directors of ActiveCore
Technologies Inc.
(3) In March 2002, Messrs. Maxwell and Trainor each received 500,000 shares of restricted common stock valued
at $.05 per share, in lieu of cash compensation.
(4) Mr. MacDonald became Chief Executive Officer on November 16, 2001. This excludes the issuance of 8,984,684
shares to Mr. MacDonald in connection with the acquisition of International Technology Marketing.
ActiveCore Technology has no deferred compensation, stock options, SAR or
other bonus arrangements for its employees and/or directors. During the calendar
year ended December 31, 2002, all decisions concerning executive compensation
were made by the Board of Directors.
EMPLOYMENT AGREEMENTS
In August 2001, International Technology Marketing entered into employment
agreements with Brian MacDonald and Peter J. Hamilton. Mr. MacDonald is employed
as President and Treasurer and Mr. Hamilton is employed as Vice President,
Sales. Each of these agreements has a term of three years and thereafter will
continue for one year terms unless either party terminates the agreement at
least 90 days prior to the end of any term. Each of Mr. MacDonald and Mr.
Hamilton has a salary of CAD $96,000 per year, plus 6% of sales revenue. As ITM
is a dormant corporation following its acquisition by ActiveCore it has no sales
revenue and therefore ActiveCore is not liable to pay any portion of its sales
revenues to Mr. MacDonald or Mr. Hamilton. ActiveCore guarantees the payments
48
under these employment contracts. Neither Mr. MacDonald nor Mr. Hamilton
receives any further compensation for service as an officer or director of
ActiveCore Technologies.
In September 2001, International Technology Marketing entered into
employment agreements with Geno Villella, Kevin Birch and Sherry Bullock. Mr.
Villella is employed as Vice President Implementation, Mr. Birch is employed as
Senior Vice President and Chief Technology Officer and Ms. Bullock was employed
as Vice President Marketing. Ms. Bullock left the company as of July 10, 2002.
Ms. Bullock received a payment of approximately $2,500 per month until June 30,
2003 as compensation under her termination agreement. Each of these agreements
has a term of three years and thereafter will continue for one year terms unless
either party terminates the agreement at least 90 days prior to the end of any
term. Mr. Villella is paid a base salary of $36,000 per year, Mr. Birch is paid
a base salary of $60,000 per year and Ms. Bullock was paid a base salary of
$30,000 per year. ActiveCore guarantees the payments under these employment
contracts. Neither Mr. Villella nor Mr. Birch received any further compensation
for services as an officer of ActiveCore. ActiveCore assumed these contracts
effective April 1, 2002.
ActiveCore has no deferred compensation, stock options, SAR or other bonus
arrangements for its employees and/or directors. All decisions concerning
executive compensation were made by the Board of Directors.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
ActiveCore Technologies' predecessor was Erebus Corporation, a non-active
reporting entity that was controlled by TPG Capital Corporation. ActiveCore
believes that James Cassidy controlled TPG Capital Corporation. Pursuant to Rule
405 promulgated under the Securities Act of 1933, Mr. Cassidy may be deemed to
be a "promoter" of ActiveCore. Based on the public records, the Securities and
Exchange Commission settled actions against Mr. Cassidy and TPG Capital
Corporation for securities fraud and disclosure violations. The Commission
alleged that, prior to selling certain "blank check" companies that they
controlled, Mr. Cassidy and TPG Corporation made false and misleading statements
in documents that were filed with the Commission and that they caused violations
of certain books and records provisions of the Securities Exchange Act of 1934.
The transactions related to an eligibility rule, issued by the NASD in January
1999, which required all companies that displayed their stock quotations on the
NASD's over-the-counter bulletin board to file periodic reports, including
financial statements, with the Commission by June 2000. Neither Mr. Cassidy nor
TPG Capital Corporation admitted or denied the allegations. A description of the
settlement is contained in SEC Litigation Release No. 17023, dated June 4, 2001.
ActiveCore has no ongoing business relationship with Mr. Cassidy and he is not
employed by ActiveCore in any manner.
The Company settled all outstanding litigation with Danson Partners LLC in
exchange for the issuance of 3,000,000 shares of common stock.
49
DESCRIPTION OF PROPERTY
ActiveCore Technologies' principal executive office is located at 2275
Lakeshore Blvd. West Suite 401, Toronto Ontario M8V 3Y3 Canada, which are also
the premises occupied by its wholly-owned Canadian subsidiary, ActiveCore
Technologies Ltd. which pays CAD $9,195 per month for the 4.600 square-foot
office space.
ActiveCore's wholly-owned subsidiary, ActiveCore Technologies UK Limited,
is in the process of locating suitable office space in London. ActiveCore also
uses a Tampa address for its US MDI Solutions activities which is the home of
its Vice President, US Operations.
LEGAL PROCEEDINGS
ActiveCore Technologies, Inc. and its subsidiary ActiveCore Technologies
Limited are presently a party to a non-material legal proceeding involving
amounts claimed to be owed to Orchestral Corporation. ActiveCore disputes the
amount as owing, although USD 226,000 has been recorded on the balance sheet as
a debt. ActiveCore has filed a defense whereby it is claimed that the limits for
claims have passed on the contract between Orchestral and ActiveCore.
50
PRINCIPAL STOCKHOLDERS
The following table contains information about the beneficial ownership of
our common stock as of December 1, 2003, for:
(i) each person who beneficially owns more than five percent of the
common stock;
(ii) each of our directors;
(iii) the named executive officers; and
(iv) all directors and executive officers as a group.
COMMON STOCK
BENEFICIALLY OWNED
------------------------------
NAME/ADDRESS TITLE OF CLASS AMOUNT PERCENTAGE(3)
---------------------- ------------------ ------------- ----------------
Brian MacDonald Common Stock 23,179,449 7.8%
Peter Hamilton Common Stock 23,879,449 8.0%
Kevin Birch Common Stock 12,037,173 4.0%
Graham Lowman Common Stock 500,000 *
Stephen Lewis Common Stock 2,000,000 (1) *
Stephen Smith Common Stock 2,000,000 (2) *
------------ -----------
All Officers and
Directors as a Group Common Stock 63,596,071 21.3%
============ ===========
- ----------
* Less than one percent.
(1) Of that total 1,000,000 shares were issued on June 24, 2003 and 1,000,000
will vest on November 1, 2003.
(2) Of that total, 500,000 shares were issued on December 31, 2002, 500,000 on
June 24, 2003 and 1,000,000 shares will vest on November 1, 2003.
(3) Applicable percentage of ownership is based on 297,921,703 shares of
common stock outstanding as of December 1, 2003 for each stockholder.
Beneficial ownership is determined in accordance within the rules of the
Commission and generally includes voting of investment power with respect
to securities. Shares of common stock subject to securities exercisable or
convertible into shares of common stock that are currently exercisable or
exercisable within 60 days of December 1, 2003 are deemed to be
beneficially owned by the person holding such options for the purpose of
computing the percentage of ownership of such persons, but are not treated
as outstanding for the purpose of computing the percentage ownership of
any other person.
51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 1, 2002, ActiveCore acquired all the outstanding shares of
Springboard Technology Solutions Inc. for consideration of 2,000 common shares
on the basis of a one for one exchange. Springboard Technology Solutions Inc.
was owned by Messrs. MacDonald, Hamilton, Birch, Villella and Ms. Bullock, all
of whom were officers or directors of ActiveCore Technology at the time of
acquisition and has provided the physical infrastructure for ActiveCore
Technology Inc., since January 1, 2002. Springboard has been in operation for
three years. At the time of acquisition Springboard Technology had 10 full time
employees and consultants. The acquisition was consummated for nominal
consideration $260 of stock and therefore ActiveCore Technology did not believe
the use of an independent negotiating committee was warranted.
On June 1, 2002, Ignition Entertainment Limited entered into a consulting
agreement with Montpelier Limited whereby Montpelier will provide business
development and financial advice to Ignition. Under the terms of the agreement,
Ignition is obligated to pay Montpelier (pound)179,850 ($262,970) yearly in
equal monthly installments of $21,914. Additionally, Montpelier was entitled to
receive a signing bonus of (pound)29,975 ($43,828) upon execution of the
agreement. Montpelier Limited is owned by Vijay Chadha, Ajay Chadha and Martin
Monnieckdam, all of whom are officers of Ignition Entertainment. This contract
has subsequently been assumed by Ignition Entertainment's new owners.
During the three months ended March 31, 2002, ActiveCore issued 1,000,000
shares each to Messrs. Smith, Sidrow and King for services as directors for the
two-year period 2001-2003. The 3,000,000 shares are held in escrow. Subsequent
to the quarter ended March 31, 2002, Messrs. Sidrow and King resigned from the
Board of Directors for personal reasons and as a result their entitlement to
shares terminated. The shares related to Mr. Sidrow and Mr. King have been
rescinded.
ActiveCore Technologies Inc.'s principal executive office is located at
2275 Lakeshore Blvd. West Suite 401, Toronto Ontario M8V 3Y3 Canada, which are
also the premises occupied by ActiveCore Technologies Ltd. a wholly-owned
subsidiary, formerly Springboard Technology Solutions, Inc., ActiveCore had an
oral agreement which commenced January 1, 2002, with Springboard Technology
Solutions, Inc., a corporation owned by Messrs. MacDonald, Hamilton, Birch,
Villella and Ms. Bullock, whereby ActiveCore was obligated to pay Springboard
approximately $30,000 per month for rent, utilities, network infrastructure,
equipment leases and all office administrative services. Messrs. MacDonald and
Hamilton are officers and directors of ActiveCore. Messrs. Birch and Villella
are officers of ActiveCore. Ms. Bullock was an officer of ActiveCore until her
resignation in July, 2002. On July 1, 2002 ActiveCore acquired Springboard
Technology Solutions and the monthly administrative charge was rescinded.
On September 17, 2001, ActiveCore Technologies entered into a stock
purchase agreement with International Technology Marketing, Inc. whereby
ActiveCore Technologies is obligated to issue 50 million shares of common stock
to the shareholders of International Technology Marketing, who include Messrs.
MacDonald, Hamilton, Birch, Villella and Ms. Bullock, the current and former
members of our management team, in exchange for all of International Technology
Marketing's common stock. In that transaction, ActiveCore Technologies,
represented by its corporate counsel, Thomas Chown, the board members and
executives in place at that time, none of which are part of current management
or its board of directors, negotiated and entered into, on a arms length basis,
an agreement with the five founders of International Technology Marketing Inc.,
a newly formed company, to gain the dedicated management services of the
International Technology Marketing's founders for the benefit of ActiveCore
Technologies. The founders of ITM were experienced finance, marketing, sales and
information technologies. The method chosen for obtaining, in bulk, the services
of the new management team was accomplished by the two companies entering into a
stock purchase agreement whereby ActiveCore acquired the shares of ITM; however
the shareholders of ITM were not to receive their shares until ActiveCore met
certain revenue milestones. A resolution with regard to the acquisition of ITM
and the obtaining of the services of the management team was included in a proxy
statement sent to the registered shareholders of ActiveCore which was, at the
properly constituted annual general meeting held on November 16, 2001, which was
approved by a majority of shareholders.
Concurrent with the approval of the acquisition of ITM, ActiveCore's
shareholders voted to increase the number of authorized shares of ActiveCore
which, in part, permitted the company to issue sufficient shares to pay out
shares for the management services obtained through the stock purchase agreement
between of ITM and ActiveCore, and, in part, to provide sufficient shares to
acquire additional assets, entities and financing. The acquisition of ITM was
satisfied by the issuance of 50,000,000 shares of ActiveCore to the five
founding shareholders of ITM. The share issuances, given in exchange for ITM,
are subject to performance milestones. In the third quarter ended September 30,
2002 the founders of ITM became eligible to receive 20,000,000 shares for
meeting the first two milestones and these shares were recorded as stock-based
compensation and valued on a market price basis on the close of business on
September 30, 2002, at a cost of $3,800,000. On December 31, 2002, an additional
52
10,000,000 shares qualified for release. These shares were valued for accounting
purposes at $0.17 per share or an aggregate of $1,700,000. These disbursements
of shares were non-cash items. The Company accelerated the issuance of the final
20,000,000 shares, which were released from escrow and recorded as stock-based
compensation on June 30, 2003, and were valued at $.027 per share for an
aggregate of $540,000.
On March 25, 2002, we issued the 50 million shares of common stock to be
held by ActiveCore Technologies until the escrow agreement is executed to hold
the shares. These shares were to be held pending satisfaction of certain
performance related goals. As these goals are achieved, the shares will be
disbursed from the escrow to the former shareholders of International Technology
Marketing. The former shareholders are entitled to vote the shares held in
escrow pending satisfaction of the performance goals. In the quarter ended
September 30, 2002 the former shareholders of ITM became eligible to receive the
first two tranches related to the revenue milestones. The issuance of the shares
was accounted for by the recording an expense under salaries for $3,800,000 or
20,000,000 times the $0.19 cent share price as at September 30, 2002. On
December 31, 2002, an additional 10,000,000 shares qualified for release. These
shares were valued for accounting purposes at $0.17 per share. These
disbursements were non-cash items.
The performance goals are as follows:
o 10,000,000 shares will be disbursed upon aggregate sales of $500,000.
o 10,000,000 shares will be disbursed upon aggregate sales of
$1,000,000.
o 10,000,000 shares will be disbursed upon aggregate sales of
$2,000,000.
o 10,000,000 shares will be disbursed upon aggregate sales of
$6,000,000.
o 10,000,000 shares will be disbursed upon aggregate sales of
$16,200,000.
In March 2000, ActiveCore, through an agreement with TPG Capital
Corporation, which was operated by James Cassidy, a lawyer in Washington D.C.,
acquired Erebus Corporation for $200,000 in cash and 350,000 shares of
ActiveCore valued at $500,000, the market value of ActiveCore's stock at the
time of acquisition. This consideration was paid as a fee to TPG Capital, the
sole shareholder of Erebus Corporation. The Erebus transaction was undertaken
between Erebus, a non-active reporting entity, and ActiveCore Technology, in
order for ActiveCore could become a reporting issuer with the SEC and thereby
maintain its status as a listed company on the OTCBB. From an accounting
standpoint the Erebus transaction was treated as a recapitalization (stock for
stock transaction and no goodwill was recorded).
TPG Capital was the sole shareholder of Erebus Inc., an inactive reporting
shell company. The consulting agreement states that one year after the execution
of the agreement ("reset date") the 350,000 common shares issued by ActiveCore
Technologies to the former stockholder shall be increased or decreased based
upon the average closing price of ActiveCore Technologies' stock 30 days prior
to the reset date, so the value of the 350,000 shares was equal $500,000. The
average closing price of the stock was $0.1487 per share. Based on the
consulting agreement ActiveCore Technologies is obligated to issue an additional
3,028,378 common shares to the consultant as an additional fee. ActiveCore
Technologies does not believe that it will be legally obligated to issue the
shares based on the reset date as the SEC had previously reached a settlement
agreement with Mr. Cassidy and TPG Capital with regard certain practices related
to vending reporting shells to nonreporting entities in order for the later to
retain listing status on the OTC BB. See SEC Litigation release no. 17023/June
4, 2001.
Since becoming a reporting entity ActiveCore Technologies has filed and
maintained its reporting obligations to the SEC.
53
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
ActiveCore (IVP) Technologies' common stock is traded on the
Over-the-Counter Bulletin Board under the symbol "TALL". The following table
sets forth, for the periods indicated, the high and low bid prices of a share of
common stock for the last two years, as well as the first three quarters of
2003.
HIGH BID LOW BID
------------ -----------
2000
Quarter Ended March 31, 2000 $3.69 $0.13
Quarter Ended June 30, 2000 1.41 0.56
Quarter Ended September 30, 2000 0.91 0.57
Quarter Ended December 31, 2000 0.67 0.14
2001
Quarter Ended March 31, 2001 $0.22 $0.12
Quarter Ended June 30, 2001 0.14 0.05
Quarter Ended September 30, 2001 0.17 0.04
Quarter Ended December 31, 2001 0.09 0.03
2002
Quarter Ended March 31, 2002 $0.11 $0.03
Quarter Ended June 30, 2002 0.32 0.08
Quarter Ended September 30, 2002 0.27 0.13
Quarter Ended December 31, 2002 0.20 0.14
2003
Quarter Ended March 31, 2003 $0.19 $0.05
Quarter Ended June 30, 2003 0.07 0.02
Quarter Ended September 30, 2003 0.04 0.02
HOLDERS OF COMMON EQUITY
As of May 1, 2003, there were 367 registered holders of record for our
common stock.
DIVIDENDS
ActiveCore has never paid any dividends on its capital stock. The Company
currently expects that it will retain future earnings for use in the operation
and expansion of its business and does not anticipate paying any cash dividends
in the foreseeable future. Any decision on the future payment of dividends will
depend on our earnings and financial position at that time and such other
factors as the Board of Directors deems relevant.
RECENT SALES OF UNREGISTERED SECURITIES
On October 14, 2003 ActiveCore issued 3,000,000 shares to Danson Partners
LLC in respect of sums owing to Wayne Danson for consulting fees during the
period March 1, 2002 to February 28 2003. The shares have valued as at the date
of issue.
On September 30, 2003 ActiveCore issued 10,200,000 shares with respect to
an investment transaction for financing that has not yet closed. If the
financing does not close the shares will be rescinded.
On September 30, 2003 ActiveCore entered into a contract with an
independent advisor to consult with the company with regard to finance
activities and general corporate development. The Company issued 1,000,000
shares. The shares were valued at $.029 per share, representing the closing bid
price on the date of the board resolution.
On September 30, 2003 ActiveCore issued shares with respect to the
creation of a subsidiary in the United Kingdom. A total of 9,000,000 shares were
issued and valued at $.029 per share, representing the closing bid price on the
date of the board resolution.
54
On September 30, 2003, ActiveCore issued 6,472,942 shares in connection
with the acquisition of the data integration assets of SCI Healthcare Group. The
shares were valued at $0.0309, representing the closing price on September 18th,
being the contracted determination date.
On September 30, 2003, ActiveCore issued 300,000 shares to complete the
purchase of the XML Connector source code from Karora Technologies Inc. The
shares were valued at $.028 per share, representing the closing bid price on the
date of the board resolution.
On September 30, 2003, ActiveCore issued 150,000 shares as bonuses to
employees for successful completion of certain technology. The shares were at
$.028 per share, representing the closing bide price on the date of the board
resolution.
On August 5, 2003, ActiveCore announced that it had acquired the rights to
build a cell phone game based on the "Zorro" character and trademark from Zorro
Productions Inc. of California. A license agreement was entered into whereby
ActiveCore shall pay no royalties on the first $50,000 of net sales and
subsequently ActiveCore and the licensor shall share equally a royalty of 50% on
net sales. There shall be no minimum royalty. The Company also entered into an
agreement with an unrelated company to source additional "name brand" properties
for cell phone game production and issued this unrelated company 2,000,000
shares of common stock as a consulting fee. These shares were issued on August
1, 2003 and were valued at $0.025 per share, representing the closing bid price
on the date of the board resolution.
On July 31, 2003, ActiveCore announced that its wholly owned subsidiary
ActiveCore Technologies Limited had received the first installment of $500,000
of a planned $2,000,000 term loan offering. Under the terms of the agreement,
the first installment will accrue a 12% interest rate per annum and is repayable
over a five-year term with no payments required in the first 12 months - the
payments will be amortized over the remaining 48 months of the term loan. The
loan is convertible into common stock of ActiveCore at the rate of 4.5 shares
for every 1 dollar of the loan balance due, excluding interest, remaining at the
time of conversion. As additional consideration for the loan advance by the
lender, ActiveCore issued 500,000 warrants on July 30, 2003 to the lender for
the purchase of 500,000 shares of common stock at a purchase price of $0.0312
per share. The fair value assigned to the warrant amounted to $0 and was
determined using the Black-Scholes option pricing model using the following
assumptions: no dividend yield for all years; expected volatility of 9.3%;
risk-free interest rate of 1.12%, and an expected life of 1 year. The warrants
expire July 31, 2004.
On July 14, 2003, ActiveCore entered into a consulting agreement with an
unrelated individual to provide services through June 2004. On August 1, 2003,
ActiveCore issued 4,000,000 shares of common stock to this consultant as
compensation for services to be rendered. These shares were valued at $.025 per
share, representing the closing bid price on the date of the board resolution.
On July 10, 2003, ActiveCore entered into a Letter of Intent to acquire
the source code for a software product known as XML/Connector for the health
care vertical from an unrelated company which is a Colorado and Toronto based
software development company. As part of the terms and conditions, ActiveCore
will pay (CAD) $120,000 in cash in the form of a note payable. On August 1,
2003, ActiveCore issued 500,000 shares of common stock to the acquiree. These
shares were valued at $.025 per share representing the closing bid price on the
date of the board resolution.
In July 2003, ActiveCore entered into a consulting agreement with an
unrelated individual to provide services through June 2004. On August 1, 2003,
ActiveCore issued 150,000 shares of common stock to this consultant. These
shares were valued at $.033 per share, representing the closing market value on
the date of grant.
