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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
____________________________to______________________________________
Commission File Number: 333-102555
INVICTA GROUP, INC.
(Exact name of Registrant as specified in its charter)
Nevada 91-2051923
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1165 North Clark Street, Suite 410 Chicago, Illinois 60610
(Address of principal executive offices - Zip Code)
(312) 867-0033
(Registrant's telephone number, including area code)
2400 East Commercial Boulevard, Suite 618, Fort Lauderdale, FL 33308
____________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer (Do not check if a smaller reporting company) [ ]
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On June 30, 2008, 225,965,883 shares of the issuer's common stock were
outstanding.
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
MATTER OF FORWARD-LOOKING STATEMENTS
THIS FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS" THAT CAN BE IDENTIFIED BY
THE USE OF FORWARD-LOOKING WORDS SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL,"
"SHOULD," OR "ANTICIPATES," OR THE NEGATIVE OF THESE WORDS OR OTHER VARIATIONS
OF THESE WORDS OR COMPARABLE WORDS, OR BY DISCUSSIONS OF PLANS OR STRATEGY
THAT INVOLVE RISKS AND UNCERTAINTIES. MANAGEMENT WISHES TO CAUTION THE READER
THAT THESE FORWARD-LOOKING STATEMENTS, INCLUDING, BUT NOT LIMITED TO,
STATEMENTS REGARDING THE COMPANY'S MARKETING PLANS, GOALS, COMPETITIVE
CONDITIONS, REGULATIONS THAT AFFECT PUBLIC COMPANIES THAT HAVE NO EXISTING
BUSINESS AND OTHER MATTERS THAT ARE NOT HISTORICAL FACTS ARE ONLY PREDICTIONS.
NO ASSURANCES CAN BE GIVEN THAT SUCH PREDICTIONS WILL PROVE CORRECT OR THAT
THE ANTICIPATED FUTURE RESULTS WILL BE ACHIEVED. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY EITHER BECAUSE ONE OR MORE PREDICTIONS PROVE TO BE ERRONEOUS
OR AS A RESULT OF OTHER RISKS FACING THE COMPANY. FORWARD-LOOKING STATEMENTS
SHOULD BE READ IN LIGHT OF THE CAUTIONARY STATEMENTS AND IMPORTANT FACTORS
DESCRIBED IN THIS FORM 10-Q FOR INVICTA GROUP, INC., INCLUDING, BUT NOT
LIMITED TO THE MATTERS SET FORTH IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE RISKS INCLUDE, BUT ARE NOT
LIMITED TO, THE RISK FACTORS AND UNCERTAINTIES SET FORTH IN ITEM 1A, RISKS
ASSOCIATED WITH A SMALL COMPANY THAT HAS ONLY A LIMITED HISTORY OF OPERATIONS,
THE COMPARATIVELY LIMITED FINANCIAL RESOURCES OF THE COMPANY, THE INTENSE
COMPETITION THE COMPANY FACES FROM OTHER ESTABLISHED COMPETITORS, ANY ONE OR
MORE OF THESE OR OTHER RISKS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THE FUTURE RESULTS INDICATED, EXPRESSED, OR IMPLIED IN SUCH FORWARD-
LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENT TO REFLECT EVENTS, CIRCUMSTANCES, OR NEW INFORMATION
AFTER THE DATE OF THIS FORM 10-Q OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED
OR OTHER SUBSEQUENT EVENTS.
As used herein, the term "the Company," "we," "us," and "our" refer to
Invicta Group, Inc., a Nevada corporation unless otherwise noted.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Background
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Our business in recent years has been focused on developing and marketing the
use of certain websites and generating advertising revenues from advertising
sold to travel companies in the form of tile ads, banner ads, top destinations
on our home page or advertisements on other internal pages. We have also
market email newsletters to approximately 24 million people through dedicated
emails.
While we believe that this business continues to offer revenue opportunities
for us, we continue to look for opportunities to improve and further enhance
the content and functionality of our websites and, at the same time, to take
whatever steps that we can to increase the amount of internet traffic at these
sites by cross promoting our current sites and email lists while we try to
sell to more potential clients.
To that end and as our financial circumstances and market opportunities allow,
we have added the ability to actually book all types of travel from our sites
with different affiliate programs (Expedia, hotels.com, hotwire, etc.) and,
wherever possible, we earn commissions by selling travel services through our
websites using these affiliate programs.
We are also using our magazine to help cross promote traffic to our web sites
by adding a travel image section in print and online.
As disclosed in our June 27, 2008 Form 8-K, on June 27, 2008 we purchased
certain "City Book Savings" assets from Image Worldwide, Inc. These assets
included the following (the "Assets"):
(a) City Book Savings Website: www.CityBooksavings.com;
(b) Domain name - www.CityBooksavings.com;
(c) Database of clients; and
(d) Future business.
The Assets were acquired from Image Worldwide, Inc. (the "Seller") in exchange
for our issuance of 5,000,000 shares of our newly-designated Series G
Preferred Stock (the "Series G Stock"). Each share of the Series G Preferred
Stock has 1,000 votes per share (and is entitled to vote with our Common Stock
on all matters submitted to our common stockholders), is convertible into
1,000 shares of our common stock, and has a liquidation right to 1,000 shares
of our Common Stock. We did not assume any liabilities of the Seller in
purchasing the Assets.
The acquisition of the Assets was also accompanied by the resignation of our
existing officers and directors and the election of Paul Sorkin as our new
President, Chief Executive Officer, Secretary, Chief Financial Officer, and
Chairman of the Board. Currently, Paul Sorkin, age 37, is the sole officer
and director of our Company. As reported in the Form 8-K dated June 27, 2008,
from 2007 to the present, Mr. Sorkin has served as Chief Executive Officer and
General Counsel at Image Worldwide, Inc. From 2005 to 2007 Mr. Sorkin has
served as Chief Executive Officer and General Counsel at Image Nationwide,
Inc. From 1996 to 2004, he served as Chief Operating Officer and General
Counsel at S & B Collectibles. He holds a B.A. degree from the University of
Illinois (1993) and a J.D. degree from Chicago Kent College of Law (1996).
