AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 2004.
AN EXHIBIT LIST CAN BE FOUND ON PAGE II-2.
REGISTRATION NO. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CONSPIRACY ENTERTAINMENT HOLDINGS, INC
(Exact Name of Registrant as Specified in its Charter)
UTAH 9995 87-0386790
------ ---- ----------
(State of Incorporation) (Primary Standard (IRS Employer
Industrial Code No.) Identification No.)
612 Santa Monica Blvd.
Santa Monica, California 90401
(310) 260-6150
(Address and telephone number of principal executive offices)
Sirus Ahmadi, CEO
Conspiracy Entertainment Holdings, Inc.
612 Santa Monica Blvd.
Santa Monica, California 90401
(310) 260-6150
(Name, address and telephone number of agent for service)
Copies to:
Marc Ross, Esq.
David Schubauer, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Floor.
New York, New York 10018
(212) 930-9700
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
(COVER CONTINUES ON FOLLOWING PAGE)
CALCULATION OF REGISTRATION FEE
======================================================= ================= ==================== ===================== ==============
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED (1) SECURITY (2) PRICE FEE
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Common Stock, $.001 par value (3) 28,600,000 $0.115 $3,289,000.00 $416.72
Common Stock, $.001 par value (4) 48,400,000 $0.115 $5,566,000.00 $705.21
Common Stock, $.001 par value (5) 1,250,000 $0.115 $143,750.00 $18.21
Common Stock, $.001 par value (6) 600,000 $0.115 $69,000.00 $8.74
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Total 78,850,000 $0.115 $9,067,750.00 $1,148.88
======================================================= ================= ==================== ===================== ==============
(1) Pursuant to Rule 416 promulgated under the Securities Act of 1933,
as amended, there are also registered hereunder such indeterminate
number of additional shares as may be issued to the selling
stockholders to prevent dilution resulting from stock splits, stock
dividends or similar transactions.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) promulgated under the
Securities Act of 1933, as amended, using the average of the high
and low price as reported on the Over-The-Counter Bulletin Board on
November 18, 2004, which was $0.115 per share.
(3) Represents: (a) up to 22,000,000 shares issuable upon conversion of
$1,100,000 in aggregate principal amount of the registrant's 5%
convertible debentures at a per share conversion price of $0.05; (b)
up to 2,200,000 shares issuable upon conversion of the convertible
debentures with respect to interest accrued thereon through the
maturity date thereof on the second anniversary of their issuance;
and (c) up to 4,400,000 shares representing our current good faith
estimate of additional shares issuable to the holders of the
convertible debentures as liquidated damages through the projected
effective date of this registration statement or as a result of
adjustments, as contemplated by certain provisions of the Securities
Purchase Agreement or the related Registration Rights Agreement.
(4) Represents: (a) up to 44,000,000 shares issuable upon exercise of
Class A and Class B warrants issued in connection with the
registrant's 5% convertible debentures; and (b) up to 4,400,000
representing our current good faith estimate of additional shares
issuable to the holders of the Class A and Class B warrants as a
result of adjustments contemplated by certain provisions of the
Securities Purchase Agreement.
(5) Represents shares issuable upon exercise of outstanding common stock
purchase warrants issued to a consultant.
(6) Represents shares of common stock issued pursuant to consulting
agreements.
The registrant amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED NOVEMBER 24, 2004
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
UP TO 78,850,000 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
78,850,000 shares of our common stock. 28,600,000 of such shares are issuable
upon conversion of outstanding secured convertible debentures, 49,650,000 of
such shares are issuable upon exercise of outstanding common stock purchase
warrants and 600,000 of such shares were issued pursuant to consulting
agreements. The selling stockholders may sell common stock from time to time in
the principal market on which the stock is traded at the prevailing market price
or in negotiated transactions.
We are not selling any shares of common stock in this offering and
therefore will not receive any proceeds from this offering. We will, however,
receive proceeds from the exercise of warrants, if exercised. The proceeds from
the exercise of warrants, if any, will be used for working capital. All costs
associated with this registration will be borne by us.
Our common stock is currently quoted on the Over-The-Counter Bulletin
Board under the symbol CPYE. The last reported sales price for our common stock
on November 12, 2004, was $0.14 per share.
Investing in our common stock involves substantial risks.
See "Risk Factors," beginning on page 2.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS 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 information in this Prospectus is not complete and may be changed.
This Prospectus is included in the Registration Statement that was filed by
Conspiracy Entertainment Holdings, Inc. with the Securities and Exchange
Commission. The selling stockholders may not sell these securities until the
registration statement becomes effective. This Prospectus is not an offer to
sell these securities and is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
TABLE OF CONTENTS
PAGE
Prospectus Summary 1
Risk Factors 2
Forward Looking Statements 5
Use of Proceeds 6
Selling Stockholders 6
Plan of Distribution 7
Market for Common Equity and Related Stockholder Matters 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Description of Business 14
Description of Property 17
Legal Proceedings 18
Management 18
Executive Compensation 19
Certain Relationships and Related Transactions 19
Security Ownership of Certain Beneficial Owners and Management 20
Description of Securities 20
Indemnification for Securities Act Liabilities 22
Changes and Disagreements With Accountants on Accounting and
Financial Disclosure 22
Legal Matters 23
Experts 23
Additional Information 23
Index to Financial Statements F-1
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "RISK
FACTORS" section, the financial statements and the debentures to the financial
statements. As used throughout this prospectus, the terms "Conspiracy
Entertainment," "we," "us," and "our" refer to Conspiracy Entertainment
Holdings, Inc.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
On May 29, 2003, we acquired 100% of the issued and outstanding capital
stock of Conspiracy Entertainment Corporation, a California corporation, and
began to carry on the business of developing, publishing and marketing
interactive entertainment software. We currently publish titles for many popular
interactive entertainment hardware platforms, such as Sony's PlayStation,
Nintendo 64 and Nintendo's Game Boy Color and Game Boy Advance as well as the
next generation hardware platforms such as Sony's PlayStation 2, Nintendo
GameCube and Microsoft's Xbox, and also for the PC.
For the years ended December 31, 2003 and December 31, 2002, we incurred
net losses of $2,252,444 and $1,726,895, respectively. For the nine months ended
September 30, 2004 we had net income of $1,289,233. For the nine months ended
September 30, 2003, we incurred a net loss of $1,036,939. On September 30, 2004,
we had a working capital deficiency of $2,206,497 (current assets less current
liabilities).
Our principal executive offices are located at 612 Santa Monica Blvd.,
Santa Monica, California 90401. Our telephone number is (310) 260-6150. We are a
Utah corporation.
THE OFFERING
Common Stock outstanding before the offering.................. 36,615,509 shares.
Common stock offered by selling stockholders.................. Up to 78,850,000 shares. *
Common stock to be outstanding after the offering............. Up to 115,465,509 shares.
Use of proceeds............................................... We will not receive any proceeds from the
sale of the common stock. However, we will
receive the exercise price for any shares
of common stock delivered in connection
with the exercise of warrants. We expect
to use the proceeds received from the
exercise of the warrants, if any, for
general working capital purposes. See "Use
of Proceeds" for a complete description.
OTCBB Symbol.................................................. CPYE
*Represents: (a) up to 22,000,000 shares of common stock issuable upon
conversion of $1,100,000 in aggregate principal amount 5% convertible
debentures, at a per share conversion price of $0.05; (b) up to 2,200,000
shares issuable upon conversion of the convertible debentures with respect
to interest accrued thereon through the maturity date thereof on the
second anniversary of their issuance; (c) up to 4,400,000 shares of common
stock representing our current good faith estimate of additional shares
issuable to the holders of the convertible debentures as liquidated
damages through the projected effective date of this registration
statement or as a result of adjustments, as contemplated by certain
provisions of the Securities Purchase Agreement or the related
Registration Rights Agreement; (d) up to 44,000,000 shares of common stock
issuable upon exercise of Class A and Class B warrants issued in
connection with the 5% convertible debentures; (e) up to 4,400,000 shares
of common stock representing a good faith estimate of additional shares
issuable to the holders of the Class A and Class B warrants as a result of
adjustments contemplated by certain provisions of the Securities Purchase
Agreement; (f) 1,250,000 shares of common stock issuable upon exercise of
warrants issued to a consultant; and (g) 600,000 shares of common stock
issued pursuant to various consulting agreements.
1
RISK FACTORS
Any investment in our shares of common stock involves a high degree of
risk. You should carefully consider the following information about these risks,
together with the other information contained in this prospectus before you
decide to buy our common stock. Each of the following risks may materially and
adversely affect our business, results of operations and financial condition.
These risks may cause the market price of our common stock to decline, which may
cause you to lose all or a part of the money you paid to buy our common stock.
We provide the following cautionary discussion of risks, uncertainties and
possible inaccurate assumptions relevant to our business and our products. These
are factors that we think could cause our actual results to differ materially
from expected results.
RISKS RELATED TO OUR BUSINESS:
WE HAVE HISTORICALLY INCURRED SIGNIFICANT LOSSES AND OUR FINANCIAL
SITUATION CREATES DOUBT WHETHER WE WILL CONTINUE AS A GOING CONCERN. For the
years ended December 31, 2003 and December 31, 2002, we incurred net losses of
$2,252,444 and $1,726,895, respectively. For the nine months ended September 30,
2004 we had net income of $1,289,233. For the nine months ended September 30,
2003, we incurred a net loss of $1,036,939. On September 30, 2004, we had a
working capital deficiency of $2,206,497. There are no assurances that we will
be able to achieve a level of revenues adequate to generate sufficient cash flow
from operations or obtain additional financing through private placements,
public offerings and/or bank financing necessary to support our working capital
requirements. To the extent that funds generated from any private placements,
public offerings and/or bank financing are insufficient, we will have to raise
additional working capital. No assurance can be given that additional financing
will be available, or if available, will be on acceptable terms. These
conditions raise substantial doubt about our ability to continue as a going
concern. If adequate working capital is not available we may be forced to
discontinue operations, which would cause investors to lose their entire
investment.
OUR INDEPENDENT AUDITORS HAVE EXPRESSED DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN. IF WE DO NOT CONTINUE AS A GOING CONCERN, INVESTORS
WILL LOSE THEIR ENTIRE INVESTMENT. In their report dated March 5, 2004, our
independent auditors have expressed doubt about our ability to continue as a
going concern. Our ability to continue as a going concern is an issue raised as
a result of ongoing operating losses and a lack of financing commitments then in
place to meet expected cash requirements. Our ability to continue as a going
concern is subject to our ability to generate a profit and/or obtain necessary
funding from outside sources, including obtaining additional funding from the
sale of our securities, increasing sales or obtaining loans and grants from
various financial institutions where possible. If we do not continue as a going
concern, investors will lose their entire investment.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING, WE MAY NOT BE ABLE TO
EXPAND OUR OPERATIONS AS ANTICIPATED AND IF WE DO OBTAIN ADDITIONAL FUNDING, OUR
THEN EXISTING STOCKHOLDERS MAY SUFFER SUBSTANTIAL DILUTION. We will require
additional funds to expand our operations. While we secured financing in the
third quarter of 2004, we anticipate that we will require up to approximately
$2,000,000 in additional financing to expand our operations over the next twelve
months. We cannot guarantee that we will be able to obtain any additional
financing or that such additional financing, if available, will be on terms and
conditions acceptable to us. The inability to obtain additional financing will
restrict our ability to grow and may reduce our ability to continue to conduct
business operations. If we are unable to obtain additional financing, we will
likely be required to curtail our marketing and development plans and possibly
cease our operations. If additional funds are raised through the issuance of
equity or convertible debt securities, the percentage ownership of our current
stockholders will be reduced and these securities may have rights and
preferences superior to those of our current stockholders. If we raise capital
through debt financing, we may be forced to accept restrictions affecting our
liquidity, including restrictions on our ability to incur additional
indebtedness or pay dividends.
THE SUCCESS OF OUR BUSINESS IS HIGHLY DEPENDENT ON BEING ABLE TO PREDICT
WHICH NEW VIDEOGAME PLATFORMS WILL BE SUCCESSFUL, AND ON THE MARKET ACCEPTANCE
AND TIMELY RELEASE OF THOSE PLATFORMS. IF WE DO NOT ACCURATELY PREDICT WHICH NEW
VIDEOGAME PLATFORMS WILL BE SUCCESSFUL, OUR FINANCIAL PERFORMANCE WILL BE
MATERIALLY ADVERSELY AFFECTED. We derive most of our revenue from the sale of
products for play on videogame platforms manufactured by third parties, such as
Sony's PlayStation 2. Therefore, the success of our products is driven in large
part by the success of new videogame hardware systems and our ability to
accurately predict which platforms will be most successful in the marketplace.
We must make product development decisions and commit significant resources well
in advance of the anticipated introduction of a new platform. A new platform for
which we are developing products may be delayed, may not succeed or may have a
shorter life cycle than anticipated. If the platforms for which we are
developing products are not released when anticipated or do not attain wide
market acceptance, our revenue growth will suffer, we may be unable to fully
recover the resources we have committed, and our financial performance will be
harmed.
2
OUR BUSINESS IS BOTH SEASONAL AND CYCLICAL. IF WE FAIL TO DELIVER OUR
PRODUCTS AT THE RIGHT TIMES, OUR SALES WILL SUFFER. Our business is highly
seasonal, with the highest levels of consumer demand, and a significant
percentage of our revenue, occurring in the December quarter. If we miss this
key selling period, due to product delays or delayed introduction of a new
platform for which we have developed products, our sales will suffer
disproportionately. Our industry is also cyclical. Videogame platforms have
historically had a life cycle of four to six years. As one group of platforms is
reaching the end of its cycle and new platforms are emerging, consumers often
defer game software purchases until the new platforms are available, causing
sales to decline. This decline may not be offset by increased sales of products
for the new platform. If we fail to deliver our products at the right times, our
sales will suffer.
INTELLECTUAL PROPERTY CLAIMS MAY INCREASE OUR PRODUCT COSTS, WHICH WOULD
CAUSE OUR BUSINESS AND FINANCIAL CONDITION TO SUFFER. Many patents have been
issued that may apply to widely used game technologies. Additionally,
infringement claims under many recently issued patents are now being asserted
against Internet implementations of existing games. If such claims are asserted
against us, our business and financial condition may be materially adversely
affected. In the event that there is a determination that we have infringed a
third-party patent, we could incur significant monetary liability and be
prevented from using the rights in the future.
OUR BUSINESS, OUR PRODUCTS AND OUR DISTRIBUTION ARE SUBJECT TO INCREASING
REGULATION IN KEY TERRITORIES OF CONTENT, CONSUMER PRIVACY AND ONLINE DELIVERY.
IF WE DO NOT SUCCESSFULLY RESPOND TO THESE REGULATIONS, OUR BUSINESS MAY SUFFER.
Legislation is continually being introduced that may affect both the content of
our products and their distribution. For example, privacy laws impose various
restrictions on our web sites. Those rules vary by territory although the
Internet recognizes no geographical boundaries. Other countries, such as
Germany, have adopted laws regulating content both in packaged goods and those
transmitted over the Internet that are stricter than current United States laws.
In the United States, the federal and several state governments are considering
content restrictions on products such as ours, as well as restrictions on
distribution of such products. Any one or more of these factors could harm our
business by limiting the products we are able to offer to our customers and by
requiring additional differentiation between products for different territories
to address varying regulations. This additional product differentiation would be
costly and could adversely affect our net income if we cannot pass additional
costs to our customers.
TECHNOLOGY CHANGES RAPIDLY IN OUR BUSINESS, AND IF WE FAIL TO ANTICIPATE
NEW TECHNOLOGIES, THE QUALITY, TIMELINESS AND COMPETITIVENESS OF OUR PRODUCTS
WILL SUFFER. Rapid technology changes in our industry require us to anticipate,
sometimes years in advance, which technologies our products must take advantage
of in order to make them competitive in the market at the time they are
released. Therefore, we usually start our product development with a range of
technical development goals that we hope to be able to achieve. We may not be
able to achieve these goals, or our competition may be able to achieve them more
quickly than we can. In either case, our products may be technologically
inferior to competitive products, or less appealing to consumers, or both. If we
cannot achieve our technology goals within the original development schedule of
our products, then we may delay products until these technology goals can be
achieved, which may delay or reduce revenue and increase our development
expenses. Alternatively, we may increase the resources employed in research and
development in an attempt to accelerate our development of new technologies,
either to preserve our product launch schedule or to keep up with our
competition, which would increase our development expenses and adversely affect
our operations and financial condition.
OUR PLATFORM LICENSORS ARE OUR CHIEF COMPETITORS AND FREQUENTLY CONTROL
THE MANUFACTURING OF AND/OR ACCESS TO OUR VIDEOGAME PRODUCTS. IF THEY DO NOT
APPROVE OUR PRODUCTS, WE WILL BE UNABLE TO SHIP TO OUR CUSTOMERS. Our agreements
with hardware licensors (such as Sony for the PlayStation 2, Microsoft for the
Xbox and Nintendo for the Nintendo GameCube) typically give significant control
to the licensor over the approval and manufacturing of our products, which
could, in certain circumstances, leave us unable to get our products approved,
manufactured and shipped to customers. In most events, control of the approval
and manufacturing process by the platform licensors increases both our
manufacturing lead times and costs as compared to those we can achieve
independently. While we believe that our relationships with our hardware
licensors are currently good, the potential for these licensors to delay or
refuse to approve or manufacture our products exists. Such occurrences would
harm our business and our financial performance.