In July 2003, ActiveCore entered into employment agreements with two
contractors related to cell phone game development and health care services. On
August 1, 2003, each contractor was issued 500,000 shares of common stock as
compensation in addition to ongoing salary costs. These shares were valued at
$.025 per share, representing the closing bid price on the date of the board
resolution.
In July 2003, ActiveCore issued 1,562,700 restricted shares of common
stock to an officer of ActiveCore in lieu of cash in order to satisfy
shareholder loans, expenses paid on behalf of ActiveCore and accrued expenses.
These shares were valued at $.025 per share, representing the closing bid price
on the date of the board resolution.
During the nine month period ended September 30, 2003, ActiveCore issued
25,508,380 shares of common stock to the Investment Bankers for cash of $400,000
in connection with the Equity Line of Credit.
On June 24, 2003, ActiveCore issued 17,804,976 shares of common stock to
the Chairman and CEO of ActiveCore in lieu of cash in order to satisfy
shareholder loans, expenses paid on behalf of ActiveCore and accrued salaries
included in the amounts due to related parties. These shares were valued at
$.025 per share, or an aggregate of $445,124 representing the market value on
the date of grant.
On June 24, 2003, ActiveCore issued 17,804,976 shares of common stock to a
the President and director of ActiveCore in lieu of cash in order to satisfy
shareholder loans, expenses paid on behalf of ActiveCore and accrued salaries
included in the amounts due to related parties on the accompanying condensed
55
consolidated balance sheets. These shares were valued at $.025 per share, or an
aggregate of $445,124 representing the market value on the date of grant.
On June 24, 2003, ActiveCore issued 1,250,000 shares of common stock to
four employees of ActiveCore for payment of accrued compensation and bonuses.
These shares were valued at $.025 per share, or an aggregate of $31,250
representing the market value on the date of grant.
On June 24, 2003, ActiveCore issued 3,000,000 shares of common stock to
certain directors of ActiveCore for director services for the period from June
2003 to June 2004. These shares were valued at $.025 per share, or an aggregate
of $75,000 representing the market value on the date of grant.
On June 24, 2003, ActiveCore issued 300,000 shares of common stock to an
unrelated consultant having a value of $7,500 for consulting services. These
shares were valued based upon the market value on the date of grant.
On June 24, 2003, ActiveCore issued 2,000,000 shares of common stock to an
unrelated party in connection with an agreement to provide investor relations
services. These shares were valued at $.025 per share, or an aggregate of
$50,000 representing the market value on the date of grant.
On June 24, 2003, ActiveCore issued 5,000,000 shares of common stock to an
unrelated consultant as consideration for an agreement to provide consulting
services from June 2003 to June 2004. These shares were valued at $.025 per
share, or an aggregate of $125,000 on the date of grant.
On June 24, 2003, ActiveCore issued 50,000,000 shares of common stock to
the former shareholders of Ignition Entertainment, Ltd. in accordance with the
original May 28, 2002 purchase agreement. The acquisition was made pursuant to
ActiveCore agreeing to issue 15,000,000 shares of common stock and 3,500,000
shares of preferred stock convertible into 35,000,000 shares of common stock;
collectively valued at $0.23898 per share for a total purchase price of
$11,949,155. The issuance of these 50,000,000 shares of common stock relieved
$11,949,155 in preferred and common stock to be issued as of April 1, 2003. (See
discussion under divestiture of Ignition Entertainment Limited).
On June 24, 2003, ActiveCore issued 5,180,000 shares of common stock to
two unrelated parties to obtain financing for ActiveCore. Financing costs
included in interest expense for the six months ended June 30, 2003 totaled
$129,500 representing the market value on the date of grant.
On June 24, 2003, ActiveCore issued 500,000 shares of common stock that
were released from escrow to an individual for services rendered from November
2002 to November 2003. The Board of Directors resolved that these shares are
considered earned as of June 24, 2003. These shares were valued at $.025 per
share, or an aggregate of $13,500 representing the market value on the date of
grant.
On February 18, 2003, ActiveCore issued 168,889 shares of common stock to
Cornell Capital Partners for payment of penalties for not completing the SB-2
filing by the due date of July 2, 2002 per the terms of the Equity Line of
Credit Agreement. These shares were valued at $0.13 per share or an aggregate of
$21,956, representing the closing market value on the date of grant.
On February 18, 2003, ActiveCore issued 114,408 share of common stock to a
consultant for payment of $15,000 of consulting services accrued at December 31,
2002 as common stock to be issued. These shares were valued at $0.13 per share
representing the closing market value on the date of grant.
On December 31, 2002, the former shareholders of ITM earned 10,000,000
contingent shares having a value of $1,700,000. These shares were released out
of escrow.
On December 31, 2002, J. Stephen Smith, our independent director, earned
500,000 shares having a value of 85,000. These shares were released out of
escrow.
56
On September 30, 2002, the former shareholders of ITM earned 20,000,000
contingent shares having a value of $3,800,000. These shares were released out
of escrow.
On July 1, 2002, ActiveCore Technologies acquired all the outstanding
shares of Springboard Technologies Solutions, Inc. for consideration of 2,000
common shares on the basis of a one for one exchange. The shares were valued at
$260 corresponding to the date that ActiveCore's Board of Directors approved the
transaction.
On June 28, 2002, ActiveCore Technologies issued 2,410,916 shares of
common stock to an unrelated investor pursuant to the terms of our March 17,
2000 debt conversion agreement.
On June 28, 2002, ActiveCore issued 23,370 shares of common stock to
Danson Partners, LLC having a value of $5,000 for consulting services rendered.
On May 28, 2002 ActiveCore acquired Ignition Entertainment Limited, a
company incorporated in the United Kingdom. ActiveCore was to issue 15,000,000
shares of common stock and 3,500,000 shares of preferred stock as payment to the
principals of Ignition over a period of two years from the date of acquisition.
Additionally, the management team of Ignition Entertainment Limited could earn
up to 1,500,000 shares of preferred stock if certain revenue and net income
goals were met at specific time periods. The shares were held in escrow to be
disbursed according to the terms of the agreement.
As a consequence of Ignition not achieving its performance goals in the
ensuing 10 months of operation, ActiveCore negotiated the sale of the company,
and, effective April 1, 2003, ActiveCore sold 100% of the issued shares and all
assets and liabilities of Ignition Entertainment, Ltd. for the return of
11,000,000 shares of ActiveCore's common stock. The transaction resulted in a
gain of $2,396,009, which has been included in the condensed consolidated
statements of operations for the three and six months ended June 30, 2003, as a
gain on sale of discontinued operations.
Upon execution of the sale agreement in June 2003, ActiveCore issued
50,000,000 shares of its common stock to the former shareholders of Ignition
Entertainment Ltd. in accordance with the original May 28, 2002 purchase
agreement. Based upon the terms of the sale agreement, ActiveCore converted all
of the 3,500,000 shares of preferred stock to be issued, into 35,000,000 shares
of common stock and accelerated the issuance of 15,000,000 shares of common
stock to be issued. The issuance of the 50,000,000 shares of common stock in
June 2003 relieved ActiveCore's obligation as of April 1, 2003, to issue
$11,949,156 in preferred and common stock under the original May 28, 2003
purchase agreement. The 50,000,000 shares were delivered, in trust, to an
independent third party upon the execution of the sale agreement and will be
distributed to the former owners. Immediately following the issuance of the
50,000,000 shares of ActiveCore's common stock, the former shareholders will
return 11,000,000 shares of common stock to ActiveCore as proceeds for the sale
of Ignition Entertainment Ltd. The 11,000,000 shares were valued at $770,000
based upon the fair market value of the stock on April 1, 2003, the effective
date of the sale agreement.
In May 2002, ActiveCore entered into an agreement with a consultant for
marketing and advisory services connected with product marketing in the European
Economic Community and North America. In relation with this agreement,
ActiveCore Technologies issued 5,000,000 shares of common stock to Ms. Land.
These shares were registered on a Form S-8 filed on May 3, 2002. These shares
were valued at $.05 per share, or an aggregate of $250,000, on the date of
issuance.
On May 1, 2002, ActiveCore agreed to issue 4,000,000 shares of its
restricted common stock having a value of $760,000 in full settlement of its
obligation to a factoring company. ActiveCore Technologies issued these shares
on or about August 6, 2002.
In April 2002, ActiveCore entered into an Equity Line of Credit Agreement
with Cornell Capital Partners. ActiveCore Technologies paid Cornell a one-time
fee equal to $340,000, payable in 3,032,000 shares of common stock. In addition,
ActiveCore entered into a placement agent agreement with Westrock Advisors,
Inc., a registered broker-dealer. Pursuant to the placement agent agreement,
ActiveCore Technologies paid a one-time placement agent fee of 100,000 shares of
common stock, which were valued at $0.10 per share, or an aggregate of $10,000,
on the date of issuance. ActiveCore agreed to pay Danson Partners, LLC, a
consultant, a one-time fee of $200,000 for its work in connection with
consulting ActiveCore on various financial matters. Of the fee, $75,000 was paid
in cash with the balance paid in 1,040,000 shares of common stock.
In April 2002, ActiveCore raised $150,000 of gross proceeds from the
issuance of convertible debentures. These debentures were redeemed in February
2003.
57
On April 26, 2002, ActiveCore issued 62,027 shares of common stock to
Danson Partners, LLC having a value of $5,000 for consulting services rendered.
On or about March 25, 2002, ActiveCore issued 100,000 shares of common
stock to Barry Gross that was earned pursuant to a consulting contract signed in
2000. These shares were valued at $0.09 per share, or an aggregate of $9,000, on
the date of issuance.
On or about March 25, 2002, ActiveCore issued 14,000,000 shares of common
stock to Brian MacDonald to be held in escrow pending achievement of the
performance clauses related to the September 17, 2001 agreement with
International Technologies Marketing. Subsequently, all of these shares have
been released from escrow.
On or about March 25, 2002, ActiveCore issued 14,000,000 shares of common
stock to Peter Hamilton to be held in escrow pending achievement of the
performance clauses related to the September 17, 2001 agreement with
International Technologies Marketing. Subsequently, all of these shares have
been released from escrow.
On or about March 25, 2002, ActiveCore issued 14,000,000 shares of common
stock to Kevin Birch to be held in escrow pending achievement of the performance
clauses related to the September 17, 2001 agreement with International
Technologies Marketing. Subsequently, all of these shares have been released
from escrow.
On or about March 25, 2002, ActiveCore issued 4,000,000 shares of common
stock to Geno Villella to be held in escrow pending achievement of the
performance clauses related to the September 17, 2001 agreement with
International Technologies Marketing. Subsequently, all of these shares have
been released from escrow.
On or about March 25, 2002, ActiveCore issued 4,000,000 shares of common
stock to Sherry Bullock to be held in escrow pending achievement of the
performance clauses related to the September 17, 2001 agreement with
International Technologies Marketing. Subsequently, Ms. Bullock left employment
with ActiveCore Technologies and has accepted a partial payment of 800,000
shares and the remainder of her performance based shares will be reallocated to
the remaining members of International Technologies Marketing. Subsequently, all
of these shares have been released from escrow.
On or about March 25, 2002, ActiveCore issued 500,000 shares of common
stock to John Maxwell in lieu of compensation for services performed in 2001 as
President of ActiveCore. These shares were valued at $0.05 per share, or an
aggregate of $25,000, on the date of issuance.
On or about March 25, 2002, ActiveCore issued 500,000 shares of common
stock to John Trainor in lieu of compensation for services performed in 2001 as
Secretary of ActiveCore. These shares were valued at $0.05 per share, or an
aggregate of $25,000, on the date of issuance.
On or about March 25, 2002, ActiveCore issued 2,375,600 shares of common
stock valued at $.05 per share to a consultant for the conversion of $118,780 of
debts owed by the corporation for services performed in 2001.
On or about March 25, 2002, ActiveCore issued 1,000,000 shares of common
stock to an unrelated investor as conversion of a fee of $50,000 earned for
introducing ActiveCore Technologies to International Technologies Marketing.
These shares were valued at $0.05 per share, or an aggregate of $50,000, on the
date of issuance.
On or about March 25, 2002, ActiveCore issued 50,000 shares of common
stock to one of its external legal counsel for payment of interest on
outstanding legal bills for the year 2001 - 2002. These shares were valued at
$0.10 per share, or an aggregate of $5,000, on the date of issuance.
On or about March 25, 2002, ActiveCore issued 1,000,000 shares of common
stock to J. Stephen Smith to be held in escrow for services as a board member
for the period from 2001 to 2003 to be accrued at the rate of 500,000 per year.
On or about March 25, 2002, ActiveCore issued 1,000,000 shares of common
stock to Michael Sidrow to be held in escrow for services as a board member for
the period from 2001 to 2003 to be accrued at the rate of 500,000 per year. In
June 2002, these shares were rescinded as a result of Mr. Sidrow's resignation
from the board of directors.
On or about March 25, 2002, ActiveCore issued 1,000,000 shares of common
stock to Robert King to be held in escrow for services as a board member for the
period from 2001 to 2003 to be accrued at the rate of 500,000 per year. In June
2002, these shares were rescinded as a result of Mr. King's resignation from the
board of directors.
58
On February 16, 2002, ActiveCore completed an interim financing agreement
for a bridge loan of (pound)600,000 (U.S. $864,180) on an unsecured basis with
the European based venture capital and merchant banking firm DcD Limited. The
loan was due April 30, 2002 and accrues interest at a rate of 4% per year above
the HSBC Bank base rate. Interest is payable monthly. On May 1, 2002, ActiveCore
Technologies received written notice from the lender, DcD Limited, that it
agreed to convert the loan into 4,000,000 shares of common stock at a conversion
rate of approximately $0.19 per share.
On or about August 17, 2001, ActiveCore issued 1,000,000 shares of common
stock to Orchestral Corporation for extension of the licensing contract and to
obtain market distribution to Switzerland. These shares were valued at $0.12 per
share, or an aggregate of $120,000, on the date of issuance.
On or about July 30, 2001, ActiveCore rescinded the issuance of 870,000
shares of common stock previously issued to consultants for services not
performed.
On or about April 26, 2001, ActiveCore issued 1,200,000 shares of common
stock to a consultant for marketing and promotion consulting services. These
shares were valued at $0.14 per share, or an aggregate of $168,000, on the date
of issuance.
On or about April 26, 2001, ActiveCore issued 1,000,000 shares of common
stock to an individual for financial advisory services. These shares were valued
at $0.14 per share, or an aggregate of $140,000, on the date of issuance.
In March 2000, ActiveCore, through an agreement with TPG Capital
Corporation, which was operated by James Cassidy, a lawyer in Washington D.C.,
acquired Erebus Corporation for $200,000 in cash and 350,000 shares of
ActiveCore valued at $500,000, the market value of ActiveCore's stock at the
time of acquisition. This consideration was paid as a fee to TPG Capital, the
sole shareholder of Erebus Corporation. The Erebus transaction was undertaken
between Erebus, a non-active reporting entity, and ActiveCore Technologies, in
order for ActiveCore could become a reporting issuer with the SEC and thereby
maintain its status as a listed company on the OTCBB. From an accounting
standpoint the Erebus transaction was treated as a recapitalization (stock for
stock transaction and no goodwill was recorded).
TPG Capital was the sole shareholder of Erebus Inc., an inactive reporting
shell company. The consulting agreement states that one year after the execution
of the agreement ("reset date") the 350,000 common shares issued by ActiveCore's
to the former stockholder shall be increased or decreased based upon the average
closing price of ActiveCore's stock 30 days prior to the reset date, so the
value of the 350,000 shares was equal $500,000. The average closing price of the
stock is $0.1487 per share. Based on the consulting agreement ActiveCore was
obligated to issue an additional 3,028,378 common shares to the consultant as an
additional fee. ActiveCore does not believe that it will be legally obligated to
issue the shares based on the reset date as the SEC had previously reached a
settlement agreement with Mr. Cassidy and TPG Capital with regard certain
practices related to vending reporting shells to non-reporting entities in order
for the later to retain listing status on the OTC BB. See SEC Litigation release
no. 17023/June 4, 2001.
With respect to the sale of unregistered securities referenced above, all
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 (the "1933 Act"), and Regulation D promulgated under the
1933 Act. In each instance, the purchaser had access to sufficient information
regarding ActiveCore Technologies so as to make an informed investment decision.
More specifically, ActiveCore had a reasonable basis to believe that each
purchaser was an "accredited investor" as defined in Regulation D of the 1933
Act and otherwise had the requisite sophistication to make an investment in
ActiveCore's securities.
59
DESCRIPTION OF SECURITIES
GENERAL
ActiveCore's authorized capital consists of 500,000,000 shares of common
stock, par value $0.001 per share and 50,000,000 shares of preferred stock, par
value $0.001 per share. At December 1, 2003, there were 297,921,703 outstanding
shares of common stock and no outstanding shares of preferred stock. Set forth
below is a summary description of certain provisions relating to ActiveCore
Technologies' capital stock contained in its Articles of Incorporation and
By-Laws and under the Nevada Revised Statutes. The summary is qualified in its
entirety by reference to ActiveCore Technologies' Articles of Incorporation and
By-Laws and the Nevada law.
COMMON STOCK
Each outstanding share of common stock has one vote on all matters
requiring a vote of the stockholders. There is no right to cumulative voting;
thus, the holder of fifty percent or more of the shares outstanding can, if they
choose to do so, elect all of the directors. In the event of a voluntary of
involuntary liquidation, all stockholders are entitled to a pro rata
distribution after payment of liabilities and after provision has been made for
each class of stock, if any, having preference over the common stock. The
holders of the common stock have no preemptive rights with respect to future
offerings of shares of common stock. Holders of common stock are entitled to
dividends if, as and when declared by the Board out of the funds legally
available therefore. It is ActiveCore's present intention to retain earnings, if
any, for use in its business. The payment of dividends on the common stock are,
therefore, unlikely in the foreseeable future.
PREFERRED STOCK
Currently there are no outstanding shares of preferred stock. The Board of
Directors is authorized, within the limitations and restrictions prescribed by
law or stated in the Articles of Incorporation, and by filing a certificate
pursuant to applicable law of the State of Nevada, to provide for the issuance
of preferred stock in series and (i) to establish from time to time the number
of shares to be included in each series; (ii) to fix the voting powers,
designations, powers, preferences and relative, participating, optional or other
rights of the shares of each such series and the qualifications, limitations or
restrictions thereof, including but not limited to the fixing and alteration of
the dividend rights, dividend rate, conversion rights, conversion rates, voting
rights, rights and terms of redemption (including sinking fund provisions), the
redemption price or prices, and the liquidation preferences of any wholly
unissued series of shares of preferred stock; and (iii) to increase or decrease
the number of shares of any series subsequent to the issue of shares of that
series, but not below the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status, which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
WARRANTS
ActiveCore has outstanding warrants to purchase 265,000 shares of common
stock, of which 15,000 shares have an exercise price of $0.50 per share and
250,000 shares have an exercise price of $0.099 per share. These warrants expire
on the fifth anniversary of issuance and were issued in connection with the
Equity Line of Credit.
As additional consideration for the first tranche of the $2,000,000 term
loan advance by a lender, ActiveCore issued 500,000 warrants on July 30, 2003 to
the lender for the purchase of 500,000 shares of common stock at a purchase
price of $0.0312 per share. The fair value assigned to the warrant amounted to
$0 and was determined using the Black-Scholes option pricing model using the
following assumptions: no dividend yield for all years; expected volatility of
9.3%; risk-free interest rate of 1.12%, and an expected life of 1 year. The
warrants expire July 31, 2004.
TRANSFER AGENT
The Transfer Agent for the common stock is Pacific Stock Transfer Company
located at P.O. Box 93385, Las Vegas, Nevada 89193-3385.
LIMITATION OF LIABILITY: INDEMNIFICATION
Our Articles of Incorporation include an indemnification provision under
which we have agreed to indemnify directors and officers of ActiveCore to
fullest extent possible from and against any and all claims of any type arising
from or related to future acts or omissions as a director or officer of
60
ActiveCore. In addition, the liability of our officers and directors for
breaches of their fiduciary duty as a director or officer other than: (a) acts
or omissions which involve intentional misconduct, fraud, or a knowing violation
of the law; or (b) the payment of dividends in violation of Nevada Revised
Statutes Section 78.300.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
IVP Technologies pursuant to the foregoing, or otherwise, ActiveCore
Technologies has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION
AUTHORIZED AND UNISSUED STOCK. The authorized but unissued shares of our
common are available for future issuance without our stockholders' approval.
These additional shares may be utilized for a variety of corporate purposes
including but not limited to future public or direct offerings to raise
additional capital, corporate acquisitions and employee incentive plans. The
issuance of such shares may also be used to deter a potential takeover of
ActiveCore Technologies that may otherwise be beneficial to stockholders by
diluting the shares held by a potential suitor or issuing shares to a
stockholder that will vote in accordance with ActiveCore Technologies' Board of
Directors' desires. A takeover may be beneficial to stockholders because, among
other reasons, a potential suitor may offer stockholders a premium for their
shares of stock compared to the then-existing market price.