As set forth in the Form 8-K dated June 27, 2008, the acquisition was also
accompanied by other additional collateral agreements that we entered into
with our former officers and directors in settlement of certain obligations
that we have to them and others relating to consulting services to be provided
in the future. While we have continued to operate our offices in Las Vegas,
Nevada, we also assigned our rights to the lease of our offices in Florida to
our former President and Chairman, William G. Forhan.
By acquiring the Assets from Image Worldwide, Inc. and sharing all our
resources we have developed an internal division that offers print advertising
in direct mailing coupon books called "City Book Savings." To the extent that
we are able, we seek to add advertising opportunities on that website as well.
We view this venture as having similarities to a mini magazine upscale coupon
book with each quarterly coupon book offerings of discount coupons for
restaurants, automobile service providers, clothing stores, lounges, health
clubs, and the like. We anticipate that we may be able to utilize the direct
mailing of these books to also cross-promote the marketing of travel services
and our travel-oriented web sites as well.
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Initially and in an effort to develop our plans further, we plan to undertake
the offering of these coupon books in one zip code area to start. Our plan is
to saturate that geographic market by mailing the "City Book Savings" book to
every address in the zip code and, as circumstances allow, we plan to enter
other zip code market areas depending on sales efforts in other zip code
markets.
We also have plans to develop a new division to be called Tickethotlink.com.
To the extent that we are able, we intend to cross promote Tickethotlink.com
with Travelhotlink.com and the other hotlink sites. We anticipate that this
internet website product will be designed to offer travelers or anyone that
comes to the site the opportunity to buy tickets to any sporting event,
concert, or special event around the country. The software and associations
we plan to use is designed to allow us to sell tickets to potentially
thousands of events on consignment basis in exchange for commissions earned on
ticket sales originating or through our website.
We continue to assess and evaluate the marketing channels utilized in the
travel and entertainment industry. In so doing we may, as our financial
resources and opportunities allow, consider other possible acquisition
opportunities in the travel and entertainment industry. We may also change
and refine our websites and the marketing efforts that we take which may serve
to increase our online traffic at our websites and overall database that may
allow us to offer other products and services in the future.
Results of Operations for the Six Months Ended June 30, 2008 Compared to the
Six Months Ended June 30, 2007
Revenues for the six months ended June 30, 2008 were $26,724 compared with
$54,013 for the six months ended June 30, 2007. This represents a decrease of
$27,289 from 2007. The decrease is due to fewer customers contracting for
advertising campaigns for the six months ended June 30, 2008 compared to the
six months ended June 30, 2007.
Operating expenses for the six months ended June 30, 2008 were $281,229
compared with $535,267 for the six months ended June 30, 2007. This represents
a decrease of $254,038 from 2007. The decrease is primarily due to the write
off of a bad debt during the six months ended June 30, 2007 of amounts
advanced to Maupintour LLC during the period of $118,000. The remainder of the
decrease is due to a decrease in operational expenses due to a reduction in
overall sales volume.
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Net other income/expense was an expense of $2,006,445 for the six months ended
June 30, 2008 which is attributed to a $2,000,000 valuation allowance on
acquired assets and interest expense, compared with net other expense of
$98,705 for the six months ended June 30, 2007, an increase of $1,907,740.
The increase is attributable to the valuation allowance on acquired assets.
The net loss for the six months ended June 30, 2008 was $2,260,950, compared
with a net loss of $579,959 for the six months ended June 30, 2007,
representing a decrease of $1,680,991.
Results of Operations for the Three Months Ended June 30, 2008 Compared to the
Three Months Ended June 30, 2007
Revenues for the three months ended June 30, 2008 were $16,325 compared with
$40,989 for the three months ended June 30, 2007. This represents a decrease
of $24,664 from 2007. The decrease is due to fewer customers contracting for
advertising campaigns for the three months ended June 30, 2008 compared to the
three months ended June 30, 2007.
Operating expenses for the three months ended June 30, 2008 were $114,252
compared with $293,296 for the three months ended June 30, 2007. This
represents a decrease of $179,044 from 2007. The decrease is primarily due to
the write off of a bad debt during the three months ended June 30, 2007 of
amounts advanced to Maupintour LLC during the period of $45,400 and $60,000 of
payroll expense which was suspended in the second quarter of 2008. The
remainder of the decrease is due to a decrease in operational expenses due to
a reduction in overall sales volume.
Net other income/expense was an expense of $2,000,000 for the three months
ended June 30, 2008 which is attributed to a $2,000,000 valuation allowance on
acquired assets, compared with net other expense of $49,627 for the three
months ended June 30, 2007, an increase of $1,950,373. The increase is
attributable to the valuation allowance on acquired assets.
The net loss for the three months ended June 30, 2008 was $2,097,927, compared
with a net loss of $301,934 for the three months ended June 30, 2007,
representing a decrease of $1,795,993.
Liquidity and Capital Resources
The Company had a working capital deficit of $441,132 at June 30, 2008.
Net cash used in operating activities was $71,517 for the six months ended
June 30, 2008, as compared to $313,714 for the six months ended June 30, 2007.
The primary use of cash from operations in 2008 was to fund operations.
Net cash provided by financing activities was $120,060 for the six months
ended June 30, 2008, as compared to $323,965 for the six months ended June 30,
2007. The Company issued $120,060 of common stock in 2008.
The Company's present intentions are to continue selling debt or equity
securities to cover its operating expenses, however, the Company may not
be able to obtain additional funds needed for working capital and operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our operations and our securities are subject to a number of substantial
risks, including those described below. If any of these or other risks
actually occur, our business, financial condition and operating results, as
well as the trading price or value of our common stock could be materially
adversely affected. No attempt has been made to rank these risks in the order
of their likelihood or potential harm. In addition to those general risks
enumerated elsewhere in the document, any purchaser of the Company's common
stock should also consider the following risk factors:
Risks Related to the Company's Operations
We require additional funding which may not be available. If we are unable to
obtain necessary financing on acceptable terms, we may have to curtail our
current or planned operations.