RISKS RELATED TO OUR CURRENT FINANCING ARRANGEMENT
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUTSTANDING CONVERTIBLE
DEBENTURES AND WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF
THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK. As of November
12, 2004, we had 36,615,509 shares of common stock issued and outstanding. There
are 77,150,000 shares of common stock being offered pursuant to this prospectus
that are issuable upon conversion of outstanding convertible debentures and
exercise of outstanding warrants. All of these shares may be sold without
restriction. The sale of these shares may adversely affect the market price of
our common stock.
3
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE DEBENTURES AND
UPON EXERCISE OF WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR
EXISTING STOCKHOLDERS. The issuance of shares upon conversion of the convertible
debentures and exercise of warrants may result in substantial dilution to the
interests of other stockholders since the selling stockholders may ultimately
convert or exercise and sell the full amount issuable on conversion or exercise.
IF WE ENGAGE IN A LOWER PRICED TRANSACTION THAN OUR CURRENT FINANCING
ARRANGEMENT WHILE THE CONVERTIBLE DEBENTURES ARE OUTSTANDING, THEN THE
CONVERSION AND EXERCISE PRICE OF OUR CONVERTIBLE DEBENTURES AND WARRANTS WILL BE
ADJUSTED TO THE LOWER TRANSACTION PRICE. IF THIS OCCURS, THE NUMBER OF SHARES
ISSUABLE UPON CONVERSION OF OUR CONVERTIBLE DEBENTURES WILL INCREASE AND THE
SHARES OF COMMON STOCK ALLOCATED FOR CONVERSION OF THE CONVERTIBLE DEBENTURES
WHICH ARE REGISTERED PURSUANT TO THIS PROSPECTUS WILL NOT BE ADEQUATE.
ACCORDINGLY, WE MAY BE REQUIRED TO FILE A SUBSEQUENT REGISTRATION STATEMENT
COVERING ADDITIONAL SHARES. IF THE SHARES WE HAVE ALLOCATED AND ARE REGISTERING
HEREWITH ARE NOT ADEQUATE AND WE ARE REQUIRED TO FILE AN ADDITIONAL REGISTRATION
STATEMENT, WE MAY INCUR SUBSTANTIAL COSTS IN CONNECTION THEREWITH. We have
allocated and registered 77,150,000 shares of common stock to cover the
conversion of convertible debentures and the exercise of warrants in this
offering. Our current financing arrangement includes restrictions on engaging in
a subsequent financing that is priced lower than the current arrangement. If we
engage in a lower priced transaction while the convertible debentures are
outstanding, then the conversion and exercise price of our convertible
debentures and warrants will be adjusted to the lower transaction price. If this
occurs, the number of shares issuable upon conversion of the convertible
debentures which are registered herewith will not be adequate. Accordingly, we
may be required to file a subsequent registration statement covering additional
shares. If the shares we have allocated to the registration statement are not
adequate and we are required to file an additional registration statement, we
may incur substantial costs in connection with the preparation and filing of
such registration statement.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING CONVERTIBLE
DEBENTURES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE,
OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE CONVERTIBLE DEBENTURES, IF
REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE
OF SUBSTANTIALLY ALL OUR ASSETS. On August 31, 2004, we entered into a
Securities Purchase Agreement for the sale of an aggregate of $1,050,000
principal amount of convertible debentures to accredited investors. On October
6, 2004, a supplement to the Securities Purchase Agreement was signed, for the
sale of an additional $50,000 principal amount convertible debenture. The
convertible debentures have a term of two years and are due and payable, with 5%
interest, unless sooner converted into shares of our common stock. Any event of
default such as our failure to repay the principal or interest when due, our
failure to issue shares of common stock upon conversion by the holder, our
failure to timely file a registration statement or have such registration
statement declared effective, breach of any covenant, representation or warranty
in the Securities Purchase Agreement or related convertible debenture, and the
commencement of a bankruptcy, insolvency, reorganization or liquidation
proceeding against us could require the early repayment of the convertible
debentures if the default is not cured with the specified grace period. We
anticipate that the full amount of the convertible debentures, together with
accrued interest, will be converted into shares of our common stock, in
accordance with the terms of the convertible debentures. If we are required to
repay the convertible debentures, we would be required to use our limited
working capital and raise additional funds. If we were unable to repay the
debentures when required, the debenture holders could commence legal action
against us and foreclose on all of our assets to recover the amounts due. Any
such action would require us to curtail or cease operations.
RISKS RELATED TO OUR COMMON STOCK:
OUR HISTORIC STOCK PRICE HAS BEEN VOLATILE AND THE FUTURE MARKET PRICE FOR
OUR COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE. FURTHER, THE LIMITED
MARKET FOR OUR SHARES WILL MAKE OUR PRICE MORE VOLATILE. THIS MAY MAKE IT
DIFFICULT FOR YOU TO SELL OUR COMMON STOCK FOR A POSITIVE RETURN ON YOUR
INVESTMENT. The public market for our common stock has historically been very
volatile. During the period from January 1, 2003 through September 30, 2004, the
market price for our common stock has ranged from $0.002 to $1.88 (See "Market
for Common Equity and Related Stockholder Matters on page 9 of this Prospectus).
Any future market price for our shares is likely to continue to be very
volatile. This price volatility may make it more difficult for you to sell
shares when you want at prices you find attractive. We do not know of any one
particular factor that has caused volatility in our stock price. However, the
stock market in general has experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance
of companies. Broad market factors and the investing public's negative
perception of our business may reduce our stock price, regardless of our
operating performance. Further, the market for our common stock is limited and
we cannot assure you that a larger market will ever be developed or maintained.
The average daily trading volume of our common stock over the past three months
was approximately 87,567 shares. The last reported sales price for our common
stock on November 12, 2004, was $0.14 per share. Market fluctuations and
volatility, as well as general economic, market and political conditions, could
reduce our market price. As a result, this may make it difficult or impossible
for you to sell our common stock.
4
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK. The
Securities and Exchange Commission has adopted Rule 3a51-1 which establishes the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, Rule 15g-9 require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the SEC relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
FORWARD-LOOKING STATEMENTS
Information in this prospectus contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements can be identified by the use of words such as
"believes," "estimates," "could," "possibly," "probably," "anticipates,"
"projects," "expects," "may," "will," or "should" or other variations or similar
words. No assurances can be given that the future results anticipated by the
forward-looking statements will be achieved. The following matters constitute
cautionary statements identifying important factors with respect to those
forward-looking statements, including certain risks and uncertainties that could
cause actual results to vary materially from the future results anticipated by
those forward-looking statements. Among the key factors that have a direct
bearing on our results of operations are the effects of various governmental
regulations, the fluctuation of our direct costs and the costs and effectiveness
of our operating strategy.
5
USE OF PROCEEDS
We will receive proceeds from the resale of shares of common stock in this
offering only to the extent that shares are acquired by the selling stockholders
through the exercise of warrants for cash. We may receive up to a maximum of
$5,500,000 from the exercise of the warrants. Such proceeds, if any, will be
used for working capital.
SELLING STOCKHOLDERS
The following table sets forth the shares beneficially owned, as of
November 12, 2004, by the selling stockholders prior to the offering
contemplated by this prospectus, the number of shares each selling stockholder
is offering by this prospectus and the number of shares which each would
beneficially own if all such offered shares are sold. Except for selling
stockholders with an asterisk (*) next to their names, the selling stockholders
acquired their beneficial interests in the shares being offered hereby in
private placements in which each such selling stockholder advised us that it
purchased the relevant securities solely for investment and not with a view to
or for resale or distribution of such securities.
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. However, except for the selling stockholders
with an asterisk (*) next to their names, each of the selling stockholders is
subject to certain limitations on the conversion of its convertible debentures
and the exercise of its warrants. Each of such convertible debentures and
warrants provides that the conversion or exercise right is first available on
the earlier of 65 days after the relevant debenture or warrant was originally
issued or the effective date of the registration statement of which this
prospectus is a part. The other significant limitation is that such selling
stockholder may not convert its debentures or exercise its warrants, if such
conversion or exercise would cause such holder's beneficial ownership of our
common stock (excluding shares underlying any of their unconverted debentures or
unexercised warrants) to exceed 4.99% of the outstanding shares of our common
stock immediately after the conversion or exercise. If the holder subsequently
disposes of some or all of its holdings, it can again convert its debenture or
exercise its warrant, subject to the same 4.99% limitation. The table below also
includes the number of shares which might be issuable on the occurrence of
certain events, such as the accrual of interest, which has not yet occurred and
may not occur. Therefore, although they are included in the table below, the
number of shares of common stock for some listed persons may include shares that
are not subject to purchase during the 65-day period. None of the selling
stockholders currently has or has had within the past three years a material
relationship with us or any of our predecessors or affiliates.
SHARES BENEFICIALLY OWNED
SHARES BENEFICIALLY NUMBER OF SHARES OFFERED AFTER THE OFFERING
OWNED PRIOR PURSUANT -----------------------------
SELLING STOCKHOLDER TO THE OFFERING TO THIS PROSPECTUS NUMBER PERCENT
- -------------------------------------- ----------------------- ------------------------- -----------------------------
Alpha Capital AG (1) 1,925,000 35,000,000 0 *
* Mac Caughern, Scott (2) 1,250,000 1,250,000 0 *
* Marina Ventures (3) 500,000 500,000 0 *
* Sol Financial, Inc. (4) 100,000 100,000 0 *
Stonestreet Limited Partnership (5) 1,925,000 24,500,000 0 *
Whalehaven Capital Fund Limited (6) 1,925,000 3,500,000 0 *
Whalehaven Fund Limited (7) 1,925,000 7,000,000 0 *
Whalehaven Capital LP (8) 1,925,000 7,000,000 0 *
* Less than 1%.
(1) Includes: (a) up to 10,000,000 shares issuable upon conversion of a
$500,000 principal amount 5% convertible debenture at a per share
conversion price of $0.05; (b) up to 1,000,000 shares issuable upon
conversion of the convertible debentures with respect to interest accrued
thereon through the maturity date thereof on the second anniversary of
their issuance; (c) up to 20,000,000 shares issuable upon exercise of
Class A and Class B warrants issued in connection with the 5% convertible
debentures; and (d) up 4,000,000 shares representing our good faith
estimate of additional shares issuable as liquidated damages through the
projected effective date of the registration statement or as a result of
adjustments, as contemplated by certain provisions of the Securities
Purchase Agreement or the related Registration Rights Agreement. Konrad
Ackerman and Rainer Posch have voting and dispositive control over the
securities held by Alpha Capital AG.
(2) Includes up to 1,250,000 shares of common stock issuable upon exercise of
outstanding common stock purchase warrants.
6
(3) Includes 500,000 shares of common stock issued to Marina Ventures in
consideration for financial consulting services. Moshe Hartstein has
voting and dispositive control over the securities held by Marina Ventures
(4) Includes 100,000 shares of common stock issued to Sol Financial, Inc. in
consideration for financial consulting services. Shlomo Stein has voting
and dispositive control over the securities held by Sol Financial, Inc.
(5) Includes: (a) up to 7,000,000 shares issuable upon conversion of a
$350,000 principal amount 5% convertible debenture at a per share
conversion price of $0.05; (b) up to 700,000 shares issuable upon
conversion of the convertible debentures with respect to interest accrued
thereon through the maturity date thereof on the second anniversary of
their issuance; (c) up to 14,000,000 shares issuable upon exercise of
Class A and Class B warrants issued in connection with the 5% convertible
debentures; and (d) up 2,800,000 shares representing our good faith
estimate of additional shares issuable as liquidated damages through the
projected effective date of the registration statement or as a result of
adjustments, as contemplated by certain provisions of the Securities
Purchase Agreement or the related Registration Rights Agreement. Michael
Finkelstein has voting and dispositive control over the securities held by
Stonestreet Limited Partnership.
(6) Includes: (a) up to 1,000,000 shares issuable upon conversion of a $50,000
principal amount 5% convertible debenture at a per share conversion price
of $0.05; (b) up to 100,000 shares issuable upon conversion of the
convertible debentures with respect to interest accrued thereon through
the maturity date thereof on the second anniversary of their issuance; (c)
up to 2,000,000 shares issuable upon exercise of Class A and Class B
warrants issued in connection with the 5% convertible debentures; and (d)
up 400,000 shares representing our good faith estimate of additional
shares issuable as liquidated damages through the projected effective date
of the registration statement or as a result of adjustments, as
contemplated by certain provisions of the Securities Purchase Agreement or
the related Registration Rights Agreement. Evan Schemenauer, Arthur Jones
and Jennifer Kelly have voting and dispositive control over the securities
held by Whalehaven Capital Fund Limited.
(7) Includes: (a) up to 2,000,000 shares issuable upon conversion of a
$100,000 principal amount 5% convertible debenture at a per share
conversion price of $0.05; (b) up to 200,000 shares issuable upon
conversion of the convertible debentures with respect to interest accrued
thereon through the maturity date thereof on the second anniversary of
their issuance; (c) up to 4,000,000 shares issuable upon exercise of Class
A and Class B warrants issued in connection with the 5% convertible
debentures; and (d) up 800,000 shares representing our good faith estimate
of additional shares issuable as liquidated damages through the projected
effective date of the registration statement or as a result of
adjustments, as contemplated by certain provisions of the Securities
Purchase Agreement or the related Registration Rights Agreement. Evan
Schemenauer, Arthur Jones and Jennifer Kelly have voting and dispositive
control over the securities held by Whalehaven Fund Limited.
(8) Includes: (a) up to 2,000,000 shares issuable upon conversion of a
$100,000 principal amount 5% convertible debenture at a per share
conversion price of $0.05; (b) up to 200,000 shares issuable upon
conversion of the convertible debentures with respect to interest accrued
thereon through the maturity date thereof on the second anniversary of
their issuance; (c) up to 4,000,000 shares issuable upon exercise of Class
A and Class B warrants issued in connection with the 5% convertible
debentures; and (d) up 800,000 shares representing our good faith estimate
of additional shares issuable as liquidated damages through the projected
effective date of the registration statement or as a result of
adjustments, as contemplated by certain provisions of the Securities
Purchase Agreement or the related Registration Rights Agreement. Evan
Schemenauer, Arthur Jones and Jennifer Kelly have voting and dispositive
control over the securities held by Whalehaven Capital LP.
PLAN OF DISTRIBUTION
The selling stockholders may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of
any state or the United States;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
7
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage puts, calls and other
transactions in our securities or derivatives of our securities and may sell or
deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. We
cannot assure that all or any of the shares offered in this prospectus will be
issued to, or sold by, the selling stockholders. The selling stockholders and
any brokers, dealers or agents, upon effecting the sale of any of the shares
offered in this prospectus, may be deemed to be "underwriters," as that term is
defined under the Securities Exchange Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, or the rules and regulations of such acts.
Accordingly, any commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders, but excluding brokerage commissions or underwriter discounts. We
have agreed to indemnify the selling stockholders against certain losses,
claims, damages and liabilities, including liabilities under the Securities Act
of 1933, as amended, or to contribute to payments to which such selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest may be required to make in respect thereof.
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
8
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock is quoted on the Over-The-Counter Bulletin Board under
the symbol CPYE. For the periods indicated, the following table sets forth the
high and low bid prices per share of common stock. The below prices represent
inter-dealer quotations without retail markup, markdown, or commission and may
not necessarily represent actual transactions.
Fiscal 2004 Fiscal 2003 Fiscal 2002
-------------------------- ------------------------- --------------------------
COMMON STOCK High Low High Low High Low
- ------------ ---- --- ---- --- ---- ---
First Quarter ended March 31 $1.88 $1.02 $0.02 $0.002 * *
Second Quarter ended June 30 $1.62 $0.16 $1.62 $0.17 * *
Third Quarter ended September 30 $0.22 $0.08 $1.85 $0.05 * *
Fourth Quarter ended December 31 -- -- $1.88 $1.25 * *
* No reliable data is available for this period.
As of November 12, 2004, we had 36,615,509 shares of common stock
outstanding and held by approximately 457 stockholders of record. The transfer
agent of our common stock is Madison Stock Transfer, Inc.
DIVIDENDS
We have not previously declared or paid any dividends on our common stock
and we do not anticipate declaring any dividends in the foreseeable future.
There are no restrictions in our articles of incorporation or bylaws that
restrict us from declaring dividends.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table shows information with respect to each equity
compensation plan under which the Company's common stock is authorized for
issuance as of the fiscal year ended December 31, 2003.