The existence of authorized but unissued and unreserved shares of
preferred stock may enable the Board of Directors to issue shares to persons
friendly to current management which would render more difficult or discourage
an attempt to obtain control of our company by means of a proxy contest, tender
offer, merger or otherwise, and thereby protect the continuity of our company's
management.
61
EXPERTS
The consolidated financial statements as of and for the years ended
December 31, 2002 and 2001 included in the Prospectus have been audited by
Weinberg & Company, P.A., independent certified public accountants, to the
extent and for the periods set forth in their report (which contains an
explanatory paragraph regarding ActiveCore's ability to continue as a going
concern) appearing elsewhere herein and are included in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.
LEGAL MATTERS
Kirkpatrick & Lockhart LLP, Miami, Florida, will pass upon the validity of
the shares of common stock offered hereby for us.
HOW TO GET MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act with respect to the securities
offered by this prospectus. This prospectus, which forms a part of the
registration statement, does not contain all the information set forth in the
registration statement, as permitted by the rules and regulations of the
Commission. For further information with respect to us and the securities
offered by this prospectus, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document that we have filed as an exhibit to the registration statement
are qualified in their entirety by reference to the to the exhibits for a
complete statement of their terms and conditions. The registration statement and
other information may be read and copied at the Commission's Public Reference
Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the
Commission.
62
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
63
IVP TECHNOLOGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
F-1
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONTENTS
--------
PAGE 1 CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2003 (UNAUDITED) AND
DECEMBER 31, 2002
PAGE 2 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
PAGE 3 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2003 (UNAUDITED)
PAGES 4 - 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 2003 AND 2002 (UNAUDITED)
PAGES 6 - 22 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2003
(UNAUDITED)
F-2
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
September 30, 2003 December 31,
(Unaudited) 2002
----------------- -------------
Current assets
Cash $ 65,066 $ 63,162
Accounts receivable, less allowance for doubtful accounts of $43,970
as of September 30, 2003 and December 31, 2002 66,779 17,165
Prepaid expenses and other current assets 171,723 34,610
----------------- -------------
Total Current Assets 303,568 114,937
----------------- -------------
PROPERTY AND EQUIPMENT
Property and equipment 227,177 173,246
Accumulated depreciation (131,460) (79,688)
----------------- -------------
Property and Equipment, Net 95,717 93,558
----------------- -------------
OTHER ASSETS
License agreements - software, net of accumulated amortization of
$624,411 and $356,806 as of September 30, 2003 and December 31, 2002,
respectively 204,906 356,806
Intangible asset - customer list 275,000 -
Investment at cost 250,000 -
Deferred consulting expense 196,850 71,816
Goodwill 100,000 -
----------------- -------------
Total Other Assets 1,026,756 428,622
----------------- -------------
TOTAL ASSETS $ 1,426,041 $ 637,117
- ------------ ================= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES
Accounts payable $ 681,763 $ 657,402
Accrued liabilities 80,775 169,679
Taxes payable 187,527 32,150
Accrued interest 58,110 14,974
Leases payable, current portion 22,013 -
Net liabilities of discontinued operations - 1,417,619
Note payable, current portion 542,886 104,020
Common stock to be issued 18,000 3,617,746
Convertible preferred stock to be issued, short-term - 4,779,662
Due to related parties 97,637 369,226
Other current liabilities 2,683 134,088
----------------- -------------
Total Current Liabilities 1,691,394 11,296,566
----------------- -------------
CONTINGENCIES AND COMMITMENTS
LONG-TERM LIABILITIES
Note payable, long-term portion 500,000 -
Convertible debentures - 150,000
Lease payable, long-term 8,603 25,570
Convertible preferred stock to be issued, long-term - 3,584,747
----------------- -------------
Total Long-Term Liabilities 508,603 3,760,317
----------------- -------------
TOTAL LIABILITIES 2,199,997 15,056,883
- ----------------- ----------------- -------------
STOCKHOLDERS' DEFICIENCY
Preferred stock, $0.001 par value, 50,000,000 shares authorized, none
issued and outstanding - -
Common stock, $0.001 par value, 500,000,000 and 150,000,000 shares
authorized, 278,707,703 and 99,449,261 shares issued and 267,707,703
and 99,449,261 shares outstanding as of September 30, 2003 and
December 31, 2002, respectively 278,708 99,449
Additional paid-in capital 36,166,766 20,870,864
Accumulated deficit (36,185,595) (35,248,562)
Less: treasury stock (11,000,000 shares) (770,000) -
Other comprehensive (loss) income - exchange gain (111,297) 80,795
Less: deferred equity line commitment fees (91,062) (222,312)
Less: deferred compensation (61,476) -
----------------- -------------
Total Stockholders' Deficiency (773,956) (14,419,766)
----------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 1,426,041 $ 637,117
- ---------------------------------------------- ================= =============
See accompanying notes to condensed consolidated financial statements.
F-3
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
For The Three For The Three For The Nine For The Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September September
2003 2002 30, 2003 30, 2002
-------------- --------------- -------------- --------------
NET SALES $ 124,767 $ 167,070 $ 355,776 $ 257,070
-------------- -------------- ------------- --------------
COST OF SALES
Product costs 20,962 24,059 121,893 24,059
Development costs - - - 1,030
Distribution and other costs including
amortization of license 92,983 298,674 279,172 1,203,972
-------------- -------------- ------------- --------------
Total Cost of Sales 113,945 322,733 401,065 1,229,061
-------------- -------------- ------------- --------------
GROSS PROFIT (LOSS) 10,822 (155,663) (45,289) (971,991)
-------------- -------------- ------------- --------------
OPERATING EXPENSES
Salaries and wages 270,095 54,124 506,069 54,124
Stock-based compensation 37,500 3,800,000 618,080 3,800,000
Consulting fees 119,044 102,835 212,974 452,815
Legal and accounting 60,335 40,192 214,209 252,166
Management fees 44,346 23,301 120,688 81,107
General and administrative 170,540 (170,872) 562,907 153,889
Financial advisory fees 9,098 - 39,914 150,000
Amortization and depreciation 9,656 107,921 28,378 271,671
-------------- -------------- ------------- --------------
Total Operating Expenses 720,614 3,957,501 2,303,219 5,215,772
-------------- -------------- ------------- --------------
LOSS FROM OPERATIONS (709,792) (4,113,164) (2,348,508) (6,187,763)
-------------- -------------- ------------- --------------
OTHER INCOME (EXPENSE)
Gain on early extinguishment of debt - 924,904 - 1,021,238
Interest income - 5,084 6,497 5,126
Interest expense (88,673) (11,432) (315,803) (77,577)
Foreign exchange gain 43,821 - 57,895 -
-------------- -------------- ------------- --------------
Total Other Income (Expense) (44,852) 918,556 (251,411) 948,787
-------------- -------------- ------------- --------------
LOSS FROM CONTINUING OPERATIONS (754,644) (3,194,608) (2,599,919) (5,238,976)
DISCONTINUED OPERATIONS:
Loss from discontinued operations - (915,876) (733,123) (1,127,835)
Gain on sale of discontinued operations - - 2,396,009 -
-------------- -------------- ------------- --------------
(Loss) Gain from Discontinued Operations, Net - (915,876) 1,662,886 (1,127,835)
-------------- -------------- ------------- --------------
NET (LOSS) $ (754,644) $ (4,110,484) $ (937,033) $ (6,366,811)
- ---------- =============== =============== ============== ==============
LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS -
BASIC AND DILUTED $ (0.00) $ (0.03) $ (0.02) $ (0.06)
============== ============== ============= ==============
GAIN (LOSS) PER COMMON SHARE FROM DISCONTINUED
OPERATIONS - BASIC $ 0.00 $ (0.01) $ 0.01 $ (0.01)
============== ============== ============= ==============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.00) $ (0.03) $ (0.01) $ (0.07)
============== ============== ============= ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 262,456,836 118,299,435 159,960,377 95,218,392
============== ============== ============= ==============
See accompanying notes to condensed consolidated financial statements.
F-4
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------
(UNAUDITED)
Additional
Preferred Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit
---------- ------- ----------- --------- ------------ -------------
Balance, December 31, 2002 - $ - 99,449,261 $ 99,449 $ 20,870,864 $(35,248,562)
Stock issued for
services and settlements - - 82,985,949 82,986 2,074,030 -
Stock issued for cash - - 29,000,001 29,001 869,088 -
Stock issued to former
shareholders of
Ignition Entertainment, Ltd. 3,500,000 3,500 15,000,000 15,000 11,930,656 -
Conversion of preferred
stock to common stock (3,500,000) (3,500) 35,000,000 35,000 (31,500) -
Stock to be received
from the sale of
Ignition
Entertainment, Ltd. - - - - - -
Stock issued for asset
acquisitions - - 7,272,492 7,272 213,628 -
Stock issued for
investment - - 10,000,000 10,000 240,000 -
Deferred cost recognized - - - - - -
Net loss for the period - - - - - (937,033)
Cumulative translation
adjustment - - - - - -
Comprehensive loss - - - - - -
---------- -------- ----------- --------- ------------ -------------
BALANCE,
SEPTEMBER 30, 2003 - $ - 278,707,703 $ 278,708 $ 36,166,766 $(36,185,595)
------------------ ========== ======== =========== ========= ============ =============
See accompanying notes to condensed consolidated financial statements.
F-5
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------
(UNAUDITED)
Deferred Deferred
Compensation Equity Line Other
Treasury & Licensing Commitment Comprehensive
Stock Fees Fees Income (Loss) Total
------------ ----------- ------------ -------------- -------------
Balance, December 31, 2002 $ - $ - $ (222,312) $ 80,795 $(14,419,766)
Stock issued for
services and settlements - (61,476) - - 2,095,540
Stock issued for cash - - - - 898,089
Stock issued to former
shareholders of
Ignition Entertainment, Ltd. - - - - 11,949,156
Conversion of preferred
stock to common stock - - - - -
Stock to be received
from the sale of
Ignition
Entertainment, Ltd. (770,000) - - - (770,000)
Stock issued for asset
acquisitions - - - - 220,900
Stock issued for
investment - - - - 250,000
Deferred cost recognized - - 131,250 - 131,250
Net loss for the period - - - - (937,033)
Cumulative translation
adjustment - - - (192,092) (192,092)
-------------
Comprehensive loss - - - - (1,129,125)
------------ ----------- ------------ ------------- -------------
BALANCE,
SEPTEMBER 30, 2003 $ (770,000) $ (61,476) $ (91,062) $ (111,297) $ (773,956)
------------------ ============ =========== =========== ============= =============
See accompanying notes to condensed consolidated financial statements.
F-6
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
For The Nine Months Ended For The Nine Months
September 30, 2003 Ended September 30, 2002
------------------------- ------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (937,033) $ (6,366,811)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on sale of discontinued operations (2,396,009) -
Amortization and depreciation 39,721 276,712
Amortization of licensing agreements 267,603 1,172,672
Amortization of consulting agreements and commitment fees 256,874 267,500
Interest expense on beneficial conversion - 64,286
Gain on early extinguishment of debt - (1,021,238)
Decrease in deferred tax asset 71,816 -
Stock issued for commitment fees and penalties 22,800 -
Stock issued for compensation 553,501 3,800,000
Stock issued for financing costs 129,500 -
Stock issued for services 62,500 567,781
Changes in operating assets and liabilities, net of effects of discontinued
operations:
(Increase) decrease in accounts receivable (112,679) 167,324
Decrease (increase) in inventory 304,783 54,453
(Increase) decrease in prepaid expenses and other current assets (150,669) 14,611
Increase in other assets - (94,071)
Decrease in accounts payable (53,318) (281,519)
Decrease in accrued liabilities (172,929) -
Increase in taxes payable 203,370 73,909
(Decrease) increase in other current liabilities (69,603) 283,258
Increase (decrease) in accrued interest 43,136 (23,357)
Net effect of discontinued operations 213,924 -
------------------------- ------------------------
Net Cash Used In Operating Activities (1,722,712) (1,044,490)
------------------------- ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from acquisition - 1,132,039
Cash Paid for acquisition - (367,217)
Cash paid from sale of discontinued operations (160)
Cash paid for licensing agreement - (713,612)
Purchase of software rights (94,803)
Purchases of fixed assets (9,126) (402,870)
------------------------- ------------------------
Net Cash Used In Investing Activities (104,089) (351,660)
------------------------- ------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft - 11,035
Repayment of notes payable (1,036,134) -
Proceeds from notes payable 1,674,146 1,300,339
Proceeds from related parties 299,878 -
Proceeds from factors 116,503 61,929
Proceeds from issuance of common stock 898,088 7,501
Payment on leases (25,474) -
------------------------- ------------------------
Net Cash Provided By Financing Activities 1,927,007 1,380,804
------------------------- ------------------------
EFFECT OF FOREIGN EXCHANGE RATES (98,302) 15,114
------------------------- ------------------------
NET DECREASE IN CASH FOR THE PERIOD 1,904 (232)
CASH - BEGINNING OF PERIOD 63,162 232
------------------------- ------------------------
CASH - END OF PERIOD $ 65,066 $ -
- -------------------- ========================= ========================
See accompanying notes to condensed consolidated financial statements.
F-7
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
For The Nine Months Ended For The Nine Months Ended
September 30, 2003 September 30, 2002
--------------------------- ----------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 47,182 $ -
=========================== ============================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Equipment purchased under capital leases $ 17,193 $ -
=========================== ============================
Acquisition of Ignition Entertainment Ltd. $ - $ 1,132,039
=========================== ============================
Acquisition of Springboard Technology Solutions Inc. $ - $ 260
=========================== ============================
Common and preferred stock issued to satisfy common and
preferred stock to be issued for the acquisition of Ignition $ 11,949,156 $ -
=========================== ============================
Common stock issued to acquire other income producing assets $ 220,900 $ -
=========================== ============================
Common stock issued for deferred consulting expenses $ 383,950 $ -
=========================== ============================
Common stock issued for payment of accrued bonuses $ 60,450 $ -
=========================== ============================
Common stock issued for payment of commitment fees $ - $ 350,000
=========================== ============================
Common stock issued for payment of debt and accrued
interest thereon $ 944,329 $ 983,773
=========================== ============================
Common stock issued for payment of amounts due to related parties $ 929,316 $ -
=========================== ============================
Common stock issued for payment of common stock to be issued
for services $ 65,000 $ 50,000
=========================== ============================
Common stock issued for investment $ 250,000 $ -
=========================== ============================
See accompanying notes to condensed consolidated financial statements.
F-8
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
- ------ -----------------------------------------------------------
(A) Organization
----------------
The consolidated financial statements of IVP Technology Corporation
d.b.a. ActiveCore Technologies, Inc. (formerly Mountain Chef, Inc.)
and consolidated subsidiaries (the "Company") include the accounts of
the parent, IVP Technology Corporation, incorporated in the State of
Nevada on February 11, 1994, d.b.a. ActiveCore Technologies, Inc., and
its subsidiaries: ActiveCore Technologies Ltd. (formerly Springboard
Technology Solutions Inc.), a Canadian company; and Erebus
Corporation, an inactive company. The Company was granted an
extra-provincial license by the Province of Ontario on June 20, 1995
to carry on business in Ontario, Canada. Prior to 1998, the Company
was involved with various unsuccessful activities relating to the sale
of technology products before becoming inactive by the end of 1997.
The Company began negotiations with a third party in 1998 to become an
exclusive distributor of software and therefore is considered to have
re-entered the development stage on January 1, 1998. Activities from
inception of development stage included raising capital and
negotiations and acquisition of software distribution licenses. On
January 1, 2002, the Company began operations and emerged from the
development stage.
The Company operates in two market segments, enterprise and consumer.
The enterprise component develops, markets, licenses, installs and
services data solutions. The consumer market group develops and
publishes interactive software games designed for mobile phones, other
handheld devices, and web-sites. The consumer unit also distributes
games developed by third parties. In 2002 the Company also produced
video games for personal computers and various console gaming
platforms. (see Note 2 - Discontinued Operations)
(B) Basis of Presentation
-------------------------
The condensed consolidated financial statements included herein have
been prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or
omitted as allowed by such rules and regulations. The Company believes
that the disclosures are adequate to make the information presented
not misleading. The condensed consolidated balance sheet information
as of December 31, 2002 was derived from the audited consolidated
balance sheet included in the Company's Annual Report Form 10-KSB. It
is suggested that these condensed consolidated financial statements be
read in conjunction with the December 31, 2002 audited consolidated
financial statements and the accompanying notes thereto included in
the Company's Annual Report Form 10-KSB. While management believes the
procedures followed in preparing these condensed consolidated
financial statements are reasonable, the accuracy of the amounts are
in some respects dependent upon the facts that will exist, and
procedures that will be accomplished by the Company later in the year.
The management of the Company believes that the accompanying unaudited
condensed consolidated financial statements contain all adjustments
(including normal recurring adjustments) necessary to present fairly
the operations and cash flows for the periods presented. The
consolidated results of operations for the three and nine months ended
September 30, 2003 and 2002 are not necessarily indicative of the
results to be expected for the full year. All material inter-company
accounts have been eliminated in consolidation.
(C) Going Concern
-----------------
The accompanying condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted
in the United States of America, which contemplates continuation of
the Company as a going concern. The Company has a net loss of
$937,033, and a negative cash flow from operations of $1,722,712 for
the nine months ended September 30, 2003. The Company also has a
working capital deficiency of $1,387,826 and a stockholders'
deficiency of $773,956 at September 30, 2003. These matters raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plan is to continue to attempt to raise
additional debt or equity capital until such time the Company is able
to generate sufficient operating revenue.
In view of these matters, realization of certain of the assets in the
accompanying condensed consolidated financial statements is dependent
upon continued operations of the Company, which in turn is dependent
upon the Company's ability to meet its financial requirements, raise
additional capital, and the success of its future operations.
Management believes that its ability to raise additional capital
provides the opportunity for the Company to continue as a going
concern.
(D) Reclassifications
---------------------
Certain reclassifications have been made to the previously reported
amounts to conform to the Company's current period presentation.
(E) Use of Estimates
--------------------
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the dates
of the condensed consolidated financial statements and the reported
amounts of revenues and expenses during the reporting periods. The
most significant estimates and assumptions relate to the
F-9
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
recoverability of prepaid royalties and licencing, capitalized
software development costs and other intangibles and the adequacy of
allowances for returns, and doubtful accounts. Actual amounts could
differ significantly from these estimates.
(F) Fair Value of Financial Instruments
---------------------------------------
The carrying amounts of the Company's financial instruments, including
cash, accounts receivable, accounts payable, accrued liabilities and
other laibilties approximate fair value because of their short
maturities. The carrying amounts of the Company's loans and notes
payable and capital lease obligations approximate the fair value of
such instruments based upon management's best estimate of interest
rates that would be available to the Company for similar debt
obligations.
For purposes of this disclosure, the fair value of a financial
instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties other than in a forced
sale or liquidation.
(G) Earnings (Loss) Per Share
-----------------------------
Basic and diluted earnings (loss) per common share is based on net
loss divided by the weighted average number of common shares or common
equivalent shares outstanding. For the three and nine months ended
September 30, 2002, common stock equivalents were not included in the
calculation of diluted loss per share as their effect would be
anti-dilutive.
(H) Recent Accounting Pronouncements
------------------------------------
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue 00-21, addressing how to account for arrangements
that involve the delivery or performance of multiple products,
services, and /or rights to use assets. Revenue arrangements with
multiple deliverables are divided into separate units of accounting if
the deliverables in the arrangement meet the following criteria: (1)
the delivered item has value to the customer on a stand-alone basis;
(2) there is objective and reliable evidence of the fair value of
undelivered items; and (3) delivery of any undelivered items is
probable. Arrangement consideration should be allocated among the
separate units of accounting based on their relative fair values, with
the amount allocated to the delivered item being limited to the amount
that is not contingent on the delivery of additional items or meeting
other specified performance conditions. The final consensus will be
applicable to agreements entered into in fiscal periods beginning
after June 15, 2003 with early adoption permitted.
F-10
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
In April 2003, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". SFAS No. 149 amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The
changes in SFAS No. 149 improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly.
This statement is effective for contracts entered into or modified
after June 30, 2003 and all of its provisions should be applied
prospectively.
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 changes the accounting for certain financial
instruments with characteristics of both liabilities and equity that,
under previous pronouncements, issuers could account for as equity.
The new accounting guidance contained in SFAS No. 150 requires that
those instruments be classified as liabilities in the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatorily redeemable
shares, which the issuing company is obligated to buy back in exchange
for cash or other assets. A second type includes put options and
forward purchase contracts, which involves instruments that do or may
require the issuer to buy back some of its shares in exchange for cash
or other assets. The third type of instruments that are liabilities
under this Statement is obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or predominantly to
a variable such as a market index, or varies inversely with the value
of the issuers' shares. SFAS No. 150 does not apply to features
embedded in a financial instrument that is not a derivative in its
entirety.
Most of the provisions of Statement 150 are consistent with the
existing definition of liabilities in FASB Concepts Statement No. 6,
"Elements of Financial Statements". The remaining provisions of this
Statement are consistent with the FASB's proposal to revise that
definition to encompass certain obligations that a reporting entity
can or must settle by issuing its own shares. This Statement shall be
effective for financial instruments entered into or modified after May
31, 2003 and otherwise shall be effective at the beginning of the
first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of a non-public entity,
as to which the effective date is for fiscal periods beginning after
December 15, 2003.