We require additional funding to implement our business plan. Advertising,
marketing, and promotional efforts to increase the stature and traffic volume
to our web sites will require significant financial expenditures and likely
lead to losses and negative cash flow for a considerable period. If we are not
successful in obtaining additional capital, we may have to curtail operations
or postpone plans indefinitely.
We have limited management and limited staff resources to manage our business.
We have one officer and one director, Paul Sorkin and we have no present plans
to increase our management and staff at the present time. While we believe
that this policy is prudent and appropriate in our circumstances, the lack of
additional officers, directors, and additional support staff serves to limit
our ability to conduct in-depth evaluations of our business, our strategy, our
competitive environment, and other critical aspects of our business. As a
result, we may be successful in correctly identifying competitive and industry
trends or, for that matter, in developing strategies that will respond
effectively to the ever-changing competitive environment.
We have no "key man" life insurance on the life of Paul Sorkin .
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Currently, we maintain no "key man" life insurance on the life of Paul Sorkin
and we have no plans to purchase any such insurance in the future. In the
event that Mr. Sorkin becomes ill or incapacitated or in the event of his
death, we may be exposed to significant and protracted losses.
Risks Related to the Company's Common Stock
Our Common Stock is traded on a limited and sporadic basis and the price of
our Common Stock is much lower than that of other common stocks of other
smaller public companies.
Our Common Stock is traded on the Electronic Bulletin Board only a limited and
sporadic basis. To the extent that we are able we will take steps that may
allow the stock to achieve greater liquidity and tradability in the market,
our stock price is trading level is much lower than that of other smaller
public companies. This will likely continue to limit the attractiveness of
our Common Stock and also limit the interest that investors and the overall
market may have in our Common Stock. For these and other reasons, we cannot
assure you that our stock will ever increase in value.
We have issued and outstanding a significant number of Common Stock Purchase
Warrants and Options and shares of Preferred Stock. These securities will
dilute and limit the rights and influence of the holders of our Common Stock.
As a result of our past financing activities, our past compensation
arrangements with our officers, and the recent acquisition of the "City Book
Savings" assets from Image Worldwide, Inc., we have outstanding 5,000,000
shares of our Series G Preferred Stock (each with 1,000 votes per share),
53,332 shares of our Series H Preferred Stock, together with 5,000,000 Common
Stock Purchase Warrants, and 6,160,000 Common Stock Purchase Options. These
outstanding securities together with any shares of our Common Stock that are
issued upon conversion of the $320,671 Promissory Note previously issued to a
former director, William G. Forhan (and which is to be assigned) together with
the amounts we owe to Golden Gate Investors, may result in a large increase in
our Common Stock, further dilution to our existing stockholders, and a further
diminution in the extent of control and influence that our existing
stockholders have over the Company's affairs.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. The term "disclosure controls and procedures," as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act
of 1934, as amended ("Exchange Act"), means controls and other procedures of a
company that are designed to ensure that information required to be disclosed
by the company in the reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures also include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company's management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate, to allow timely decisions regarding
required disclosure. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer concluded as of June 30, 2008, that our disclosure
controls and procedures are effective to a reasonable assurance level of
achieving such objectives. However, it should be noted that the design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
Management's Report on Internal Control Over Financial Reporting
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Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. The internal controls for the Company are provided by executive
management's review and approval of all transactions. Our internal control
over financial reporting also includes those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with U.S. GAAP,
and that our receipts and expenditures are being made only in accordance with
the authorization of our management; and
(3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2007. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated
Framework. Management's assessment included an evaluation of the design of
our internal control over financial reporting and testing of the operational
effectiveness of these controls.
Based on this assessment, management has concluded that as of December 31,
2007, our internal control over financial reporting was effective to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this annual report.
Changes in Internal Control over Financial Reporting
While we have had a complete turnover in our Board of Directors and elected a
new President and Chief Executive Officer effective June 27, 2008, there were
no changes in our internal control over financial reporting during our fiscal
quarter ended June 30, 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
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PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
In General. The purchase of shares of our common stock is very speculative and
involves a very high degree of risk. As a small company, our business
organization and structure all involve elements of risk. In many instances,
these risks arise from factors over which we will have little or no control.
Some adverse events may be more likely than others and the consequence of some
adverse events may be greater than others. No attempt has been made to rank
risks in the order of their likelihood or potential harm.
1) The market price of our common stock may fluctuate significantly.
The market price of our common shares may fluctuate significantly in
response to factors, many of which are beyond our control, such as:
* the announcement of new technologies by us or our competitors;
* quarterly variations in our and our competitors' results of operations;
* changes in earnings estimates or recommendations by securities analysts;
* developments in our industry;
* general market conditions and other factors, including factors unrelated
to our own operating performance;
* changing regulatory exposure, laws, rules and regulations which may
change; and
* tax incentives and other changes in the tax code.
Further, the stock market in general has recently experienced extreme
price and volume fluctuations. Continued market fluctuations could result in
extreme volatility in the price of our common shares, which could cause a
decline in the value of our common shares. You should also be aware that price
volatility might be worse if the trading volume of our common shares is low.
2) Trading of our common stock is limited.
Our Common Stock is traded only on the Bulletin Board. Trading in our
stock has historically been limited and sporadic with no continuous trading
market over any long or extended period of time. This has adversely effected
the liquidity of our common stock, not only in terms of the number of
securities that can be bought and sold at a given price, but also through
delays in the timing of transactions and reduction in security analysts' and
the media's coverage of us. This may result in lower prices for our common
stock than might otherwise be obtained and could also result in a larger
spread between the bid and asked prices for our common stock. There will
likely be only limited liquidity and investors will not likely have the
ability to purchase or sell our common stock in any significant quantities.
This too will sharply limit interest by individual and institutional
investors.
3) Limited Financial Resources and Future Dilution
We are a small company and we have limited financial resources. While
we believe that we have some growth opportunities, we cannot assure you that
we will be successful in obtaining additional financial resources to meet our
financial needs or, we are successful in doing so, that we can obtain such
financial resources on terms that are reasonable in light of our current
financial circumstances. Further, the existing debt securities that we have
issued, including, but not limited to the Note previously issued to Mr.