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Plan category NUMBER OF SECURITIES WEIGHTED AVERAGE NUMBER OF SECURITIES
TO BE ISSUED UPON EXERCISE PRICE OF REMAINING AVAILABLE FOR
EXERCISE OF OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER
OUTSTANDING OPTIONS, WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
WARRANTS AND RIGHTS (EXCLUDING SECURITIES
REFLECTED IN COLUMN (A)
- ------------------------------------ ------------------------ ----------------------- ---------------------------
(A) (B) (C)
- ------------------------------------ ------------------------ ----------------------- ---------------------------
EQUITY COMPENSATION PLANS APPROVED
BY SECURITY HOLDERS -0- -0- -0-
- ------------------------------------ ------------------------ ----------------------- ---------------------------
- ------------------------------------ ------------------------ ----------------------- ---------------------------
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS -0- -0- -0-
- ------------------------------------ ------------------------ ----------------------- ---------------------------
- ------------------------------------ ------------------------ ----------------------- ---------------------------
TOTAL -0- -0- -0-
- ------------------------------------ ------------------------ ----------------------- ---------------------------
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
The information in this registration statement contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. This Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about themselves so long
as they identify these statements as forward looking and provide meaningful
cautionary statements identifying important factors that could cause actual
results to differ from the projected results. All statements other than
statements of historical fact made in this registration statement are forward
looking. In particular, the statements herein regarding industry prospects and
future results of operations or financial position are forward-looking
statements. Forward-looking statements reflect management's current expectations
and are inherently uncertain. Our actual results may differ significantly from
management's expectations.
The following discussion and analysis should be read in conjunction with
our financial statements, included herewith. This discussion should not be
construed to imply that the results discussed herein will necessarily continue
into the future, or that any conclusion reached herein will necessarily be
indicative of actual operating results in the future. Such discussion represents
only the best present assessment of our management.
PERIODS ENDED SEPTEMBER 30, 2004 COMPARED TO PERIODS ENDED SEPTEMBER 30, 2003
Revenues for the three and nine months ended September 30, 2004 were
$27,472 and $788,061, respectively, as compared to $235,468 and $979,917 for the
three and nine months ended September 30, 2003, respectively. This represents a
decrease of $207,996, or 88%, for the three months ended September 30, 2004 and
a decrease of $191,856, or 20%, for the nine months ended September 30, 2004
when compared to the same period of 2003. The decrease in revenue for the
three-month periods ended September 30, 2004 is primarily the result of fewer
re-orders of our products.
Gross profit totaled approximately $6,926 for the three months ended
September 30, 2004 and $151,929 for the nine months September 30, 2004. For the
three and nine months ended September 30, 2003, gross profit totaled $22,524 and
$265,924 respectively. Comparing the three-month period ended September 30, 2004
to the same period of 2003, gross profit decreased approximately $15,598, or
69%. For the nine-month period ended September 30, 2004, gross profit decreased
approximately $113,995, or 43%, compared to the same period of 2003. The
decrease in gross profit for the three months and nine months ended September
30, 2004 is primarily the result of re-orders for product with discounted sales
prices. Our distributors were looking for special priced discounts to fulfill
orders at various retail stores and mass merchandising outlets. To obtain these
orders we had to provide additional discounts.
For the three months and nine months ended September 30, 2004, selling,
general and administrative expenses totaled $673,061 and $1,313,751,
respectively. This was an increase of $238,288 (35%) and decrease of $42,324
(3%) when compared to the three- and nine-month periods ended September 30,
2003. The increase in selling, general and administrative expenses for the three
months ended September 2004 can be attributed to the increased attorney fees due
to our litigation with Bravado and Cousins. Our expenditures for consultant fees
also increased as a result of our funding efforts. Selling, general and
administrative expenses decreased for the nine months ended September 30, 2004,
due to our efforts to streamline our operations. More specifically, we spent
less on insurance, payroll and travel.
Interest expense was approximately $731 and $37,133 for the three and nine
months ended September 30, 2004, respectively. For the three and nine months
ended September 30, 2003, interest expense was $45,942 and $46,790. This was a
decrease of $45,211 (98%) for the three months ended September 30, 2004 and a
decrease of $9,657 (20%) for the nine months ended September 30, 2003. The
reason for these decreases was that interest due on a loan to an investor was
eliminated in the second year of its term.
We received $2,438,188 in forgiveness of debt for the nine months
September 30, 2004 compared to $100,000 in forgiveness of debt for the nine
months ended September 30, 2003. This was a result of a settlement with SWING!
Media AG.
We also received $50,000 in consulting fees from Giant Mobile Corporation
for the nine months ended September 30, 2004 for services provided in
establishing the corporation.
10
Our net loss was $666,866 and net profit $ 1,289,233 for the three and
nine months ended September 30, 2004 compared to losses of $358,191 and $
1,036,939 for the three and nine months ended September 30, 2003. The decrease
in profitability for the three months ended September 30, 2004 was due to a
combination of reduced revenues due to reduced number of re-orders and the
increase in selling, general and administrative expenses more specifically
attorney fees due to our litigation with Bravado and Cousins, and increased
consulting fees related to our financing. The increase in profitability for the
nine months ended September 30, 2004 can be attributed to the $2,438,188 in
forgiveness of debt received from SWING! Media AG.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
For the fiscal year ended December 31, 2003 we had total revenue of
$2,377,107 compared to revenue of $6,329,890 for the fiscal year ended December
31, 2002. The decrease in revenue of $3,952,783, or 62%, is a primarily the
result of cancelled titles that were scheduled for release, most specifically
Mix TV Presents: Eminem, The Music Video Game from which we anticipated a
minimum of 500,000 units to be sold. In addition, over the previous two years,
we were developing many titles which were cancelled upon the sudden bankruptcy
of SWING! Media AG, some of which were scheduled for 2003 release. In 2003, we
also generated $493,478 in license revenue for the licensing of Enclave and
Rally Championship. License revenue applies to products published by companies
other than us. In these cases, Vivendi/Universal (Enclave) and Encore (Rally
Championship) paid us license fees to publish these games. For Enclave the fees
are paid on a per unit basis, whereas Encore obtained the publishing rights to
Rally Championship for $50,000.
Gross profit totaled $123,088 for the fiscal year ended December 31, 2003
as compared to $450,129 for the fiscal year ended December 31, 2002, a decrease
of $327,041 or 73%. Gross profit as a percentage of sales for the fiscal year
ended December 31, 2003 was 5% as compared to 7% for the fiscal year ended
December 31, 2002. The decrease in our gross profit percentage is a result of
2003 sales reflecting a higher percentage of discounted sales and license
revenue which normally generates a higher gross profit as compared to the fiscal
year ended December 31, 2002.
Total operating expenses in each of the fiscal years ended December 31,
2003 and December 31, 2002 were comprised of selling, general and administrative
expenses. Operating expenses for the fiscal years ended December 31, 2003 and
2002 were $2,394,425 and $2,172,523, respectively, which constituted an increase
of $221,902, or 10%. The increase in operating expenses is attributable to the
general increase in overhead which accompanied the expansion in the capacity of
our business.
Our net loss was $2,252,444 in the fiscal year ended December 31, 2003
compared to $1,726,895 in the fiscal year ended December 31, 2002. This increase
in loss was due to the reasons explained above.
LIQUIDITY AND CAPITAL RESOURCES
SEPTEMBER 30, 2004
As of September 30, 2004, we had approximately $612,193 of cash and cash
equivalents on hand and a working capital deficiency of $2,206,497. As of
September 30, 2004, the President and CFO of the corporation waived $450,000 of
deferred compensation owed them. In addition, a former director and co-founder
of the company waived his debt of $259,300 in exchange for 648,250 shares of
common stock.
We currently plan to use the cash balance and cash generated from
operations for increasing our working capital reserves and, along with
additional debt financing, for new product development, securing new licenses,
building up inventory, hiring more sales staff and funding advertising and
marketing. Management believes that the current cash on hand and additional cash
expected from operations in fiscal 2004 will be sufficient to cover our working
capital requirements for fiscal 2004.
DECEMBER 31, 2003
As of December 31, 2003, our cash balance was $44,329, as compared to
$115,994 at December 31, 2002. Total current assets at December 31, 2003 were
$723,010, as compared to $2,384,860 at December 31, 2002.
Our accounts receivable at December 31, 2003 was $20,000, as compared to
$2,257,869 at December 31, 2002. The change in accounts receivable is primarily
due to the bankruptcy of SWING! Media AG. SWING! Media AG owed us $2,133,164
upon filing for bankruptcy in February 2003. This entire amount has been offset
against payables due to SWING! Media AG in accordance with an agreement with
SWING!'s creditor's committee entered into in September 2004. In this agreement
the balance of approximately $2,400,000 that we owe SWING! will be converted to
shares of our common stock. In addition, we purchased from the trustee the
rights to a nearly completed title for $300,000 cash.
11
As of December 31, 2003 we had a working capital deficiency of $5,751,671.
The major portion of this deficiency is money due to SWING! Media AG, Calluna
Capital Corporation and Fraser Lakes Enterprises, Ltd. These debts have either
been resolved by agreement (September 2004), or converted to shares and repaid
(March 2004). In addition, we have taken great effort in reducing out debt on a
non-cash basis.
The current portion of long-term debt at December 31, 2003 consisted of
$15,906 as opposed to $13,669 at December 31 2002. We expect to pay off the
entire $25,311 by year-end 2005. We plan to pay this with proceeds generated
from normal operational cash flow.
At December 31, 2003 and December 31, 2002 we had no bank debt.
FINANCING NEEDS
We currently have commitments to pay Discovery Licensing, Inc. an
aggregate of $150,000 in advance royalties for the Monster Garage and The Jeff
Corwin Experiences licenses. We also have an outstanding commitment to pay
Constant Entertainment LLP - SEGA Limited $252,000 in advance royalties for SEGA
title distribution. However, we are currently renegotiating the commitment to
Constant Entertainment to reflect the fact that the titles are now being
packaged as a 10-in-1 disc. Other than these commitments, we do not have any
other material commitments for capital expenditures. We expect our capital
requirements to increase over the next several years as we continue to develop
new products, increase marketing and administration infrastructure, and embark
on in-house business capabilities and facilities. Our future liquidity and
capital funding requirements will depend on numerous factors, including, but not
limited to, the cost and hiring and training production personnel who will
produce our titles, the cost of hiring and training additional sales and
marketing personnel to promote our products, and the cost of hiring and training
administrative staff to support current management.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
results of operations, liquidity or capital expenditures.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ASSIGNMENT OF ACCOUNTS RECEIVABLE
We regularly assign our receivables to vendors with recourse and we
account for such assignments in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 140 " Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities. " Assigned accounts
receivable are shown on the accounts receivable section of the balance sheet
until collected by the beneficiary. Should the accounts receivable become
uncollectible, we are ultimately responsible for paying the vendor and recording
an allowance for potential credit losses as deemed necessary. The assigned
accounts receivable are generally collected within 90 days; therefore, the
balance shown approximates its fair value.
CAPITALIZED DEVELOPMENT COSTS AND LICENSES
Capitalized development costs include payments made to independent
software developers under development agreements, as well as direct costs
incurred for internally developed products.
We account for software development costs in accordance with SFAS No. 86 "
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed. " Software development costs are capitalized once technological
feasibility of a product is established and such costs are determined to be
recoverable. Technological feasibility of a product encompasses both technical
design documentation and game design documentation.
CAPITALIZED DEVELOPMENT COSTS
For products where proven technology exits, this may occur early in the
development cycle. Technological feasibility is evaluated on a
product-by-product basis. Prior to a product's release, we expense, as part of
cost of sales, development costs when we believe such amounts are not
recoverable. Amounts related to capitalized development costs that are not
capitalized are charged immediately to cost of sales. We evaluate the future
recoverability of capitalized amounts on a quarterly basis. The recoverablility
of capitalized development costs is evaluated based on the expected performance
of the specific products for which the costs relate. The following criteria are
used to evaluate expected product performance: historical performance of
comparable products using comparable technology and orders of the product prior
to its release. Commencing upon product release, capitalized development costs
are amortized to cost of sales - software royalties and amortization is based on
the ratio of current revenues to total projected revenues, generally resulting
in an amortization period of one year or less. For products that have been
released in prior periods, we evaluate the future recoverability of capitalized
amounts on a quarterly basis. The primary evaluation criterion is actual title
performance.
12
CAPITALIZED LICENSES
Capitalized license costs represent license fees paid to intellectual
property rights holders for use of their trademarks or copyrights in the
development of the products. Depending on the agreement with the rights holder,
we may obtain the rights to use acquired intellectual property in multiple
products over multiple years, or alternatively, for a single product over a
shorter period of time.
We evaluate the future recoverability of capitalized licenses on a
quarterly basis. The recoverability of capitalized license costs is evaluated
based on the expected performance of the specific products in which the licensed
trademark or copyright is to be used. Prior to the related product's release, we
expense, as part of cost of sales, licenses when we believe such amounts are not
recoverable. Capitalized development cost for those products that are cancelled
or abandoned are charged to cost of sales. The following criteria are used to
evaluate expected product performance: historical performance of comparable
products using comparable technology and orders for the product prior to its
release.
Commencing upon the related products release, capitalized license costs
are amortized to cost of sales - licenses based on the ratio of current revenues
for the specific product to total projected revenues for all products in which
the licensed trademark or copyright will be utilized. As license contracts may
extend for multiple years, the amortization of capitalized intellectual property
license costs relating to such contracts may extend beyond one year. For
intellectual property included in products that have been released, we evaluate
the future recoverability of capitalized amounts on a quarterly basis. The
primary evaluation criterion is actual title performance.
REVENUE RECOGNITION
Revenue from video game distribution contracts, which provide for the
receipt of non-refundable guaranteed advances, is recognized when the games are
delivered to the distributor by the manufacturer under the completed contract
method, provided the other conditions of sale as established by the Securities
and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101, " Revenue
Recognition ," are satisfied:
i. Persuasive evidence of an arrangement exists.
ii. Delivery has occurred or services have been rendered.
iii. The seller's price to the buyer is fixed or determinable.
iv. Collectibility is reasonably assured
Until all of the conditions of the sale have been met, amounts received on
such distribution contracts are recorded as deferred income. Although we
regularly enter into the assignment of accounts receivable to vendors, we do not
record revenues net versus gross per Emerging Issues Task Force ("EITF") No.
99-19, " Reporting Revenue Gross as a Principal versus Net as an Agent ," since
we:
i. Act as the principal in the transaction.
ii. Take title to the products.
iii. Have risks and rewards of ownership, such as the risk of loss for
collection, delivery, or returns.
iv. Do not act as an agent or broker.
At all times, we maintain control of the development process and is
responsible for directing the vendor. Other than for payment, the customer does
not communicate with the vendor.
We utilize the completed contract method of revenue recognition as opposed
to the percentage-of-completion method of revenue recognition for substantially
all of its products since the majority of its products are completed within six
to eight months. We complete the products in a short period of time since we
obtain video games that are partially complete or obtain foreign language video
games published by foreign manufacturers that are completed.
13
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FAS 123. SFAS No. 148
amends SFAS No. 123, Accounting for Stock-Based Compensation , to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of SFAS No. 123 to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. This
Statement also amends APB Opinion No. 28, Interim Financial Reporting , to
require disclosure about those effects in interim financial information. SFAS
No. 148 is effective for annual and interim periods beginning after December 15,
2002. The adoption of the interim disclosure provisions of SFAS No. 148 did not
have an impact on our financial position, results of operations or cash flows.
We are currently evaluating whether to adopt the fair value based method of
accounting for stock-based employee compensation in accordance with SFAS No. 148
and its resulting impact on our financial statements.
DESCRIPTION OF BUSINESS
We develop, publish and market interactive entertainment software. We
currently publish titles for many popular interactive entertainment hardware
platforms, such as Sony's PlayStation, Nintendo 64 and Nintendo's Game Boy Color
and Game Boy Advance as well as the next generation hardware platforms such as
Sony's PlayStation 2, Nintendo GameCube, Microsoft's Xbox, and also for the PC.
We were incorporated under the laws of the State of Utah on July 29, 1982
as Strategic Recovery Corporation, with the purpose of investing in real and
personal property and buying and selling strategic metals. On February 16, 1987,
we entered into a merger agreement with Lance, Inc. Under the Certificate of
Merger, we were the surviving corporation and subsequent to the merger we
changed our name to Lance, Inc. After the merger we intended to distribute
software applications to assist managers of HUD qualified projects to complete
required forms and reports to maintain HUD qualification for rental payments.
This project eventually failed and we ceased operations until May 29, 2003, when
we entered into a Share Exchange Agreement with Conspiracy Entertainment
Corporation and its stockholders. Pursuant to the Share Exchange Agreement, we
acquired all of the issued and outstanding common stock of Conspiracy
Entertainment Corporation in exchange for 21,552,900 shares of our common stock.
We subsequently changed our name to Conspiracy Entertainment Holdings, Inc. and
began developing, publishing and marketing interactive entertainment software.
PUBLISHING
We have entered into publishing agreements with publishers of interactive
entertainment hardware platforms. These agreements are for non-exclusive
licenses, both for the rights to publish and to develop titles for their
hardware platforms. These agreements are the foundation for our business. We
must maintain a license to develop and publish titles for each hardware
platform. Each license specifies the territory to which it applies, and licenses
range from multi-national distribution to approval on a title-by-title basis.
Our existing hardware platform licenses for Sony's PlayStation and PlayStation
2, Nintendo's Game Boy Color and Game Boy Advance, Nintendo 64 and Microsoft's
Xbox, and our license for Nintendo GameCube require that we obtain approval for
publication of new titles on a title-by-title basis. As a result, the number of
titles we are able to publish for these hardware platforms and our ability to
time the release of titles is dependent upon decisions made by third party
publishers.