F-11
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
In January 2003, The FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities", an interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements".
Interpretation No. 46 addresses consolidation by business enterprises
of variable interest entities, which have one or both of the following
characteristics: (i) the equity investment at risk is not sufficient
to permit the entity to finance its activities without additional
subordinated support from other parties, which is provided through
other interest that will absorb some or all of the expected losses of
the entity; (ii) the equity investors lack one or more of the
following essential characteristics of a controlling financial
interest: the direct or indirect ability to make decisions about the
entities activities through voting rights or similar rights; or the
obligation to absorb the expected losses of the entity if they occur,
which makes it possible for the entity to finance its activities; the
right to receive the expected residual returns of the entity if they
occur, which is the compensation for the risk of absorbing the
expected losses.
Interpretation No. 46 also requires expanded disclosures by the
primary beneficiary (as defined) of a variable interest entity and by
an enterprise that holds a significant variable interest in a variable
interest entity but is not the primary beneficiary. Interpretation No.
46 applies immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the
first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. Interpretation No.
46 may be applied prospectively with a cumulative-effect adjustment as
of the date on which it is first applied or by restating previously
issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year
restated.
In June 2003, the FASB issued an Exposure Draft for proposed SFAS
entitled "Qualifying Special Purpose Entities ("QSPE") and Isolation
of transferred Assets", an amendment of SFAS No. 140 ("The Exposure
Draft"). The Exposure Draft is a proposal that is subject to change
and as such, is not yet authoritative. If the proposal is enacted in
its current form, it will amend and clarify SFAS 140. The Exposure
Draft would prohibit an entity from being a QSPE if it enters into an
agreement that obliged a transferor of financial assets, its
affiliates, or its agents to deliver additional cash or other assets
to fulfill the special-purposes entity's obligation to beneficial
interest holders.
The Company believes that the adoption of the above pronouncements
will not have a material effect on the Company's condensed
consolidated financial position or results of operations.
F-12
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
NOTE 2 DISCONTINUED OPERATIONS
- ------ -----------------------
Effective April 1, 2003, the Company sold 100% of the issued shares
and all assets and liabilities of Ignition Entertainment, Ltd. for the
return of 11,000,000 shares of the Company's common stock originally
issued to and held by the former shareholders. The transaction
resulted in a gain of $2,396,009, which has been included in the
condensed consolidated statements of operations for the three and nine
months ended September 30, 2003, as a gain on sale of discontinued
operations.
Upon execution of the sale agreement in June 2003, the Company issued
50,000,000 shares of its common stock to the former shareholders of
Ignition Entertainment Ltd. in accordance with the original May 28,
2002 purchase agreement. Based upon the terms of the sale agreement,
the Company converted all of the 3,500,000 shares of preferred stock
to be issued, into 35,000,000 shares of common stock and accelerated
the issuance of 15,000,000 shares of common stock to be issued. The
issuance of the 50,000,000 shares of common stock in June 2003
relieved the Company's obligation as of April 1, 2003, to issue
$11,949,156 in preferred and common stock under the original May 28,
2002 purchase agreement. The 50,000,000 shares were delivered, in
trust, to an independent third party upon the execution of the sale
agreement and will be distributed to the former owners. Immediately
following the issuance of the 50,000,000 shares of the Company's
common stock, the former shareholders will return 11,000,000 shares of
common stock to the Company as proceeds for the sale of Ignition
Entertainment Ltd. The 11,000,000 shares were valued at $770,000 based
upon the fair market value of the stock on April 1, 2003, the
effective date of the sale agreement (See Note 9).
In connection with the sale agreement, the Company will retain rights
to certain intellectual property and receive a source code licensing
agreement for certain interactive software games developed by Ignition
Entertainment Ltd. In addition to the source code licensing agreement,
the Company will also receive a distribution agreement to distribute
the interactive software games on a worldwide basis for a period of
three years, renewable annually thereafter. The Company will pay
Ignition Entertainment Ltd. a royalty fee of 30% of all gross
revenues, less direct costs, from the sale, distribution or marketing
of those game titles. As of September 30, 2003, the Company did not
assign any value to the acquired intellectual property due to the
uncertainty of obtaining financing to fund the conversion of acquired
intellectual property into saleable products.
Following is a summary of net liabilities and results of operations of
Ignition Entertainment Ltd. as of April 1, 2003 and December 31, 2002
and for the period from January 1, 2003 through April 1, 2003 and for
the three and nine months ended September 30, 2002:
F-13
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
As of As of December
April 1, 2003 31, 2002
------------------- -------------------
Cash $ 160 $ 213,923
Accounts receivable, net 212,741 149,676
Inventory 78,955 383,738
Prepaid expenses 113,044 99,488
Property, plant and equipment, net 417,727 442,674
Other assets 24,963 -
------------------- -------------------
Total Assets $ 847,590 $ 1,289,499
------------------- -------------------
Accounts payable 1,044,294 1,182,423
Accrued liabilities 134,058 240,833
Due to factor 211,249 94,746
Taxes payable 436,513 388,520
Translation adjustment 93,790 -
Notes payable 129,366 80,220
Due to related parties 424,329 720,376
------------------- -------------------
Total Liabilities 2,473,599 2,707,118
------------------- -------------------
Net Liabilities of Discontinued Operations $ 1,626,009 $ 1,417,619
=================== ===================
For the Period
From For the Three For the Nine
January 1, 2003 Months Ended Months Ended
Through September 30, September 30,
April 1, 2003 2002 2002
--------------------- ------------------- ------------------------
Revenues, net $ 1,087,906 $ 1,241,332 $ 1,648,658
Cost of sales 960,501 1,235,730 1,618,446
--------------------- ------------------- ------------------------
Gross profit 127,405 5,602 30,212
Operating expenses 815,985 906,967 1,135,708
--------------------- ------------------- ------------------------
Loss from discontinued
operations (688,580) (901,365) (1,105,496)
--------------------- ------------------- ------------------------
Other expense (44,543) (14,511) (22,339)
--------------------- ------------------- ------------------------
Net loss from discontinued
operations $ (733,123) $ (915,876) $ (1,127,835)
===================== =================== ========================
F-14
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
NOTE 3 PREPAID EXPENSES AND OTHER CURRENT ASSETS
- ------ -----------------------------------------
Prepaid expenses and other current assets as of September 30, 2003 and
December 31, 2002 consist of:
September 30, December 31,
2003 2002
-------------- ------------
Prepaid expenses $ 9,300 $ 14,763
GST receivable 21,585 18,002
Receivable, unrelated parties 140,462 -
Other 376 1,845
-------------- ------------
Total $ 171,723 $ 34,610
============== ============
NOTE 4 INVESTMENT
- ------ ----------
On June 26, 2003, the Company purchased 5% of the then issued share
capital of ePocket, Inc. for 10,000,000 shares of the Company's
unregistered common stock or the equivalent of $300,000 Canadian
dollars ("CAD"). The Company is in the process of registering the
10,000,000 shares. The shares will then be sold in the open market. If
the sale of these shares does not generate the amount of funds required
($300,000 CAD), the Company will be required to fund the difference. If
the sales of the shares exceed the minimum required amount, the Company
may increase its interest in or have any remaining unsold shares
returned for cancellation or rescission. The Company issued the
10,000,000 shares on June 26, 2003. The shares were valued at $0.025
per share or an aggregate of $250,000, representing the market value at
the date of grant. The investment in ePocket, Inc. is valued at cost in
the accompanying condensed consolidated balance sheet.
NOTE 5 ACQUISITIONS
- ------ ----------
On September 30, 2003 the Company issued 6,472,492 shares of common
stock in connection with the acquisition of the data integration
division of SCI Healthcare Group. The shares were valued based on the
closing price of the Company's common stock on September 18th, being
the contracted determination date, which represented $200,000. An
additional cash consideration of $175,000 was given in the form of a
promissory note. There is a further provision to allow for the increase
or reduction of a percentage of the issued shares if certain gross
revenue targets are not met. The shares are therefore being held in
trust by the seller's legal counsel. The Company allocated the purchase
price between goodwill ($100,000) and customer list ($275,000). The
customer list will be amortized over a term of three years based on the
tenure and cancellability of existing contracts.
F-15
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
The following unaudited pro forma consolidated results of operations
are presented as if the acquisition of the data integration division of
SCI Healthcare Group had been made at the beginning of the period
presented:
For the Nine
Months Ended
September 30,
2003
--------------
Net sales $ 802,479
Net loss (946,869)
Basic and diluted loss per share $ (0.01)
On July 22, 2003, the Company acquired the source code license for a
software product known as XML/Connector for the healthcare industry,
from an unrelated company, which is a Colorado and Toronto based
software development company. As part of the terms and conditions, the
Company paid (CAD) $120,000 in cash in the form of a note payable, and
on August 1, 2003, issued 500,000 shares of common stock to the seller.
These shares were valued at $.025 per share, or an aggregate of
$12,500, representing the market value on the date of grant. At
September 30, 2003, the balance owing on the promissory note was
$36,955. Subsequently, on August 19, 2003, the Company acquired the
intellectual property rights of the XML/Connector. As a result, the
seller will cease to develop the product and will transfer all existing
customer contracts to the Company. As part of the terms and conditions,
the Company paid (CAD) $10,000 in cash at closing and on September 30,
2003 issued 300,000 shares of common stock to the seller. These shares
were valued at $.028 per share or an aggregate of $8,400, representing
the market value on the date of grant. The combined values of the
XML/Connector purchase total $115,703 and are included in license
agreements on the accompanying condensed consolidated balance sheet.
Amortization will begin in the fourth quarter of 2003 as sales of the
product are expected to commence during that period.
NOTE 6 NOTES PAYABLE
Notes payable consists of the following:
September 30, December 31,
2003 2002
------------------ -------------------
1,000,000 note payable to Cornell Capital Partners, LP, $ 226,911 $ -
non-interest bearing (1)
F-16
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
Note payable to IBEW Local Union 105, five-year term,
no principal payments until August 2004, bearing interest
at 12% per annum (2) 500,000 -
Note payable to SCI Healthcare Group, unsecured (3) 200,000 -
Note payable to Berra Holdings, payable on demand, bearing
interest at 6% per annum 79,020 104,020
Note payable to Karora Technologies, Inc., unsecured (4) 36,955 -
------------------ -------------------
1,042,886 104,020
Less: current portion 542,886 104,020
------------------ -------------------
Notes Payable - Long-Term Portion $ 500,000 $ -
================== ===================
(1) In February 2003, the Company received $970,000 proceeds from the
issuance of a $1 million promissory note net of a 3% cash fee of
$30,000, which yields an effective interest rate of approximately
12% per annum. The promissory note was non-interest bearing and
was to be paid in full within 95 calendar days. The Company has
the discretion to repay the note either with the cash received
from the issuance of stock under the Equity Line of Credit
Agreement or with cash received from operations or other
financing sources. The note was not fully paid when due, and the
outstanding principal balance owed is payable in full together
with interest that will be charged at the rate of 24% per annum
or the highest rate permitted by law, if lower. The Company has
accrued $34,707 at September 30, 2003, which is included in
accrued interest in the current liabilities section of the
accompanying condensed consolidated balance sheet. See Note 8
below for partial repayment of this note.
(2) On July 31, 2003, the Company's wholly owned subsidiary
ActiveCore Technologies Limited, received the first installment
of $500,000 of a planned $2,000,000 term loan offering from an
electrical workers union in Toronto, Canada. Under the terms of
the agreement, the first installment will accrue a 12% interest
rate per annum and is repayable over a five-year term with no
payments required in the first 12 months - the payments will be
amortized over the remaining 48 months of the term loan. The loan
is convertible into common stock of the Company at the rate of
4.5 shares for every 1 dollar of the loan balance due, excluding
interest, remaining at the time of conversion. As additional
consideration for the loan advance by the lender, the Company
issued 500,000 warrants on July 30, 2003 to the lender for the
purchase of 500,000 shares of common stock at a purchase price of
F-17
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
$0.0312 per share. The fair value assigned to the warrant
amounted to $0 and was determined using the Black-Scholes option
pricing model. The Company estimates the fair value of the
warrant at the grant date by using the Black-Scholes
option-pricing model with the following weighted average
assumptions used for this grant; no dividend yield for all years;
expected volatility of 9.3%; risk-free interest rate of 1.12%,
and an expected life of 1 year. The warrants expire July 31,
2004. The loan is collateralized by substantially all of the
assets of the Company.
(3) As part of the terms and conditions of the acquisition of the
data integration division of SCI Healthcare Group (See Note 5),
part of the consideration paid was in the form of a promissory
note for $175,000. Additionally, $25,000 of the note payable was
used to purchase computer software. The terms of the note stated
that this note would be paid in full by the Company no later than
October 7, 2003. The note contained a default provision that
allowed for interest on the unpaid balance to accrue at 18% per
annum until paid in full. The Company and SCI Healthcare Group
have agreed in principle to a waiver of default, which includes
an extension of the due date. Such agreement is subject to the
parties entering into a formal agreement.
(4) As part of the terms and conditions of the acquisition of
XML/Connector (See Note 5), part of the consideration paid was in
the form of a promissory note for (CAD) $120,000. The terms of
the note stated that this note would be paid in full by the
Company no later than September 30, 2003. The note contained a
default provision that allowed for interest on the unpaid balance
to accrue at 10% per annum until paid in full. As of the date of
this filing, $36,955 remains unpaid and the noteholder has not
demanded payment on the overdue amount.
NOTE 7 CONTINGENCIES AND COMMITMENTS
- ------ -----------------------------
Activecore Technologies, Ltd., the Canadian subsidiary has a liability
to the Canada Customs and Revenue Agency ("CCRA") in respect of
unremitted payroll taxes in the amount of $184,000 which figure is
comprised of $101,000 for current payroll taxes, and $83,000 from a
December 31, 2002 CCRA audit assessment whereby several contract
employees were deemed to be eligible for statutory pension and
unemployment premiums not previously recorded. The Company has accrued
these liabilities together with appropriate interest and penalties.
This liability is included in taxes payable in the current liabilities
section of the accompanying condensed consolidated balance sheet as of
September 30, 2003. An aggressive collection effort by the CCRA could
have a significant negative effect on the Company's operations.
F-18
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
NOTE 8 STOCKHOLDERS' DEFICIENCY
- ------ ------------------------
On February 18, 2003, the Company issued 168,889 shares of common stock
to an investment banker for payment of penalties for not completing the
SB-2 filing by the due date of July 2, 2002 per the terms of the
registration rights agreement entered into in connection with the
Equity Line of Credit Agreement. These shares were valued at $0.13 per
share or an aggregate of $21,956, representing the closing market value
on the date of grant.
On February 18, 2003, the Company issued 114,408 share of common stock
to a consultant for payment of $15,000 of consulting services accrued
at December 31, 2002 as common stock to be issued included in currently
liabilities in the accompanying consolidated balance sheet as of
December 31, 2002 and $5,000 of consulting services for January and
February of 2003. These shares were valued at $0.13 per share
representing the closing market value on the date of grant.
During the nine month period ended September 30, 2003, the Company
issued 25,508,381 shares of common stock to the Investment Bankers for
cash of $773,089 in connection with the Equity Line of Credit (See Note
6). The cash was applied against the $1 million promissory note payable
to the Investment Bankers issued in February 2003.
On April 23, 2003, the Company issued 3,491,620 shares of common stock
to the Investment Bankers for cash of $125,000 or $.036 per share.
On May 28, 2003, the Company amended the Articles of Incorporation to
increase the total number of authorized common and preferred stock to
500,000,000 and 50,000,000 shares, respectively.
On June 26, 2003, the Company issued 17,804,976 shares of common stock
to the president of the Company in lieu of cash in order to satisfy
shareholder loans, expenses paid on behalf of the Company and accrued
salaries included in the amounts due to related parties in the
accompanying condensed consolidated balance sheets. These shares were
valued at $.025 per share, or an aggregate of $445,124 representing the
market value on the date of grant.
On June 26, 2003, the Company issued 17,804,976 shares of common stock
to a director of the Company in lieu of cash in order to satisfy
shareholder loans, expenses paid on behalf of the Company and accrued
salaries included in the amounts due to related parties in the
accompanying condensed consolidated balance sheets. These shares were
valued at $.025 per share, or an aggregate of $445,124 representing the
market value on the date of grant.
F-19
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
On June 26, 2003, the Company issued 1,250,000 shares of common stock
to four employees of the Company for payment of accrued compensation
and bonuses. These shares were valued at $.025 per share, or an
aggregate of $31,250 representing the market value on the date of
grant.
On June 26, 2003, the Company issued 3,000,000 shares of common stock
to certain directors of the Company for director services for the
period from June 2003 to June 2004. These shares were valued at $.025
per share, or an aggregate of $75,000 representing the market value on
the date of grant. As of September 30, 2003, the Company has deferred
$61,476 included in total stockholders' deficiency as deferred
compensation in the accompanying condensed consolidated balance sheets.
On June 26, 2003, the Company issued 300,000 shares of common stock to
an unrelated consultant having a value of $7,500 for consulting
services. These shares were valued based upon the market value on the
date of grant.
On June 26, 2003, the Company issued 2,000,000 shares of common stock
to an unrelated party in connection with an agreement to provide
investor relations services. These shares were valued at $.025 per
share, or an aggregate of $50,000 representing the market value on the
date of grant. As of September 30, 2003, the Company has deferred
$8,333, included in deferred consulting expense on the accompanying
condensed consolidated balance sheet.
On June 26, 2003, the Company issued 5,000,000 shares of common stock
to an unrelated consultant as consideration for an agreement to provide
consulting services from June 2003 to June 2004. These shares were
valued at $.025 per share, or an aggregate of $125,000, representing
the market value on the date of grant. At September 30, 2003, the
Company has deferred $83,333, included in deferred consulting expense
on the accompanying condensed consolidated balance sheets.
On June 26, 2003, the Company issued 50,000,000 shares of common stock
to the former shareholders of Ignition Entertainment, Ltd. in
accordance with the original May 28, 2002 purchase agreement. The
acquisition was made pursuant to the Company agreeing to issue
15,000,000 shares of common stock and 3,500,000 shares of preferred
stock convertible into 35,000,000 shares of common stock; collectively
valued at $0.23898 per share for a total purchase price of $11,949,156.
The issuance of these 50,000,000 shares of common stock relieved
$11,949,156 in preferred and common stock to be issued as of April 1,
2003. (See Note 2, Discontinued Operations for details on the
acceleration of the issuance of these shares and the sale agreement of
Ignition Entertainment Ltd.)
F-20
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
On June 26, 2003, the Company issued 5,180,000 shares of common stock
to two unrelated parties for fees and interest payable relating to
financing for the Company. Financing costs included in interest expense
for the nine months ended September 30, 2003 totaled $129,500
representing the market value on the date of grant.
On June 26, 2003, the Company issued 500,000 shares of common stock
that were released from escrow to an individual for services rendered.
These shares were valued at $.025 per share, or an aggregate of $13,500
representing the market value on the date of grant, which was expensed
for the nine months ended September 30, 2003.
In 2002, the Company issued 50,000,000 shares of common stock to
various officers and directors of the Company in accordance with the
stock purchase agreement with International Technology Marketing
("ITM"). All shares were held in safekeeping pending the completion of
an escrow agreement. As of December 31, 2002, 30,000,000 shares were
earned and were released from escrow. The Company has accelerated the
issuance of the final 20,000,000 shares from escrow. These 20,000,000
shares were released from escrow as stock-based compensation on June
30, 2003 and were valued at $.027, or an aggregate of $540,000 on the
date of sale.
On August 1, 2003, the Company issued 500,000 shares of common stock in
connection with the acquisition of the XML/Connector source code
license. The shares were valued at $.025 per share representing the
market value on the date of grant (See Note 5).
On September 30, 2003, the Company issued 300,000 shares of common
stock in connection with the acquisition of the intellectual property
rights of the XML/Connector. The shares were valued at $.028 per share
representing the market value on the date of grant (See Note 5).
On July 14, 2003, the Company entered into a consulting agreement with
an unrelated individual to provide services through June 2004. On
August 1, 2003, the Company issued 4,000,000 shares of common stock to
this consultant as compensation for services to be rendered. These
shares were valued at $.025 per share, representing the market value on
the date of grant. The Company has deferred $75,000 included in
deferred consulting expense in the accompanying condensed consolidated
balance sheets.
In July 2003, the Company entered into a consulting agreement with an
unrelated individual to provide services through June 2004. On August
1, 2003, the Company issued 150,000 shares of common stock to this
consultant. These shares were valued at $.033 per share, representing
the closing market value on the date of grant. The Company has deferred
$3,600 included in deferred consulting expense on the accompanying
condensed consolidated balance sheets.
F-21
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
In July 2003, the Company entered into employment agreements with two
contractors related to cell phone game development and medical data
integration services, respectively. On August 1, 2003, each contractor
was issued 500,000 shares of common stock as compensation. These shares
were valued at $.025 per share, representing the market value on the
date of grant.