William G. Forhan (and later assigned to a third party) and the convertible
debt issued to an institutional investor will result in our issuance of
additional shares of our Common Stock which will further dilute our existing
stockholders.
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4) Control by Image Worldwide, Inc.
As a result of the Agreement with Image Worldwide, Inc., on June 27,
2008 control over our Company passed to Image Worldwide, Inc., a Colorado
corporation. The Chief Executive Officer of Image Worldwide, Inc. is Paul
Sorkin who is also currently our President, Chief Executive Officer and
Chairman of the Board. Since Image Worldwide, Inc. owns 5,000,000 shares of
our newly-designated Series G Preferred Stock and each share has the right to
1,000 voting rights and to vote and on all matters submitted to the holders of
our Common Stock, they effectively hold 95.71% of the outstanding voting
rights. On this basis, persons who acquire our common stock have no real
ability to have any influence or control over the Company, its affairs, or its
future direction.
5) Limited Management, Lack of Key Man Life Insurance, & Limited Internal
Evaluation of Business Strategy.
Our sole officer and director is Paul Sorkin. We have no other officers or
directors. While we believe that our current management structure is suitable
to our needs and the requirements of our business, we have no present plans to
increase our executive management in the near future. We also do not have and
have no present plans to obtain, any key man life insurance on the life of
Paul Sorkin. In the event of his disability or death, we may be exposed to
significant and protracted costs and expenses in obtaining appropriate and
suitable managerial resources. Finally, because we are primarily dependent
upon Paul Sorkin, our business strategy is largely dependent upon decisions
and evaluations made by him.
6) Outstanding Debt, Convertible Debt, Options and Warrants
We have a significant amount of debt owed to our creditors and as a
result of the acquisition of the Assets from Image Worldwide, Inc. we
anticipate that holders of our convertible debt and holders of certain common
stock purchase options and warrants will likely exercise their right to
acquire shares of our Common Stock. In the case of the holders of our debt and
convertible debt, we anticipate that these holders will exercise their rights
and seek to avail themselves of their right to claim the exemption provided by
Rule 144 of the Securities Act of 1933 ("Rule 144"). In that event, it is
likely that there may be significant re-sales of our Common Stock and this may
limit or depress the price of our Common Stock. Further, a large portion of
our outstanding Common Stock are "restricted securities" and may be sold only
in compliance with Rule 144 adopted under the Securities Act of 1933 or other
applicable exemptions from registration. Rule 144 provides that a non-
Affiliate person holding restricted securities for a period of six months may
have the restricted legend removed Possible or actual sales of our by present
shareholders under Rule 144 may have a depressive effect on the price of the
Company's Common Stock in any market which may develop.
7) Risks of Low Priced Stocks.
Our common stock has only limited and sporadic trading on the Bulletin Board.
As a result and due to the limited and sporadic trading market, a shareholder
may find it more difficult to dispose of, or to obtain accurate quotations as
to the price of, our Common Stock. In the absence of a security being quoted
on NASDAQ, or the Company having $2,000,000 in net tangible assets, trading in
the Common Stock is covered by Rule 3a51-1 promulgated under the Securities
Exchange Act of 1934 for non-NASDAQ and non-exchange listed securities.
Under this rule, broker/dealers who recommend such securities to persons other
than established customers and accredited investors (generally institutions
with assets in excess of $5,000,000 or individuals with net worth in excess of
$1,000,000 or an annual income exceeding $200,000 or $300,000 jointly with
their spouse) must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale.
Securities are also exempt from this rule if the market price is at least
$5.00 per share, or for warrants, if the warrants have an exercise price of at
least $5.00 per share. The Securities Enforcement and Penny Stock Reform Act
of 1990 requires additional disclosure related to the market for penny stocks
and for trades in any stock defined as a penny stock. The Commission has
recently adopted regulations under such Act which define a penny stock to be
any NASDAQ or non-NASDAQ equity security that has a market price or exercise
price of less than $5.00 per share and allow for the enforcement against
violators of the proposed rules.
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In addition, unless exempt, the rules require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule prepared by the
Commission explaining important concepts involving the penny stock market, the
nature of such market, terms used in such market, the broker/dealer's duties
to the customer, a toll-free telephone number for inquiries about the
broker/dealer's disciplinary history, and the customer's rights and remedies
in case of fraud or abuse in the sale.
Disclosure also must be made about commissions payable to both the
broker/dealer and the registered representative, current quotations for the
securities, and if the broker/dealer is the sole market-maker, the
broker/dealer must disclose this fact and its control over the market.
Finally, monthly statements must be sent disclosing recent price information
for the penny stock held in the account and information on the limited market
in penny stocks. While many NASDAQ stocks are covered by the proposed
definition of penny stock, transactions in NASDAQ stock are exempt from all
but the sole market-maker provision for (i) issuers who have $2,000,000 in
tangible assets ($5,000,000 if the issuer has not been in continuous operation
for three years), (ii) transactions in which the customer is an institutional
accredited investor and (iii) transactions that are not recommended by the
broker/dealer. In addition, transactions in a NASDAQ security directly with
the NASDAQ market-maker for such securities, are subject only to the sole
market-maker disclosure, and the disclosure with regard to commissions to be
paid to the broker/dealer and the registered representatives.
Finally, all NASDAQ securities are exempt if NASDAQ raised its requirements
for continued listing so that any issuer with less then $2,000,000 in net
tangible assets or stockholder's equity would be subject to delisting. These
criteria are more stringent than the proposed increased in NASDAQ's
maintenance requirements.
The Company's securities are subject to the above rules on penny stocks and
the market liquidity for the Company's securities could be severely affected
by limiting the ability of broker/dealers to sell the Company's securities.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
As reported in our Form 8-K, dated June 27, 2008 and previously filed with the
Commission, we entered into the Asset Purchase Agreement (the "Agreement")
with Image Worldwide, Inc. While the Agreement primarily concerned the
purchase of the Assets from Image Worldwide, Inc., the Agreement also included
other provisions (as disclosed in the above Form 8-K) relating to our issuance
of certain securities, as follows:
(A) In exchange for certain Series C Preferred Stock issued to or issuable
to Mr. Forhan and Mr. Scott, we agreed to grant the following Common Stock
Purchase Warrants (the "Warrants"): 2,473,120 Warrants to Mr. William G.
Forhan; 1,451,612 Warrants to Mr. Richard David Scott; and 1,075,268 Warrants
to Ms. Mercedes Henze. All of the Warrants are to be issued with a restricted
securities legend pursuant to a claim of exemption under Section 4(2) of the
Securities Act of 1933.
(B) We confirmed our prior issuance of the following Common Stock Purchase
Options (the "Options"): 4,000,000 Options to Mr. William G. Forhan, a
Director; 2,000,000 Options to Mr. Richard David Scott, a Director; and
160,000 Options to Mercedes Henze, an officer. All of the Options are to be
issued with a restricted securities legend pursuant to a claim of exemption
under Section 4(2) of the Securities Act of 1933.
(C) We agreed that all of the Series E Preferred Stock issued to or issuable
to Mr. William G. Forhan, a Director and to Mr. Richard David Scott, a
Director are to be exchanged for our issuance of 26,666 shares of our Series H
Preferred Stock to Mr. Forhan and for our issuance of 26,666 shares of our
Series H Preferred Stock to Mr. Scott, respectively. All of the shares of the
Series H Preferred Stock are to be issued with a restricted securities legend
pursuant to a claim of exemption under Section 4(2) of the Securities Act o0f
1933.
(D) We agreed to allow William G. Forhan the right to assign a $320,671
Promissory Note (dated September 30, 2002 and previously issued by the
Company) (the "Note") to a party designated by Image Worldwide, Inc.. We have
been informed that the Note has been assigned to a third party and we have
subsequently agreed to amend the terms of the Note so that the Note may be
converted, at the option of the holder of the Note, into shares of our Common
Stock at a price equal to $0.00005 per share.
11
<page>
All of the above transactions were completed without the use of an
underwriter. And, further the transactions and the agreements were completed
directly without any intermediary. In each case, we claimed that the
transactions satisfied the requirements to the statutory exemption provided by
Section 4(2) of the Securities Act of 1933 since:
(1) each person acquiring the securities had received information, business
and financial documents, and other disclosures regarding the Company and
management equivalent to that found in a registration statement;
(2) each person acquiring the securities had a full and unrestricted
opportunity to ask questions of the Company's officers and directors and to
receive answers to all such questions;
(3) each person acquiring the securities, as an officer and/or director of
the Company was, at the time of the transaction, an Accredited Investor who is
experienced and sophisticated in investment transactions made with small
public companies;
(4) each person acquiring the securities understood that they were acquiring
the securities as "restricted securities," for investment purposes only and
not with a view toward their resale; and
(5) the transaction with each person who purchased our securities was not
the product of any general solicitation or
advertising but was the result of a pre-existing business relationship.
On this basis, we relied upon the exemption provided by Section 4(2) of the
Securities Act of 1933 and we did not receive any proceeds from any of these
transactions.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits.
Exhibit
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer
12
<page>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INVICTA GROUP, INC.
Date: August 19, 2008 BY: /s/ Paul Sorkin
PAUL SORKIN
Chief Executive Officer
Date: August 19, 2008 BY: /s/ Paul Sorkin
PAUL SORKIN
Chief Financial Officer
13
<page>
INVICTA GROUP INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2008
ASSETS
<table>
<s> <c>
Current assets:
Cash and cash equivalents $54,752
--------------
Total current assets 54,752
--------------
Total assets $54,752
==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Convertible debentures $151,295
Accounts payable and accrued liabilities 41,555
Other notes payable 303,034
--------------
Total current liabilities 495,884
--------------
Commitments and contingencies -
Shareholders' equity (deficit)
Preferred stock series G par value $.0001, 50,000,000 shares
authorized; 5,000,000 issued and outstanding 500
Preferred stock series H par value $.0001, 50,000,000 shares
authorized; 53,332 issued and outstanding 5
Common stock, par value $ .0001, 1,000,000,000 shares
authorized, 225,965,883 issued and outstanding 22,597
Additional paid in capital 9,772,502
Accumulated deficit (10,236,736)
--------------
Total shareholders' deficit (441,132)
--------------
Total liabilities and shareholders' deficit $54,752
==============
</table>
See accompanying notes to consolidated financial statements
F-1
<page>
INVICTA GROUP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007
<table>
<s> <c> <c>
2008 2007
-------------- --------------
Revenues earned $16,325 $40,989
Selling, general, and administrative expenses 114,252 293,296
-------------- --------------
Income (loss) from operations before other income and expense (97,927) (252,307)
Other income and (expense)
Interest expense - related parties - (4,400)
Interest expense - (45,227)
Valuation allowance on aquired assets (2,000,000) -
-------------- --------------
Net income (loss) before provision for income taxes (2,097,927) (301,934)
Provision for income taxes - -
Net income (loss) $(2,097,927) $(301,934)
============== ==============
Net income (loss) per share weighted average share, basic
and diluted ($0.02) ($2.10)
============== ==============
Weighted average shares outstanding, basis and diluted 106,919,216 143,972
============== ==============
</table>
See accompanying notes to consolidated financial statements
F-2
<page>
INVICTA GROUP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
<table>
<s> <c> <c>
2008 2007
-------------- --------------
Revenues earned $26,724 $54,013
Selling, general, and administrative expenses 281,229 535,267
-------------- --------------
Income (loss) from operations before other income and expense (254,505) (481,254)
Other income and (expense)
Interest expense - related parties (3,500) (8,825)
Interest expense (2,945) (89,880)
Valuation allowance on acquired assets (2,000,000) -
-------------- --------------
Net income (loss) before provision for income taxes (2,260,950) (579,959)
Provision for income taxes - -
-------------- --------------
Net income (loss) $(2,260,950) $(579,959)
============== ==============
Net income (loss) per share weighted average share, basic
and diluted ($0.04) ($6.55)
============== ==============
Weighted average shares outstanding, basis and diluted 54,877,067 88,601
============== ==============
</table>
See accompanying notes to consolidated financial statements
F-3
<page>
INVICTA GROUP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
<table>
<s> <c> <c>
2008 2007
-------------- --------------
Net income (loss) (2,097,927) $(579,959)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 3,750 3,750
Amortization 1,550 25,810
Stock issued for services` 19,610 96,125
Valuation allowance on purchased asset 2,000,000 -
Changes in assets and liabilities:
Accounts receivable and prepaid expenses - (99,048)
Advances to affiliates - -
Other assets 1,500 (2,000)
Bank overdraft -
Accounts payable and accrued liabilities - 241,608
-------------- --------------
Total funds provided by operating activities (71,517) (313,714)
-------------- --------------
Capital asset expenditures - -
-------------- --------------
Funds provided by financing activities
Proceeds from issuance of common stock 120,060 340,970
Payments on long term debt - (17,005)
-------------- --------------
Total funds provided by financing activities 120,060 323,965
-------------- --------------
Net change in cash and cash equivalents 48,543 10,251
Cash and cash equivalents, beginning of period 6,209 12,960
-------------- --------------
Cash and cash equivalents, end of period 54,752 $23,211
============== ==============
Additional Cash Flow Information:
Cash paid during the period for:
Interest $6,445 $9,508
============== ==============
Income taxes $- $-
============== ==============
Non-Cash Activities:
Stock issued for redemption of Preferred B stock $- $175,000
============== ==============
Stock issued for payment of accounts payable $- $38,097
============== ==============
The Company issued 5,000,000 shares of Preferred G stock for the
acquisition of certain intangible assets.
</table>
See accompanying notes to consolidated financial statements
F-4
<page>
INVICTA GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
ORGANIZATION AND CAPITALIZATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America for interim financial information. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. The preparation requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results may differ from these estimates. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 2008 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2008.
The financial statements include the accounts of the Company and its wholly-
owned subsidiary. All significant inter-company balances and transactions have
been eliminated.
Certain reclassifications have been made to the prior year financial
statements in order for them to be in conformity with the current year
presentation.
SIGNIFICANT ACCOUNTING POLICIES:
In preparing our unaudited consolidated condensed financial statements and
accounting for the underlying transactions and balances reflected therein, we
have applied the significant accounting policies described in Note 1 to our
consolidated financial statements included in our Annual Report on Form 10-
KSB for the year ended December 31, 2007.
NOTE 2. INCOME PER SHARE
The Company presents "basic" and, if applicable, "diluted" earnings (loss) per
common share pursuant to the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128") and certain other
financial accounting pronouncements. Basic earnings (loss) per common share
are calculated by dividing net income (loss) by the weighted average number of
common shares outstanding during
F-5
<page>
each period. The calculation of diluted earnings (loss) per common share is
similar to that of basic earnings (loss) per common share, except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if all potentially dilutive common shares,
such as those issuable upon the conversion of debentures, were issued during
the period.
NOTE 3: GOING CONCERN
The Company's financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business.
The Company has incurred losses of approximately $10,236,736 since inception
and the Company had negative working capital of $441,132 at June 30, 2008.
These factors raise substantial doubt about the Company's ability to continue
as a going concern.
Management believes that it will be able to generate cash sufficient to
support its operations. Management believes that it can generate this cash
and ultimately profits from advertising revenues on its website
travelhotlink.com. Travel Hot Link has no involvement with the reservation;
its revenues are generated from the Travel Supplier that advertises its travel
products online. It is estimated that Travel Hot Link will reach a potential
24 million travel enthusiasts that are seeking travel bargains online.
In addition to the assumption regarding increased revenues, the Company's
management has raised approximately $120,000 during the six months ended June
30, 2008 in funding from its securities purchase agreement with Golden Gate
Investors, Inc. Invicta estimates it will need $200,000 additional funding for
working capital over the next twelve months.
Management feels that its increase revenues from its Travel Hot Link web-site,
its equity and financing plans and the revenues from the acquisition will
provide the working capital to allow it to continue as a going concern.
However, there can be no assurances the Company will be successful in its
efforts to secure additional equity funding, financing or attain profitable
operations. The accompanying consolidated financial statements do not include
any adjustments that might result should the Company be unable to continue as
a going concern.
NOTE 4. PURCHASE OF ASSETS
On June 27, 2008 we closed (the "Closing") on the acquisition of certain
assets from Image Worldwide, Inc., a Colorado corporation (the "Seller") in
accordance with the Asset Purchase Agreement (dated June 23, 2008) (the
"Agreement").
While the Agreement involved the purchase of certain assets from the Seller,
the Agreement also included other transactional understandings and commitments
as summarized below.
F-6
<page>
In connection with the purchase of assets from the Seller, we acquired the
following assets (the "Assets") in accordance with the Agreement:
(a) City Book Savings Website www.CityBooksavings.com;
(b) Domain name - www.CityBooksavings.com;
(c) Database of clients; and
(d) Future business.
The Assets were acquired from the Seller in exchange for our issuance of
5,000,000 shares of our newly-designated Series G Preferred Stock (the "Series
G Stock"). Each share of the Series G Preferred Stock has 1,000 votes per
share (and is entitled to vote with our Common Stock on all matters submitted
to our common stockholders), is convertible into 1,000 shares of our common
stock, and has a liquidation right to 1,000 shares of our Common Stock. We
did not assume any liabilities of the Seller in purchasing the Assets. This
Series G Preferred Stock was valued at $2,000,000, the fair market value of
the underlying common stock at the date of the transaction. The company took
an immediate $2,000,000 valuation allowance against the computed value of the
purchased assets.
The Seller, and its current officers and directors also agreed to the
following additional understandings and commitments and as set forth in the
Agreement. They are as follows.
First, the Seller agreed to pay the sum of $27,500 to the Invicta Bank
Account on or before the closing.
Second, we entered into a consulting agreement with Mr. William G.
Forhan, a Director, and agreed to pay him the sum of $36,250 within 30 days
after the Closing and an amount equal to 12.50% of the net proceeds that we
receive (after the bridge loans) from our future efforts to raise additional
capital but no more than $62,500 during the 15 month period from and after the
Closing. The term of the consulting agreement is nine months.
Third, we entered into a consulting agreement with Mr. Richard David
Scott, a Director, and agreed to pay him the sum of $36,250 within 30 days
after the Closing and an amount equal to 12.50% of the net proceeds that we
receive (after the bridge loans) from our future efforts to raise additional
capital but no more than $62,500 during the 15 month period from and after the
Closing. The term of the consulting agreement is nine months.
Fourth, we agreed to transfer the lease (and all associated assets) for
our current office in Florida to Mr. Forhan and Mr. Scott.
F-7
<page>
Fifth and in exchange for certain Series C Preferred Stock issued to or
issuable to Mr. Forhan and Mr. Scott, we agreed to grant the following Common
Stock Purchase Warrants (the "Warrants"): 2,473,120 Warrants to Mr. William
G. Forhan; 1,451,612 Warrants to Mr. Richard David Scott; and 1,075,268
Warrants to Ms. Mercedes Henze. All of the Warrants are to be issued with a
restricted securities legend pursuant to a claim of exemption under Section
4(2) of the Securities Act of 1933 since each of the above persons are
officers and Directors of the Company and each has full and unrestricted
access to all of our books and records sufficient to allow each to make an
informed investment decision. The warrants were valued at $2,000. The Black-
Scholes valuation model was used to determine the fair value of the warrants
at the time of issuance
Sixth, we confirmed the prior issuance of the following Common Stock
Purchase Options (the "Options"): 4,000,000 Options to Mr. William G. Forhan,
a Director; 2,000,000 Options to Mr. Richard David Scott, a Director; and
160,000 Options to Mercedes Henze, an officer. All of the Options are to be
issued with a restricted securities legend pursuant to a claim of exemption
under Section 4(2) of the Securities Act of 1933 since each of the above
persons are officers and/or Directors of the Company and each has full and
unrestricted access to all of our books and records sufficient to allow each
to make an informed investment decision.
Seventh, we agreed that all of the Series E Preferred Stock issued to or
issuable to Mr. William G. Forhan, a Director and to Mr. Richard David Scott,
a Director are to be exchanged for our issuance of 26,666 shares of our Series
H Preferred Stock to Mr. Forhan and for our issuance of 26,666 shares of our
Series H Preferred Stock to Mr. Scott, respectively. All of the shares of the
Series H Preferred Stock are to be issued with a restricted securities legend
pursuant to a claim of exemption under Section 4(2) of the
Securities Act of 1933 since each of the above persons are officers and
Directors of the Company and each has full and unrestricted access to all of
our books and records sufficient to allow each to make an informed investment
decision.
Eighth, we accepted the resignations of Mr. Forhan, Mr. Scott, and Ms.
Henze, as officers and Directors of the Company and we elected Paul Sorkin as
President, Chief Executive Officer, and Chairman of the Company.
Ninth, Mr. Forhan, a Director, agreed to assign a $320,671 Promissory
Note (dated September 30, 2002 and previously issued by the Company) (the
"Note") to a party designated by the Seller. We have been informed that the
Note is to be assigned to a third party.
In addition section 2.4 of the agreement states that the Purchaser, the
Seller, and each member of the Review Committee each acknowledge and agree
that:
F-8
<page>
"At Closing, the Purchaser shall be solely liable for the liabilities which
shall include an aggregate of twelve thousand seven hundred eighty-five
dollars ($12,785) of accrued and unpaid liabilities and the obligations owed
to Golden Gate Investors". As a result of this provision the Company realized
a debt reduction totaling $2,378,026 in connection with this purchase
transaction.
NOTE 5 - EQUITY
Preferred Stock
The board of directors is authorized to determine, without stockholder
approval, the designations, rights, preferences, powers and limitations of the
Company's 50,000,000 shares of authorized preferred stock.
Issuance of Series G Preferred Stock
As stated above, the Agreement required that we issue 5,000,000 shares
of our newly-designated Series G Preferred Stock (the "Series G Stock") to the
Seller. The issuance of the Series G Preferred Stock was in exchange for the
purchase of the Assets (described above). In that respect:
(1) We sold 5,000,000 shares of our Series G Stock;
(2) All of the Series G Stock was issued to Image Worldwide, Inc.;
(3) No underwriter, placement manager, broker-dealer, or finder was used in
connection with the issuance of the Series G Stock;
(4) No commissions or finders' fees were paid in connection with the
issuance of the Series G Stock;
(5) We acquired the following assets from Image Worldwide, Inc.:
(a) City Book Savings Website www.CityBooksavings.com;
(b) domain name -www.CityBooksavings.com;
(c) database of clients; and
(d) future business;
(6) We did not receive any cash from the issuance of the Series G Stock;
(7) We claimed the exemption provided by Section 4(2) of the Securities Act
of 1933 since:
We have been assured that the management of Image Worldwide, Inc. are
sophisticated and experienced in business and financial matters, we granted
the management of Image Worldwide unrestricted access to our books and
records, we made available our officers and directors for management's
questions and answers, and we provided management with such disclosures
regarding our affairs as would be equivalent to a registration statement. We
also entered into the transaction with Image Worldwide, Inc. without any
advertising or general solicitation and the Series G Preferred Stock
certificates to be issued to Image Worldwide, Inc. are to be issued with a
restricted securities legend.
Issuance of Series H Preferred Stock
As part of the understandings and commitments given as part of the
Agreement, and in exchange for certain Series E Preferred Stock issued to or
issuable to Mr. Forhan and Mr. Scott:
F-9
<page>
(1) We agreed to issue 26,666 shares of our Series H Preferred Stock to Mr.
Forhan and 26,666 shares of our Series H Preferred Stock to Mr. Scott.
(2) No commissions or finders' fees were paid in connection with the
issuance of the Series H Preferred Stock;
(3) We did not receive any cash from the issuance of the Series H Preferred
Stock;
(4) We claimed the exemption provided by Section 4(2) of the Securities Act
of 1933 since each of the persons who acquired the Options were, at the time
at which they acquired the Series H Preferred Stock, an officer and/or
Director of the Company. As such, we believe each is sophisticated and
experienced in business and financial matters, each had unrestricted access to
our books and records, each had a full opportunity to ask other members of
management any questions and receive answers to said questions, and we took
steps that each of them had such disclosures regarding our affairs as would be
equivalent to a registration statement. Further, the issuance of the Series H
Preferred Stock was undertaken without any advertising or general solicitation
and the stock certificates are to be issued with a restricted securities
legend.
Common Stock
Issuance of Common Stock Purchase Warrants
As part of the understandings and commitments given as part of the
Agreement, and in exchange for certain Series C Preferred Stock issued to or
issuable to Mr. Forhan and Mr. Scott:
(1) We agreed to grant the following Common Stock Purchase Warrants (the
"Warrants"): 2,473,120 Warrants to Mr. William G. Forhan; 1,451,612 Warrants
to Mr. Richard David Scott; and 1,075,268 Warrants to Ms. Mercedes Henze.
(2) No underwriter, placement manager, broker-dealer, or finder was used in
connection with the issuance of the Warrants;
(3) No commissions or finders' fees were paid in connection with the
issuance of the Warrants;
(4) We did not receive any cash from the issuance of the Warrants (the
Warrants were issued in exchange for the cancellation of the Series C
Preferred Stock);
(5) We claimed the exemption provided by Section 4(2) of the Securities Act
of 1933 since each of the persons who acquired the Warrants were, at the time
at which they acquired the Warrants, an officer and/or Director of the
Company. As such, we believe each is sophisticated and experienced in business
and financial matters, each had unrestricted access to our books and records,
each had a full opportunity to ask other members of management any questions
and receive answers to said questions, and we took steps that each of them had
such disclosures regarding our affairs as would be equivalent to a
registration statement. Further, the issuance of the Warrants was undertaken
without any advertising or general solicitation and the Warrant certificates
are to be issued with a restricted securities legend.
F-10
<page>
During the three months ended June 30, 2008, the Company issued 108,900,000
shares of its common stock for cash. The Company relied upon the exemption
from registration contained in Section 4(2), as the recipients were deemed to
be sophisticated with regard to an investment in the Company.
During the three months ended June 30, 2008, the Company issued 31,000,000
shares of its common stock as compensation for consulting services. A charge
of $13,200 was recorded for the three months ended June 30, 2008, valued at
fair market value, in connection with this transaction. The Company relied
upon the exemption from registration contained in Section 4(2), as the
recipients were deemed to be sophisticated with regard to an investment in the
Company.
During the three months ended June 30, 2008 the Company issued 66,8000,000
shares of common stock in accordance with the terms of the convertible
debenture agreement in the form of warrant exercise for total proceeds of .
The Company relied upon the exemption from registration contained in Section
4(2), as the recipients were deemed to be sophisticated with regard to an
investment in the Company.
Stock Options
A total of 7,765 stock options were granted to employees, non-employee
directors, officers, or consultants during the year ended December 31, 2004. A
total of 6,160,000 stock options were granted to employees, non-employee
directors, officers, or consultants during the six months ended June 30, 2008
valued at $24,640.
At June 30, 2008, the Company had one stock based compensation plan, which is
described below. The Company accounts for the fair value of its grants under
this plan in accordance with FASB 123R. The compensation cost that has been
charged against income for this plan is $24,640 and $0 for the six months
ended June 30, 2008 and 2007.
Stock options outstanding and exercisable at June 30, 2008 are as follows
<table>
<s> <c> <c> <c>
Options Outstanding
Weighted Average Weighted Average
Range of Exercise Price Shares Outstanding Exercise Price Remaining Life
$12,500 to $.004 6,167,765 $.004 3.00
</table>
NOTE 6: EMPLOYMENT AGREEMENTS
We entered into a consulting agreement with Mr. William G. Forhan, a Director,
and agreed to pay him the sum of $36,250 within 30 days after the Closing and
an amount equal to 12.50% of the net proceeds that we receive (after the
bridge loans) from our future efforts to raise additional capital but no more
than $62,500 during the 15 month period from and after the Closing. The term
of the consulting agreement is nine months.
F-11
<page>
We entered into a consulting agreement with Mr. Richard David Scott, a
Director, and agreed to pay him the sum of $36,250 within 30 days after the
Closing and an amount equal to 12.50% of the net proceeds that we receive
(after the bridge loans) from our future efforts to raise additional capital
but no more than $62,500 during the 15 month period from and after the
Closing. The term of the consulting agreement is nine months.
NOTE 7: COMMITMENTS AND CONTINGENCIES
In addition section 2.4 of the agreement states that the Purchaser, the
Seller, and each member of the Review Committee each acknowledge and agree
that:
"At Closing, the Purchaser shall be solely liable for the liabilities which
shall include an aggregate of twelve thousand seven hundred eighty-five
dollars ($12,785) of accrued and unpaid liabilities and the obligations owed
to Golden Gate Investors". As a result approximately $1,230,000 of debts
associated with discontinued and inactive subsidiaries were assigned to other
parties.
NOTE 8- INTERNAL CONTROLS
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"), the
Securities and Exchange Commission adopted rules requiring small business
issuers, such as our company, to include a report of management on the
company's internal controls over financial reporting in their annual reports.
Presently, we will become subject to compliance with SOX 404 for our fiscal
year ending December 31, 2009. The independent registered public accounting
firm auditing our financial statements must also attest to and report on
management's assessment of the effectiveness of our internal controls over
financial reporting as well as the operating effectiveness of our internal
controls. We have yet to begin evaluating our internal control systems in
order to allow our management to report on, and our independent auditors
attest to, as presently required. During 2008 we expect to expend significant
resources in developing the necessary documentation and testing procedures
required by SOX 404. In the event we identify significant deficiencies or
material weaknesses in our internal controls that we cannot remedy in a timely
manner or we are unable to receive a positive attestation from our independent
auditors with respect to our internal controls, investors and others may lose
confidence in the reliability of our financial statements and our ability to
obtain financing as needed could suffer.
F-12
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