On August 28, 2000, we entered into a licensed publisher agreement with
Sony Computer Entertainment America, Inc. Under the agreement, Sony Computer
Entertainment granted us a non-exclusive license to publish, develop, have
manufactured, market, distribute and sell software for Sony's computer
entertainment system, PlayStation 2, in the United States and Canada. The term
of the license agreement was until March 31, 2003, but automatically extends for
additional one-year terms thereafter, unless either party provides the other
with written notice of its election not to so extend on or before January 31 of
the applicable year. We are required to have the software that we develop under
the agreement manufactured by a manufacturing facility designated by Sony
Computer Entertainment. We are required to pay Sony Computer Entertainment a
royalty fee for each unit of the licensed products that is manufactured, based
on the initial wholesale price of the product.
14
On September 28, 2000, we entered into a publisher license agreement with
Microsoft Corporation to develop and/or publish software products running on the
Xbox game system and license proprietary materials from Microsoft. When we
develop a concept for a game for the Xbox system, we are required to submit to
Microsoft a written and completed concept submission form that includes details
of the proposed game. Microsoft then evaluates the proposed game and, if
approved, we deliver to Microsoft a beta version of the game which includes all
of the games features, along with disclosure about any hidden characters,
cheats, "eater eggs," bonus video and audio, and similar elements included in
the beta version and/or intended to be included in the final release version of
the game. When is game title is complete, we deliver to Microsoft the proposed
final release version that is ready for manufacture and commercial distribution.
Microsoft playtests the beta version and proposed final release version of each
game title and Microsoft provides us written comments regarding the results. We
are required to comply with any requests by Microsoft to improve a game based on
playtests. We are required to retain only authorized software replicators that
are certified and approved by Microsoft for replication (manufacture) of games
that run on Xbox. For each finished product unit manufactured, we must pay
Microsoft royalties in accordance with the agreement.
On October 2, 2000, we entered into a licensed publisher agreement with
Sony Computer Entertainment America, Inc. Under the agreement, Sony Computer
Entertainment granted us a non-exclusive license to publish, have manufactured,
market, distribute and sell software for Sony's CD-based interactive console,
PlayStation, in the United States, Canada and Mexico. Unless earlier terminated,
the license is effective for four years. On September 11, 2004, this agreement
was extended for another four years. Sony Computer Entertainment manufactures
the software that we develop under the agreement. We are required to pay Sony
Computer Entertainment a royalty fee for each unit of the licensed products that
is manufactured.
On November 9, 2001, we entered into a license agreement with Nintendo of
America Inc. to develop, have manufactured, advertise, market and sell video
game software for play on the Game Boy Advance system in countries within the
Western hemisphere and their respective territories and possessions. The term of
the agreement is for three years. Upon completion of a game, we deliver a
prototype to Nintendo of America where it is tested and, if approved, we place
purchase orders for the game from Nintendo of America for distribution to end
consumers.
On November 1, 2002, we entered into a license agreement with Nintendo of
America Inc. to develop, have manufactured, advertise, market and sell video
game software for play on the Nintendo GameCube system in countries within the
Western hemisphere and their respective territories and possessions. The term of
the agreement is for three years. Upon completion of a game, we deliver a
prototype to Nintendo of America where it is tested and, if approved, we place
purchase orders for the game from Nintendo of America for distribution to end
consumers.
ENTERTAINMENT LICENSING
We have entered into strategic license arrangements with entertainment and
media companies that have developed well-known characters and brands and that
are producing properties that are expected to form the basis for future
products. Our agreements with licensors and developers generally require us to
make advance royalty payments.
On July 1, 2003, we entered into an agreement with Discovery Licensing,
Inc. to use certain marks, characters and content relating to "The Jeff Corwin
Experience" to produce computer and video games for Nintendo Game Boy Advance,
Sony PlayStation 1, Sony PlayStation 2 and PC platforms. The term of the
agreement is for two years. The agreement requires us to pay advance royalty
payments totaling $100,000 by December 31, 2004. To date, the advance royalty
payments have not been paid. We are also required to distribute at least one
licensed product in reasonably commercial quantities no later than May 1, 2004.
This project is temporarily on hold until we find a developer and game design
that meets our objectives and those of Discovery. The agreement provides that if
we (a) fail to distribute a particular licensed product by May 1, 2004 and/or
(b) are not making regular sales of more than a nominal amount of a particular
licensed product for any 120-day period or more after May 1, 2004 and do not
have plans to make regular sales of more than a nominal amount of such licensed
products within the 120 days after May 1, 2004, then Discovery Licensing has the
right upon 30 days written notice to terminate our rights for such particular
licensed product for the term of the agreement. We have not met these
requirements and, to date, Discovery Licensing has not notified us that it is
terminating our rights under the agreement. We must obtain Discovery Licensing's
approval for all licensed products to be manufactured, created, sold,
distributed or otherwise used under the agreement. The agreement requires us to
pay royalties to Discovery Licensing based on our net revenue derived from
licensed products through various distribution channels, which are payable
within 30 days of the end of each calendar quarter.
On July 1, 2003, we entered into an agreement with Discovery Licensing,
Inc. to use certain marks, characters and content relating to "Monster Garage"
to produce computer video games for Nintendo Game Boy Advance, Sony PlayStation
1 and Sony PlayStation 2. The term of the agreement is for two years. The
agreement requires us to pay advance royalty payments totaling $50,000 by
December 31, 2004. We are also required to distribute at least one licensed
product in reasonably commercial quantities no later than May 1, 2004. It is
currently uncertain whether we will proceed with this agreement because there is
a legal issue between Discovery and Monster Cables over the rights to the name
"Monster." This project is on hold until the matter between Discovery and
Monster Cables is resolved and until we find a developer and game design that
meets our objectives and those of Discovery. The agreement provides that if we
(a) fail to distribute a particular licensed product by May 1, 2004 and/or (b)
are not making regular sales of more than a nominal amount of a particular
licensed product for any 120-day period or more after May 1, 2004 and do not
have plans to make regular sales of more than a nominal amount of such licensed
products within the 120 days after May 1, 2004, then Discovery Licensing has the
right upon 30 days written notice to terminate our rights for such particular
licensed product for the term of the agreement. We have not met these
requirements and, to date, Discovery Licensing has not notified us that it is
terminating our rights under the agreement. We must obtain Discovery Licensing's
approval for all licensed products to be manufactured, created, sold,
distributed or otherwise used under the agreement. The agreement requires us to
pay royalties to Discovery Licensing based on our net revenue derived from
licensed products through various distribution channels, which are payable
within 30 days of the end of each calendar quarter.
15
On July 7, 2003, we entered into two software licensing agreements with
Constant Entertainment LLP - SEGA Limited to manufacture, market and otherwise
exploit (including via online sales) various games for the Sony PlayStation 2
platform. One agreement covers the territories of North America, Canada, Mexico,
and South America. The other agreement covers the territories of Europe. The
term of each agreement is for 48 months after release of the products. Each
agreement requires us to make royalty advances to Constant Entertainment in the
amount of $60,000 per each title, or a total of $840,000 for 14 titles covered
by the agreement. The schedule for royalty advances is as follows: (1) 30%, or
$252,000 upon signing each agreement; (2) 30% upon concept approval for each
product by Sony Computer Entertainment of America; and (3) 40% upon concept
approval for each product by Sony Computer Entertainment of America for
commercial production. To date, only the $252,000 advance royalty payment for
the European territories has been paid. The royalty advances are credited
against royalties which are payable under each agreement of $1.15 per each unit
sold by us. This agreement calls for multiple titles to be release individually.
With the full knowledge and instructions of SEGA, we presented this project
first as a 4-in-1 package and ultimately as a 10-in-1 package which was approved
by Sony on April 16, 2004. Recently, Constant Entertainment received a
termination letter from 3D AGES/SEGA for the US Publishing rights to the titles
under our agreement because the project was presented as a 10-in-1 package. On
September 28, 2004 we received a cease and desist email notification from SEGA
US who is apparently the new publisher of these game titles. We believe the
actions of SEGA/3D AGES are not valid and in fact our agreement with Constant
may be have been infringed by a third party (SEGA US).
DEVELOPMENT
We design and develop our titles primarily through third parties with whom
we have relationships. We do not currently have any formal arrangements for the
design or development of any titles. The development cycle for a new title
typically ranges from 24 to 36 months and products are sold to mass
merchandisers and through outsourced distributors. All of our products are
manufactured by third parties. We do not currently have any formal agreements
for the manufacture of products.
We also develop and market foreign game titles that have been successfully
released in other countries to make them suitable for production in the United
States. This process is generally shorter in time and allows us to quickly
market these products. Generally these products are release at "budget" pricing,
taking advantage of impulse buyers in retail outlets.
OUR BUSINESS STRATEGY
Our objective is to become a leading independent developer and publisher
of interactive entertainment software. With our ability to license popular
titles, develop quality content with third-party developers and distribute
titles through our worldwide distribution channels, we anticipate growth
opportunities during the next major growth cycle of the interactive software
industry. We also strive to become a leader in "budget" title publishing. To
further our objectives, we:
WORK INTERNALLY AND WITH THIRD-PARTY GAME DEVELOPERS. We design and
develop our products both internally and through our informal relationships with
third-party game developers. Titles are created around our licenses with third
party developers and our own proprietary content. This model allows us to create
game ideas utilizing the latest technologies and consumer trends and enables us
to better manage production efforts in a cost-effective manner.
PLAN TO TAKE DIRECT CONTROL OVER DISTRIBUTION CHANNELS. Our sales and
marketing efforts are designed to broaden product distribution and increase the
penetration of our products. Currently, our titles are sold to many mass
merchandisers such as Toys "R" Us, Target, Kmart, Wal-Mart and Best Buy through
distributors such as SVG and Universal. We do not have formal written
distribution agreements with any distributors. In the long-term, we plan to take
more direct control of the sales marketing and distribution process by
establishing our own direct distribution and sales organization.
ENTER INTERNATIONAL MARKETS. In early 2004 we founded Conspiracy
Entertainment Europe, Ltd., a United Kingdom corporation, and we own 51% of this
entity. Through Conspiracy Entertainment Europe, we have established
relationships for the development and distribution of game titles in Europe. The
size of the European market is approximately 80% of the United States market,
providing an incremental revenue growth opportunity for direct distribution of
our interactive titles.
16
MAINTAIN HARDWARE PLATFORM FLEXIBILITY. We develop products for most
hardware platforms that are currently available. In addition, we market more
popular titles across multiple platforms that have large installed bases. We
work with hardware companies to coordinate the release of new titles with the
launch of next generation hardware platforms for which those titles are
designed.
OUR PRODUCT DEVELOPMENT STRATEGY
We have secured orders to pre-sell a number of our interactive
entertainment titles. We plan to use the following product development strategy
to develop consistent quality titles for future release:
DEVELOP NEW TITLES FOR 2005/2006. Over the next several years, we plan to
transition from licensing and subcontracting the development of our products to
internal development. Because of the 24-36 month development cycle for new
titles, our products for 2005/2006 will be developed through our existing
license agreements.
INCREASINGLY CREATE CONSPIRACY ENTERTAINMENT-GENERATED TITLES. We expect
that within the next several years approximately 50% of our released titles will
come from in-house generated concepts and ideas. We believe that increased
intellectual property content enhances the value of our business and will permit
greater control and improved profit margins. We plan to focus on developing
titles that target specific segments of the interactive entertainment industry.
We identify popular properties that we believe have the potential to become
successful titles, evaluate the demographic segment that the titles are most
likely to appeal to and begin the development process. In this way, we believe
we are able to develop titles with brand name recognition that appeal to
targeted segments of the interactive entertainment software market.
COMPETITION
The interactive entertainment software industry is intensely competitive
and is characterized by the frequent introduction of new hardware platforms and
titles. Our competitors vary in size from small companies to large corporations,
including the manufacturers of the hardware platforms. We must obtain a license
from and compete with hardware platform manufacturers in order to develop and
sell titles for their respective platforms. Each hardware platform manufacturer
is the largest publisher and seller of software products for its own hardware
platforms. As a result of their commanding market positions, these manufacturers
generally have better bargaining positions with respect to retail pricing, shelf
space and purchases than do any of their licensees.
In addition to the hardware platform manufacturers, we compete with other
interactive entertainment software companies. Significant competitors include
Acclaim Entertainment, Inc., Activision, Inc., Bandai America Incorporated,
Capcom USA, Inc., Eidos PLC, Electronic Arts Inc., Infogrames, Inc., Interplay
Entertainment Corp., Konami Corporation of America, Inc., Midway Games Inc.,
Namco Ltd., Sega Enterprises, Inc. (USA), Take-Two Interactive Software, Inc.,
THQ, Inc., BAM Entertainment, Ubi Soft Entertainment, Vivendi Universal S.A. and
The 3DO Company. Many of these competitors are large corporations that have
significantly greater financial, marketing, personnel and product development
resources than us. Due to these greater resources, certain of these competitors
are able to undertake more extensive marketing campaigns, adopt more aggressive
pricing policies, pay higher fees to licensors of desirable motion picture,
television, sports and character properties and pay more to third-party software
developers than we can. We believe that w are able to successfully compete with
regard to the principal factors of the interactive entertainment software
industry, including product features, brand name recognition, rights to
properties, access to distribution channels, product quality and ease of use,
price, marketing support, independent product reviews and quality of customer
service. However, any significant increase in the development, marketing and
sales efforts of our competitors could harm our business.
EMPLOYEES
As of November 12, 2004, we had three full time employees. We intend to
hire additional employees as needed. We retain independent contractors from time
to time to provide various services, primarily in connection with our software
development and sales activities. None of our employees are covered by a
collective bargaining agreement. We consider our relations with our employees to
be good.
DESCRIPTION OF PROPERTY
We maintain an office located at 612 Santa Monica Blvd., Santa Monica,
California. We occupy approximately 1,900 square feet of office space at this
location under a lease that expires in April 2006. Our current rent under the
lease is $4,038 per month.
17
LEGAL PROCEEDINGS
Except as discussed below, we are not currently a party to, nor is any of
our property currently the subject of, any pending legal proceeding. None of our
directors, officers or affiliates is involved in a proceeding adverse to our
business or has a material interest adverse to our business.
On July 22, 2003, we filed a lawsuit in the Superior Court of California,
County of Los Angeles, against Bravado International Group, Inc. and Cousins
Entertainment, Inc. seeking damages in an amount of not less than $5,000,000 in
connection with the breach of a contract for the development and exploitation of
a computer game. The complaint states causes of action based on fraud and
deceit, conspiracy to defraud, breach of contract, and breach of the covenant of
good faith and fair dealing. On December 24, 2003, we filed an amended complaint
alleging the above claims and adding claims based on tortuous interference with
contractual relations and tortuous interference with prospective economic
advantage against Cousins Entertainment, Inc. The conspiracy to defraud and
tortuous interference with prospective economic advantage claims were against
Cousins Entertainment were dismissed. We are proceeding against Bravado
International Group based on claims for fraud and deceit, conspiracy to defraud,
breach of contract and breach of the covenant of good faith and fair dealing,
and against Cousins Entertainment on the claim for tortuous interference with
contractual relations, reserving our right to re-allege the conspiracy to
defraud claim against Cousins Entertainment should subsequent discovery indicate
the viability of such claim. On September 16, 2003, Bravado International Group
filed its answer with a cross-complaint alleging breach of contract against us
and seeking damages of $50,000 plus interest, attorney's fees and costs. On
April 9, 2004, Cousins Entertainment filed its answer with a cross-complaint
alleging unauthorized use of name, image and likeness under California Civil
Code section 3344 and common law misappropriation of the right of publicity
against us and seeking damages in excess of $10,000,000, disgorgement of
profits, proceeds or other consideration received by us, punitive damages,
attorney's fees and costs. Discovery is proceeding and we intend to vigorously
pursue our claims, while at the same time contest the claims brought against us
by way of Bravado International Group's and Cousins Entertainment's
cross-complaints.
On September 28, 2004 we received a cease and desist email notification
from SEGA US who is apparently the new publisher of game titles under our July
7, 2003 software licensing agreement with Constant Entertainment LLP - SEGA
Limited. The agreement with Constant Entertainment LLP provides for multiple
titles to be released individually. With the full knowledge and instructions of
SEGA, we presented a project to release titles as a 10-in-1 package. Constant
Entertainment received a termination letter from 3D AGES/SEGA for the US
publishing rights to the titles under our agreement due to the proposal to
release titles as a 10-in-1 package, rather than individually. We believe the
actions of SEGA/3D AGES are not valid and in fact our agreement with Constant
may be have been infringed by a third party (SEGA US). On October 13, 2004 we
retained legal counsel to represent us in this matter.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the members of our Board of
Directors and our executive officers and the positions held by each.
- --------------------------------------------------------------------------------
NAME AGE POSITION
- --------------------------------------------------------------------------------
Sirus Ahmadi 34 Chief Executive Officer and Director
- --------------------------------------------------------------------------------
Keith Tanaka 41 Chief Financial Officer, Principal
Accounting Officer, Secretary and Director
- --------------------------------------------------------------------------------
Randy Broweleit 48 Director
- --------------------------------------------------------------------------------
SIRUS AHMADI, Chief Executive Officer and Director. Mr. Ahmadi has been
our Chief Executive Officer and a Director since August 2003. Prior to joining
us, Mr. Ahmadi was the President and Chief Executive Officer of Conspiracy
Entertainment Corporation since 1997. Mr. Ahmadi is currently a member of the
Board of Directors of Giant Mobile Corporation, a wireless gaming company.
KEITH TANAKA, Chief Financial Officer, Principal Accounting Officer,
Secretary and Director. Mr. Tanaka has been our Chief Financial Officer,
Principal Accounting Officer, Secretary and a Director since August 2003. Prior
to joining us, Mr. Tanaka was the Controller and Chief Financial Officer of
Conspiracy Entertainment Corporation since 2000. Before joining Conspiracy
Entertainment Corporation, he was an independent consultant for Conspiracy
Entertainment Corporation since 1997. Mr. Tanaka is currently a member of the
Board of Directors of Giant Mobile Corporation, a wireless gaming company.
18
RANDY BROWELEIT, Director. Mr. Broweleit has been a member of our Board of
Directors since August 2003. Prior to joining us, Mr. Broweleit served as the
Senior Vice President and General Manager of Konami of America since 2000. In
1998, he held the position of Vice President of Business Development for
Animation Science Corporation.
All directors hold office until the next annual meeting of stockholders
and until their successors have been duly elected and qualified. There are no
agreements with respect to the election of directors. We do not compensate our
directors. Officers are appointed annually by the Board of Directors and each
executive officer serves at the discretion of the Board of Directors. The
Company does not have any standing committees at this time.
No director, Officer, affiliate or promoter of the Company has, within the
past five years, filed any bankruptcy petition, been convicted in or been the
subject of any pending criminal proceedings, or is any such person the subject
or any order, judgment or decree involving the violation of any state or federal
securities laws.
AUDIT COMMITTEE
We do not have a separately designated standing audit committee, or a
committee performing similar functions. We also do not have an audit committee
financial expert, as that term is defined in Item 401 of Regulation S-B.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the total
compensation that we have paid or that has accrued on behalf of our chief
executive officer and other executive officers with annual compensation
exceeding $100,000 during the fiscal years ending December 31, 2003, 2002 and
2001.
LONG-TERM
COMPENSATION
-------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- ------------------------------ ------------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDERLYING OTHER
NAME AND COMPEN- STOCK AWARD(S) OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SATION ($) ($) SARS (#) PAYOUTS ($) SATION ($)
- -------------------------- ---------- ------------- ---------- ------------ ----------------- ------------ ------------ -----------
Sirus Ahmadi 2003 (1) $324,000 --- --- --- --- --- ---
2002 $324,000 --- --- --- --- --- ---
2001 $120,000 --- --- --- --- --- ---
Keith Tanaka 2003 (2) $134,400 --- --- --- --- --- ---
2002 $134,400 --- --- --- --- --- ---
2001 $60,000 --- --- --- --- --- ---
1. During the fiscal year ended December 31, 2003, $74,672 of Mr.
Ahmadi's $324,000 salary was deferred.
2. During the fiscal year ended December 31, 2003, $27,258 of Mr.
Tanaka's $134,400 salary was deferred.
EXECUTIVE EMPLOYMENT AGREEMENTS
On January 1, 2002, we entered into three-year employment agreements with
Sirus Ahmadi, our Chief Executive Officer, and Keith Tanaka, our Chief Financial
Officer, providing for annual salaries of $324,000, plus benefits, and $134,400,
plus benefits, respectively. In addition, per the agreements, each employee is
entitled to a corporate vehicle monthly allowance of $800 and $500,
respectively. Mr. Tanaka is also entitled to 10% of our total issued and
outstanding common shares as of the date of the agreement.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have not entered into any transaction during the last two years and we
have not proposed any transaction to which we were or are to be a party, in
which any of the following persons had or is to have a direct or indirect
material interest:
- Any director or executive officer of Conspiracy Entertainment
Holdings, Inc.;
- Any nominee for election as a director;
- Any security holder named in the "Security Ownership of Certain
Beneficial Owners and Management" section below; and
- Any member of the immediate family (including spouse, parents,
children, siblings, and in-laws) of any such person.
19
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of November 12, 2004. The information in this
table provides the ownership information for:
o each person known by us to be the beneficial owner of more than 5%
of our common stock;
o each of our directors;
o each of our executive officers; and
o our executive officers and directors as a group.
Beneficial ownership has been determined in accordance with the rules and
regulations of the SEC and includes voting or investment power with respect to
the shares. Unless otherwise indicated, the persons named in the table below
have sole voting and investment power with respect to the number of shares
indicated as beneficially owned by them.
Percentage of Percentage of
Common Stock Common Stock Common Stock
Name of Beneficial Owner (1) Beneficially Owned (2) Before Offering (2) After Offering (3)
--------------------------------------- ------------------------- ------------------------ ----------------------
Sirus Ahmadi 14,779,131 40.4% 12.9%
Keith Tanaka 2,155,290 5.9% 1.9%
All Directors and Executive Officers
as a Group (2 persons) 16,934,421 46.3% 14.7%
--------------------------------------- ------------------------- ------------------------ ----------------------
(1) The address of the listed beneficial owners is c/o Conspiracy
Entertainment Holdings, Inc., 612 Santa Monica Blvd., Santa Monica,
California 90401
(2) Applicable percentage ownership is based on 36,615,509 shares of
common stock outstanding as of November 12, 2004, together with
securities exercisable or convertible into shares of common stock
within 60 days of November 12, 2004 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
that are currently exercisable or exercisable within 60 days of
November 12, 2004 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.
(3) Based on 114,865,509 shares of common stock outstanding.
DESCRIPTION OF SECURITIES
The following description of our capital stock is a summary and is
qualified in its entirety by the provisions of our Articles of Incorporation,
with amendments, all of which have been filed as exhibits to our registration
statement of which this prospectus is a part.
DIVIDEND POLICY
We have not previously declared or paid any dividends on our common stock
and we do not anticipate declaring any dividends in the foreseeable future.
There are no restrictions in our articles of incorporation or bylaws that
restrict us from declaring dividends.
Our Board of Directors has no present intention of declaring any cash
dividends, as we expect to re-invest all profits in the business for additional
working capital for continuity and growth. The future declaration and payment of
dividends will be determined by our Board of Directors after considering the
conditions then existing, including the our earnings, financial condition,
capital requirements, and other factors.
20
CAPITAL STRUCTURE
Our authorized capital consists of 140,000,000 shares of common stock, par
value $.001 per share, and no shares of preferred stock. Of our authorized
common stock, we are authorized to issue up to 40,000,000 shares of Class B
Common Stock. As of November 12, 2004, we had 36,615,509 shares of common stock
outstanding. Stockholders: (i) have general ratable rights to dividends from
funds legally available therefor, when, as and if declared by the Board of
Directors; (ii) are entitled to share ratably in all assets of the Company
available for distribution to stockholders upon liquidation, dissolution or
winding up of the affairs of the Company; (iii) do not have preemptive,
subscription or conversion rights, nor are there any redemption or sinking fund
provisions applicable thereto; and (iv) are entitled to one vote per share on
all matters on which stockholders may vote at all stockholder meetings. The
common stock does not have cumulative voting rights, which means that the
holders of more than fifty percent of the common stock voting for election of
directors can elect one hundred percent of the directors of the Company if they
choose to do so.
CONSULTING AGREEMENTS
On August 24, 2004, we entered into a consulting agreement with Moshe
Hartstein. Under the consulting agreement, we paid Mr. Hartstein $55,250 cash
and agreed to issue Mr. Hartstein 500,000 shares of our common stock and Mr.
Hartstein agreed to provide us advisory and consulting services relating to
financial matters and sales and marketing as reasonably requested by us. The
term of the consulting agreement is from August 24, 2004 through November 31,
2004. The shares under the consulting agreement were issued in the name of
Marina Ventures, an entity owned by Mr. Hartstein. We are registering in this
prospectus the 500,000 shares of common stock that we issued to Marina Ventures.
On August 26, 2004, we entered into a consulting agreement with Sol
Financial, Inc. Under this agreement, we paid Sol Financial $15,000 cash and
issued Sol Financial 100,000 shares of our common stock and Sol Financial agreed
to provide us advisory and consulting services relating to financial matters and
sales and marketing as reasonably requested by us. The term of this agreement is
from August 26, 2004 through October 31, 2004. We are registering in this
prospectus the 100,000 shares of common stock that we issued to Sol Financial,
Inc.
On September 28, 2004, we entered into a consulting agreement with Scott
Mac Caughern. Under this agreement, we issued Mr. Mac Caughern: (1) a common
stock purchase warrant to purchase up to 625,000 shares of our common stock,
exercisable until August 31, 2009 at a price of $0.20 per share; and (2) a
common stock purchase warrant to purchase up to 625,000 shares of our common
stock, exercisable until August 31, 2009 at a price of $0.40 per share. Such
warrants are exercisable on a cashless basis unless the share of common stock
underlying the warrants have been registered pursuant to an effective
registration statement under the Securities Act of 1933. We are registering in
this prospectus up to 1,250,000 shares of common stock issuable upon exercise of
these warrants.
AUGUST 31, 2004 FINANCING AND OCTOBER 6, 2004 FINANCING
On August 31, 2004, we sold an aggregate of $1,050,000 principal amount of
5% Secured Convertible Debentures, 21,000,000 Class A Common Stock Purchase
Warrants, and 21,000,000 Class B Common Stock Purchase Warrants, to four
institutional investors. On October 6, 2004, we issued an additional $50,000
principal amount of 5% Secured Convertible Debentures, 1,000,000 Class A Common
Stock Purchase Warrants and 1,000,000 Class B Common Stock Purchase Warrants to
one institutional investor. We received gross proceeds totaling $1,100,000 from
the sale of the Secured Convertible Debentures and the Class A and Class B
Common Stock Purchase Warrants in the foregoing transactions. The purchasers of
the Debentures and Warrants were as follows:
Principal
Amount of Class A Class B
Investor Debentures Warrants Warrants
-------- ---------- -------- --------
Alpha Capital AG $500,000 10,000,000 10,000,000
Stonestreet Limited
Partnership $350,000 7,000,000 7,000,000
Whalehaven Fund Limited $100,000 2,000,000 2,000,000
Whalehaven Capital LP $100,000 2,000,000 2,000,000
Whalehaven Capital Fund
Limited $ 50,000 1,000,000 1,000,000
Principal and accrued interest on each of the Debentures is due and
payable on August 30, 2006. Interest is payable on the earlier of a conversion
of the Debentures (as described below) or on the maturity date. At our election
accrued interest on the Debentures may be paid by us in shares of common stock
at the conversion price then in effect. The conversion ratio is $0.05 per share,
subject to adjustment for subsequent lower price issuances by us, as well as
customary adjustment provisions for stock splits, combinations, dividends and
the like. We are registering under this prospectus 22,000,000 shares of common
stock issuable upon conversion of the Debentures, 2,200,000 shares issuable upon
conversion of the convertible debentures with respect to interest accrued
thereon through the maturity date thereof on the second anniversary of their
issuance, and 4,400,000 shares of common stock representing our current good
faith estimate of additional shares issuable to the holders of the Debentures as
liquidated damages through the projected effective date of this registration
statement or as a result of adjustments, as contemplated by certain provisions
of the Securities Purchase Agreement or the related Registration Rights
Agreement. Payment of all amounts due pursuant to the Debentures, as well as our
other obligations to these selling stockholders, is secured by a lien on all of
our assets.
21
Each Class A Warrant is exercisable at a price of $0.20 per share from the
earlier of 65 days after its original issuance or the date on which the shares
of common stock issuable upon exercise of the Class A Warrants are registered
under the Securities Act of 1933. The Class A Warrants are exercisable until
expiration on August 31, 2009. Each Class B Warrant is exercisable at a price of
$0.05 per share from the earlier of 65 days after its original issuance or the
date on which the shares of common stock issuable upon exercise of the Class B
Warrants are registered under the Securities Act of 1933. The Class B Warrants
are exercisable until expiration nine months after the effectiveness of that
registration (subject to extension under certain circumstances). The exercise
price of each of the Warrants is subject to adjustment for subsequent lower
price issuances by the Company, as well as customary adjustment provisions for
stock splits, combinations, dividends and the like. We are registering under
this prospectus 44,000,000 shares of common stock issuable upon exercise of the
Warrants and 4,400,000 shares of common stock representing a good faith estimate
of additional shares issuable to the holders of the Warrants as a result of
adjustments contemplated by certain provisions of the Securities Purchase
Agreement.
The Debentures and the Warrants were issued in a private placement
transaction pursuant to Section 4(2) under the Securities Act of 1933. Pursuant
to the terms of a registration rights agreement, we agreed to include the shares
of common stock issuable upon conversion of the Debentures and upon exercise of
the Warrants in a registration statement under the Securities Act of 1933 to be
filed no later than October 15, 2004 and to use our best efforts to cause such
registration statement to be declared effective no later than November 29, 2004.
In the event we do not meet these deadlines, we may be required to issue
additional shares of common stock to the investors under the terms of the
registration rights agreement.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Bylaws require that we indemnify and hold harmless our officers and
directors for any obligations arising out of any acts or conduct performed on
our behalf. Specifically, our Bylaws provide that we shall and do hereby
indemnify and hold harmless each person and his heirs and administrators who
shall serve at any time hereafter as a director or officer from and against any
and all claims, judgments and liabilities to which such persons shall become
subject by reason of his having heretofore or hereafter been a director or
officer, or by reason of any action alleged to have been heretofore or hereafter
taken or omitted to have been taken by him as such director or officer, and
shall reimburse each such person for all legal and other expenses reasonably
incurred by him in connection with any such claim or liability; including power
to defend such person from all suits as provided for under the provisions of the
Utah Revised Business Corporation Act; provided, however, that no such person
shall be indemnified against, or be reimbursed for, any expense incurred in
connection with any claim or liability arising out of his own negligence or
willful misconduct.
The indemnification provision of our Bylaws do not exclude any other right
to which our officers or directors may lawfully be entitled and it does not
restrict our right to indemnify or reimburse such persons in a proper case, even
though not specifically provided for in the Bylaws. Further, our Bylaws provide
that our directors, officers, employees and agents shall be fully protected in
taking any action or making any payment or in refusing to do so in reliance on
the advice of counsel. These indemnification rights are exclusive of any other
rights to which those seeking indemnification may be entitled under any Bylaw,
agreement, vote of stockholders, or disinterested directors, or otherwise, both
as to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer or employee and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On July 22, 2003, our Board of Directors resolved as follows:
We engaged Chisholm and Associates as our independent accountants for the
fiscal year ending June 30, 2003. During the most recent fiscal year and any
subsequent interim period prior to engaging Chisholm and Associates, we did not
consult with Chisholm and Associates regarding either (i) the application of
accounting principals to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on our financial statements;
or (ii) any matter that was either the subject matter of a disagreement (as
defined in Item 304(a)(1)(iv) of Regulation S-B) and the related instructions)
or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-B).
22
Chisholm and Associates reviewed the disclosure required by Item 304(a)
before it was filed with the Commission and has been provided an opportunity to
furnish us with a letter addressed to the Commission containing any new
information, clarification of the expression of our views, or the respects in
which it does not agree with the statements made by us in response to Item
304(a).
Our previous auditor's reports on the financial statements for either of
the past two years contained no adverse opinion or disclaimer of opinion, nor
were modified as to uncertainty, audit scope or accounting principles. During
the two most recent fiscal years and later interim period through the
termination of the client-auditor relationship, there were no disagreements of
the type described under Item 304(a)(1)(iv)(A) of Regulation S-B.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be
passed upon for us by Sichenzia Ross Friedman Ference LLP, New York, New York.
EXPERTS
Our financial statements at December 31, 2003 appearing in this prospectus
and registration statement have been audited by Chisholm, Bierwolf & Nilson,
LLC, independent registered public accounting firm, as set forth on their report
thereon appearing elsewhere in this prospectus, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
Our financial statements at December 31, 2002 appearing in this prospectus
and registration statement have been audited by Singer Lewak Greenbaum &
Goldstein LLP, independent registered public accounting firm, as set forth on
their report thereon appearing elsewhere in this prospectus, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Conspiracy Entertainment Holdings,
Inc., filed as part of the registration statement, and it does not contain all
information in the registration statement, as certain portions have been omitted
in accordance with the rules and regulations of the Securities and Exchange
Commission.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, which requires us to file reports, proxy
statements and other information with the Securities and Exchange Commission.
Such reports, proxy statements and other information may be inspected by public
reference facilities of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Because we file documents
electronically with the SEC, you may obtain this information by visiting the
SEC's Internet website at http://www.sec.gov.
23
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
PERIODS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
------------------------------------------------
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-4
Notes to Financial Statements F-5
YEARS ENDED DECEMBER 31, 2003 AND 2002 (AUDITED)
------------------------------------------------
Independent Auditors' Report F-6
Independent Auditors' Report F-7
Consolidated Balance Sheet F-8
Consolidated Statements of Operations and Comprehensive Income (Loss) F-10
Consolidated Statements of Stockholders' Equity (Deficit) F-11
Consolidated Statements of Cash Flows F-12
Notes to Financial Statements F-14
F-1
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
2004
-------------
(Unaudited)
Current Assets:
Cash $ 209,193
Cash - Restricted 403,000
Accounts Receivable, net 80,237
-----------
Total Current Assets 692,430
Property and Equipment, Net 32,983
Other Assets:
Capitalized Development Costs and Licenses, Net 720,717
Deposits 8,025
Investments 11,272
-----------
Total Other Assets 740,014
-----------
Total Assets $ 1,465,427
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 776,718
Accounts Payable - Related Party 3,501
Accrued Expenses 13,094
Accrued Interest Payable 90,370
Payroll Taxes Payable 289,275
Deferred Compensation 166,574
Deferred Revenue 368,257
Lease Obligations - Current 7,378
Convertible Notes Payable 1,050,000
Notes Payable 133,760
-----------
Total Current Liabilities 2,898,927
Long-Term Liabilities:
Lease Obligations - Noncurrent 16,783
Less: Current Portion (7,378)
-----------
Total Long-Term Liabilities 9,405
-----------
Total Liabilities 2,908,332
-----------
Stockholders' Equity:
Common Stock, 100,000,000 Shares Authorized, $.001 Par Value,
36,650,509 Shares Issued and Outstanding 36,649
Additional Paid in Capital 2,386,134
Other Comprehensive Income (36,661)
Retained Earnings (Deficit) (3,829,027)
-----------
Total Stockholders' Equity (1,442,905)
-----------
Total Liabilities and Stockholders' Equity $ 1,465,427
===========
The accompanying notes are an integral part of these financial statements.
F-2
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues 27,472 235,468 788,061 979,917
Cost of Sales 20,546 212,944 636,132 713,992
------------ ------------ ------------ ------------
Gross Profit (Loss) 6,926 22,524 151,929 265,924
------------ ------------ ------------ ------------
Operating Expenses:
Depreciation Expense 7,369 9,102 23,630 25,362
Professional Fees 419,181 84,431 561,135 161,888
Salaries & Wages 144,441 243,434 468,734 642,919
General & Administrative 102,070 97,806 260,252 525,905
------------ ------------ ------------ ------------
Total Operating Expenses 673,061 434,773 1,313,751 1,356,075
------------ ------------ ------------ ------------
Net Operating Income (Loss) (666,135) (412,249) (1,161,822) (1,090,150)
------------ ------------ ------------ ------------
Other Income(Expense)
Interest Income -- -- -- 2
Interest Expense (731) (45,942) (37,133) (46,790)
Forgiveness of Debt -- 100,000 2,438,188 100,000
Miscellaneous Income -- 50,000 --
------------ ------------ ------------ ------------
Total Other Income(Expense) (731) 54,058 2,451,055 53,212
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes (666,866) (358,191) 1,289,233 (1,036,939)
Income Tax Expense -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) $ (666,866) $ (358,191) $ 1,289,233 $ (1,036,939)
============ ============ ============ ============
Basic and Diluted Income
(Loss) Per Share $ (0.02) $ (0.02) $ 0.04 $ (0.05)
============ ============ ============ ============
Weighted Average Shares Outstanding 35,600,814 20,179,036 33,130,851 20,179,036
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-3
CONSPIRACY ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2004 2003
----------- -----------
Cash Flows from Operating Activities:
Net Income (Loss) $ 1,289,233 $(1,036,939)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations:
Depreciation & Amortization 23,630 25,362
Stock Issued for Services 155,298 --
Stock Issued for Relief of Accounts Payable 259,300 --
Forgiveness of Deferred Compensation 450,000 --
Change in Operating Assets and Liabilities:
(Increase) Decrease in Accounts Receivable (60,237) (2,060,077)
(Increase) Decrease in Prepaid Expenses 11,559 8,002
Increase (Decrease) in Accounts Payable and Accrued Expenses (2,711,027) 2,613,206
Increase (Decrease) in Deferred Revenue 99,580 140,080
Increase (Decrease) in Deferred Compensation (249,756) 120,665
----------- -----------
Net Cash Provided(Used) by Operating Activities (732,420) (189,700)
Cash Flows from Investing Activities:
Payments for Development Costs and Licenses (149,507) 89,021
Payments for Property and Equipment -- (2,872)
----------- -----------
Net Cash Provided (Used) by Investing Activities (149,507) 86,149
Cash Flows from Financing Activities:
Proceeds from Notes Payable 139,019 --
Proceeds from Convertible Notes Payable 1,075,000 194,376
Proceeds from Exercise of Stock Warrant 245,000 --
Proceeds from Issuance of Common Stock 278,800 --
Payments for Capital Leases (8,528) (8,274)
Principal Payments on Notes Payable (279,500) (42,372)
----------- -----------
Net Cash Provided (Used) by Financing Activities 1,449,791 143,730
----------- -----------
Increase (Decrease) in Cash 567,864 40,179
Cash and Cash Equivalents at Beginning of Period 44,329 115,994
----------- -----------
Cash and Cash Equivalents at End of Period $ 612,193 $ 156,173
=========== ===========
Cash Paid For:
Interest $ -- $ --
=========== ===========
Income Taxes $ -- $ --
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
September 30, 2004
GENERAL
Conspiracy Entertainment Holdings, Inc. (the Company) has elected to omit
substantially all footnotes to the financial statements for the nine months
ended September 30, 2004 since there have been no material changes (other than
indicated in other footnotes) to the information previously reported by the
Company in their Annual Report Form 10-KSB filed for the fiscal year ended
December 31, 2003.
UNAUDITED INFORMATION
The information furnished herein was taken from the books and records of the
Company without audit. However, such information reflects all adjustments which
are, in the opinion of management, necessary to properly reflect the results of
the interim period presented. The information presented is not necessarily
indicative of the results from operations expected for the full fiscal year.
STOCKHOLDERS' EQUITY
On March 10, 2004, the Company issued 1,492,536 shares of common stock in
satisfaction of $1,000,000 in convertible notes payable. Accordingly, additional
paid-in-capital has been credited $998,508.
On May 17, 2004, the Company issued 2,792,200 shares of common stock for cash at
a price of $.10 per share. Accordingly, additional paid-in-capital has been
credited $276,008.
During the quarter ended June 30, 2004, shareholders of the Company exercised
their stock warrants in the Company. The Company issued 245,000 shares of common
stock at an exercise price of $1.00 per share. Common stock and related
additional paid-in capital have been increased by $245 and $244,755,
respectively.
During the quarter ended September 30, 2004, the Company issued 648,250 shares
of common stock to relieve $259,300 in accounts payable. Further more, the
Company issued 600,000 and 712,977 shares of common stock for services valued at
$84,000 and $71,298 respectively.
Conspiracy Entertainment Holdings, Inc. Notes to the Consolidated Financial
Statements September 30, 2004
ACCOUNTS PAYABLE - SWING ENTERTAINMENT
On June 22, 2004, an agreement between Conspiracy Entertainment Holdings, Inc.
("Conspiracy") and SWING! Media AG ("SWING"), a German corporation, was reached
wherein $2,438,188 in accounts payable to SWING were forgiven pursuant to
bankruptcy proceedings by SWING. SWING was a non-related party to Conspiracy.
Accordingly, the full amount has been charged to other income.
LEGAL MATTERS - SEGA US
On September 28, 2004 the Company received a cease and desist email notification
from SEGA US who is apparently the new publisher of game titles under the
Company's July 7, 2003 software licensing agreement with Constant Entertainment
LLP - SEGA Limited. The agreement with Constant Entertainment LLP provides for
multiple titles to be released individually. With the full knowledge and
instructions of SEGA, the Company presented a project to release titles as a
10-in-1 package. Constant Entertainment received a termination letter from 3D
AGES/SEGA for the US publishing rights to the titles under the Company's
agreement due to the proposal to release titles as a 10-in-1 package, rather
than individually. The Company believes the actions of SEGA/3D AGES are not
valid and in fact its agreement with Constant may be have been infringed by a
third party (SEGA US). On October 13, 2004 the Company retained legal counsel to
represent it in this matter.
F-5
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Conspiracy Entertainment Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Conspiracy
Entertainment Holdings, Inc., as of December 31, 2003 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
financial statements of Conspiracy Entertainment Holdings, Inc., for the year
ended December 31, 2002, were audited by other auditors whose report dated April
30, 2003 expressed an unqualified opinion.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Conspiracy
Entertainment Holdings, Inc. as of December 31, 2003 and the consolidated
results of its operations and cash flows for the year 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. The Company has incurred
ongoing operating losses and does not currently have financing commitments in
place to meet expected cash requirements through 2003. Additionally, the Company
is in default on its debt obligations. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty.
/S/ CHISHOLM, BIERWOLF & NILSON, LLC
Chisholm, Bierwolf & Nilson, LLC
Bountiful, Utah 84010
March 5, 2004
F-6
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
Conspiracy Entertainment Corporation
We have audited the accompanying statements of operations and comprehensive
income (loss), shareholder's deficit, and cash flows of Conspiracy Entertainment
Corporation (a California corporation) for the year ended December 31, 2002.
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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Conspiracy
Entertainment Corporation for the year ended December 31, 2002 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a good concern. As discussed in Note 7 to the financial
statements, during the year ended December 31, 2002, the Company incurred a net
loss of $1,726,895. In addition, the Company had an accumulated deficit of
$2,865,813 at December 31, 2002. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 7. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 23, 2003
F-7
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Balance Sheets
December 31,
2003
ASSETS
Current Assets
Cash $ 44,329
Accounts Receivable (net of allowance of $0) 20,000
Prepaid expenses 11,559
Total Current Assets 75,888
Property & Equipment (Net) 56,615
Other Assets
Capitalized software development and licenses 571,210
Deposits 8,025
Investments 11,272
Total Other Assets 590,507
Total Assets $723,010
The accompanying notes are an integral part of these financial statements.
F-8
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Balance Sheets
(continued)
December 31,
2003
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 3,287,175
Accounts Payable-related party 262,801
Accrued Expenses 68,672
Payroll Taxes Payable 283,757
Deferred Compensation 416,330
Deferred Revenue 268,677
Current Portion of Lease Obligations 15,906
Notes Payable 274,241
Convertible Notes Payable 950,000
Total Current Liabilities 5,827,559
Long-Term Liabilities
Capital Lease Obligations 25,311
Less Current Portion (15,906)
Total Long-Term Liabilities 9,405
Total Liabilities 5,836,964
Stockholders' Equity
Commitments and Contingencies
Common Stock, Authorized 140,000,000 Shares, $.001 Par Value,
Issued and Outstanding 30,159,546 shares 30,159
Additional Paid in Capital 4,225
Other Comprehensive Income (Loss) (30,082)
Retained Earnings (Deficit) (5,118,256)
Total Stockholders' Equity (5,113,954)
Total Liabilities and Stockholders' Equity $ 723,010
The accompanying notes are an integral part of these financial statements.
F-9
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Year Ended
December 31,
2003 2002
Revenues, Net
Product Sales $ 1,881,629 $ 5,162,685
License Revenue 495,478 1,167,205
Total Revenues 2,377,107 6,329,890
Cost of Sales
Product Costs 1,161,808 3,053,457
License Development 1,092,211 2,826,304
Total cost of sales 2,254,019 5,879,761
Gross Profit (Loss) 123,088 450,129
Operating Expenses
General & Administrative 689,144 941,941
Professional Fees 890,148 164,881
Wages & Salaries 815,133 1,065,701
Total Operating Expenses 2,394,425 2,172,523
Net Operating Income (Loss) (2,271,337) (1,722,394)
Other Income(Expense)
Interest Income 2 23
Interest Expense (50,309) (3,724)
Other Income (Expense) 70,000 --
Total Other Income(Expense) 19,693 (3,701)
Income (Loss) Before Income Taxes (2,251,644) (1,726,095)
Provision for Income Taxes 800 800
Net Income (Loss) $ (2,252,444) $ (1,726,895)
Basic and Diluted Income
(Loss) Per Share $ (0.10) $ (0.09)
Weighted Average Shares Outstanding 21,857,762 19,090,500
A summary of the components of other
comprehensive income (loss) for the
years ended December 31, 2003 and 2002
is as follows
Net Income(Loss) $ (2,252,444) $ (1,726,895)
Foreign currency translation (30,082) -
Total Other Comprehensive Income (Loss) $ (2,282,526) $ (1,726,895)
The accompanying notes are an integral part of these financial statements.
F-10
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
Common Stock Committed Additional Other Retained
----------------------------- Common Paid-in Comprehensive Earnings
Shares Amount Stock Capital Income (Deficit)
-------------------------------------------------------------------------------------------------
Balance, December 31, 2001 19,090,500 $ 19,091 -- $ 12,182 $(1,138,918)
Common stock committed as
compensation expense -- -- 3,112 -- --
Net loss for the year ended
December 31, 2002 -- -- -- -- (1,726,895)
-------------------------------------------------------------------------------------------------
Balance, December 31, 2002 19,090,500 $ 19,091 $ 3,112 $ 12,182 $(2,865,813)
Reverse merger
adjustement (note 1) 8,606,646 8,606 (8,606) --
Issuance of committed shares 2,462,400 2,462 (3,112) 650
Foreign Currency Translation
adjustment to Notes Payable
(British pound to USD) (30,082)
Net loss for the year ended
December 31, 2003 (2,252,444)
-------------------------------------------------------------------------------------------------
Balance, December 31, 2003 30,159,546 $ 30,159 $ -- $ 4,226 $(30,082) $ (5,118,257)
=================================================================================================
The accompanying notes are an integral part of these financial statements.
F-11
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Statements of Cash Flows
For the Year Ended
December 31,
2003 2002
Cash Flows from Operating Activities:
Net Income (Loss) $(2,252,444) $(1,726,895)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations:
Depreciation & Amortization 38,410 38,605
Amortization of capitalized development costs and licenses 1,188,726 5,160,291
Issuance of committed stock as compensation expense -- 3,112
Change in Operating Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable 2,237,869 540,986
Prepaid expenses (562) (8,732)
Increase (Decrease) in:
Accounts Payable and accrued expenses (1,308,210) (35,739)
Due to related party (20,000) (7,199)
Deferred compensation 111,930 304,400
Deferred revenue (439,645) 625,756
Net Cash Provided(Used) by Operating Activities (443,926) 4,894,585
Cash Flows from Investing Activities:
Purchase of development costs and licenses (514,412) (5,283,372)
Purchase of property and equipment -- (7,823)
Net Cash Provided (Used) by Investing Activities (514,412) (5,291,195)
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Payable 915,128
Proceeds from convertible note payable -- 300,000
Principal Payments on notes payable (15,700)
Principal Payments on capital lease obligations (12,755) (12,270)
Net Cash Provided (Used) by Financing Activities 886,673 287,730
Increase (Decrease) in Cash (71,665) (108,880)
Cash and Cash Equivalents at Beginning of Period 115,994 224,874
Cash and Cash Equivalents at End of Period $ 44,329 $ 115,994
The accompanying notes are an integral part of these financial statements.
F-12
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Statements of Cash Flows (Continued)
For the Year Ended
December 31,
2003 2002
Cash Paid For:
Interest $ -- $ 3,724
Income Taxes $ 800 $ 800
Non-Cash Investing and Financing Activities:
Receivables assigned to payable vendor $ -- $2,133,165
Assets purchased on capital lease $ -- $ 72,199
Stock Issued for Marketing Rights $ -- $ --
The accompanying notes are an integral part of these financial statements.
F-13
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
The financial statements presented are those of Conspiracy Entertainment
Holdings, Inc., (formerly Lance Systems, Inc.) (the Company). The Company was
incorporated under the laws of the state of Utah on July 29, 1982 as Strategic
Recovery Corporation. On February 16, 1987, the Company merged with Lance, Inc.,
(a Utah Corporation), and changed its name to Lance Systems, Inc. The Company
was organized for the purpose of acquiring investments. However, subsequent to
the merge, the Company changed its purpose from acquiring investments to
creating, developing and selling micro computer software. The Company has ceased
operations and is presently seeking new business opportunities believed to hold
a potential for profit. The Company is considered a development stage company as
defined in SFAS No. 7.
On October 7, 2003, the Company effected a reorganization and acquisition
agreement with Conspiracy Entertainment Holdings, Inc. (CEG). The reorganization
agreement provided for the issuance of 21,552,900 shares of common stock to the
shareholder of CEG, for all outstanding shares of CEG. Pursuant to the
acquisition, CEG became a wholly-owned subsidiary of the Company, and the name
of the Company was changed to Conspiracy Entertainment Holdings, Inc. The
reorganization was recorded as a reverse acquisition using the purchase method
of business combination. In a reverse acquisition all accounting history becomes
that of the accounting acquirer, therefore all historical information prior to
the acquisition is that of CEG. The shares issued to the shareholders of CEG
have been stated retroactively, as though a 1,026 for 1 stock split occurred.
The reverser merger adjustment is therefore all the shares held by the Lance
shareholders prior to the acquisition.
b. Accounting Method
The Company recognizes income and expense on the accrual basis of accounting.
The Company has elected a December 31 year end.
c. Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less to be cash equivalents.
d. Receivables
The Company sells its products throughout the United States. The Company
evaluates its accounts receivable on a regular basis for collectibility and
provides for an allowance for potential credit losses as deemed necessary.
F-14
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
e. Assignment of Accounts Receivable
Regularly, the Company assigns its receivables to vendors with recourse and
accounts for such assignments in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 140 " Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities. " Assigned accounts
receivable are shown on the accounts receivable section of the balance sheet
until collected by the beneficiary. Should the accounts receivable become
uncollectible, the Company is ultimately responsible for paying the vendor and
recording an allowance for potential credit losses as deemed necessary. The
assigned accounts receivable are generally collected within 90 days; therefore,
the balance shown approximates its fair value.
f. Capitalized Development Costs and Licenses
Capitalized development costs include payments made to independent software
developers under development agreements, as well as direct costs incurred for
internally developed products.
The Company accounts for software development costs in accordance with SFAS No.
86 " Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed. " Software development costs are capitalized once
technological feasibility of a product is established and such costs are
determined to be recoverable. Technological feasibility of a product encompasses
both technical design documentation and game design documentation.
CAPITALIZED DEVELOPMENT COSTS
For products where proven technology exits, this may occur early in the
development cycle. Technological feasibility is evaluated on a
product-by-product basis. Prior to a product's release, the Company expenses, as
part of cost of sales, development costs when the Company believes such amounts
are not recoverable. Amounts related to capitalized development costs that are
not capitalized are charged immediately to cost of sales. The Company evaluated
the future recoverability of capitalized amounts on a quarterly basis. The
recoverablility of capitalized development costs is evaluated based on the
expected performance of the specific products for which the costs relate. The
following criteria are used to evaluate expected product performance: historical
performance of comparable products using comparable technology and orders of the
product prior to its release.
F-15
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Commencing upon product release, capitalized development costs are amortized to
cost of sales - software royalties and amortization is based on the ratio of
current revenues to total projected revenues, generally resulting in an
amortization period of one year or less. For products that have been released in
prior periods, the Company evaluates the future recoverability of capitalized
amounts on a quarterly basis. The primary evaluation criterion is actual title
performance.
CAPITALIZED LICENSES
Capitalized license costs represent license fees paid to intellectual property
rights holders for use of their trademarks or copyrights in the development of
the products. Depending on the agreement with the rights holder, the Company may
obtain the rights to use acquired intellectual property in multiple products
over multiple years, or alternatively, for a single product over a shorter
period of time.
The Company evaluates the future recoverability of capitalized licenses on a
quarterly basis. The recoverability of capitalized license costs is evaluated
based on the expected performance of the specific products in which the licensed
trademark or copyright is to be used. Prior to the related product's release,
the Company expenses, as part of cost of sales, licenses when the Company
believes such amounts are not recoverable. Capitalized development cost for
those products that are cancelled or abandoned are charged to cost of sales. The
following criteria are used to evaluated expected product performance:
historical performance of comparable products using comparable technology and
orders of the product prior to its release.
Commencing upon the related products release, capitalized license costs are
amortized to cost of sales - licenses based on the ratio of current revenues for
the specific product to total projected revenues for all products in which the
licensed trademark or copyright will be utilized. As license contracts may
extend for multiple years, the amortization of capitalized intellectual property
license costs relating to such contracts may extend beyond one year. For
intellectual property included in products that have been released, the Company
evaluates the future recoverability of capitalized amounts on a quarterly basis.
The primary evaluation criterion is actual title performance.
F-16
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
g. Property and Equipment
Software and equipment as of December 31, 2003 consists of the following and are
recorded at cost:
2003
Development tools $ 25,910
Furniture and fixtures 70,878
Equipment held under capital lease agreements 72,199
Leasehold improvements 24,457
Total fixed assets 193,444
Accumulated depreciation 136,831
Net software and equipment $ 56,613
Provision for depreciation of software and equipment is computed on the
straight-line method for financial reporting purposes. Depreciation is based
upon estimated useful lives as follows:
Computer equipment 5 Years
Software and loan costs 3 Years
Office equipment 6 Years
Furniture and fixtures 10 Years
Leasehold improvements 5 Years
Maintenance, repairs, and renewals which neither materially add to the value of
the equipment nor appreciably prolong its life are charged to expense as
incurred.
Depreciation charged to operations was $38,410 and $38,605 for the years ended
December 31, 2003 and 2002, respectively.
In accordance with Financial Accounting Standards Board Statement No. 144, the
Company records impairment of long-lived assets to be held and used or to be
disposed of when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the carrying
amount. At December 31, 2003 and 2002, no impairments were recognized.
h. Revenue Recognition
Revenue from video game distribution contracts, which provide for the receipt of
non-refundable guaranteed advances, is recognized when the games are delivered
to the distributor by the manufacturer under the completed contract method,
provided the other conditions of sale as established by the Securities and
Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101, " Revenue
Recognition ," are satisfied:
F-17
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
i. Persuasive evidence of an arrangement exists.
ii. Delivery has occurred or services have been rendered.
iii. The seller's price to the buyer is fixed or determinable.
iv. Collectibility is reasonably assured
Until all of the conditions of the sale have been met, amounts received on such
distribution contracts are recorded as deferred income. Although regularly the
Company enters into the assignment of accounts receivable to vendors, the
Company does not record revenues net versus gross per Emerging Issues Task Force
("EITF") No. 99-19, " Reporting Revenue Gross as a Principal versus Net as an
Agent ," since the Company:
i. Acts as the principal in the transaction.
ii. Takes title to the products.
iii. Has risks and rewards of ownership, such as the risk of loss for
collection, delivery, or returns.
iv. Does not act as an agent or broker.
At all times, the Company maintains control of the development process and is
responsible for directing the vendor. Other than for payment, the customer does
not communicate with the vendor.
The Company utilizes the completed contract method of revenue recognition as
opposed to the percentage-of-completion method of revenue recognition for
substantially all of its products since the majority of its products are
completed within six to eight months. The Company completes the products in a
short period of time since the Company obtains video games that are partially
complete or obtains foreign language video games published by foreign
manufacturers that are completed.
i. Advertising and Marketing Expense
The Company expenses advertising and marketing costs as incurred. Advertising
and marketing expense for the years ended December 31, 2003 and 2002 was
$184,731 and $245,936, respectively
F-18
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
j. Earnings (Loss) Per Share of Common Stock
The Company reports loss per share in accordance with SFAS No. 128 " Earnings
per Share. " Basic net loss per common share is computed by dividing net loss
available to common stockholder by the weighted average number of common shares
outstanding. Diluted net loss per common share is computed by dividing net loss
available to common stockholders by the weighted average number of common shares
and dilutive potential common share equivalents then outstanding. Potential
common shares consist of shares issuable upon the exercise of stock options and
warrants and upon the conversion of the convertible note payable. The
calculation of the net loss per share available to common stockholders for the
years ended December 31, 2003 and 2002 does not include potential shares of
common stock equivalents, as their impact would be antidilutive.
For the Years Ended
December 31,
Basic Earnings per share: 2003 2002
Income (Loss)(numerator) $ (2,252,444) $ (1,726,895)
Shares (denominator) 21,857,762 19,090,500
Per Share Amount $ (.10) $ (.09)
k. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
l. Fair Value of Financial Instruments
The fair value of the Company's cash and cash equivalents, receivables, accounts
payable, accrued liabilities and notes payable approximate carrying value based
on their effective interest rates compared to current market prices.
NOTE 2 - INCOME TAXES
The provision for income taxes is based on income and expense reported in the
financial statements, which differs from that reported for income tax purpose.
Accordingly, deferred income taxes are provided in recognition of such
differences. Temporary differences include differences between book and tax
depreciation and benefits derived from net operating losses. At December 31,
2003, the Company had net operating losses totaling approximately $5,100,000
which begin to expire in the year 2015.
F-19
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 2 - INCOME TAXES (Continued)
Income tax liabilities, expense and deferred taxes are computed by following the
procedures outlined in Financial Accounting Standards Board Statement No. 109, "
Accounting for Income Taxes ." The applicable federal and state tax rates in
effect at December 31, 2003 and 2002 were used in calculating the income tax
liabilities, expense, and deferred taxes.
The actual tax benefit differs from the expected tax benefit computed by
applying the United States federal corporate tax rate of 34% to loss before
income taxes as follows for the years ended December 31, 2003 and 2002:
2003 2002
Expected tax benefit $(765,800) $(587,000)
State income taxes, net of federal benefit (112,600) (101,000)
Changes in valuation allowance 879,200 687,500
Other -- 1,300
Total $ 800 $ 800
The following table summarizes the significant components of the Company's
deferred tax asset at December 31, 2003:
2003
Deferred tax assets
Deferred revenue $ 91,300
State taxes --
Net operating loss carry-forwards 1,734,000
Valuation allowance (1,825,300)
Net deferred tax asset $ --
The Company has recorded a valuation allowance to reflect the estimated amount
of deferred tax assets which may not be realized, principally due to the
expiration of net operating loss carry forwards. As of December 31, 2003 and
2002, a valuation allowance has been recorded in the amount of $(1,825,300) and
$(687,000), respectively.
NOTE 3 - Convertible Notes Payable
On February 25, 2003, the Company entered into a convertible notes payable
agreement with Calluna Capital Corporation for $450,000, of which $300,000 was
received on December 10, 2002. The convertible note payable is secured by the
general credit of the Company, the personal guarantee of the Company's Chief
Executive Officer, and 9,000 shares of outstanding common stock held by the
Chief Executive Officer.
F-20
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 3 - Convertible Notes Payable (Continued)
On August 5, 2003, the Company entered into a convertible notes payable
agreement with Fraser Lakes Enterprises, Ltd. for $500,000. The convertible note
payable is secured by the general credit of the Company and the personal
guarantee of the Company's Chief Executive Officer, and Chief Operations
Officer.
The convertible notes payable are non-interest bearing and due on demand. The
loans are repayable by the issuance of 1,492,537 shares of the Company's common
stock at a preset conversion rate of $.67 per share.
NOTE 4 - Notes Payable
The Company has the following notes payable obligations:
December 31,
2003
Note Payable, to individual, unsecured,
non-interest bearing and due on demand $ 12,500
Note Payable, to individual, interest payable
annually at 50,000, unsecured and due on demand 261,741
Total Notes Payable 274,241
Less Current Maturities 274,241
Total Long-Term Notes Payable $ --
Following are maturities of long-term debt for each of the next five years:
Year Amount
---- ------
2004 $ 274,241
2005 -
2006 -
2007 -
2008 -
Total $ 274,241
F-21
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 5 - Commitments and Contingencies
LEASE COMMITMENTS
The Company leases certain facilities for its corporate and operations offices
under a non-cancelable operating lease agreement that expires in April 2006. The
Company also leases certain office equipment and a vehicle under non-cancelable
capital lease arrangements that expire through September 2005. Future minimum
lease payments under non-cancelable operating and capital leases with initial or
remaining terms of one year or more at December 31, 2003 were as follows:
Year Ending Operating Capital
December 31, Leases Leases
2004 $ 49,424 $ 17,464
2005 50,900 10,630
2006 17,132 -
Total $ 117,456 28,094
Less amount representing interest 2,783
Total 25,311
Less current portion 15,906
Long-term portion $ 9,405
Included in property and equipment is capitalized leased equipment of $72,199
with accumulated depreciation of $41, 107 at December 31, 2003.
Rent expense was $89,226 and $119,184 for the years ended December 31, 2003 and
2002, respectively.
LITIGATION
On July 22, 2003, the Company filed a lawsuit in the Superior Court of
California, County of Los Angeles, against Bravado International Group, Inc. and
Cousins Entertainment, Inc. seeking damages in an amount of not less than
$5,000,000 in connection with the breach of a contract for the development and
exploitation of a computer game. The complaint states causes of action based on
fraud and deceit, conspiracy to defraud, breach of contract, and breach of the
covenant of good faith and fair dealing. On December 24, 2003, the Company filed
an amended complaint alleging the above claims and adding claims based on
tortuous interference with contractual relations and tortuous interference with
prospective economic advantage against Cousins Entertainment, Inc. The
conspiracy to defraud and tortuous interference with prospective economic
advantage claims were against Cousins Entertainment were dismissed. The Company
is proceeding against Bravado International Group based on claims for fraud and
deceit, conspiracy to defraud, breach of contract and breach of the covenant of
good faith and fair dealing, and against Cousins Entertainment on the claim for
tortuous interference with contractual relations, reserving the Company's right
to re-allege the conspiracy to defraud claim against Cousins Entertainment
should subsequent discovery indicate the viability of such claim. On September
16, 2003, Bravado International Group filed its answer with a cross-complaint
alleging breach of contract against the Company and seeking damages of $50,000
plus interest, attorney's fees and costs. On April 9, 2004, Cousins
Entertainment filed its answer with a cross-complaint alleging unauthorized use
of name, image and likeness under California Civil Code section 3344 and common
law misappropriation of the right of publicity against us and seeking damages in
excess of $10,000,000, disgorgement of profits, proceeds or other consideration
received by us, punitive damages, attorney's fees and costs. Discovery is
proceeding and the Company intends to vigorously pursue its claims, while at the
same time contest the claims brought against the Company by way of Bravado
International Group's and Cousins Entertainment's cross-complaints.
F-22
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 6 - Agreements
EMPLOYMENT AGREEMENTS
On January 1, 2002, the Company entered into three-year employment agreements
with its President and its Chief Financial Officer, providing for annual
salaries of $324,000, plus benefits, and $134,400, plus benefits, respectively.
In addition, per the agreement, each employee is entitled to a corporate vehicle
monthly allowance of $800 and $500, respectively. The Chief Financial Officer is
also entitled to 10% of the Company's total issued and outstanding common shares
as of the date of the agreement. As of December 31, 2003, the Company recorded
$812,589 of compensation expense, of which $1,556 is related to committed common
stock, and $416,330 of deferred compensation as related to these agreements.
WITHHOLDING TAX PAYABLE
The Company withholds 10% of all foreign sales intended to be remitted to the
Internal Revenue Service ("IRS"). As of December 31, 2003 and 2002 the Company
withheld $117,400 and $94,500, respectively. As of December 31, 2003, the
Company had not remitted any of the 2001, 2002 or 2003 withholdings to the IRS
for which it might be subject to penalties and interest. As of December 31,
2003, the Company had not been audited or invoiced by the IRS. The amount due at
December 31, 2003 is included in accounts payable and accrued expenses in the
accompanying balance sheet.
VACATION ACCRUAL
During the years ended December 31, 2003 and 2002, the Company did not accrue
liabilities for vacation payable to employees. The Company's management believes
all vacation earned during and prior to 2003 was utilized by the employees of
the Company as of December 31, 2003, and accordingly, has not recorded an
accrued liability.
NOTE 7 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. However, during the
year ended December 31, 2003, the Company incurred a net loss of $2,252,444. In
addition, the Company had an accumulated deficit of $5,118,256 as of December
31, 2003. These factors raise substantial doubt about the Company's ability to
continue as a going concern.
Recovery of the Company's assets is dependent upon future events, the outcome of
which is indeterminable. Successful completion of the Company's development
program and its transition to the attainment of profitable operations is
dependent upon the Company achieving a level of sales adequate to support the
Company's cost structure. In addition, realization of a major portion of the
assets in the accompanying balance sheet is dependent upon the Company's ability
to meet its financing requirements and the success of its plans to develop and
sell its products. The financial statements do no include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence
F-23
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 8 - ACCOUNTS PAYABLE - SWING ENTERTAINMENT
The Company obtains most of its financing for development costs through Swing
Entertainment. The Company had entered into various licensing agreements with
Swing Entertainment for the development of games. Based on these agreements, the
Company received advances from the vendor in order to finance its operations. On
December 4, 2001, the Company entered into an agreement with Swing Entertainment
to assign its receivables with recourse in return of the extinguishment of its
liability of $410,619.
During the year ended December 31, 2002, the Company entered into several
agreements with Swing Entertainment to assign its receivables with recourse for
the extinguishment of liability of $2,133,165. As of December 31, 2002, the
Company had accounts payable to Swing Entertainment of $4,571,353. In 2003, the
$2,133,165 was applied against the $4,571,353 with $2,438,188 remaining as
accounts payable to Swing Entertainment.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company has a development agreement with one of its investors, ELO
Interactive, for the development of a game. The owner of ELO Interactive also
owned 14% of the Company's common stock as of December 31, 2003. As of December
31, 2002, the Company had $3,501 of accounts payable due to this investee, which
is included in accounts payable due to this investee. During the year ended
December 31, 2002, the Company recorded $10,001 in development expenses related
to this agreement.
As of December 31, 2002, the Company owed $282,801 to one of its developers, who
is also one of the Company's directors and a shareholder. During the year ended
December 31, 2002, the Company did not record any development expense related to
this developer since the expense was incurred during the year ended December 31,
2000. On June 9, 2003 the Company made a payment in the amount of $20,000 to the
above mentioned developer and ended the year with a related party balance of
$262,801.
NOTE 10 - CONCENTRATIONS AND UNCERTAINTIES
Amounts due from one major customer represented 100% of the net accounts
receivable balance at December 31, 2002. Amounts due to one major vendor
represented 94% of the net accounts payable balance at December 31, 2002. Total
net sales earned from two customers constituted 100% of total net sales earned
for the year ended December 31, 2002. Amounts due from one customer represented
100% of the net accounts receivable as of December 31, 2003. Amounts due to one
major vendor represented 74% of the net accounts payable balance at December 31,
2003.
The Company operates in the computer software industry, which is highly
competitive and changes rapidly. The Company's operating results could be
significantly affected by its ability to develop new products and find new
distribution channels for new and existing products.
F-24
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 11 - INVESTMENTS
On January 1, 1998, the Company signed a stock purchase agreement with a
shareholder in return for a 49% investment in ELO Interactive Media Co. ("ELO")
for $11,272. The Company accounts for this investment using the equity method of
accounting. Due to the immateriality of the balance, this amount is included in
other assets on the accompanying balance sheet.
During the year ended December 31, 2001, Swing Entertainment, Inc. ("Swing"),
the Company's major developer and licensor, attempted to acquire the Company. As
part of the intended acquisition, a stock purchase agreement was signed between
the Company and ELO to increase the Company's investment in the vendor from 49%
to 51%. As of December 31, 2002, the acquisition had been canceled, and the
investment remains at 49%.
NOTE 12 - CAPITALIZED DEVELOPMENT COSTS AND LICENSES
Capitalized development costs and licenses at December 31, 2003 consisted of the
following:
Capitalized development costs $ 111,000
Capitalized licenses 564,846
Less accumulated amortization (104,636)
Total $ 571,210
---------
Amortization expense was $1,188,726 and $5,160,291 for the years ended December
31, 2003 and 2002, respectively.
NOTE 13 - NEW TECHNICAL PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FAS 123. SFAS No. 148
amends SFAS No. 123, Accounting for Stock-Based Compensation , to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of SFAS No. 123 to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. This
Statement also amends APB Opinion No. 28, Interim Financial Reporting , to
require disclosure about those effects in interim financial information. SFAS
No. 148 is effective for annual and interim periods beginning after December 15,
2002. The adoption of the interim disclosure provisions of SFAS No. 148 did not
have an impact on the Company's financial position, results of operations or
cash flows. The Company is currently evaluating whether to adopt the fair value
based method of accounting for stock-based employee compensation in accordance
with SFAS No. 148 and its resulting impact on the Company's financial
statements.
F-25
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 13 - NEW TECHNICAL PRONOUNCEMENTS
In January 2003, the Emerging Issues Task Force ("EITF") issued EITF Issue No.
00-21, Accounting for Revenue Arrangements with Multiple Deliverables . This
consensus addresses certain aspects of accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities,
specifically, how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. EITF Issue No. 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003, or entities may elect to report the change in accounting as
a cumulative-effect adjustment. The adoption of EITF Issue No. 00-21 did not
have a material impact on the Company's financial statements.
In January 2003, the FASB issued Interpretation ("FIN") No. 46, Consolidation of
Variable Interest Entities .. Until this interpretation, a company generally
included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. FIN No. 46 requires a variable
interest entity, as defined, to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns.
FIN No. 46 is effective for reporting periods ending after December 15, 2003.
The adoption of FIN No. 46 did not have an impact on the Company's financial
statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities , which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The adoption of
SFAS No. 149 will not have an impact on the Company's financial statements.
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 guidance for certain financial instruments that, under
previous guidance, could be classified as equity or "mezzanine" equity by now
requiring those instruments to be reported as liabilities. SFAS No. 150 also
requires disclosure relating to the terms of those instruments and settlement
alternatives. SFAS No. 150 is generally effective for all financial instruments
entered into or modified after May 31, 2003, and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 did not have an impact on the Company's financial
statements.
F-26
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 13 - NEW TECHNICAL PRONOUNCEMENTS
In December 2003, the SEC issued SAB No. 104. SAB No. 104 revises or rescinds
portions of the interpretative guidance included in Topic 13 of the codification
of staff accounting bulletins in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. It also rescinds the Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers document issued in conjunction
with Topic 13. Selected portions of that document have been incorporated into
Topic 13. The adoption of SAB No. 104 in December 2003 did not have an impact on
the Company's financial position, results of operations or cash flows.
NOTE 14 - Subsequent Events
In April 2004, the Company entered into a settlement agreement with Swing
Entertainment Media (SWING). Pursuant to the agreement the Company will issue
200,000 common shares for relief of all obligations to or from SWING. The effect
of this agreement on the financial statements of the Company is substantial.
Approximately $2.4 million of payables will be converted to equity. An agreement
was also reached which will enable the Company to purchase the "Tiny-Toons" game
for development and marketing for $100,000.
NOTE 15- Warrants
Pursuant to the acquisition agreement between Lance Systems, Inc ("Lance") and
Conspiracy Entertainment Corporation("Conspiracy"), Lance guaranteed a private
placement to raise $1 million for Conspiracy. The funds were to be raised
through the issuance of 1 common share at $.67 per share with one attached
warrant to purchase 1 share of common stock at $1 per share. As of December 31,
2003, the warrants had not been issued due to the incomplete receipt of the $1
million in private placement funding. In March 2004, the funding was completed
and 1,500,000 warrants were issued.
F-27
UP TO 78,850,000
SHARES OF
COMMON STOCK
OF
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
PROSPECTUS
The date of this prospectus is __________, 2004
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Bylaws require that we indemnify and hold harmless our officers and
directors for any obligations arising out of any acts or conduct performed on
our behalf. Specifically, our Bylaws provide that we shall and do hereby
indemnify and hold harmless each person and his heirs and administrators who
shall serve at any time hereafter as a director or officer from and against any
and all claims, judgments and liabilities to which such persons shall become
subject by reason of his having heretofore or hereafter been a director or
officer, or by reason of any action alleged to have been heretofore or hereafter
taken or omitted to have been taken by him as such director or officer, and
shall reimburse each such person for all legal and other expenses reasonably
incurred by him in connection with any such claim or liability; including power
to defend such person from all suits as provided for under the provisions of the
Utah Revised Business Corporation Act; provided, however, that no such person
shall be indemnified against, or be reimbursed for, any expense incurred in
connection with any claim or liability arising out of his own negligence or
willful misconduct.
The indemnification provision of our Bylaws do not exclude any other right
to which our officers or directors may lawfully be entitled and it does not
restrict our right to indemnify or reimburse such persons in a proper case, even
though not specifically provided for in the Bylaws. Further, our Bylaws provide
that our directors, officers, employees and agents shall be fully protected in
taking any action or making any payment or in refusing to do so in reliance on
the advice of counsel. These indemnification rights are exclusive of any other
rights to which those seeking indemnification may be entitled under any Bylaw,
agreement, vote of shareholders, or disinterested directors, or otherwise, both
as to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer or employee and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
NATURE OF EXPENSE AMOUNT
----------------- ------
SEC Registration fee $ 1,248.79
Accounting fees and expenses 5,000.00*
Legal fees and expenses 45,000.00*
-------------
TOTAL $ 51,248.79*
* Estimated
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth information regarding all sales of our
unregistered securities during the past three years.
On February 25, 2003, we entered into a convertible notes payable
agreement with Calluna Capital Corporation for $450,000 of which $300,000 was
received on December 10, 2002. The convertible note was secured by our general
credit, the personal guarantee of our Chief Executive Officer, and 9,000 shares
of outstanding common stock held by our Chief Executive Officer.
On August 5, 2003, we entered into a convertible notes payable agreement
with Fraser Lakes Enterprises, Ltd. for $500,000. The convertible note is
secured by our general credit and the personal guarantee of our Chief Executive
Officer and Chief Operations Officer. The convertible notes payable are
non-interest bearing and due on demand.
The convertible notes payable are non-interest bearing and due on demand.
The loans are repayable by the issuance of 1,492,537 shares of our common stock
at a preset conversion rate of $.67 per share. They were converted and 1,492,537
shares were issued in March 2004.
Pursuant to a Share Exchange Agreement dated May 29, 2003, we issued
21,552,900 shares of common stock to the four shareholders of Conspiracy
Entertainment Corporation, in exchange for all of the issued and outstanding
shares of common stock of Conspiracy Entertainment Corporation.
During the first quarter of 2004, certain of our shareholders exercised
their stock purchase warrants. We issued 210,000 shares of common stock at an
exercise price of $1.00 per share, for gross proceeds of $210,000.
On January 16, 2004, we received $50,000 from Calluna Capital Corporation
under the terms of the February 25, 2003 convertible notes payable agreement
bringing the total amount borrowed to $500,000.
On March 10, 2004, we issued 1,492,536 shares of common stock in
satisfaction of $950,000 in convertible notes payable.
On May 17, 2004, we sold 2,792,200 shares of common stock to accredited
investors for $.10 per share, or an aggregate of $279,220.
On August 24, 2004, we entered into a consulting agreement with Moshe
Hartstein. Under the consulting agreement, we agreed to issue Mr. Hartstein
500,000 shares of our common stock for advisory and consulting services relating
to financial matters and sales and marketing as reasonably requested by us.
These shares were issued in the name of Marina Ventures, an entity owned by Mr.
Hartstein.
On August 26, 2004, we entered into a consulting agreement with Sol
Financial, Inc. Under this agreement, we issued Sol Financial 100,000 shares of
our common stock for advisory and consulting services relating to financial
matters and sales and marketing as reasonably requested by us.
On August 31, 2004, we sold an aggregate of $1,050,000 principal amount of
5% Secured Convertible Debentures, Class A Common Stock Purchase Warrants to
purchase 21,000,000 shares of our common stock, and Class B Common Stock
Purchase Warrants to purchase 21,000,000 shares of our common stock, to four
institutional investors. We received gross proceeds totaling $1,050,000 from the
sale of the Debentures and the Warrants.
On September 28, 2004, we sold a $50,000 principal amount 5% Secured
Convertible Debenture, Class A Common Stock Purchase Warrants to purchase
1,000,000 shares of our common stock, and Class B Common Stock Purchase Warrants
to purchase 1,000,000 shares of our common stock, to one institutional investor.
We received gross proceeds totaling $50,000 from the sale of the Debentures and
the Warrants.
On September 28, 2004, we entered into a consulting agreement with Scott
Mac Caughern. Under this agreement, we issued Mr. Mac Caughern: (1) a common
stock purchase warrant to purchase up to 625,000 shares of our common stock,
exercisable until August 31, 2009 at a price of $0.20 per share; and (2) a
common stock purchase warrant to purchase up to 625,000 shares of our common
stock, exercisable until August 31, 2009 at a price of $0.40 per share.
II-2
All of the above issuances and sales were deemed to be exempt under
Regulation S, Regulation D and/or Section 4(2) of the Securities Act of 1933, as
amended. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors, business associates of ours or our
executive officers, and transfer was restricted by us in accordance with the
requirements of the Securities Act of 1933. For issuances and sales that were
exempt from registration under Regulation S, the shares were purchase in an
"offshore transaction" as defined in, and pursuant to, Regulation S on the basis
that the purchaser was not offered the shares in the United States and did not
execute or deliver any agreement in the United States.
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References
to "the Company" in this Exhibit List mean Conspiracy Entertainment Holdings,
Inc., a Utah corporation.
EXHIBIT NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
2.1 Share Exchange Agreement, dated May 29, 2003, by and among Lance
Systems, Inc., Conspiracy Entertainment Corporation, and Wallace
Boyack and John Spicer (Incorporated by reference to Definitive
Information Statement on Schedule 14C, filed with the Securities and
Exchange Commission on July 2, 2003)
3.1 Articles of Incorporation (Incorporated by reference to registration
statement on Form 10-SB (File No. 000-32427), filed with the
Securities and Exchange Commission on March 9, 2001)
3.2 Articles of Amendment to Articles of Incorporation (Incorporated by
reference to registration statement on Form 10-SB (File No.
000-32427), filed with the Securities and Exchange Commission on
March 9, 2001)
3.3 Articles of Merger (Incorporated by reference to registration
statement on Form 10-SB (File No. 000-32427), filed with the
Securities and Exchange Commission on March 9, 2001)
3.4 Articles of Amendment to Articles of Incorporation (Incorporated by
reference to Definitive Information Statement on Schedule 14C, filed
with the Securities and Exchange Commission on July 2, 2003)
3.5 Bylaws (Incorporated by reference to registration statement on Form
10-SB (File No. 000-32427), filed with the Securities and Exchange
Commission on March 9, 2001)
4.1 Securities Purchase Agreement dated as of August 31, 2004
(Incorporated by reference to Form 8-K, filed with the Securities
and Exchange Commission on September 3, 2004)
4.2 Form of Convertible Debenture (Incorporated by reference to Form
8-K, filed with the Securities and Exchange Commission on September
3, 2004)
4.3 Form of Class A Warrant (Incorporated by reference to Form 8-K,
filed with the Securities and Exchange Commission on September 3,
2004)
4.4 Form of Class B Warrant (Incorporated by reference to Form 8-K,
filed with the Securities and Exchange Commission on September 3,
2004)
4.5 Form of Registration Rights Agreement (Incorporated by reference to
Form 8-K, filed with the Securities and Exchange Commission on
September 3, 2004)
4.6 Form of Security Interest Agreement (Incorporated by reference to
Form 8-K, filed with the Securities and Exchange Commission on
September 3, 2004)
4.7 Supplement No. 1, dated as of September 28, 2004, between the
Company and Whalehaven Capital Fund Limited, to Securities Purchase
Agreement, dated as of August 31, 2004 (Incorporated by reference to
Form 10-QSB, filed with the Securities and Exchange Commission on
November 16, 2004)
4.8 $50,000 principal amount 5% Secured Convertible Debenture issued to
Whalehaven Capital Fund Limited (Incorporated by reference to Form
10-QSB, filed with the Securities and Exchange Commission on
November 16, 2004)
4.9 Class A Common Stock Purchase Warrant issued to Whalehaven Capital
Fund Limited (Incorporated by reference to Form 10-QSB, filed with
the Securities and Exchange Commission on November 16, 2004)
4.10 Class B Common Stock Purchase Warrant issued to Whalehaven Capital
Fund Limited (Incorporated by reference to Form 10-QSB, filed with
the Securities and Exchange Commission on November 16, 2004)
4.11 Common Stock Purchase Warrant issued to Scott Mac Caughern
exercisable at $0.20 per share
4.12 Common Stock Purchase Warrant issued to Scott Mac Caughern
exercisable at $0.40 per share
5.1 Opinion and Consent of Sichenzia Ross Friedman Ference LLP
10.1 Employment Agreement with Sirus Ahmadi dated January 1, 2002
10.2 Employment Agreement with Keith Tanaka dated January 1, 2002
10.3 Licensed Publisher Agreement, dated August 28, 2000, by and between
Sony Computer Entertainment America, Inc. and Conspiracy
Entertainment
II-3
10.4 Publisher License Agreement, dated September 28, 2000, by and
between Microsoft Corporation and Conspiracy Entertainment
Corporation
10.5 Licensed Publisher Agreement, dated October 2, 2000, by and between
Sony Computer Entertainment America, Inc. and Conspiracy
Entertainment
10.6 License Agreement, dated November 9, 2001, between Nintendo of
America Inc. and Conspiracy Entertainment Corporation
10.7 License Agreement, dated November 1, 2002, between Nintendo of
America Inc. and Conspiracy Entertainment Corporation
10.8 Retail License Agreement, dated July 1, 2003, by and between
Discovery Licensing, Inc. and Conspiracy Entertainment Corporation
relating to "The Jeff Corwin Experience"
10.9 Retail License Agreement, dated July 1, 2003, by and between
Discovery Licensing, Inc. and Conspiracy Entertainment Corporation
relating to "Monster Garage"
10.10 Software License Agreement, dated July 7, 2003, between Conspiracy
Entertainment Corporation and Constant Entertainment LLP - SEGA
Limited covering North America, Canada, Mexico and South America
10.11 Software License Agreement, dated July 7, 2003, between Conspiracy
Entertainment Corporation and Constant Entertainment LLP - SEGA
Limited covering Europe
10.12 Consulting Agreement, dated August 24, 2004, between the Company and
Moshe Hartstein
10.13 Consulting Agreement, dated August 26, 2004, between the Company and
Sol Financial, Inc.
10.14 Consulting Agreement, dated September 28, 2004 between the Company
and Scott Mac Caughern
16.1 Letter from HJ & Associates, L.L.C., dated July 22, 2003, on change
in certifying accountant (Incorporated by reference to Form 8-K,
filed with the Securities and Exchange Commission on July 24, 2003)
16.2 Letter from HJ & Associates, L.L.C. on change in certifying
accountant (Incorporated by reference to Form 8-K/A, filed with the
Securities and Exchange Commission on July 30, 2003) 21.1
Subsidiaries of the Company.
23.1 Consent of Chisholm, Bierwolf & Nilson, LLC
23.2 Consent of Singer Lewak Greenbaum & Goldstein LLP
23.3 Consent of Sichenzia Ross Friedman Ference LLP (incorporated in
Exhibit 5.1).
II-4
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement; and Notwithstanding the forgoing, any increase or decrease in volume
of securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in Santa Monica, California on
November 17, 2004.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
By: /S/ SIRUS AHMADI
------------------------------------------
Sirus Ahmadi
Chief Executive Officer and Director
By: /S/ KEITH TANAKA
-------------------------------------------
Keith Tanaka
Chief Financial Officer, Principal
Accounting Officer, Secretary and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ SIRUS AHMADI Chief Executive Officer November 17, 2004
- ----------------------------------- and Director
Sirus Ahmadi
/S/ KEITH TANAKA Chief Financial Officer, Principal November 17, 2004
- ----------------------------------- Accounting Officer, Secretary
Keith Tanaka and Director
/S/ RANDY BROWLEIT Director November 17, 2004
- -----------------------------------
Randy Broweleit
II-6