In July 2003, the Company issued 1,562,700 unregistered shares of
common stock to an officer of the Company in lieu of cash in order to
satisfy shareholder loans, expenses paid on behalf of the Company and
accrued expenses. These shares were valued at $.025 per share,
representing the market value on the date of grant.
The Company entered into an agreement with an unrelated company to
source additional "name brand" properties for cell phone game
production and issued this unrelated company 2,000,000 shares of common
stock as a consulting fee. These shares were issued on August 1, 2003
and were valued at $0.025 per share, representing the market value on
the date of grant.
On September 30, 2003, the Company entered into a contract with an
independent advisor to consult with the Company with regard to finance
activities and general corporate development. The Company issued
1,000,000 shares of common stock, which were valued at $.029 per share,
representing the market value on the date of grant. The Company has
deferred $26,583 of this charge.
On September 30, 2003, the Company issued 6,472,492 shares in
connection with the acquisition of certain assets of the data
integration unit of SCI Healthcare Group. The shares were valued as at
the closing price on September 18, 2003 being the contracted
determination date, which represented $200,000. An additional cash
consideration of $175,000 was given in the form of a promissory note
(See Note 5).
On September 30, 2003 the Company issued 150,000 shares as bonuses to
employees for successful completion of certain technology. The shares
were valued at $.028 per share, representing the closing bid price on
the date of the board resolution.
On June 26, 2003 the Company purchased 5% of the then issued share
capital of ePocket, Inc. for 10,000,000 shares of common stock valued
at $250,000 (See Note 4).
NOTE 9 TREASURY STOCK
- ------ --------------
Treasury stock is shown at cost and consists of 11,000,000 shares of
common stock held in trust with an independent third party as of
September 30, 2003. The value of the 11,000,000 shares to be received
in connection with the sale of Ignition Entertainment, Ltd. was
$770,000, representing the closing market value on the effective date
of the sale.
F-22
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
NOTE 10 AGREEMENTS
- ------- ----------
(A) DEVELOPMENT AND DISTRIBUTION AGREEMENT
------------------------------------------
On February 10, 2003, the Company signed a development and distribution
agreement with a distribution company for distribution of the Company's
games and other applications for mobile phones and other handheld
devices to the distribution company's mobile operator channels on a
worldwide basis. Under the terms of the agreement, which sets forth an
initial publication schedule consisting of 14 products, the Company may
also sublicense and provide games and applications created by other
developers to the distribution company for distribution to their mobile
operators. Under the terms of the agreement, the Company will receive
royalty payments as the developer for each sale of the Company's games
and other applications. The Company has not received any royalty
payments through September 30, 2003, but expects sales of these
products to begin in the fourth quarter of 2003.
(B) HOSPITAL SERVICE AGREEMENTS
-------------------------------
The Company has entered into a number of one-year agreements with
medium to large hospitals and health care facilities in Ontario. The
Company will make interfacing resources available to these customers
throughout the contract term and provide general medical data
integration support services as requested by the client, either on a
fixed cost, or time and materials basis. These agreements will
automatically be renewed for one-year terms unless terminated by either
party in accordance with the terms set forth in the agreements.
(C) MERCHANDISING LICENSE AGREEMENT
-----------------------------------
In August 2003, the Company acquired the rights to build a cell phone
game based on the "Zorro" character and trademark from Zorro
Productions, Inc. of California. A license agreement was entered into
whereby the Company shall pay no royalties on the first $50,000 of net
sales and subsequently the Company and the licensor shall share equally
a royalty of 50% on net sales. There shall be no minimum royalty. The
initial term of the agreement expires on March 31, 2004. There are
automatic renewal options if the Licensor receives specified royalty
amounts. These renewal options extend through March 31, 2005. The
Company has not received nor made any royalty payments through
September 30, 2003. The Company this product to be launched in December
2003.
F-23
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
------------------------
(UNAUDITED)
NOTE 11 SUBSEQUENT EVENTS
- ------- -----------------
On October 15, 2003, the Company issued 3,000,000 shares of common
stock to Danson Partners, LLC in full settlement of cash and share
obligations. The shares were valued at $0.031 per share, or an
aggregate of $93,000, representing the market value on the date of
grant. This share issuance satisfies the $72,851 liability included in
accounts payable on the condensed consolidated balance sheet at
September 30, 2003 plus 1,000,000 shares due Danson Partners, LLC for
previous services rendered.
Subsequent to September 30, 2003, the Company entered into a memorandum
of understanding with EXML Limited of Padiham, Lancashire, UK to
distribute software products based on the Appworld.net development
platform. The Company is in the process of establishing two new
subsidiaries to be called ActiveCore Exml Inc. and AcitveCore Exml
Limited to market applications based on the Appworld development
platform. Through the end of March 2004, the Company will have
exclusive distributorship of products based on Appworld in North
America. During the period of exclusivity, ActiveCore and Exml will
negotiate potential joint venture arrangements for the distributorship
of the products.
On November 12, 2003, the Company entered into an agency agreement with
an unrelated party to raise up to $7,000,000 in equity financing to
enable the Company to purchase a 23% equity interest in an unrelated
company that is engaged in certain technology within the health care
industry. Under the terms of the agreement, the Company will sell
50,000,000 shares to certain investors at $.14 per share. In accordance
with the existing letter of intent, the 23% investment will cost
$10,000,000 with additional funds expected to come from a term loan.
Under the terms of the equity financing the Company will be seeking to
register the 50,000,000 shares at the earliest opportunity.
If the offering is completed, the agent will receive a cash commission
equal to 4% of the gross proceeds of the offering. The Company shall
also issue to the agent a number of freely tradable common shares equal
to 5.6% of the aggregate number of common shares issued pursuant to the
offering and a number of restricted common shares equal to 6.47% of the
aggregate number of common shares being issued pursuant to the offering
as additional compensation. Also, in connection with the above
offering, the Company will be responsible at the escrow release date
for all reasonable costs and expenses of the agent not to exceed
$100,000. As collateral for these payment obligations, Brian McDonald,
Peter Hamilton and Kevin Birch, each of whom are insiders of the
Company, have agreed to pledge an aggregate of 300,000 registered
common shares of the Company.
F-24
IVP TECHNOLOGY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
F-25
IVP TECHNOLOGY CORPORATION
AND SUBSIDIARIES
CONTENTS
PAGE F-27 INDEPENDENT AUDITORS' REPORT
PAGE F-28 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND
2001
PAGE F-29 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2002 AND 2001
PAGE F-30 F-31 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
DEFICIENCY FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
PAGES F-32 F-33 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2002 AND 2001
PAGES F-34 F-54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER
31, 2002 AND 2001
F-26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and shareholders of:
IVP Technology Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of IVP Technology
Corporation and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' deficiency, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the account principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentations. We believe that our audits provide a
reasonable basis for our opinion.
As more fully described in Note 2 of the notes to the consolidated financial
statements, an error resulting in an understatement of previously reported net
loss for the year ended December 31, 2001 resulting from the accounting for the
beneficial conversion feature and warrants attached to the issuance of a
convertible promissory note was discovered by management of the Company during
2002. Accordingly, the consolidated balance sheet as of December 31, 2001 and
the statements of operations, stockholders' deficiency and cash flows for the
year ended December 31, 2001 have been restated to reflect the correction to the
previously reported amounts.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IVP Technology
Corporation and subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations, and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 17 to
the consolidated financial statements, the Company has a net loss of
$21,313,290, a negative cash flow from operations of $1,084,884, a working
capital deficiency of $10,534,701 and a stockholders' deficiency of $14,419,766.
These matters raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 17. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
March 31, 2003
F-27
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
ASSETS
------
2001
2002 (As Restated)
---------------- -------------
CURRENT ASSETS
Cash $ 277,085 $ 232
Accounts receivable, net of allowance for doubtful accounts of $43,970 at
December 31, 2002 166,841 -
Inventory 383,738 -
Prepaid expenses and other current assets 134,098 -
--------------- ------------
Total Current Assets 961,762 232
--------------- ------------
FIXED ASSETS
Property and equipment, at cost 701,775 -
Accumulated depreciation (165,543) -
--------------- ------------
Total Fixed Assets 536,232 -
--------------- ------------
OTHER ASSETS
License agreement - software, net of accumulated amortization of $356,806
and $19,837 at December 31, 2002 and 2001, respectively 356,806 3,600,431
Other assets 71,816 872
--------------- ------------
Total Other Assets 428,622 3,601,303
--------------- ------------
TOTAL ASSETS $ 1,926,616 $ 3,601,535
- ------------ =============== ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES
Accounts payable $ 1,839,825 $ 479,571
Accrued liabilities 410,512 -
Due to factor 94,746 -
Taxes payable 420,670 -
Other current liabilities 134,088 -
Accrued interest 14,974 34,841
Accounts payable - license agreement - 3,620,268
Notes payable, current portion 184,240 200,000
Common stock to be issued 3,617,746 -
Convertible preferred stock to be issued, short-term 4,779,662 -
--------------- ------------
Total Current Liabilities 11,496,463 4,334,680
--------------- ------------
LONG-TERM LIABILITIES
Convertible debenture and notes payable 150,000 129,020
Leases payable 25,570 -
Convertible preferred stock to be issued, long-term 3,584,747 -
Due to related parties 1,089,602 -
--------------- ------------
Total Long-Term Liabilities 4,849,919 129,020
--------------- ------------
TOTAL LIABILITIES 16,346,382 4,463,700
--------------- ------------
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.001 par value, 50,000,000 shares authorized, none
issued and outstanding - -
Common stock, $0.001 par value, 150,000,000 shares authorized, 99,449,261
and 48,753,348 shares issued and outstanding at December 31, 2002 and
2001, respectively 99,449 48,753
Common stock to be issued - 50,000
Additional paid-in capital 20,870,864 13,314,354
Accumulated deficit (35,248,562) (13,935,272)
Other comprehensive income - exchange gain 80,795 -
Less deferred equity line commitment fees (222,312) -
Less deferred compensation and licensing - (340,000)
--------------- ------------
Total Stockholders' Deficiency (14,419,766) (862,165)
--------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 1,926,616 $ 3,601,535
- ---------------------------------------------- =============== ============
See accompanying notes to consolidated financial statements.
F-28
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2001
2002 (As Restated)
------------------ ----------------
REVENUES, NET $ 3,210,595 $ 67,358
------------------ ----------------
COST OF SALES
Product costs 2,770,587 -
Development costs 251,796 -
Amortization of licensing agreements and other distribution costs 1,640,742 259,837
------------------ ----------------
Total Cost of Sales 4,663,125 259,837
------------------ ----------------
GROSS LOSS (1,452,530) (192,479)
------------------ ----------------
OPERATING EXPENSES
Salaries and wages 1,176,084 -
Stock-based compensation 5,500,000 -
Consulting fees 1,000,876 420,694
Legal and accounting 523,063 119,773
Management fees 220,523 59,500
General and administrative 819,894 358,561
Financial advisory fees 166,275 -
Research and development 110,112 37,800
Amortization and depreciation 92,447 -
Impairment of goodwill and intangible assets 11,086,863 -
------------------ ----------------
Total Operating Expenses 20,696,137 996,328
------------------ ----------------
LOSS FROM OPERATIONS (22,148,667) (1,188,807)
------------------ ----------------
OTHER INCOME (EXPENSE)
Gain on early extinguishment of debt 1,021,238 -
Interest income 9,287 -
Interest expense (111,623) (98,341)
Foreign exchange loss (83,525) -
------------------ ----------------
Total Other Income (Expense) 835,377 (98,341)
------------------ ----------------
NET LOSS $ (21,313,290) $ (1,287,148)
- -------- ================== ================
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.32) $ (0.03)
================== ================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 66,013,725 44,855,321
================== ================
See accompanying notes to consolidated financial statements.
F-29
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Preferred Stock Common Stock Common Stock to be Issued
Shares Amount Shares Amount Shares Amount
----------- ----------- ---------------- ------------- ---------------- --------------
Balance, December 31, 2000 - $ - 39,110,848 $ 39,111 1,000,000 $ 720,000
Stock issued for services - - 9,512,000 9,512 - -
Stock issued - - 1,000,000 1,000 (1,000,000) (720,000)
Stock rescission - - (870,000) (870) - -
Deferred cost recognized - - - - - -
Stock to be issued for services - - - - 1,000,000 50,000
Net loss, 2001 - - - - - -
----------- ----------- ---------------- ------------- ---------------- --------------
Balance, December 31, 2001 (as - - 48,752,848 48,753 1,000,000 50,000
reported)
Prior period adjustment - - - - - -
----------- ----------- ---------------- ------------- ---------------- --------------
Balance, December 31, 2001 (as - - 48,752,848 48,753 1,000,000 50,000
restated)
Stock issued for services and
settlements - - 11,151,497 11,151 (1,000,000) (50,000)
Stock issued for commitment - -
fees 3,132,000 3,132 - -
Stock issued as management
compensation - - 30,000,000 30,000 - -
Stock issued for debt - - 6,410,916 6,411 - -
Stock issued for Springboard
Acquisition - - 2,000 2 - -
Warrants issued for commitment
fees - - - - - -
Deferred cost recognized - - - - - -
Beneficial conversion feature
of convertible debt - - - - - -
Net loss for the period - - - - - -
Cumulative translation
adjustment - - - - - -
Comprehensive loss - - - - - -
----------- ----------- ---------------- ------------- ---------------- --------------
BALANCE, - $ - 99,449,261 $ 99,449 - $ -
DECEMBER 31, 2002 =========== =========== ================ ============= ================ ==============
See accompanying notes to consolidated financial statements.
F-30
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Deferred
Compensation
Additional and Other
Paid-In Accumulated Commitment Comprehensive
Capital Deficit Fees Income Total
--------------- ----------------- ---------------- --------------- ----------------
Balance, December 31, 2000 $ 12,151,156 $ (12,648,124) $ (896,286) $ - $ (634,143)
Stock issued for services 883,488 - - - 893,000
Stock issued 719,000 - - - -
Stock rescission (515,290) - - - (516,160)
Deferred cost recognized - - 556,286 - 556,286
Stock to be issued for services - - - - 50,000
Net loss, 2001 - (1,211,148) - - (1,211,148)
--------------- ----------------- ---------------- --------------- ----------------
Balance, December 31, 2001 (as 13,238,354 (13,859,272) (340,000) - (862,165)
reported)
Prior period adjustment 76,000 (76,000) - - -
--------------- ----------------- ---------------- --------------- ----------------
Balance, December 31, 2001 (as 13,314,354 (13,935,272) (340,000) - (862,165)
restated)
Stock issued for services and
settlements 691,629 - - - 652,780
Stock issued for commitment
fees 346,868 - (350,000) - -
Stock issued as management
compensation 5,470,000 - - - 5,500,000
Stock issued for debt 977,361 - - - 983,772
Stock issued for Springboard
Acquisition 258 - - - 260
Warrants issued for commitment
fees 6,107 - (6,107) - -
Deferred cost recognized - - 473,795 - 473,795
Beneficial conversion feature
of convertible debt 64,287 - - - 64,287
Net loss for the period - (21,313,290) - - (21,313,290)
Cumulative translation
adjustment - - - 80,795 80,795
----------------
Comprehensive loss - - - - (21,232,495)
--------------- ----------------- ---------------- --------------- ----------------
BALANCE, $ 20,870,864 $ (35,248,562) $ (222,312) $ 80,795 $ (14,419,766)
DECEMBER 31, 2002 =============== ================= ================ =============== ================
See accompanying notes to consolidated financial statements.
F-31
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2001
2002 (As Restated)
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (21,313,290) $ (1,287,148)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 92,447 -
Amortization of licensing agreements and software kits 1,610,695 19,837
Amortization of commitment fees 131,250 -
Interest expense on beneficial conversion 64,286 76,000
Gain on extinguishment of debts (1,021,238) -
Stock to be issued for settlement of licensing agreement 18,000 -
Bad debts (recovery) expense (3,000) 46,970
Impairment of goodwill and intangible assets 11,086,863 -
Warrants issued for commitment fees 2,545 -
Stock issued for compensation 5,500,000 -
Stock issued for services 667,780 983,126
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease (increase) in accounts receivable 653,469 (39,646)
Increase in inventory (327,049) -
Decrease (increase) in prepaid expenses and other current assets 45,552 (872)
Decrease in other assets 3,620 -
Increase in accounts payable 1,045,653 49,181
Increase in accrued liabilities 246,927 -
Increase in taxes payable 309,335 -
Increase in other current liabilities 97,365 -
Increase in accrued interest 3,906 22,340
---------------- ---------------
Net Cash Used In Operating Activities (1,084,884) (130,212)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net assets acquired from acquisitions 1,168,628 -
Cash paid for licensing agreement (713,612) -
Purchases of fixed assets (187,899) -
Purchases of software development kits (45,367) -
---------------- ---------------
Net Cash Provided By Investing Activities 221,750 -
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable (40,000) -
Proceeds from notes payable 941,235 129,020
Proceeds from convertible debentures 150,000 -
Proceeds from related parties 238,363 -
Repayment of loan to factors (202,428) -
Payment on leases (27,979) -
---------------- ---------------
Net Cash Provided By Financing Activities 1,059,191 129,020
---------------- ---------------
EFFECT OF FOREIGN EXCHANGE RATES 80,796 -
---------------- ---------------
NET INCREASE (DECREASE) IN CASH FOR THE YEAR 276,853 (1,192)
CASH - BEGINNING OF YEAR 232 1,424
---------------- ---------------
CASH - END OF YEAR $ 277,085 $ 232
- ------------------ ================ ===============
See accompanying notes to consolidated financial statements.
F-32
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 24,991 $ -
================ ===============
Cash paid for taxes $ - $ -
================ ===============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment purchased under capital leases $ 9,480 $ -
================ ===============
Acquisition of license agreement for short-term payable $ - $ 3,620,268
================ ===============
Acquisition of Ignition Entertainment Ltd. for common and preferred stock to
be issued $ 11,949,155 $ -
================ ===============
Acquisition of Springboard Technology Solutions, Inc. for common stock to be
issued and debt assumed $ 409,688 $ -
================ ===============
Revaluation of the TIG licensing agreement $ 2,695,364 $ -
================ ===============
Common stock issued for payment of commitment fees $ 350,000 $ -
================ ===============
Stock issued for payment of debt and accrued interest thereon $ 223,772 $ -
================ ===============
Stock issued for payment of debt held with factors $ 760,000 $ -
================ ===============
See accompanying notes to consolidated financial statements.
F-33
IVP TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
- -------------------------------------------------------------------
(A) ORGANIZATION
-----------------
The consolidated financial statements of IVP Technology Corporation
(formally Mountain Chef, Inc.) and consolidated subsidiaries (the
"Company") include the accounts of the parent, IVP Technology Corporation,
incorporated in the State of Nevada on February 11, 1994, and its
subsidiaries: Ignition Entertainment Ltd. ("Ignition"), a United Kingdom
("UK") company; Springboard Technology Solutions, Inc. ("Springboard"), a
Canadian company; and Erebus Corporation, an inactive company (See Note
1(B)). The Company was granted an extra-provincial license by the Province
of Ontario on June 20, 1995 to carry on business in Ontario, Canada. Prior
to 1998, the Company was involved with various unsuccessful activities
relating to the sale of technology products before becoming inactive by the
end of 1997. The Company began negotiations with a third party in 1998 to
become an exclusive distributor of software and therefore is considered to
have re-entered the development stage on January 1, 1998. Activities from
inception of development stage included raising capital and negotiations
and acquisition of software distribution licenses are more fully described
herein (See Note 14). On January 1, 2002, the Company began operations and
emerged from the development stage.
The Company operates two divisions, enterprise and consumer. The enterprise
division develops, markets, licenses, installs and services data solutions.
The consumer division develops and publishes interactive software games
designed for mobile phones, other handheld devices, web-sites, personal
computers and video game consoles. The consumer division also distributes
games, hardware and accessories developed or manufactured by third parties.
(B) ACQUISITION AND RECAPITALIZATION
------------------------------------
Effective March 2000, the Company acquired all the outstanding shares of
common stock of Erebus Corporation, an inactive reporting shell company
with no assets or liabilities, from the stockholders thereof in an exchange
for an aggregate of 350,000 shares of the Company's common stock and paid
$200,000 of consulting expenses in connection with the acquisition. The
$200,000 was recorded as an expense in the 2000 financial statements.
Pursuant to Rule 12-g-3 (a) of the General Rules and Regulations of the
Securities and Exchange Commission, the Company elected to become the
successor issuer to Erebus Corporation for reporting purposes under the
Securities Exchange Act of 1934. For financial reporting purposes, the
acquisition was treated as a recapitalization of the Company with the par
value of the common stock charged to additional-paid-in capital.
(C) PRINCIPLES OF CONSOLIDATION
-------------------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries Ignition, Springboard and Erebus
Corporation. All significant inter-company transactions and balances have
been eliminated in consolidation.
(D) BASIS OF PRESENTATION
-------------------------
The consolidated financial statements are expressed in United States
dollars and have been prepared in accordance with generally accepted
accounting principles ("GAAP") in the United States.
(E) RECLASSIFICATIONS
---------------------
Certain reclassifications have been made to the previously reported
statements to conform to the Company's current consolidated financial
statement format.
(F) FOREIGN CURRENCY TRANSACTIONS
---------------------------------
Assets and liabilities of foreign subsidiaries, whose functional currency
is the local currency, are translated at year-end exchange rates. Capital
accounts are re-measured into U.S. dollars at the acquisition date rates.
Income and expense items are translated at the average rates of exchange
F-34
prevailing during the year. The adjustment resulting from translating the
financial statements of such foreign subsidiaries is reflected as a
separate component of stockholder's equity. Foreign currency transaction
gains or losses are reported in results of operations.
(G) COMPREHENSIVE INCOME (LOSS)
-------------------------------
Comprehensive income (loss) represents the change in net assets of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive income (loss) of the
Company includes net income adjusted for the change in foreign currency
translation adjustments and the change in net unrealized gain (loss) from
investments, if applicable.
(H) USE OF ESTIMATES
--------------------
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. The most
significant estimates and assumptions relate to the recoverability of
prepaid royalties and licencing, capitalized software development costs and
other intangibles, inventories, realization of deferred income taxes and
the adequacy of allowances for returns, and doubtful accounts. Actual
amounts could differ significantly from these estimates.
(I) CASH AND CASH EQUIVALENTS
-----------------------------
For purposes of the cash flow statements, the Company considers all highly
liquid investments with original maturities of three months or less at the
time of purchase to be cash equivalents.
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
---------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires disclosures of information
about the fair value of certain financial instruments for which it is
practicable to estimate the value. For purposes of this disclosure, the
fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties other
than in a forced sale or liquidation.
The carrying amounts of the Company's financial instruments, including
cash, accounts receivable, accounts payable, accrued liabilities, due to
factor, taxes payable and other current laibilties approximate fair value
because of their short maturities. The carrying amount of licensing
agreements and investments approximate fair value based upon the
recoverability of these assets. The carrying amount of the Company's lines
of credit approximates fair value because the interest rates of the lines
of credit are based on floating rates identified by reference to market
rates. The carrying amounts of the Company's loans and notes payable and
capital lease obligations approximate the fair value of such instruments
based upon management's best estimate of interest rates that would be
available to the Company for similar debt obligations.
(K) ADVERTISING
---------------
The Company expenses advertising costs as incurred. Advertising expense for
the years ended December 31, 2002 and 2001 amounted to $21,160 and $0,
respectively.
(L) ALLOWANCES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
------------------------------------------------------
The Company makes judgments as to the ability to collect outstanding
receivables and provide allowances for the portion of receivables when
collection becomes doubtful. Provisions are made based upon a specific
review of all significant outstanding invoices. For those invoices not
specifically reviewed, provisions are provided at differing rates, based
upon the age of the receivable. In determining these percentages, the
Company analyzes historical collection experience and current economic
trends. If the historical data used to calculate the allowance provided for
doubtful accounts does not reflect the future ability to collect
outstanding receivables, additional provisions for doubtful accounts may be
needed and the future results of operations could be materially affected.
F-35
The Company also records a provision for estimated sales returns and
allowances on product and service related sales in the same period as the
related revenues are recorded. These estimates are based on historical
sales returns, analysis of credit memo data and other known factors. If the
historical data used to calculate these estimates do not properly reflect
future returns, then a change in the allowances would be made in the period
in which such a determination is made and revenues in that period could be
adversely affected.
(M) INVENTORY
-------------
Inventories, which consist primarily of system components, parts and
supplies and completed games and other video accessories, are stated at the
lower of weighted average cost or market. The weighted average cost of
inventories approximates the first-in, first-out ("FIFO") method.
Management performs periodic assessments to determine the existence of
obsolete, slow-moving and non-salable inventories and records necessary
provisions to reduce such inventories to net realizable value.
(N) PROPERTY AND EQUIPMENT
--------------------------
Office equipment, furniture and fixtures and automobiles are depreciated
using the straight-line method over their estimated lives ranging from five
to seven years. Computer equipment and software are depreciated using the
straight-line method over three years. Leasehold improvements are amortized
over the lesser of the term of the related lease or estimated useful lives.
The cost of additions and betterments are capitalized, and repairs and
maintenance costs are charged to operations in the periods incurred. When
depreciable assets are retired or sold, the cost and related allowances for
depreciation are removed from the accounts and the gain or loss is
recognized. The carrying amounts of these assets are recorded at historical
cost.
(O) LONG-LIVED ASSETS
---------------------
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company compares the
carrying amount of the asset to the estimated undiscounted future cash
flows expected to result from the use of the asset. If the carrying amount
of the asset exceeds estimated expected undiscounted future cash flows, the
Company records an impairment charge for the difference between the
carrying amount of the asset and its fair value. The estimation of fair
value is generally measured by discounting expected future cash flows at
the Company's incremental borrowing rate or fair value if available.
(P) EXCESS OF COST OVER NET ASSETS ACQUIRED
-------------------------------------------
In accordance with SFAS No. 141, the Company allocates the purchase price
of its acquisitions to the tangible assets, liabilities and intangible
assets acquired based on their estimated fair values. The excess purchase
price over those fair values is recorded as "Excess of Cost Over Net Assets
Acquired." The fair value assigned to intangible assets acquired is based
on valuations prepared by independent third party appraisal firms using
estimates and assumptions provided by management. In accordance with SFAS
No. 142, goodwill and purchased intangibles with indefinite lives acquired
after June 30, 2001 are not amortized but will be reviewed periodically for
impairment. The Company has recognized an impairment of goodwill and
intangible assets of $11,086,863 in the year ended December 31, 2002 (See
Note 15). Purchased intangibles with finite lives will be amortized on a
straight-line basis over their respective useful lives.
(Q) CAPITALIZED SOFTWARE DEVELOPMENT COSTS
------------------------------------------
The Company capitalizes internal software development costs, as well as
other content costs, subsequent to establishing technological feasibility
of a title. Capitalized software development costs represent the costs
associated with the internal development of the Company's publishing
products. Amortization of such costs as a component of cost of sales is
recorded on a title-by-title basis based on the greater of the proportion
of current year sales to total of current and estimated future sales for
the title or the straight-line method over the remaining estimated useful
life of the title. The Company continually evaluates the recoverability of
capitalized software costs and will charge to cost of sales any amounts
that are deemed unrecoverable or for projects that it will abandon.
Development costs incurred prior to establishing technological feasibility
are expensed in the period incurred and is included as a component of cost
of sales in the accompayning consolidated statement of operations.
F-36
(R) INCOME TAXES
----------------
The Company accounts for income taxes under the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("Statement 109"). Under Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(S) CONCENTRATION OF CREDIT RISK
--------------------------------
The Company maintains its cash in bank deposit accounts, which, at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
(T) STOCK-BASED COMPENSATION
----------------------------
The Company accounts for employee stock option plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Under APB 25, generally no compensation expense is
recorded when the terms of the award are fixed and the exercise price of
the employee stock option equals or exceeds the fair value of the
underlying stock on the date of grant. The Company adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
(U) LOSS PER COMMON SHARE
-------------------------
Basic loss per common share is based on net loss divided by the weighted
average number of common shares outstanding. Common stock equivalents were
not included in the calculation of diluted loss per share as their effect
would be anti-dilutive.
(V) BUSINESS SEGMENTS
---------------------
The Company applies Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information". The
Company operates in one segment and therefore segment information is not
presented.
Management has determined that it is not practicable to provide geographic
segment disclosures for revenues and long-lived assets because the Company
sells its products to a large variety of locations in the Americas and
Europe, and in many instances, these products are then resold through
distributors.
(W) REVENUE RECOGNITION
-----------------------
RISK AND UNCERTAINTIES
----------------------
A significant portion of all of the Company's net sales are derived from
software publishing and distribution activities, which are subject to
increasing competition, rapid technological change and evolving consumer
preferences, often resulting in the frequent introduction of new products
and short product lifecycles. Accordingly, the Company's profitability and
growth prospects depend upon its ability to continually acquire, develop
and market new, commercially successful software products and obtain
adequate financing. If the Company is unable to continue to acquire,
develop and market commercially successful software products, its operating
results and financial condition could be materially adversely affected in
the near future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reported periods. The most significant estimates and assumptions
relate to the recoverability of prepaid royalties, capitalized software
development costs and other intangibles, realization of deferred income
F-37
taxes, valuation of inventories and the adequacy of allowances for returns,
price protection and doubtful accounts. Actual amounts could differ
significantly from these estimates.
REVENUE RECOGNITION
-------------------
Publishing revenue is derived from the sale of internally developed
interactive software titles or from the sale of titles licensed from
third-party developers. Publishing revenue amounted to $2,896,532 for the
year ended December 31, 2002. The Company had no publishing revenues during
the year ended December 31, 2001.
Distribution revenue is derived from the sale of third-party interactive
software titles, accessories and hardware. Distribution revenue amounted to
$196,949 for the year ended December 31, 2002. The Company had no
distribution revenues during the year ended December 31, 2001.
Revenues from services and commercial software sold under licenses were
$117,114 and $67,358 for the years ended December 31, 2002 and 2001
respectively.
The Company recognizes revenue in accordance with Statement of Position
("SOP") 97-2 "Software Revenue Recognition", as amended by SOP 98-9
"Modification of SOP 97-2 Software Revenue Recognition with respect to
Certain Transactions." SOP 97-2 provides guidance on applying generally
accepted accounting principles in recognizing revenue on software
transactions. SOP 98-9 deals with the determination of vendor specific
objective evidence of fair value in multiple element arrangements, such as
maintenance agreements sold in conjunction with software packages. The
Company's consumer software transactions generally include only one
element, the interactive software game or commercial software under
license. The Company recognizes revenue when the price is fixed and
determinable; there is persuasive evidence of an arrangement, the
fulfillment of its obligations under any such arrangement and determination
that collection is probable. Accordingly, revenue is recognized when title
and all risks of loss are transferred to the customer, which is generally
upon receipt by customer. The Company's payment arrangements with its
customers provide primarily 60 day terms and to a limited extent with
certain customers 30 or 90 day terms. The Company does not have any
multi-element arrangements that would require it to establish VSOE for each
element, nor does the Company have any sales activity that requires the
contract method of accounting.
The Company's distribution arrangements with customers generally do not
give customers the right to return products; however, the Company at its
discretion may accept product returns for stock balancing or defective
products. In addition, the Company sometimes negotiates accommodations to
customers, including price discounts, credits and product returns, when
demand for specific products falls below expectations. The Company's
publishing arrangements generally do not require the Company to accept
product returns and provide price protection. The Company establishes a
reserve for future returns and other allowances based primarily on its
return policies, price protection policies and historical return rates. The
Company may not have a reliable basis to estimate returns and price
protection for certain customers or it may be unable to determine that
collection of the receivable is probable. In such circumstances, the
Company defers the revenues at the time of the sale and recognizes them
when collection of the related receivable becomes probable or cash is
received.
Revenue from product sales is recognized when title passes to the customer,
provided that: there are no uncertainties regarding customer acceptance;
persuasive evidence of an arrangement exists; the sales price is fixed or
determinable; and collectability is deemed probable. The Company provides
for estimated product returns at the time of the product shipment, if
necessary. In December 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in
Financial Statements, which establishes guidance in applying generally
accepted accounting principles to revenue recognition in financial
statements and is effective beginning with the fourth quarter of the year
ended December 31, 2000. The Company has determined that its existing
revenue recognition practices comply with the requirements of SAB 101 for
all periods presented.
(X) CONSIDERATION GIVEN TO CUSTOMERS OR RESELLERS
-------------------------------------------------
In November 2001, the Financial Accounting Standards Board ("FASB")
Emerging Issues Task Force (EITF) reached a consensus on EITF Issue 01-09,
Accounting for Consideration Given by a Vendor to a Customer or Reseller of
the Vendor's Products, which is a codification of EITF 00-14, 00-22 and
00-25. This EITF presumes that consideration from a vendor to a customer or
reseller of the vendor's products to be a reduction of the selling prices
of the vendor's products and, therefore, should be characterized as a
reduction of revenue when recognized in the vendor's income statement and
could lead to negative revenue under certain circumstances. Revenue
reduction is required unless consideration relates to a separate
identifiable benefit and the benefit's fair value can be established. The
F-38
Company has adopted EITF 01-09 effective January 1, 2002. The adoption of
the new standard did not have a material impact on the consolidated
condensed financial statements. There was no effect on prior period
financial statements as a result of adopting this statement.
(Y) RECENT ACCOUNTING PRONOUNCEMENTS
------------------------------------
Statement No. 143 "Accounting for Asset Retirement Obligations" establishes
standards for the initial measurement and subsequent accounting for
obligations associated with the sale, abandonment, or other type of
disposal of long-lived tangible assets arising from the acquisition,
construction, or development and/or normal operation of such assets. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002, with
earlier application encouraged.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is applicable to
financial statements issued for fiscal years beginning after December 15,
2001. The FASB's new rules on asset impairment supercede SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", and portions of Accounting Principles Board
(APB) Opinion No 30, "Reporting the Results of Operations". SFAF No. 144
provides a single accounting model for long-lived assets to be disposed of
and significantly changes the criteria that would have to be met to
classify an asset as held-for sale. Classification as held-for sale is an
important distinction since such assets are not depreciated and are stated
at the lower of fair value or carrying amount. SFAS No. 144 also requires
expected future operating losses from discontinued operations to be
displayed in the period in which the losses are incurred, rather than as of
the measurement date as presently required.
In April 2002, the FASB issued SFAS No 145, "Rescission of FASB Statements
No. 4, 44 and 62, Amendment of FASB No 13, and Technical Corrections",
which is generally applicable to financial statements for fiscal years
beginning after May 15, 2002; however, early adoption is encouraged. SFAS
145 eliminates the requirement under FASB No. 4, "Reporting Gains and
Losses from Extinguishment of Debt" to report gains and losses from
extinguishments of debt as extraordinary items in the income statement.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Restructuring
Costs." SFAS 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts and relocating plant facilities or personnel. Under
SFAS 146, the Company will record a liability for a cost associated with an
exit or disposal activity when that liability is incurred and can be
measured at fair value. SFAS 146 will require the Company to disclose
information about its exit and disposal activities, the related costs, and
changes in those costs in the notes to the interim and annual financial
statements that include the period in which an exit activity is initiated
and in any subsequent period until the activity is completed. SFAS 146 is
effective prospectively for exit or disposal activities initiated after
December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a
company cannot restate its previously issued financial statements and the
new statement grandfathers the accounting for liabilities that a company
had previously recorded under Emerging Issues Task Force Issue 94-3.
In December 2002, the Financial Accounting Standards Board issued Statement
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure
- an amendment of FASB Statement No. 123," ("SFAS 148"). SFAS 148 amends
FASB Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS
123") and provides alternative methods for accounting for a change by
registrants to the fair value method of accounting for stock-based
compensation. Additionally, SFAS 148 amends the disclosure requirements of
SFAS 123 to require disclosure in the significant accounting policy
footnote of both annual and interim financial statements of the method of
accounting for stock based-compensation and the related pro forma
disclosures when the intrinsic value method continues to be used. The
statement is effective for fiscal years beginning after December 15, 2002,
and disclosures are effective for the first fiscal quarter beginning after
December 15, 2002.
The adoption of these pronouncements will not have a material effect on the
Company's financial position or results of operations.
NOTE 2 PRIOR PERIOD ADJUSTMENT
- -------------------------------
The Company entered into a convertible promissory note (the "Note") with a
lender for a principal sum of $200,000. The Company borrowed the money to
meet certain operating expenses. The Note bore interest at 10% per annum
F-39
and was due May 14, 2001. The debt and accrued interest is convertible to
common stock at a conversion price equal to 80% of the average closing bid
price per common share during the ten trading days immediately prior to any
such conversion. On July 16, 2001, the Company received notice from lender
of their intent to convert the Note and accrued interest to common stock.
The note was converted and the shares were issued on June 28 2002.
In connection with the Note, the Company issued warrants to purchase up to
100,000 shares of common stock at an exercise price equal to 80% of the
average closing bid price per share of common stock during the ten trading
days immediately prior to any such per exercise share at any time to and
through May 15, 2001. Using the Black-Scholes model, the warrants have an
estimated value of $30,000, using the following assumptions: no annual
dividend, volatility of 53.1%, risk-free interest rate of 6.33% and a term
of one year.
The Company did not account for the value of the beneficial conversion
feature and warrants upon issuance of the Note in accordance with EITF 98-5
"Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios" and APB 14 "Accounting for
Convertible Debt and Debt Issue with Stock Purchase Warrants". The Company
believed that the effect of EITF 98-5 and APB 14 does not affect the trend
in earnings or the results of the Company's operations and will restate the
comparative prior periods presented in the December 31, 2002 and 2001
condensed consolidated statements of operations to reflect additional
interest expense for the full value of the warrants and beneficial
conversion feature. The value ascribed to the beneficial conversion feature
totaled approximately $46,000, which was based upon 80% of the average
closing bid price per common share during the ten trading days prior to
January 1, 2001. The total effect of the restatement was to increase
interest expense and additional paid-in capital by approximately $76,000
for the year ended December 31, 2001, increasing the net loss to
$1,287,148. The interest expense and additional paid-in capital accounts in
the comparative prior periods balance sheet, statement of operations,
statement of changes in stockholders' equity and statement of cash flows
have been restated for the effects of the adjustments resulting from the
correction of an error. Earning per share did not change from previously
reported amounts due to this adjustment.
NOTE 3 ACQUISITION OF IGNITION ENTERTAINMENT LIMITED
- -----------------------------------------------------
On May 28, 2002, the Company acquired 100% of the stock of Ignition, a UK
corporation, which specializes in the design, development, licensing,
publishing and distribution of personal computer, mobile devices and game
console software and accessories. The Company accounted for this
acquisition using the purchase method of accounting in accordance with the
provisions of SFAS 141. This acquisition is the Company's first step in
expanding the Company's business from soley an enterprise software
distributor to a developer, publisher and licensor of consumer software
entertainment and video games. This acquisition was made pursuant to the
Company agreeing to issue 15,000,000 shares of unregistered common stock
and 3,500,000 of unregistered preferred stock convertible into 35,000,000
shares of common stock, collectively valued at $0.23898 per share for a
total purchase price of $11,949,155. Based upon the provisions of SFAS 141,
the purchase price was determined by using the weighted average share price
of the Company's common stock for the three trading days before and after
the day the Company entered into the terms of the acquisition agreement.
These shares will be held in escrow until disbursed in accordance with the
terms of the escrow agreement. IVP has also agreed to offer incentive
payments to certain parties in connection with the Ignition acquisition
(the "Incentive Stock"). A factoring company (the "Factor") will receive
5,000,000 shares of the Company's common stock 90 to 180 days after May 28,
2002 for maintaining adequate factoring and letter of credit lines for
Ignition (see Note 10). The Ignition management team will also have the
opportunity to earn an additional 1,500,000 shares of convertible preferred
shares over three years, which are also convertible into 15,000,000 shares
of the Company's common stock, for key employees and shareholders depending
upon the attainment of certain levels of gross revenues and net income. The
acquisition has been accounted for by the purchase method of accounting
and, accordingly, the operating results have been included in the Company's
consolidated results of operations from the date of acquisition. The
Company acquired net tangible assets of $1,291,060. The excess of the
consideration given over the fair value of net assets acquired has been
recorded as goodwill of $10,658,095. The Company will account for the
purchased goodwill in accordance with the provisions of SFAS 142. The
non-incentive common and preferred stock that the Company is obligated to
issue for the purchase of Ignition's net assets is recorded in the
liability section of the balance sheet. The liability associated with any
Incentive Stock issuable in conjunction with this acquisition based on the
achievement of certain revenue and net income results over a two-year
period will be recorded as additional goodwill as payout thresholds are
achieved.
F-40
The purchase price allocation recorded for the acquisition of the assets
and liabilities of Ignition, approximate the following:
Cash $ 1,132,039
Accounts receivables, net 775,457
Inventory 56,689
Fixed assets, net 350,461
Prepaid expenses and other assets 173,769
-----------------
Total Assets 2,488,415
-----------------
Liabilities assumed:
Accounts payable and accrued expenses 384,152
Income taxes payable 83,002
Other liabilities 730,202
-----------------
Total Liabilities Assumed 1,197,356
-----------------
Excess of assets acquired over liabilities assumed 1,291,059
Purchase price 11,949,155
-----------------
Goodwill $ 10,658,096
=================
The 3,500,000 Convertible Preferred Shares, which are convertible into
35,000,000 shares of common stock is issuable to the Ignition shareholders
as follows; 1,000,000 convertible preferred shares to be issued on or
before May 28, 2003, with additional issuances on or before November 28,
2003 (1,000,000 shares), May 28, 2004 (1,000,000 shares) and May 29, 2004
(500,000 shares). Because the convertibility of the preferred stock into 35
million common shares is contingent on the Company's shareholders ratifying
the approval of an increase in the amount of common stock that the Company
is authorized to issue, the Company has recorded the future issuance of the
convertible preferred stock as a current and long-term liability on its
balance sheet and not as a component of stockholders equity. The beneficial
conversion feature of the Convertible Preferred Stock will also result in
the Company incurring interest expense at the time that the shares are
converted into common stock.
The 15,000,000 shares of common stock that the Company has agreed to issue
as part of the consideration for the acquisition have not yet been issued.
The escrow agreement states that these shares are issuable 91 to 180 days
after the acquisition. As of the date of this report, the shares have not
been issued. The Company has recorded the future issuance of this common
stock as a current liability on its balance sheet.
The following unaudited pro forma consolidated results of operations are
presented as if the acquisition of Ignition had been made at the beginning
of the periods presented:
Fiscal Year Ended
Fiscal Year Ended December 31, 2001
December 31, 2002 (As Restated)
----------------- -----------------
Net sales $ (4,231,084) 67,358
Net loss (22,196,395) (1,287,148)
Basic and diluted loss per common share (.34) (.03)
F-41
The following unaudited pro forma consolidated balance sheet is presented
as if the acquisition of Ignition had been made at the beginning of the
calendar year ended December 31, 2001:
CONSOLIDATED BALANCE SHEET DATA
-------------------------------
Assets:
Cash $ 1,132,271
Accounts receivable, net 775,457
Inventory 56,689
----------------
Current Assets 1,964,417
----------------
Fixed assets, net 350,462
Prepaid expenses and other assets 174,641
Deferred licensing fee, net 3,600,431
Excess of cost over net assets acquired 10,658,095
----------------
Total Assets $ 16,748,046
================
Liabilities:
Accounts payable and accrued expenses $ 863,723
License agreement 3,620,268
Note and interest payable 234,841
Common stock to be issued 3,584,747
Convertible preferred stock to be issued, short-term 4,779,662
----------------
Current Liabilities 13,083,241
----------------
Other Liabilities 942,224
Convertible preferred stock to be issued, long-term 3,584,747
----------------
Total Liabilities 17,610,212
Stockholders' deficiency (862,166)
----------------
Total Liabilities and Stockholders' Deficiency $ 16,748,046
================
The unaudited pro forma information is not necessarily indicative of the
results of operations that would have occurred had the purchase been made
at the beginning of the periods presented or the future results of the
combined operations.
NOTE 4 ACQUISITIONS OF SPRINGBOARD TECHNOLOGY SOLUTIONS, INC.
- --------------------------------------------------------------
On July 1, 2002, the Company acquired all the outstanding shares of
Springboard for consideration of 2,000 common shares on the basis of a one
for one exchange. The value of the common stock issued was $260 or $.13 per
share based on the value of the Company's common stock on the date that the
Board approved the transaction. Springboard was owned by some of the
Company's officers and directors at the time of acquisition. Springboard is
a data solutions company that provides network solutions, web and software
development and data interface services, which has been in operation for
three years. At the time of acquisition, Springboard had 10 full time
employees and consultants. The acquisition will enable the Company to
expand its enterprise software business and complements its existing
enterprise software products. It also provides the Company with additional
employees dedicated to the marketing and selling of the enterprise line of
software products. This acquisition has been accounted for by the purchase
method of accounting in accordance with the provisions of SFAS 141 and,
accordingly, the operating results have been included in the Company's
consolidated results of operations from the date of acquisition. As a
result of the Springboard acquisition, the Company recorded goodwill in the
amount of approximately $410,000. The Company will account for the
purchased goodwill in accordance with the provisions of SFAS 142. As of the
balance sheet date, management has determined that the goodwill associated
with this acquisition is not impaired.
F-42
The Company's acquisition of Springboard is not considered a
"significant" or material event because Springboard's net assets and
results of operations are less than 10% of the Company's consolidated
balance sheet and results of operations.
NOTE 5 ACCOUNTS RECEIVABLE
- ---------------------------
The components of accounts receivable are as follows:
2002 2001
--------------- ----------------
Unrestricted trade receivables $ 61,135 $ -
Restricted trade receivables 149,676 -
Allowance for doubtful accounts (43,970) -
--------------- ----------------
Accounts receivable, net $ 166,841 $ -
=============== ================
Restricted trade receivables are collateral for the Factor's secured
borrowing facility that Ignition entered into in April 2002. Unrestricted
trade receivables consists primary of vendor receivables for enterprise
software and information technology services sold by the Company and its
Springboard subsidiary.
NOTE 6 PREPAID EXPENSES AND OTHER CURRENT ASSETS
- -------------------------------------------------
Prepaid expenses and other current assets as of December 31, 2002 and 2001
consist of:
2002 2001
-------------- -------------
Prepaid expenses $ 56,820 $ -
VAT receivable 30,090 -
GST receivable 18,002 -
Miscellaneous receivable, unrelated parties 27,341
Other 1,845 -
-------------- ------------
Total $ 134,098 $ -
============== ============
NOTE 7 FIXED ASSETS
- --------------------
As of December 31, 2002 and 2001, fixed assets consist of:
2002 2001
--------------- --------------
Computer equipment $ 291,505 $ -
Office equipment and furniture 19,698 -
Computer software 74,565 -
Software development kits 45,367 -
Automobiles 26,777 -
Leasehold improvements 243,863 -
--------------- --------------
701,775 -
Less accumulated depreciation
and amortization (165,543) -
--------------- --------------
$ 536,232 $ -
=============== ==============
Depreciation expense for the years ended December 31, 2002 and 2001
amounted to $92,447 and $0, respectively.
F-43
NOTE 8 TAXES PAYABLE
- ---------------------
Taxes payable as of December 31, 2002 and 2001 consist of:
2002 2001
-------------- --------------
Employment and payroll related taxes $ 405,503 $ -
Sales taxes payable 15,167 -
-------------- --------------
Total $ 420,670 $ -
============== ==============
As of December 31, 2002, Ignition had not paid and remitted the employer
and employee payroll taxes from July 2002 through December 31, 2002. Total
amount due to the UK taxing authorities was approximately $338,520 as of
December 31, 2002. Ignition negotiated a payment plan from the UK taxing
authorities to repay delinquent payroll taxes in monthly installments of
approximately $32,000, until the total amount due has been settled. The
Company has classified taxes payable as a currently liability on the
accompanying consolidated balance sheet as of December 31, 2002.
As of December 31, 2002, Springboard had not paid employer and employee
related taxes for employees originally classified as consultants by the
Company. However, as a result of an on-going audit by the Canadian taxing
authorities, the Company has estimated its exposure to be approximately
$51,780 as of December 31, 2002, which is included in payroll related taxes
payable.
NOTE 9 DUE TO RELATED PARTIES
- ------------------------------
The Company's officers and directors have loaned various amounts to the
Company and its subsidiaries to meet operating cash flow requirements. The
amounts due to related parties are non-interest bearing and have no
specific repayment terms. The Company has classified amounts due to related
parties as a long-term liability because it is more likely than not that
amounts will not be repaid during 2003 and related parties will not demand
repayment. The balances due them were $1,089,602 and $0 as of December 31,
2002 and 2001, respectively.
NOTE 10 NOTES PAYABLE
- ----------------------
(A) NOTES PAYABLE - SHORT-TERM
------------------------------
The Company had a convertible note payable with a lender for $200,000,
which was outstanding at March 31, 2002 and December 31, 2001. The note
bore interest at 10% per annum and was due May 2001. As of March 31, 2002,
accrued interest on the note amounted to $37,561. The debt and accrued
interest was convertible to common stock at a conversion price equal to 80%
of the average closing bid price per share during the ten trading days
immediately prior to any such conversion. On July 16, 2001, the Company
received notice from this lender of their intent to convert the note and
accrued interest to common stock. On June 28, 2002, the Company converted
the note plus accrued interest into 2,410,916 shares of restricted common
stock in full satisfaction of the outstanding obligation and accrued
interest.
On July 30, 2001, the Company entered into a two-year note with another
unrelated lender to borrow up to $187,500 at 6% interest. As of December
31, 2002 and 2001, the balance due on this note was $89,020 and $129,020,
respectively. The note is collateralized by 2,500,000 shares of common
stock, held in the name of an unrelated party. Accrued interest of $9,234
is due to this lender as of December 31, 2002.
FACTORING AGREEMENT
-------------------
On April 9, 2002, Ignition Entertainment Limited entered into a one-year
factoring agreement with the Factor, wherein Ignition has agreed to borrow
and the Factor has agreed to loan, on a fully secured basis, up to
(pound)500,000 ($802,200 as of December 31, 2002) to Ignition based on 75%
of its eligible accounts receivables. Interest charged on amounts borrowed
is equal to 3% above the UK Base Bank rate. Under the terms of the
factoring loan agreement, the Factor is obligated to remit, from time to
time, excess collections to Ignition to the extent that collections on
secured receivables exceed the sum of (i) advances made by the Factor, (ii)
interest and service charges on funds advanced, (iii) monthly services fees
F-44
and (iv) customer discounts. Ignition has granted the Factor a first lien
and security interest in all of Ignition's assets, including its accounts
receivable, inventories and intangible assets. In accordance with the
provisions of SFAS 140, the Company has treated this Factoring Facility as
a secured borrowing by Ignition and not as a sale of accounts receivable
because the Company maintains effective control over the receivables
transferred. As of December 31, 2002, Ignition is indebted $94,746 to the
Factor, which is reported as a currently liability in the December 31, 2002
balance sheet as " Due to Factors."
In addition to the factoring agreement, Ignition has also entered into a
short-term loan agreement with the Factor in the amount of $80,220. This
balance is reported as a current liability in the December 31, 2002 balance
sheet as a "note payable, current portion."
NOTE PAYABLE - INVESTMENT BANKER
--------------------------------
On December 1, 2002, the Company entered into a 6-month note with an
investment banking group (the "Investment Banker") to borrow $15,000 at 8%
interest per annum. As of December 31, 2002, the unpaid principal balance
and accrued interest due on this note was $15,000 and $100, respectively.
During February 2003, the Company repaid this note and accrued interest
thereon in connection with the Equity Line of Credit Agreement (See Notes
14 (F) and 18).
LINE OF CREDIT FACILITY
-----------------------
On April 10, 2002 Ignition entered into a (pound)1,000,000 ($1,604,400 as
of December 31, 2002) revolving credit facility with an unrelated investor
for the purpose of allowing Ignition to purchase goods and services from
third party vendors. Under the terms of the revolving credit facility, the
investor will advance up to 60% of the purchase price of goods and services
purchased by Ignition for its business. Ignition is obligated to pay this
investor interest on each advance at a rate equal to 3% over the UK Bank
Base rate, a 2% commission of total disbursements made on behalf of
Ignition and a facility fee. Ignition's obligation to repay an advance is
guaranteed by the Factor. As of December 31, 2002, the Company has not
borrowed any funds under the revolving credit facility.
(B) NOTES PAYABLE - LONG-TERM
-----------------------------
5% CONVERTIBLE DEBENTURE
------------------------
In April 2002, the Company raised $150,000 of gross proceeds from the
issuance of convertible debentures to the Investment Banker. These
debentures accrue interest at a rate of 5% per year and mature two years
from the issuance date. The debentures are convertible at the holder's
option any time up to maturity at a conversion price equal to the lower of
(i) 120% of the closing bid price of the common stock as of the closing
date (ii) 80% of the average closing bid price of the common stock for the
4 lowest trading days of the 5 trading days immediately preceding the
conversion date. At maturity, the Company has the option to either pay the
holder the outstanding principal balance and accrued interest or to convert
the debentures into shares of common stock at a conversion price equal to
the lower of (i) 120% of the closing bid price of the common stock as of
the closing date or (ii) 80% of the average closing bid price of the common
stock for the 4 lowest trading days of the 5 trading days immediately
preceding the conversion date. The Company has the right to redeem the
debentures upon 30 days notice for 120% of the amount redeemed. Upon such
redemption, the Company will issue the investor a warrant to purchase
10,000 shares of common stock at an exercise price of $0.50 per share for
every $100,000 of debentures that are redeemed.
The convertible debentures contain a beneficial conversion feature computed
at its intrinsic value that is the difference between the conversion price
and the fair value on the debenture issuance date of the common stock into
which the debt is convertible, multiplied by the number of shares into
which the debt is convertible at the commitment date. Since the beneficial
conversion feature is to be settled by issuing equity, the amount
attributed to the beneficial conversion feature, or $64,286, was recorded
as an interest expense and a component of equity on the issuance date.
Accrued interest at December 31, 2002 was $5,487.
F-45
Future maturities of short and long-term notes payable as of December 31,
2002 are as follows:
Year Amount
-------------------------------- ---------------
2003 $ 184,240
2004 150,000
---------------
Total $ 334,240
===============
NOTE 11 STOCKHOLDERS' DEFICIENCY
- ---------------------------------
During the three months ended March 31, 2002, the Company issued 50,000,000
shares of its restricted common stock to various officers and directors of
the Company in accordance with the stock purchase agreement with
International Technology Marketing ("ITM") (see Note 14(E)). All shares are
held in safekeeping pending completion of the escrow agreement. On
September 30, 2002 and December 31, 2002, the former shareholders of ITM
earned 20,000,000 and 10,000,000 contingent shares having a value of
$3,800,000 and $1,700,000 respectively. These shares are to be released out
of escrow (See Note 14(E)). The shares were valued at $.19 per share based
on the closing price of the Company's stock as of September 30, 2002 and
$.17 per share based on the Company's stock price as of December 31, 2002,
the dates that the shares were earned. The Company recorded $5,500,000 as
stock-based compensation expense for the year ended December 31, 2002.
On or about March 25, 2002, the Company issued 500,000 shares of common
stock to an individual in lieu of compensation for services performed in
2001 as President of the Company. These shares were valued at $0.05 per
share, or an aggregate of $25,000, on the date of grant.
On or about March 25, 2002, the Company issued 500,000 shares of common
stock to an individual in lieu of compensation for services performed in
2001 as Secretary of the Company. These shares were valued at $0.05 per
share, or an aggregate of $25,000, on the date of grant.
On or about March 25, 2002, the Company issued 2,375,600 shares of common
stock valued at $.05 per share to an independent consultant for the
conversion of $118,780 of debts owed by the corporation for services
performed in 2001.
On or about March 25, 2002, the Company issued 1,000,000 shares of common
stock to an unrelated investor as conversion of a fee of $50,000 earned for
introducing the Company to ITM. These shares were valued at $0.05 per
share, or an aggregate of $50,000, on the date of grant.
On or about March 25, 2002, the Company issued 50,000 shares of common
stock to one of its external legal counsel for payment of interest on
outstanding legal bills for the year 2001 and 2002. These shares were
valued at $0.10 per share, or an aggregate of $5,000, on the date of grant.
On or about March 25, 2002, the Company issued 1,000,000 shares of common
stock to an individual to be held in escrow for services as a board member
for the period from 2001 to 2003 to be accrued at the rate of 500,000 per
year. As of December 31, 2002, 500,000 shares were deemed earned at the
December 31, 2002 closing price of $.17 per share to account for the
director's fee of $85,000.
On or about March 25, 2002, the Company issued 1,000,000 shares of common
stock to an individual to be held in escrow for services as a board member
for the period from 2001 to 2003 to be accrued at the rate of 500,000 per
year. Subsequently these shares have been rescinded as a result of his
resignation from the board of directors.
On or about March 25, 2002, the Company issued 1,000,000 shares of common
stock to an individual to be held in escrow for services as a board member
for the period from 2001 to 2003 to be accrued at the rate of 500,000 per
year. Subsequently these shares have been rescinded as a result of his
resignation from the board of directors.
On April 26, 2002, the Company issued 62,027 shares of common stock to an
unrelated consultant having a value of $5,000 for consulting services
rendered.
F-46
On April 26, 2002 and June 28, 2002, the Company issued 3,032,000 shares of
restricted common stock to the Investment Banker, having a value of
$330,000 as a one-time commitment fee (See Note 14(F)).
On April 26, 2002 and June 28, 2002, the Company issued 1,040,000 shares of
restricted common stock to an unrelated consultant, having a value of
$125,000 for financial consulting services rendered (See Note 14 (F)).
On May 28, 2002, the Company acquired Ignition. The Company will issue
15,000,000 shares of common stock and 3,500,000 shares of convertible
preferred stock as payment to Ignition over a period of two years from the
date of the acquisition. Additionally, the management team of Ignition may
earn up to 1,500,000 shares of convertible preferred stock if certain
revenue and net income goals are met at specific time periods. These shares
will be held in escrow and disbursed by the escrow agent according to the
escrow agreement. As of the date of this report, the shares discussed in
this paragraph have not been issued. (See Note 3)
In May 2002, the Company issued 5,000,000 shares of common stock in
relation to an agreement entered into with an unrelated consultant for
marketing and advisory services connected with product marketing in the
European Economic Community and North America. These shares were registered
on a Form S-8 filed on May 3, 2002. These shares were valued at $.05 per
share, or an aggregate of $250,000, on the date that the Company entered
into the agreement (See Note 14 (D)).
On May 1, 2002, the Company agreed to issue 4,000,000 shares of its
restricted common stock having a value of $760,000 in full settlement of
its obligation to the Factor. The Company issued these shares on or about
August 6, 2002.
On June 28, 2002, the Company issued 2,410,916 shares of common stock to an
unrelated investor pursuant to the terms of our March 17, 2000 debt
conversion agreement (See Note 10(A)).
On June 28, 2002, the Company issued 23,370 shares of common stock to an
independent consultant having a value of $5,000 for consulting services
rendered. The Company has also accrued $15,000 (83,038 shares) of common
stock to be issued for consulting services rendered which has been included
the shareholders equity and operating expenses portions of the accompanying
consolidated balance sheet as of December 31, 2002.
On June 28, 2002, the Company issued 100,000 shares of restricted common
stock to an unrelated broker-dealer having a value of $20,000 for placement
agent fees (See Note 14(F)).
On August 6, 2002, the Company issued 2,000 shares of restricted common
stock to certain officers and directors having a total value of $260, for
the acquisition of Springboard (See Note 4).
NOTE 12 PREFERRED STOCK
- ------------------------
The Company has authorized 50,000,000 shares of its Series A Preferred
Stock, with a par value of $0.001, as of December 31, 2002 and 2001. As of
December 31, 2002 and 2001, there were no shares of the Series A Preferred
Stock issued and outstanding. Each share of Series A Preferred Stock is
convertible into ten shares of Common Stock at the option of the holder.
The Series A Preferred Stock votes on equal per share basis with the Common
Stock, and is eligible to receive equivalent dividends to the shares of
Common Stock. In the event of a liquidation of the Company, the Series A
Preferred Stock has a liquidation preference over the holders of the
Company's common stock.
NOTE 13 STOCK BASED COMPENSATION
- ---------------------------------
(A) STOCK OPTIONS AND WARRANTS
------------------------------
As permitted by FASB Statement No. 123, Accounting for Stock-Based
Compensation, the Company has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and
related interpretations in accounting for its employee option plans. Under
APB 25, compensation expenses are recognized at the time of option grant if
the exercise price of the Company's employee stock option is below the fair
market value of the underlying common stock on the date of the grant.
F-47
The Company's Board of Directors has granted non-qualified stock options
and warrants to investors of the Company. The following is a summary of
activity under these stock option plans for the years ended December 31,
2002 and 2001.
Non-Employee Weighted
Employee Options and Average
Options Warrants Exercise Price
---------------- --------------- ---------------
Options outstanding at
December 31, 2000 - - $ -
Granted - 100,000 $ .74
Exercised - - $ -
Cancelled - - $ -
---------------- --------------- ---------------
Options outstanding at
December 31, 2001 - 100,000 $ .74
Granted - 265,000 $ .12
Exercised - - $ -
Cancelled - - $ -
---------------- --------------- ---------------
Options outstanding at
December 31, 2002 - 365,000 $ .29
================ =============== ===============
For all warrants granted during 2002, the weighted average fair value of
the grants at market was $.02. The fair value of the 265,000 warrants
issued above and below market was calculated to be $6,107 (See Note 14(F)).
For the warrants granted during 2001, the weighted average fair value of
the grant at market was $.29. The fair value of the 100,000 warrants issued
below market was calculated to be $30,000 (See Note 2).
The weighted average remaining life of all warrants as of December 31,
2002, was approximately 3.9 years. As of December 31, 2002, all warrants
were fully vested and exercisable.
(B) PRO FORMA STOCK-BASED COMPENSATION DISCLOSURES
--------------------------------------------------
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock options granted to employees. The Company has not
granted any options to employees during the year ended December 31, 2002,
thus no pro forma amounts are presented.
NOTE 14 AGREEMENTS
- -------------------
(A) SOFTWARE DISTRIBUTION AGREEMENT
-----------------------------------
On March 30, 1999, the Company entered into a software distributing
agreement with an unrelated company (the "Licensor"), granting the Company
an exclusive right to distribute a software product known as "Power Audit"
throughout the United States of America. (See below for subsequent
amendments and extensions.) The significant terms and conditions governing
the agreement are as follows:
o Payment by the Company of $50,000 in development funds.
o Issuance of 500,000 in common shares of the Company to the owners and
developers of the software upon its delivery, which was in October
1999.
o Royalty payments of 20% on the first $500,000 of sales, 12.5% on sales
between $500,000 and $1,000,000 and 5% on sales over $1,000,000.
The agreement has a term of fourteen (14) months and could be terminated on
six-month notice by either party. It can be extended on a year-to-year
basis, provided the gross annual sales exceed $1,000,000 and all other
terms are observed by the parties.
F-48
In September 1999, for a consideration of the Company's issuance of an
additional 1,000,000 common shares, the agreement was amended to include
the European Economic Community in its distribution territory and payment
of $4,200 per month for software support and services. The 1,500,000 common
shares were issued in 1999 and were valued on the dates of the agreement
and amendment based on the quoted trading prices. The resulting $220,000
value was presented as license fees, net of $106,000 accumulated
amortization, as of December 31, 1999. During the year ended December 31,
2000, the remaining license fees of $114,000 were charged to operations as
amortization expense.
In May 2000, the parties agreed to amend and extend the software agreement
for three years to May 31, 2003. The amended agreement expanded the
territory to include the Country of Switzerland, required the Company to
issue an additional 1,000,000 common shares and complete a financing of a
minimum of $2,000,000 with a portion of the proceeds to be used to contract
services of or to develop its own technical support and internal marketing
group. In addition, the Company was required to complete a minimum of
twelve sales or licensing agreements of the software product prior to the
expiration of the twelve-month period ending June 1, 2002. In the event
that the minimum sales requirement is not met, the Company is required to
compensate the Software Owner for unpaid royalties at the rate of $3,750
per sale shortfall up to the maximum of twelve, or $45,000, and issue an
additional 100,000 common shares. Lastly, the royalty fee for sales over
$1,000,000 was changed from 5% to 7.5%.
On June 13, 2002, the Company notified the Licensor that it was canceling
its license agreement effective immediately. Subsequently, the Licensor
filed a claim against the Company for breach of contract. During fiscal
2003, the claim has been settled, and there is no litigation presently
outstanding with respect to this claim. The terms of the settlement are
that the Company will pay to the Licensor the sum of $226,824 in nine
monthly installments; the Company will deliver a replacement share
certificate to replace the one million previously issued, non-registered,
shares of its common stock to freely tradable shares; and will issue to the
Licensor an additional 100,000 freely tradable common shares or an
equivalent payment in cash based on a calculation of 100,000 shares
multiplied by .18 per share, or $18,000. The value of the shares were
determined based upon the closing price of the Company's common stock on
November 7, 2002. The Company will also return to the Licensor all
confidential information and property in their possession.
At December 31, 2002, the Company has recorded the future issuance of the
100,000 shares of its common stock as common stock to be issued in the
current liabilities section of the balance sheet. Also, the $226,824
payable in cash has been recorded in accounts payable in the current
liabilities section of the balance sheet at December 31, 2002.
In fiscal 2003, the Company executed a promissory note in the sum of
$226,824 for the cash portion of the settlement with the Licensor. The
principal sum of this promissory note will be paid by the Company in nine
equal installments of $25,203. There is no interest being charged in
connection with this debt.
Amortization expense related to this licensing agreement for the years
ended December 31, 2002 and 2001 were $340,000 and $240,000, respectively,
and is included in cost of goods sold.
(B) CONSULTING AGREEMENTS
-------------------------
On March 17, 2000, the Company entered into a consulting agreement with the
former stockholder of the acquired inactive reporting shell company (See
Note 1(B)). The consulting agreement states that one year after the
execution of the agreement ("reset date"), the 350,000 common shares issued
by the Company to the former stockholder shall be increased or decreased
based upon the average closing price of the Company's stock 30 days prior
to the reset date, so the value of the 350,000 shares will equal $500,000.
The average closing price of the stock was $0.1487 per share. The Company
is obligated to issue an additional 3,012,475 common shares to the
consultant as an additional fee. The Company is currently contesting the
issuance of the additional shares. The Company has not accrued an estimated
loss for this contingency because, in accordance with the provisions of
SFAS 5, it is not probable at the time that the financial statements were
issued that a liability had been incurred and that the amount of loss can
be reasonably estimated.
(C) LICENSING AGREEMENT
-----------------------
On December 28, 2001, the Company entered into a two-year licensing
agreement to distribute software used primarily by the insurance industry,
which agreement includes a non-exclusive right to sell such software to
clients in the United States, Mexico, Canada, and their overseas
territories. The Company is the only reseller in North America. The cost of
such agreement was (pound)2,500,000 (US $3,620,268 at December 31, 2001)
and is being amortized over the two-year period of the agreement. Through
F-49
September 30, 2002, the Company paid $713,612 in connection with the
license. On September 30, 2002, the Company renegotiated the terms of the
license agreement whereby the licensor agreed to extinguish the remaining
amount due under the agreement, or $2,906,656 in exchange for the return of
the license and distribution rights to the Classifier(TM) software product
to the financial services sector while retaining the rights to distribute
the product to other sectors. The Company was also granted a non-exclusive
distributorship for the I-Bos(TM) software product. For financial
statements purposes, the Company recorded a gain on the early
extinguishment of debt in the amount of $924,904. This gain is reported as
Other Income in the Consolidated Statement of Operations.
Amortization expense related to this licensing agreement for the years
ended December 31, 2002 and 2001 was $1,261,873 and $18,837, respectively,
and is included in cost of goods sold. Deferred licensing fees, net of
amortization is included as an Other asset - license agreement, on the
accompanying consolidated balance sheets.
(D) MARKETING AGREEMENT
-----------------------
On January 18, 2002, the Company entered into a one-year marketing
agreement with an unrelated consultant to provide product marketing and
advisory services to the Company in the European Economic Community and
North America territories. The Company issued 5,000,000 shares to the
consultant on March 25, 2002 which were registered in a Form S-8 filed on
May 3, 2002. The shares were valued at $.05 per share corresponding to the
date that the Company entered into the agreement with the consultant. The
Company accounted for the cost of the marketing agreement by recording an
expense for the entire cost in the amount of $250,000 in accordance with
the provisions of SFAS 123 "Accounting for Stock-Based Compensation". The
expense is included in Consulting Fees in the Consolidated Statement of
Operations.
(E) STOCK PURCHASE/MANAGEMENT AGREEMENT
---------------------------------------
On September 17, 2001, the Company entered into a stock purchase agreement
to acquire 100% of the outstanding stock of ITM (see Note 11). In
connection with the agreement, the Company is to issue 50,000,000 shares to
the former shareholders, which will be held in escrow subject to the
Company reaching certain sales milestones. The agreement calls for the
Company to compensate the former shareholders of ITM in their efforts to
meet the sales milestones.
The revenue milestones to be reached after the closing are as follows:
o Upon achieving revenues of $500,000 the escrow agent will release
10,000,000 shares.
o Upon achieving an additional $500,000 of revenues the escrow agent
will release another 10,000,000 shares.
o Upon achieving $2,000,000 in cumulative revenues the escrow agent will
release another 10,000,000 shares.
o Upon achieving $6,000,000 in cumulative revenues the escrow agent will
release another 10,000,000 shares.
o Upon reaching $16,200,000 in cumulative revenues the final 10,000,000
shares will be released.
Pending execution of the escrow agreement, the Company is holding these
shares for the benefit of the former shareholders of ITM. The former
shareholders of ITM include the Company's current management group. The
Company has not recorded any amounts associated with the acquisition of
ITM, which had minimal assets and/or liabilities on the date of
acquisition. For accounting purposes, the Company has not treated the
acquisition as an acquisition under the principles of APB 16, but has
instead treated the acquisition as an assumption of contingent management
contracts for services to be rendered by the former ITM shareholders to the
Company. The contingent shares will be issued and released out of escrow to
the former principal owners of ITM upon the attainment of certain
performance goals as described above. In return, the former principal
owners will perform management and marketing services to the Company. Upon
attainment of each performance milestone, the Company will record the
issuance of stock as compensation expense in the period earned based on
current market prices as of the date of grant.
During the quarters ended September 30, 2002 and December 31, 2002, the
former ITM shareholders became eligible to receive 20,000,000 and
10,000,000 shares, respectively, out of escrow. The Company recorded
F-50
stock-based compensation expense of $5,500,000 for the year ended December
31, 2002 and credited shareholders equity for the value of the contingent
stock earned. The Company valued the shares at $.19 and $.17 per share
based on the closing price of the stock at September 30, 2002 and December
31, 2002, respectively, the dates that the shares are deemed earned.
(F) INVESTMENT BANKER EQUITY LINE OF CREDIT AGREEMENT
-----------------------------------------------------
In April 2002, the Company entered into an Equity Line of Credit Agreement
with the Investment Banker (see Note 18). Under this agreement, the Company
may issue and sell to the Investment Banker common stock for a total
purchase price of up to $10 million. Subject to certain conditions, the
Company will be entitled to commence drawing down on the Equity Line of
Credit when the common stock to be issued under the Equity Line of Credit
is registered with the Securities and Exchange Commission and the
registration statement is declared effective and will continue for two
years thereafter (See Note 18). The purchase price for the shares will be
equal to 92% of the market price, which is defined as the lowest closing
bid price of the common stock during the five trading days following the
notice date. The amount of each advance is subject to an aggregate monthly
maximum advance amount of $425,000 in any thirty-day period. In no event
shall the number of shares issuable to the Investment Banker, which causes
them to own in excess of 9.9% of the then outstanding shares of the
Company's common stock. The Company paid the Investment Banker a one-time
fee equal to $330,000, payable in 3,032,000 shares of common stock. The
Investment Banker is entitled to retain 3.0% of each advance. In addition,
the Company entered into a placement agent agreement with a placement agent
firm, a registered broker-dealer. Pursuant to the placement agent
agreement, the Company paid a one-time placement agent fee of 100,000
shares of common stock, which were valued at $0.20 per share, or an
aggregate of $20,000, on the date of issuance. The Company agreed to pay an
unrelated consultant, a one-time fee of $200,000 for its work in connection
with consulting the company on various financial matters. Of the fee,
$75,000 was paid in cash with the balance paid in 1,040,000 shares of
common stock.
The termination date of this agreement is the earliest of: (1) the
Investment Banker makes payment of Advances of $10,000,000, (2) any stop
order or suspension of the effectiveness of the Registration Statement for
an aggregate of fifty (50) Trading Days or (3) the Company shall at any
time fail materially to comply with the requirements of the agreement and
such failure is not cured within thirty (30) days after receipt of written
notice from the Investment Banker or (4) the date occurring twenty-four
(24) months after the Effective Date. Pursuant to the terms of the Equity
Line of Credit Agreement, the Company is required to file with the SEC a
registration statement covering the shares to be acquired by the Investment
Banker. The 24-month term commences the effective date of the registration
statement. During February 2003, the Company completed its registration
statement in connection with the Equity Line of Credit Agreement.
To induce the Investment Banker to execute and deliver the Equity Line of
Credit Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations there under, or any similar successor statute (collectively,
the "1933 Act"), and applicable state securities laws. During the
commitment period, the Company shall not, without the prior written consent
of the Investment Banker, issue or sell (i) any Common Stock without
consideration or for a consideration per share less than the Bid price on
the date of issuance or (ii) issue or sell any warrant, option, right,
contract, call, or other security or instrument granting the holder thereof
the right to acquire Common Stock without consideration or for a
consideration per share less than the Bid Price on the date of issuance,
provided, however, that the Investment Banker is given ten (10) days prior
written notice and nothing in this section shall prohibit the issuance of
shares of Common Stock pursuant to existing contracts or commitments, upon
exercise of currently outstanding options or convertible securities, or in
connection with any acquisition. On the date hereof, the Company shall
obtain from each officer and director a lock-up agreement, as defined
below, in the form annexed hereto as Schedule 2.6 (b) agreeing to only sell
in compliance with the volume limitation of Rule 144.
On each advance date in the Company shall pay to the Investment Banker,
directly from the gross proceeds held in escrow, an amount equal to three
percent (3%) of the amount of each advance as a commitment fee. The Company
has paid the Investment Banker a one-time commitment fee in the amount of
3,032,000 shares of common stock and warrants to purchase 265,000 shares of
common stock of which a warrant to purchase 15,000 shares has an exercise
price of $0.50 per share and a warrant to purchase 250,000 shares has an
exercise price of $0.099 per share. These warrants vest immediately upon
issuance. The value of the one-time commitment fee related to the issuance
of common stock totaled approximately $350,000, which was computed based
upon the market prices of the Company's common stock on the applicable
issuance dates. The warrants issued in connection with the Equity Line of
Credit Agreement for commitment fees were valued on the date of grant using
the Black-Scholes option-pricing model which computed a value of $6,107.
F-51
The commitment fees will be expensed ratably over the life of the Equity
Line of Credit agreement and are included in stockholders' deficiency in
the accompanying consolidated balance sheet as of December 31, 2002. The
Company has recognized commitment fees of approximately $133,795, which has
been included in general and administrative expenses on the consolidated
statement of operations for the year ended December 31, 2002.
(G) CONSULTING AGREEMENT
------------------------
On June 1, 2002, Ignition entered into a consulting agreement with an
unrelated consultant whereby the consultant will provide business
development and financial advice to Ignition. Under the terms of the
agreement, Ignition is obligated to pay the consultant annually
(pound)179,850 ($262,970) in equal monthly installments. Additionally, the
consultant was entitled to receive a signing bonus of (pound)29,975
($43,828) upon execution of the agreement. The cost of this agreement will
be borne by Ignition and the consultant will be paid out of Ignition's
operating cash flow.
(H) OPERATING LEASE AGREEMENT
-----------------------------
The Company leases its UK office spaces under a five-year operating lease,
which commenced on December 2001 and expire in 2007. The Company leases its
corporate office space on a month-to-month basis.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess on 1 year as of December 31, 2002 for each of the
next 5 years are as follows:
Years Ending
------------
2003 $ 138,479
2004 120,330
2005 120,330
2006 120,330
2007 120,330
--------------
$ 619,799
==============
Rent expense for the years ended December 31, 2002 and 2001 totaled
approximately $101,890 and $7,800, respectively.
NOTE 15 INTANGIBLE ASSETS
- --------------------------
As a result of the adoption of SFAS 142, the Company discontinued the
amortization of goodwill effective January 1, 2002. Identifiable intangible
assets are amortized under the straight-line method over the period of
expected benefit ranging from three to ten years, except for intellectual
property, which is amortized based on the shorter of the useful life or
expected revenue stream. Intangible assets consist of trademarks,
intellectual property, acquired technology and the excess purchase price
paid over identified intangible and tangible net assets of acquired
companies (goodwill).
The Company has evaluated goodwill for impairment as of December 31, 2002.
As a result of this review, the Company has determined its goodwill is
fully impaired and wrote-off $10,658,096 and $409,688 related to the
acquisitions of Ignition and Springboard, respectively. In connection with
the review of intangible assets, the Company recorded an additional
impairment charge to acquired intellectual property in the amount of
$19,079. The charges were included in operating expenses on the
accompanying consolidated financial statements for the year ended December
31, 2002. The Company's assessment of its goodwill is based on undiscounted
future cash flows and the uncertainty of obtaining financing to fund the
conversion of acquired intellectual property into saleable products.
NOTE 16 INCOME TAXES
- ---------------------
No provision for Federal and state income taxes has been recorded as the
Company has net operating loss carryforwards to offset any net income for
the year ended December 31, 2002. As of December 31, 2002, the Company had
approximately $23,400,000 of net operating loss carryforwards for Federal
income tax reporting purposes available to offset future taxable income.
Such carryforwards begin to expire in 2018. Under the Tax Reform Act of
F-52
1986, the amounts of and benefits from net operating losses and capital
losses carried forward may be impaired or limited in certain circumstances.
Events, which may cause limitations in the amount of net operating losses
that the Company may utilize in any one year, include, but are not limited
to, a cumulative ownership change of more than 50% over a three-year
period.
Deferred tax assets as of December 31, 2002 and 2001 consisting primarily
of the tax effect of net operating loss carryforwards and amortization of
intangibles, amounted to approximately $11,790,649 and $4,446,475,
respectively. Other deferred tax assets and liabilities are not
significant. The Company has provided a full valuation allowance on the
deferred tax assets as of December 31, 2002 and 2001 to reduce such
deferred income tax assets to zero, as it is management's belief that
realization of such amounts is not considered more likely than not.
NOTE 17 GOING CONCERN
- ----------------------
The accompanying consolidated financial statements have been prepared in
conformity with principles generally accepted in the United States, which
contemplates continuation of the Company as a going concern. However, the
Company has a net loss of $21,313,290, a negative cash flow from operations
of $1,084,884, a working capital deficiency of $10,534,701 and a
stockholders' deficiency of $14,419,766, which raises substantial doubts
about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty. Management's plan to continue operations is to raise
additional debt or equity capital until such time as the Company is able to
generate sufficient operating revenues through its newly acquired
subsidiaries.
In view of these matters, realization of certain of the assets in the
accompanying financial statements is dependent upon continued operations of
the Company, which in turn is dependent upon the Company's ability to meet
its financial requirements, raise additional capital, and the success of
its future operations. Management believes that its ability to raise
additional capital provides the opportunity for the Company to continue as
a going concern.
NOTE 18 SUBSEQUENT EVENTS
- --------------------------
During February 2003, upon the Company's SB-2 Registration becoming
effective, the Company received $970,000 proceeds from the issuance of a $1
million promissory note to the Investment Bankers, net of a 3% cash fee of
$30,000, which yields an effective interest rate of approximately 12% per
annum. The promissory note is non-interest bearing and is to be paid in
full within 95 calendar days. The Company has the discretion to repay the
note either through cash received from the issuance of stock under the
Equity Line of Credit Agreement or by cash. In connection with the note,
the Company has agreed to escrow 10 requests for advances under the Equity
Line of Credit Agreement in the amount not less than $100,000 (see Note
14(F)). The request will be held in escrow by an independent law firm, who
will release such requests to the Investment Banker every 7 calendar days
commencing on March 3, 2003. If this note is not fully paid when due, the
outstanding principal balance owed will be payable in full together with
interest at the rate of 24% per annum or the highest rate permitted by law,
if lower. See below for partial repayment of this note.
Proceeds received from the issuance of this note were used to repay the
convertible debenture and note payable to the Investment Bankers. As of
December 31, 2002, total outstanding principal and accrued interest payable
on the convertible debenture and note payable was $155,487 and $15,000,
respectively.
On February 18, 2003, the Company issued 168,889 shares of common stock to
the Investment Banker for payment of penalties for not completing the SB-2
filing by the due date of July 2, 2002 per the terms of the Equity Line of
Credit Agreement (See Note 14(F)). These shares were valued at $0.13 per
share or an aggregate of $21,956, representing the closing market value on
the date of grant.
On February 18, 2003, the Company issued 114,408 share of common stock to a
consultant for payment of $15,000 of consulting services accrued at
December 31, 2002 as common stock to be issued included in currently
liabilities in the accompanying consolidated balance sheet as of December
31, 2002. These share were valued at $0.13 per share representing the
closing market value on the date of grant.
On February 10, 2003, fhe Company signed a development and distribution
agreement with a distribution company for distribution of the Company's
games and other applications for mobile phones and other handheld devices
to the distribution company's mobile operator channels on a worldwide
basis. Under the terms of the agreement, which sets forth an initial
publication schedule consisting of 14 products. The Company may also
sublicense and provide games and applications created by other developers
F-53
to the distribution company for distribution to their mobile operators.
Under the terms of the agreement, the Company will receive royalty payments
as the developer for each sale of the Company's games and other
applications.
During March 2003, the Company issued 2,155,964 shares of common stock to
the Investment Bankers for cash of $150,000 or $.07 per share, in
connection with the Equity Line of Credit (See Note 14 (F)). The cash was
applied against the $1 million promissory note payable to the Investment
Bankers issued in February 2003. As of March 31, 2003, the remaining
balance of the note payable to the Investment Banker totaled $850,000.
F-54
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO PROVIDE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS ABOUT IVP TECHNOLOGIES CORPORATION
EXCEPT THE INFORMATION OR REPRESENTATIONS CONTAINED IN THIS PROSPECTUS. YOU
SHOULD NOT RELY ON ANY ADDITIONAL INFORMATION OR REPRESENTATIONS IF MADE.
----------------------
PROSPECTUS
---------------------
131,886,552 SHARES OF COMMON STOCK
IVP TECHNOLOGIES CORPORATION
December 19, 2003
This prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy any securities:
[ ] except the common stock offered by this prospectus;
[ ] in any jurisdiction in which the offer or solicitation is not
authorized;
[ ] in any jurisdiction where the dealer or other salesperson is not
qualified to make the offer or solicitation;
[ ] to any person to whom it is unlawful to make the offer or
solicitation; or
[ ] to any person who is not a United States resident or who is outside
the jurisdiction of the United States.
The delivery of this prospectus or any accompanying sale does not imply that:
[ ] there have been no changes in the affairs of IVP Technologies
Corporation after the date of this prospectus; or
[ ] the information contained in this prospectus is correct after the
date of this prospectus.
-----------------------
Until March 18, 2004, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters.