SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT 1934:
For the Fiscal Year Ended December 31, 2003
Commission File Number: 0-30717
E-SMART TECHNOLOGIES, INC.
(Name of Small Business Issuer in its Charter)
Nevada 880409261
(State of Incorporation) (I.R.S. Employer Identification No.)
7225 Bermuda Road, Suite C, Las Vegas, Nevada 89119
(Address of Principal executive Office, including Zip Code)
(702) 447-5210
(Issuer's Telephone Number)
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Check whether Issues: (1) filed all reports required to be filed by Section 13
or 15 (d) of the Securities Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for the two year ended December 31, 2003: $ - 0-
The aggregate market value of Common Stock held by non-affiliates at March 23,
2004 was $36,951,558.
Shares of Common Stock, $.001 par value per share, outstanding at March 25,
2004: 170,707,012 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
No documents are incorporated by reference into this Annual Report.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
TABLE OF CONTENTS
PART I
ITEM 1. Description of Business ITEM 2. Description of Property ITEM 3. Legal
Proceedings ITEM 4. Submission of Matters to a Vote of Security Holders PART II
ITEM 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities ITEM 6. Management's
Discussion and Analysis or Plan of Operations ITEM 7. Financial Statements ITEM
8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ITEM 8-A.Controls and Procedures PART III ITEM 9.Directors,
Executive Officers, Promoters and Control Persons; Compliance With Section 16(a)
of the Exchange Act ITEM 10. Executive Compensation ITEM 11. Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 12. Certain Relationships and Related Transactions ITEM 13. Exhibits and
Reports on Form 8K ITEM 14. Principal Accountant Fees and Services SIGNATURES
CERTIFICATIONS
Safe Harbor Statement
Certain statements contained herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. We
desire to avail ourselves of certain "safe harbor" provisions of the 1995 Reform
Act and are therefore including this special note to enable us to do so.
Forward-looking statements included in this Report on Form 10-KSB involve known
and unknown risks, uncertainties, and other factors which could cause our actual
results, performance (financial or operating) or achievements to differ from our
best estimate of future results, performance (financial or operating) or
achievements expressed or implied by such forward-looking statements. These
risks include, but are not limited to, risks related to recently consummated
acquisitions as well as future acquisitions, our ability to increase our
revenues and generate income from operations, effects of competition and
technological changes, risks related to exposure to personal injury and workers'
compensation claims, risks that our insurers may not provide adequate coverage,
risks associated with compliance with government regulations such as ERISA,
state and local employment regulations and dependence upon key personnel.
We believe it is important to communicate our expectations to our investors.
There may be events in the future, however, that we are not able to accurately
predict or over which we have no control. The risk factors listed above, as well
as any cautionary language in this report, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we described in our forward-looking statements. Before any
investment is made in our securities, be aware that the occurrence of any of the
events described in the risk factor section and elsewhere in this report, and
other events that we have not predicted or assessed could have a material
adverse effect on our ability to transition out of the development stage. In
such case, the price of our securities could decline and any investor may lose
all or part of the investor's investment.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
e-Smart Technologies, Inc., a Nevada corporation (the "Company", "we", "our" or
the "Registrant"), was incorporated on July 15, 1997, under the name Boppers
Holdings, Inc. ("Boppers"). On December 22, 2000, and by virtue of a Certificate
of Amendment to our Articles of Incorporation, our name was changed to e-Smart
Technologies, Inc. Prior to the change of name, and pursuant to an Acquisition
Agreement and Plan of Merger dated as of August 16, 2000, between Boppers and
Plainview Laboratories, Inc. ("PLI"), a Nevada corporation, all the outstanding
shares of common stock of PLI were exchanged for 20,000 shares of Rule 144
restricted common stock of Boppers in a transaction in which Boppers was the
successor corporation. At the time of the merger with Boppers, PLI was a
publicly owned entity with a class of securities registered pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
We have had limited operations, and, in accordance with SFAS#7, are considered a
development stage company. Our administrative offices are located at 7225
Bermuda Road, Suite C, Las Vegas, Nevada 89119. Our registered agent in the
State of Nevada is The Corporation Service Company and our transfer agent is
Holladay Stock Transfer Company of Scottsdale, Arizona. Our common stock trades
in the over-the-counter market under the symbol ESMT. Our telephone number is
(702) 447-5210.
The 2000 Merger
On October 20, 2000, Boppers, Boppers Acquisition Corp., a then newly-formed
Nevada corporation and wholly owned subsidiary of Boppers ("BAC"), and e-Smart
Systems, Inc., a Nevada corporation ("e-Smart Systems") and wholly owned
subsidiary of Intermarket Ventures, Inc., a Utah corporation ("IVI"), entered
into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the
terms of the Merger Agreement: (i) Boppers acquired all of the issued and
outstanding shares of common stock of e-Smart Systems; (ii) BAC merged with and
into e-Smart Systems such that e-Smart Systems was the survivor; (iii) e-Smart
Systems became a wholly owned subsidiary of Boppers; and (iv) IVI, the sole
shareholder of e-Smart Systems, acquired control of Boppers as described below.
Prior to the consummation of the transactions contemplated by the Merger
Agreement, Boppers had 200,000,000 authorized shares of Common Stock, par value
$.001 per share (the "Boppers Common Stock"), 20,000,000 authorized shares of
Preferred Stock, par value $.001 per share and 3,501,000 issued and outstanding
shares of Boppers Common Stock. Pursuant to the Merger Agreement, Boppers: (i)
issued 58,600,000 shares of Boppers Common Stock to IVI in exchange for
58,600,000 shares of e-Smart System's common stock, par value $.001 per share,
owned of record by IVI; and (ii) exchanged its warrants to purchase an aggregate
of 3,000,000 shares of e-Smart System's common stock at $10.00 per share into
warrants to purchase an aggregate of 3,000,000 shares Boppers' Common Stock at
$10.00 per share (the "Warrants"). The foregoing caused a change in the control
of Boppers.
On November 27, 2000, Bopper's management resigned and our present management
took control. The Company's name was changed from Boppers Holdings, Inc. to
e-Smart Technologies, Inc., effective on December 22, 2000.
By virtue of a merger that was completed on December 22, 2000, and pursuant to
subsequent grants of rights from IVI Smart (defined hereinafter), we directly
own the exclusive license for certain technologies for the U.S.A. and Asia
except China. In addition, and through our wholly owned subsidiary e-Smart
Systems, Inc., a Nevada corporation, we own the exclusive license for China to
the smart card technology and any and all other smart card related assets
originally developed or otherwise owned by IVI, one of our major shareholders,
and now owned by IVI Smart Technologies, Inc., a Delaware corporation and
subsidiary of IVI ("IVI Smart"). IVI's and now IVI Smart's research and
development lab was the creator of what we believe to be the market leader in
multi-application smart card solutions. IVI dubbed this technology the "Super
Smart Card System." We have sublicensed the rights to market the technology to
state and federal agencies to our forty-five (45%) percent owned affiliate,
Homeland Defense, Inc., a Nevada corporation, which is majority owned (fifty-
five (55%) percent) by our Chairman, Chief Executive Officer, President and
Chief Financial Officer Mary A. Grace.
Products
The Company, IVI Smart and our subsidiaries and affiliates are all principally
engaged in the business of creating, marketing, manufacturing, installing,
operating and maintaining proprietary systems that are designed to
positively authenticate each and every end user of any networked or local
access system while protecting at all times all information residing on or
transported by the system. These products are designed to provide assurance
that the user is the person that he or she claims to be and whether or not he
or she has the credential to access the premises or information being sought.
As stated, our business is providing and operating systems. We intend to earn
income primarily from transaction fees and/or other service based fees
connected to the use of our systems once installed. We do not intend to
either manufacturer or install systems on our own, rather, we intend to
outsource manufacturing of our Super Smart Card(TM), Super Smart Readers and
proprietary components under OEM agreements; and to outsource installation
to select "partners" that are major systems integrators in each country of
installation. Prior to the sale of a system, our business activities are
strictly limited to marketing, research and development, and customer
customization. After a sale is made, we supervise the manufacture and
installation of the system and, once deployed, operate the system on behalf of
the purchaser. By outsourcing all other activities, we hope to keep our cost of
operations down and minimize the complexity of our business.
One of the key distinctions of our system from all other systems is our
proprietary smart card, the Super Smart Card(TM). We believe that we are the
world's first and currently the only provider of a commercially available dual
ISO 7816 (contact) and ISO 14443 B (wireless) compatible smart card featuring
both a fingerprint sensor onboard, a biometric matching engine onboard and a
multi-application microprocessor. To our knowledge, as of the date hereof, the
Super Smart Card(TM) is the only dual-interface biometrically activated,
microprocessor-based smart card product. Because our Super Smart Card(TM)
contains a microprocessor, it can store and process information and run multiple
applications. Because our Super Smart Cards(TM) have an on-board digital
fingerprint sensor, hold a biometric fingerprint template, and have an onboard
biometric matching engine, our Super Smart Cards are able to perform an ID
verification without reference to any network (or any other) database. For this
reason, we call the Super Smart Card(TM) biometrically activated or
biometrically powered. Our cards are referred to as "dual interface" because
they work either in conjunction with a reader that requires physical contact
with the card to supply power and to transfer data or with a reader that does
not require physical contact with a card reader, as power and data are
transferred to each card through a magnetic field generated by a card reader.
Our Super Smart Card(TM) combines the benefits of microprocessors, biometrics
and dual interface cards in an ISO compatible system and form-factor.
All of our products are designed to operate on a common platform which we
currently refer to as the Biometric Verification Security System(TM) or the
BVS2(TM) (the current and improved version of the Super Smart Card(TM) System).
The BVS2(TM) Platform is based on our licensor's pending patents and other
proprietary technologies and consists of our Super Smart Card(TM) (our unique
smart card with an on-board biometric multi-application micro-processor, a
unique on-board biometric sensor (fingerprint) and a unique digital photo ID
system among other items), readers, operational software, application
development software and a communication technology that ensures that the
transmission of data to and from the Super Smart Card(TM) and throughout the
system is secure and reliable. The BVS2(TM) can be customized to support a large
number of applications in a multitude of markets. Some of the markets for which
we have customized the BVS2(TM)platform include national security,
immigration/border crossing, ID-fraud free credit/debit card pre-processing,
welfare/food-stamp benefits and medical services. We believe that there is no
existing practical limit to the number or types of applications we can customize
our system to run.
Our products offer the following benefits:
o The information stored on our card and transferred between the card
and the reader is secured behind biometric activation and is protected
by both physical and software encryption down to the physical layer
(our PrestoChango protection system);
o The biometric system being completely on the card with full
independent operation capabilities allows for identity and credential
verification even during emergency situations where denial of service
attacks or other network outages prevent network database access and
would cause many other systems to fail;
o Our Super Smart Cards(TM) support multiple, independent applications
secured even from each other on the same card, each protected by the
biometric and each protected end-to-end throughout the system by our
proprietary information protection system, "PrestoChango";
o The system operator of the BVS2(TM) platform (whether we or anyone
else) has no access to user or customer information unless granted
access by the application owner for some specific reason; and
o Our cards are durable and easy to use, our technology can be placed in
objects that take a variety of forms, such as key chains, wristwatches
and necklaces/pendants.
The e-Smart Solution
We believe that our Super Smart Card(TM) has a technological advantage over any
other existing smart cards that we have seen in the market. The Super Smart
Card(TM) is a dual interface card working with existing contact and existing
wireless type "B" readers. The Super Smart Card(TM) is a complete biometric
system with its own sensor and matching system onboard every card. The Super
Smart Card(TM) is an advanced microprocessor type smart card protected by a
hardware based firewall enhanced by software that protects data down to the
physical layer. We believe that our Super Smart Card(TM) is rendered useless if
tampered with and that counterfeiting is not possible. In short, we believe that
at this time the Super Smart Card(TM) is a one-of-a-kind piece of technology
that gives us a competitive advantage over all other suppliers and that makes us
a sole source supplier to anyone that needs a reliable, stand-alone, privacy
protected, biometrically empowered system of identity verification for all
purposes whether for public security or private commercial use.
Our technology not only enables a microprocessor-based smart card system to
operate in both a contact and a contactless environment, but also enables our
biometric fingerprint sensor and biometric engine to work in both a contact and
a contactless environment as well. We believe that this ability to operate the
biometric system both with a contact reader and wirelessly is but one of the
abilities unique to our Super Smart Card(TM). As the Super Smart Card(TM) is an
ISO compatible smart card, our technology is not only available for new systems,
but can be integrated with existing contact and contactless (wireless) systems.
The "Biometric Verification Security System(TM)" ("BVS2(TM)")
The BVS2(TM) is an integrated platform designed from the ground up to provide a
security blanket of networked services necessary to protect everything from a
single system to a nation-wide system. We believe that the BVS2(TM) is a
complete platform that can accommodate virtually any existing peripheral deemed
appropriate for whatever task is required. We also believe that the BVS2's(TM)
architecture is totally modular and upgradeable, almost infinitely scalable,
fault tolerant, redundant and highly trustworthy. Authorized access - both
physical and logical - is provided via the BVS2's(TM) secure, standardized and
irrefutable biometric credential as generated by the Super Smart Card(TM) (as
described below).
All BVS2(TM) transactions (financial, data or otherwise) are routed through,
logged, indexed and sorted by the BVS2's(TM) "Universal Gateway" subsystem. This
subsystem is empowered by a secure group of networked servers that can access an
almost unlimited numbers of diverse and legacy database systems and protocols
via the Universal Gateway's exceptional data translation system, the "Automated
Protocol Manager" ("APM"). If the BVS2(TM) is tasked to make an inquiry of the
normally incompatible database systems of multiple domestic and foreign
agencies; the BVS2(TM) can complete the inquiry quickly and efficiently, without
human intervention, automatically combining normally irreconcilable data into
one single language report. The BVS2's instant data-field manager allows any
authorized user to instantly change information requests. With the addition of
an optional analysis module, the BVS2's(TM) proprietary algorithms can analyze
data customized to user requirements. In short, the BVS2(TM) is an easy to use,
yet extremely powerful system built to provide security to entire nations. At
the same time and without unnecessary hampering the work and needs of government
officials, we believe that the BVS2(TM) offers the maximum in privacy protection
to individuals. Some key components and subsystems comprising the BVS2(TM) are
described below.
The Super Smart Card(TM)
The Super Smart Card(TM) is the tool required to unlock a "BVS2(TM)
Transaction". A BVS2(TM) Transaction can be many different things depending on
the application in use. However, whether a money transaction or a data
transaction or an access transaction or any other transaction, the Super Smart
Card(TM) utilizing our complete on-board biometric fingerprint matching system
and our Presto Chango(TM) application and information security system is the
BVS2's(TM) "ignition" and the user's fingerprint is the key to start the
BVS2(TM) Transaction.
The Super Smart Card(TM) is a unique interoperable smart card featuring a
non-JAVA based, multi application micro-processor that can perform multiple
independent and discrete functions all protected behind hardware firewalls
enhanced by software within the chip (the Presto Chango(TM) system). In
addition, each Super Smart Card(TM) contains our own unique fingerprint sensor
and biometric processing engine. No biometric data ever leaves the card in the
privacy protected version of the Super Smart Card(TM). Biometric data resides
only on the Super Smart Card(TM). All biometric processing is done on the card.
Only the finger of the owner of each Super Smart Card(TM) placed on their own
Super Smart Card's(TM) fingerprint sensor will activate the card, thereby
insuring the personal
privacy of each holder. We believe that Identity theft is theoretically made
impossible. Lost or stolen cards have no value to anyone. The Super Smart
Card(TM), which we believe to be both tamperproof and counterfeit-
proof, supports multiple discrete applications including, among others: ID
Card, Debit/Credit Card, Driver's License and Physical and/or Logical Access
Card.
The standard Super Smart Card(TM) features an ISO contact operation interface
(ISO 7816) and an ISO wireless operation interface (ISO 14443 B) and will
operate on most ISO compatible contact 7816 readers or wireless 14443 B readers.
The Super Smart Card(TM) is an integral part of the BVS2(TM). Every Super Smart
Card(TM) contains an on-card biometric fingerprint sensor and digital 3-D photo
ID system. Any other biometric can be added to the card and to the system. The
Super Smart Card(TM) is inherently secure due to our hardware-based
architecture. Each application on a Super Smart Card(TM) is secured from access
by any unauthorized party by virtue of our on-chip hardware firewall system and
our high-level encryption system, Presto-Chango(TM). Other card systems, such as
those now used for the DOD CAC cards, rely on and run software, primarily JAVA
based, to create pseudo multi-applications all with the inherent security
problems of JAVA.
The following is a summary of certain of the salient features of the Super Smart
Card(TM):
o Unique Sensor On-Card. Only the fingerprint of the registered user can
activate the card. The sensor performs with equal reliability with
wet, dry, hot or cold fingers. The system prevents unauthorized use of
any card or card application by requiring the authorized cardholder's
fingerprint to activate the micro-processor inside and to initiate any
transaction or to access any information (see below for more
information about our fingerprint sensor);
o Fraud-proof, counterfeit-proof and hack-proof. We believe that the
physical characteristics of each Super Smart Card(TM) causes tampering
to permanently disable it and destroy any information contained
therein. We also believe that counterfeit cards cannot work on the
system, rendering any fake cards absolutely useless for all purposes;
o Hardware Based, Software Enhanced, Multi-Application System. One card
can contain multiple and independent and secure applications. For
example, the technology will permit/deny access (physical and/or
logical), identify precise location and/or movement of personnel
and/or watch list parties while at the same time operating other
secure applications, each completely and securely isolated one from
the other;
o Immediate identification Assurance & Privacy Protection. The system
provides immediate and we believe sure authentication for all users
and their credentials once they are properly enrolled onto the system.
All biometric details are stored only on the Super Smart Card(TM) and
not in any database (except where required by law, e.g., for INS needs
or as required by certain voluntary programs) and the user leaves his
or her fingerprint only on his or her own card which never leaves
their hand;
o Stolen fingerprints of no use. Unlike other systems where a stolen
fingerprint can mean a stolen identity, use of biometric information
alone without one's own Super Smart Card(TM) is of no use with the
BVS2(TM). Each person's biometric information is inextricably entwined
with certain other information unique to that user. Unless the
biometric presented contains the additional unique information just
mentioned (i.e., one's own Super Smart Card(TM)), not even the true
owner of the biometric information will be granted access without the
intervention of at least one, if not two high level, human, operations
supervisors'/officers' intervention, to establish the identity of the
person concerned.
o One Card System - Multiple Government Applications - Total Security -
Saves Taxpayer Money. The Super Smart Card(TM) allows multiple secure
applications to co-exist and operate on the same card. Because of the
versatility of the BVS2(TM) and Super Smart Card(TM), one card and one
system can be used by every federal agency, saving the cost of having
a multitude of systems and infrastructure to support each. In
addition, because of the many services that the Super Smart Card(TM)
can securely perform, there are many opportunities to defray costs by
using one multi-purpose card and one multi-purpose network system and
charging separate application fees for each application. In addition,
we believe that since there is broad compatibility with many of the
readers already in use, our system will, upon installation, save time
and money for certain uses.
o More Information Regarding Our Fingerprint Sensor. A key component of
each Super Smart Card(TM)is the BioSensor Fingerprint Sensor. Each
Super Smart Card(TM)contains one of these tiny (.33 mm thin), low
power consumption sensors that is durable enough to be embedded in a
smart card and yet not effected by static electricity, the elements or
the condition (wet, dry, hot, cold) of the user's skin. Imaging is in
3D and based on micro-pressure variations across the sensor surface
caused by the ridges and valleys existing in one's fingerprint. Users
of the Super Smart Card(TM)with our built in sensor do not have to be
concerned about leaving their fingerprint(s) on some reader that is
fixed on a wall or sitting on a desk for someone to steal. The
cardholder is always in control of his or her own fingerprint(s). The
biometric fingerprint sensor incorporated in the Super
Smart Card(TM)was developed by BioSensor LLC, a Hawaiian limited
liability company ("BioSensor") and wholly owned subsidiary of
IVI Smart, utilizing base intellectual property developed by IVI
Smart but productized by BioSensor.
Use of the sensor is made possible pursuant to a Confidential
Technology Assignment and License Agreement dated as of May 1, 2003,
with IVI Smart, a principal stockholder of our Company (the "License
Agreement"). Pursuant to the License Agreement, IVI Smart granted to
BioSensor the exclusive right to develop certain of our intellectual
property at BioSensor's sole cost and expense with respect to certain
biometric fingerprint sensor technology created by IVI Smart and
BioSensor granted to IVI Smart the exclusive rights to any sensor
developed by BioSensor. In consideration for the use of IVI Smart's
intellectual property, BioSensor issued 50,000,000 of its Common Units
to IVI Smart. No other Common Units were issued by Biosensor.
Accordingly, Biosensor became a wholly owned subsidiary of IVI Smart
and an affiliate of ours. In consideration for the exclusive rights to
use the sensor technology developed by BioSensor, IVI Smart agrees to
pay a one-time royalty to BioSensor equal to $.35 for each Super Smart
Card(TM) sold or distributed by IVI Smart or any affiliate or
licensee.
o The "Zero/Zero" System. Our "Zero False Acceptance - Zero False
Reject" system is believed by us to be unique in the field of
biometrics. In the normal course, when setting a biometric system, the
closer to theoretical "zero" false acceptances you set your matching
system for, the further you get from "zero" false rejections. In fact,
a false rejection rate in the 30% to 40% range is not unheard of when
many systems are set to the theoretical zero false acceptance rate. A
false acceptance means the system confirms that you are someone else.
A false rejection means the system will not confirm that you are who
you really are. Based on our internal studies, our Zero/Zero System,
using a patent pending technique that combines human factors with
mechanical factors, is able to reduce the false reject rate to
something less than 0.5% on the first use and to something less than
0.2% after the third to fifth use of the system by each new user. This
reduction in the false rejection rate is extremely significant when
dealing with high volumes of people in situations such as border
crossings and airports. Each false rejection means that valuable time
and manpower must be used to conduct a secondary inspection to check
someone who is already cleared and increases the risk that an
unauthorized individual will get through in the confusion. The
Zero/Zero System is built in to of our Super Smart Cards(TM).
Card Readers
The card reader is the tool that supplies power to our Super Smart CardsTM and
the instrument through which each card communicates with the BVS2TM platform. We
intend to offer a full complement of readers as part of our proposed BVS2(TM)
system offering. For clients that need readers, we intend to offer a family of
multi-system readers ready to meet almost any need that the market may have.
These include a handheld wireless internet appliance and card reader to a
dedicated stand alone desktop reader to interface modules that allow the use of
most standard, off the shelf PDA's, sub-notebooks and other similar devices. We
intend to offer a browser-phone with a contact card reader already incorporated.
Our latest reader is a mobile GPRS based internet appliance with constant
wireless access to the commercial mobile internet. This reader features a large,
full color LCD display, a keyboard and a printer all in a handheld battery
operated unit. We believe that there will be a large demand for this reader. All
of our readers will be manufactured under contract with established card reader
manufacturers on an as ordered basis based on customer orders as received. We
intend to distribute these readers on a fully burdened cost basis making little
or no profit and generally retaining ownership and maintenance responsibilities.
(For the avoidance of confusion, maintenance responsibilities are outsourced to
our strategic partners.)
The Universal Gateway with Legacy Preserver(TM) Technology
The BVS2(TM) features a special gateway that is designed to both take in all
types of information from multiple sources and applications and forward it to
its correct destinations and to translate the "Babel-Speak" of over one hundred
(100) different legacy systems and technical services (this prevents the need to
replace entire systems in use). When any such legacy system is attached to a
BVS2(TM) empowered network using our Legacy Preserver(TM) hardware, virtually
all information passing through the network enters the Universal Gateway and by
default is translated by the Universal Gateway's Automated Protocol Manager(TM)
into a common language such that the information becomes available for use on
all connected systems. Translation is in near real-time with the speed of any
particular data's delivery basically controlled by the transmission speed of the
legacy system that such data resides on. The Universal Gateway is a distributed
system with redundant back up at all points. We believe that in the unlikely
event that any node went down including the redundancy, that failure would not
shut down the entire system.
Presto-Chango(TM)
Presto-Chango(TM) is designed to protect computer information down to the
physical layer from unauthorized access. We believe
that any attempt to move information from our storage place without proper
authority causes that iteration of the information to morph into gibberish
that cannot be deciphered by anyone or any system. Authorized access allows
information to move, encrypted for transport, for any authorized and proper use
which can be specified by user. Coupled with the BVS2's(TM) operating software,
Presto-Chango(TM) is designed to enable sensitive information to transit the
Internet or any public network without risk of information theft. Working
together with the Super Smart Card(TM), we believe that our system can
provide superior logical protection where truly secure computer access and
records are an absolute requirement.
Our Strategy
Our goal is to create a global network featuring the BVS2(TM) platform that
allows the full potential of each Super Smart Card(TM) to be used anywhere in
the world and the maximum potential transaction fees for us. Key elements of our
strategy include:
Enhance Technological Position. We intend to continue to invest in research and
development in order to enhance our technological position, develop new
technologies, extend the functionality of our products and services, and offer
innovative products to our customers. For example, at the request of a potential
government client, we have just completed the development of a fully wireless
biometric passport that can match fingerprints on a stand alone basis or faces
when coupled with our digital video reader or both. We intend to continue with
this type of research and development that can lead to immediate potential
sales. During fiscal year 2002, the Company spent approximately $310,000 on
research and development compared to $ -0- during fiscal year 2001.
Expand Domestic Market Presence. We are directly and through our Homeland
Defense, Inc., affiliate actively engaged in marketing efforts to various
agencies of the U.S. federal government. We have especially targeted various
agencies within the Department of Homeland Security, including but not limited
to the Bureau of Immigration and Customs Enforcement and the Transportation
Security Administration. We intend to step up our marketing efforts to these and
other agencies both on a direct basis and on a partnering basis with major U.S.
domestic systems integrators in line with these agencies' current policy of
awarding virtually all major contracts to a handful of well known integrators,
such as, EDS, Accenture, CSC and the like.
Expand Global Market Presence. Our sales and marketing effort is directed from
Las Vegas, Nevada. Currently, we market our products in Asia from our marketing
subsidiary in Seoul, Korea and through strategic partnering agreements with two
global IT companies and a Chinese state-owned company for domestic sales in the
People's Republic of China. We intend to use these entities to strengthen our
presence in existing markets, penetrate new markets, provide local customer
service and technical support, and adapt our products to our local customers'
specific needs.
Generate Recurring Revenues. We rejected a business model that called for
one-time payments for our products and technologies. Other companies that have
followed the one-time payment model in the smart card business, such as Gemplus
and Oberthur, have not fared well financially through business cycles during the
low end of business cycles. Instead, our business plan is to sell entire
systems, including our Super Smart Cards(TM), only on a turn key basis in a
manner that permits us to operate the system and collect transaction fees and
service fees for an extended period of time. Our business plan is also to focus
on large scale governmental clients that will cause wide use of our Super Smart
Card(TM) in the event of a sale and in such circumstances would maximize our
potential transaction fee base.
Leverage Existing Relationships and Seek New Ones. We have entered into a
relationship with Daewoo International, among others, to help us cover the Asian
national ID card market. We have entered into this relationship, and others, in
order to facilitate and accelerate our penetration into new markets, and to
assist us in defining and pursuing new applications for our products. We are
continuously seeking additional relationships to complement our marketing
strategy and promote our brand worldwide.
Leverage Presence in Existing Industries to Enter into New Industries. We intend
to offer our customers the ability to add new applications to their smart cards,
thereby expanding the number of industries in which our products are used and
the number of transaction fees that we could potentially collect. For example,
users of the national ID card will have the option to add a payment application
to their card among many others. We plan to generate additional revenues through
the sale and installation of the software required to add and operate these
applications.
Marketing and Distribution
We intend to enhance our position in the design and development of Super Smart
Card(TM) based products by developing new applications for our technology. We
also intend to enter new markets, either alone or through strategic
relationships. In so doing, we
aim to create additional potential sources of revenues from transaction fees
and additional potential sources for revenue from customer support.
We intend to market our technologically advanced products directly, through our
Homeland Defense, Inc. affiliate, and through e-Smart Korea, Inc., our Korean
subsidiary, as well as indirectly through a global network of strategic
relationships with major systems integrators and others. Our sales and marketing
efforts will be directed from our offices in Las Vegas, Nevada. We do not engage
in any significant advertising activities.
Proprietary Technologies
We are the owner of three technology licenses. Each license has been granted
pursuant to an "Exclusive Use and Distribution Agreement" (collectively the
"License Agreements"), each of which grants us exclusivity to the technology
covered in a particular territory. The three territories covered are the
People's Republic of China, all of Asia except the People's Republic of China,
and the United States of America. IVI Smart, the current licensor, is one of our
principal shareholders. The rights to technology granted to us includes all
smart card and related assets of the licensor including the Super Smart
Card(TM), the BVS2(TM) platform and all relevant components thereof. The License
Agreements require that all inventions and improvements made by us be assigned
to the licensor with a license to use granted back to us on the same terms and
conditions as the technology was granted to us in the original license. We are
jointly responsible to protect and defend the technology in the event of
challenge, or disputes of any kind in a covered territory.
Our success and ability to compete depend in large part upon the protection of
the proprietary technology that we license. We and the licensor rely on a
combination of patent, trademark, copyright and trade secret law, as well as
know-how, confidentiality agreements and other contractual relationships with
employees, affiliates, distributors and others. In this regard, our licensor has
a number of pending patent applications in various jurisdictions, globally.
Neither we nor the licensor can be certain that patents will be issued with
respect to any of the pending or future patent applications. In addition, as
with every other company that depends on patents, until the outcome of any
future litigation is determined, we can not be certain that any patents if
issued will be enforceable against alleged infringers or will be upheld if their
validity is challenged.
Recent Developments
Commencing in the spring of 2003, we began a global marketing program with
particular emphasis in Asia. In October 2003, we authorized the creation of
e-Smart Korea, Inc. as a wholly owned Korean subsidiary. During the first
quarter of fiscal 2004, and through our new Korean subsidiary, we entered into
two material agreements that we believe will lay the groundwork for our
transition to operating status. On February 25, 2004, we signed a "Mutual
Cooperation Agreement" with Daewoo International ("Daewoo"), a multinational
trading company, manufacturer and infrastructure builder-provider (the "Daewoo
Agreement"). On February 27, 2004, we entered into a "Master Teaming Agreement"
(the "Samsung Agreement") with Samsung SDS ("Samsung"), a leading global IT
solutions provider in Korea with annual revenue of in excess of US $1.43
billion. In addition, the Company directly entered into another material
agreement that is designed to pave the way towards re-commencing operations in
China. In that regard, we directly entered into a "Cooperation Agreement" on
February 27, 2004 with a Chinese corporation principally owned by entities
controlled by the PRC's Ministry of Information Industry (the "China
Agreement"). The following is a summary of each of the foregoing agreements:
A. The Daewoo Agreement. In furtherance of our business plan, we endeavor to
engage or partner with a large system integrator in undertaking any given
project. Towards that end, and pursuant to the terms of the Daewoo Agreement,
the parties have agreed to work together to identify projects on an
international basis within listed countries that capitalize both on the unique
biometric and other systems developed by us and on Daewoo's strengths within
those countries. Upon jointly agreeing to pursue a potential project, a project
specific agreement will be entered into on terms to be negotiated on a case by
case basis. We have commenced discussions concerning our first joint project and
have commenced negotiating the terms of the first project-specific agreement.
Prior to the date of the Daewoo Agreement, Daewoo chose our Super Smart Card(TM)
and BVS2(TM) to gain an edge over competitors in the national ID market.
B. The Samsung Agreement. Samsung is a leading contender in the domestic Korean
market for the development and implementation of a National ID Card and other
large scale public ID card systems. We believe that Samsung, like Daewoo,
selected our biometric systems, because when configured for a privacy protected,
multi-application, National ID Card, our systems provide a
powerful tool for identity verification that is useful for security purposes,
an exceptional ability to prevent ID theft crimes and a unique ability to
protect the privacy and civil rights of each cardholder. Under the terms of the
Samsung Agreement, the parties have agreed to work together to identify domestic
Korean projects as well as certain international projects that capitalize on the
unique features of our technologies and upon Samsung's status and implementation
abilities. Upon jointly agreeing to pursue a potential project, a project-
specific agreement will be entered into on terms to be negotiated on a case by
case basis. To date, the parties have identified three potential projects
and discussions are underway in connection therewith. Despite the clear need to
protect the Korean public from identity theft and other ID related crimes,
however, the notion of a national ID card with a biometric system has stirred
controversy regarding privacy related issues amongst both legislators and
privacy groups. These fears, coupled with the failure of other biometric systems
tested in the Korean public arena, have prevented the introduction of a
biometric National ID Card in Korea.
C. The China Agreement. We have agreed to form a joint venture company in the
People's Republic of China ("PRC") with two PRC companies. One is primarily
owned and controlled by an entity of the Ministry of Information Industry
("MII") named Guo Xin Well-tel Technology Co., Ltd., and the other, named
EarthNetMedia Trading Co., Ltd., is primarily owned and controlled by PRC
persons involved in media and public relations in the PRC. We will be a fifty
(50%) percent shareholder of this joint venture (the maximum allowed by law for
this type of venture) and the two PRC companies will own thirty (30%) percent
and twenty (20%), respectively. The MII was created March 1998 by merging the
former Ministry of Post and Telecommunications, which oversaw network standards
and access, and the Ministry of Electronics and Information, which oversaw
computers and software (and by divesting the resulting ministry of
responsibility for postal administration and the telecom trunk line network).
MII is now described as "a super-agency overseeing telecommunications,
multimedia, broadcasting, satellites, and the Internet." The parties to this
Agreement have agreed to work together and to cooperate in doing everything
necessary to create the joint venture and to obtain a business license that will
allow the joint venture to effectuate our business plan of mass distribution of
the Super Smart Card(TM) and the operation of the BVS2(TM) throughout the PRC.
Commencing March 1, 2004, Guo Xin Well-tel Technology Co., Ltd. agreed to
provide office space to the joint venture within their offices at the MII and to
provide all required local liaison services necessary to obtain the required
permit necessary to do business in the PRC. We agreed to pay a non-accountable
expense allowance of US$10,000 per month commencing March 1, 2004, in exchange
for the above mentioned facilities and services. Upon its formation, the joint
venture will repay all formation expenses to us. We are also responsible for
providing twenty-five million (25,000,000) Chinese Yuan (approximately
US$3,000,000) capital to the joint venture company after formation in various
traunches over a period of two years commencing with a payment of fifteen (15%)
percent of this total within three months of the formation of the joint venture
with all required permit and licenses having been issued.
Competition
Based on our own extensive research, we believe that, at least as of the date
hereof, that there is no product that can directly compete with Super Smart
Card(TM) and the BVS2(TM) platform. On the other hand, there are numerous
products and competitors in the smart card and smart card operating system
arena. We must, therefore, anticipate competition in sales of our products,
systems and technologies from other providers of microprocessor-based smart card
technologies. We expect competition to intensify as, and if, we become
successful in our deployment plans and our competitors commit greater resources
to the development of biometrically empowered contactless microprocessor-based
smart cards. Some of the larger chip manufacturers that operate in the smart
card market, including Atmel, STM, Infineon and Philips Semiconductors, have
announced that they are developing contactless microprocessor-based smart cards.
However, we know of no card planned or otherwise that has the sophistication and
features of the Super Smart Card(TM).
We also compete with contactless ASIC-based technologies developed primarily by
Philips Semiconductors, which comply with ISO 14443 and which are used by some
of the largest manufacturers of smart cards, including Gemplus, Schlumburger and
Giesecke & Devrient, and Sony's contactless ASIC based technology, that is not
ISO compliant. Further, we also compete with contact-based products such as
microprocessor-based contact cards, ASIC-based contact cards, memory chip cards
and magnetic strip cards.
We believe that all of these cards offer inferior functionality compared to our
dual interface, biometrically powered, contactless microprocessor-based smart
cards. Nevertheless, some of our potential customers have in the past, and may
in the future, consider these inferior alternatives sufficient for their needs.
Employees
As of December 31, 2003, we had two employees; our Chief Executive Officer,
President and Chief Financial Officer, Mary A.
Grace, who lives in New York City but who travels more than 95% of the time on
our behalf, and our Chief Technical Officer, Tamio Saito, who lives in San Jose,
California. None of our employees is a party to a collective bargaining
agreement.
Risk Factors
The following risks with respect to our proposed business and financial
condition should be carefully considered. These risks and uncertainties are not
the only ones facing us. Other risks and uncertainties that have not been
predicted or assessed by us may also adversely affect us. Some of the
information in this report contains forward-looking statements that involve
substantial risks and uncertainties. These statements can be identified by
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"intend," "estimate," and "continue" or other similar words. Statements that
contain these words should be carefully read for the following reasons:
o The statements may disclose our future expectations;
o The statements may contain projections of our future earnings or our
future financial condition; and
o The statements may state other "forward-looking" information.
Risks Related to Our Business
Although we are required to file annual, quarterly and special reports, and
other information with the Securities and Exchange Commission (the "SEC"), we
are materially delinquent in our filing of these required reports. During
2003, we filed our Form 10-QSB Quarterly Report for the six months ended June
30, 2003, on November 13, 2003, and our Form 10-QSB Quarterly Report for the
nine months ended September 30, 2003, on December 30, 2003. Prior to that, our
last quarterly report was filed on October 10, 2000. We have not filed any
reports for any period during the fiscal years ended December 31, 2001 or
December 31, 2002. Accordingly, and prior to this report, there has been
limited public information on which to base an informed investment decision
concerning our securities.
The SEC commenced an Administrative Proceeding and the Administrative Law Judge
Ruled against us.
On December 12, 2002, the SEC commenced an administrative proceeding against
us seeking, among other things, to interrupt public trading in our common
stock. Pending a decision by the Administrative Law Judge, we agreed to
utilize our best efforts to prepare and file our Annual Report on Form 10-KSB
for the fiscal years ending December 31, 2002 and December 31, 2003, on or
before March 30, 2004.
On March 4, 2004, Lillian A. McEwan, Administrative Law Judge, published an
Initial Decision in the Proceeding. In her decision, the Administrative Law
Judge (i) ordered: that, effective 21 days after the date of the initial
decision, the registration of our common stock be revoked as a result of our
violations of the periodic reporting requirements of the Exchange Act and (ii)
dismissed the allegations in the Proceeding that we violated Section 12b-20 of
the Exchange Act be dismissed. In accordance with applicable rules, we appealed
that decision and our stock continues to trade.
On July 16, 2004, the SEC published an order wherein the Division of
Enforcement's motions for summary affirmance and for leave to file a brief in
opposition to our petition for review were denied.
We have no history of revenue from operations and we have only minimal assets.
We have never generated any history of revenue from operations. We have no
significant assets or financial resources other than our licenses of the smart
card intellectual property from IVI Smart. In all likelihood, we will continue
to incur pre-operating expenses without corresponding revenues for the
foreseeable future. This may result in our continuing to incur a net operating
loss which will increase continuously until we can generate cash flow from
operations. There can be no assurance that we will be successful in developing
our proposed smart card operations or that we will ever become profitable.
We are undercapitalized and may be unable to continue our business unless we
raise additional money.
We have very limited working capital and until we execute a product specific
material contract for our system and smart cards, we will continue to be
entirely dependent upon proceeds derived from private securities offerings for
funds for the continuation of our proposed smart card transaction business.
Currently, we do not have any existing credit facilities or similar bank
borrowing arrangements. We will need to obtain additional financing in order
to implement the material aspects of our business plan. There can be no
assurance that any additional financing will be available to us on acceptable
terms, if at all. If we continue to raise funds by issuing additional equity
securities, further dilution to existing equity holders will necessarily
result. If adequate additional funds are not available, we may be required to
significantly curtail our long term business objectives and may not be able to
transition out of the development stage. Accordingly, we are subject to all of
the risks inherent in starting a new business enterprise including the potential
loss of all monies invested and never realizing any revenue generating
operations.
It is difficult to evaluate our business and prospects because we do not have
any history of revenue from operations.
The present management of the Company assumed control in October 2000. Since
that date, we have not generated any revenue from operations and the success
of our proposed plan of operation will depend, to a great extent, on the
ability of management to successfully implement an untested business model
with limited capital. Our short existence and our lack of working capital make
it difficult to evaluate our current business and prospects or to accurately
predict our future revenue or results of operations. Our revenue and income
potential as well as our business strategy continue to be unproven. The
ultimate success or failure of our smart card endeavor may wind up being
dependent upon numerous factors beyond the control of us or our management.
We may not be able to operate successfully if we are unable to hire qualified
additional personnel.
Our success may largely be dependent on the personal efforts and abilities of
our management and our ability to attract and retain qualified key personnel
in the future. Except for Tamio Saito, our Chief Technical Officer and member
of our Board of Directors, none of our management team has ever operated a
smart card business or has any experience with the manufacture and marketing
of smart card products. In addition to performing their regular duties, our
management must spend a significant amount of time devising strategies to
execute our untested and unproven business model.
We are presently dependent upon four people.
Our ultimate success or failure will depend to a large extent on the services
and efforts of our two executive and operating officers, Mary A. Grace and
Tamio Saito and two of the co-inventors of our BVS2(TM) and Super Smart Card
(TM) technology, Wayne Drizin and Takashi Aida. The loss of the services of
any one or more of these key persons, especially during the initial stages of
our operations, could disrupt our business and harm our operations. In the
event of the untimely demise, unavailability or disability of any one or more
of these four persons, there can be no assurance that we will be able to secure
a successor of equivalent talent and experience.
As stated in greater detail in this report, our technology was developed
primarily by Tamio Saito and Wayne Drizin, while the key managers of our
business operations were Mary A. Grace and Tamio Saito. During the period since
our last periodic filing, our marketing efforts have resulted in contracts
and/or ongoing negotiations with an increasing number of governmental and
private entities in the United States and abroad. Our ability, at this point, to
effectively pursue each of these potential contracting opportunities and to
design and complete system installation in connection with those contracts is
dependent on the continued efforts not only of Ms. Grace and Mr. Saito, but also
the other co-inventors of the system, Wayne Drizin and Takashi Aida. Both of
these individuals have consulting arrangements with us. Mr. Saito, Mr. Drizin
and Mr. Aida were instrumental in the development and the refinement of the
system which forms the basis for the employment of the e-Smart biometric card.
We believe that Messrs. Saito, Drizin and Aida are the individuals best able to
continue to refine, to present and to customize the use of our system and
oversee its installation. In the event we were to be deprived of the services of
any of these three individuals, our ability to pursue, procure and fulfill
contracting opportunities will be materially decreased and/or delayed.
We have no Key Man Insurance.
Presently, we do not maintain or carry any key man life insurance. We intend
to purchase life insurance on the lives of our key personnel as soon as we are
financially able. Upon purchase of this insurance, we will pay the premiums and
designate the Company as the sole beneficiary. The lack of key man coverage and
the lack of other such insurance may have a material adverse effect upon our
business in the event of the untimely loss of any of our four key employees.
We may be deprived of the services of a co-inventor of our Super Smart Card(TM)
technology.
In September of 2000, the U.S. Attorney's Office in Phoenix, Arizona, charged
Wayne Drizin, a co-inventor of our Super Smart Card(TM) technology, with
six counts of wire fraud in connection with certain share transactions
involving a predecessor of IVI that allegedly took place during 1995 and 1996.
In October 2003, and after a trial by jury, Mr. Drizin was found not guilty of
four counts in the complaint but convicted on two counts of wire fraud. Legal
counsel for Mr. Drizin will file an appeal and advised us that based on his
review of the government's case and the evidence presented at trial, he is
confident that the conviction will be reversed. However, and in the event the
conviction is not reversed, it is likely that Mr. Drizin will be barred by
the SEC from serving as one of our executive officers or as one of our directors
and that he may be incarcerated for some period of time. In light of the fact
that Mr. Drizin has never been an executive officer or director, but has
exclusively served as a consultant to us, we do not believe that an SEC imposed
bar will materially and adversely affect our business model. On the other
hand, any incarceration of Mr. Drizin will deprive us of his skills and advice,
and may have a material adverse effect upon our proposed business during any
such period of incarceration.
We may not be able to get D&O insurance.
The election of qualified independent members of our Board of Directors is
contingent upon our acquiring a policy of directors and officers liability
insurance in an amount reasonably satisfactory to such nominees. Given our lack
of revenue generating operations during our development stage as well as
the adverse decision of the in the SEC Administrative Proceeding (discussed
above), any such policy, we expect, will be very expensive and may not be
available at any price. Our failure to acquire such a policy may prevent us
from attracting the services of qualified independent members to our Board of
Directors. This, in turn, will create a material adverse effect upon our
ability to meet the corporate governance regulations imposed on publicly owned
companies.
We have a history of losses and may not achieve profitability in the foreseeable
future.
We have incurred losses in each year since our inception. Our losses resulted
primarily from expenses we incurred in research and development, selling and
marketing, as well as in general and administrative expenses. We have never
had any revenue. We expect to continue to incur operating losses in future
periods as we invest in the expansion of our global operations and continue to
enhance our research and development capabilities and expand our relationship
with contract manufacturers.
If the market for smart cards in general, and for biometric,
multi-application-based smart cards in particular, does not grow as we expect,
we may not succeed in selling our products.
The success of our products depends on commercial enterprises, governmental
authorities and other potential card issuers adopting biometric multi-
application based smart card technologies. Other card technologies, such as
magnetic strips or bar codes, are widely used and could be viewed by potential
customers as more cost effective alternatives to our products. Additionally,
potential customers in developed countries such as the United States may already
have installed systems that are based on technologies different than ours and
may therefore be less willing to incur the capital expenditure required to
install or upgrade to a biometric multi-application-based smart card
system. As a result, we cannot provide any assurance that there will be
significant market opportunities for smart card systems. If demand for biometric
multi-application-based smart card products such as ours does not develop or
develops more slowly than we anticipate, we may have fewer opportunities for
growth than we expect.
If we fail to develop new products or adapt our existing products for use in new
markets, our revenue growth may be impeded and we may incur significant losses.
To date, we have not sold any products incorporating our technology in any
markets. We are currently developing and attempting to market our technology for
use as national identity cards for use by governmental authorities. We have yet
to recognize revenues from sales of these products. We are devoting significant
resources to developing and marketing these and other products and adapting our
existing products for use in new markets. If we fail to develop a market for our
products we will not generate any revenue and continue to incur significant
losses.
We intend to derive a significant portion of our revenues from sales to systems
integrators who are not the end-users of our products. Accordingly, we may
become dependent on the ability of these integrators to maintain their existing
business and secure new business.
We anticipate that much of our revenue will be derived from sales to systems
integrators who incorporate our products into systems which they supply and
install for use in a specific project. To the extent our revenues depend on
systems integrators' ability to successfully market, sell, install and provide
technical support for systems in which our products are integrated or to sell
our products on a stand-alone basis, our revenues may decline if such systems
integrators' efforts fail. Further, the faulty or negligent implementation and
installation of our products by systems integrators may harm our reputation and
tarnish our brand name. Because we may be one step removed from the end users
of our products in this situation, it may be more difficult for us to rectify
damage to our reputation caused by systems integrators who have direct contact
with end users. In addition, termination of agreements with systems integrators
or revocation of exclusive distribution rights within a certain area may have
negative effects on our business. Further, if we are unable to maintain our
current relationships with systems integrators or develop relationships with
new systems integrators, we may not be able to sell our products and our results
of operations could be impaired. Unless we continue to expand our direct sales,
our future success will depend upon the timing and size of future purchases by
systems integrators and the success of the projects and services for which they
use our products.
Our inability to maintain our current, and establish new, strategic
relationships could impair our revenue growth.
The markets for our products are usually highly specialized and require us to
enter into strategic relationships in order to facilitate or accelerate our
penetration into new markets. We consider a relationship to be strategic when
we integrate our technology into some of the product offerings of a systems
integrator that has a significant position in a specified market, and then
cooperate in marketing the resulting product. The termination of any of our
strategic relationships or our failure to develop additional relationships in
the future may limit our ability to expand the markets in which our products are
deployed or to sell particular products, and thereby impair our revenue growth.
We face intense competition. If we are unable to compete successfully, our
business prospects will be impaired.
We face intense competition from developers of contact and contactless
microprocessor-based technologies and products, developers of contactless
products that use other types of technologies that are not microprocessor-based,
and non-smart card technologies. We compete on a range of competitive factors
including price, compatibility with the products of other manufacturers, and the
ability to support new industry standards and introduce new reliable
technologies. Many of our competitors, such as Phillips Semiconductors,
a division of Phillips Electronics N.V., and Infineon Technologies AG,
have greater market recognition, larger customer bases, and substantially
greater financial, technical, marketing, distribution, and other resources than
we possess. As a result, they may be able to introduce new products, respond
to customer requirements and adapt to evolving industry standards more
quickly than we can.
While at the moment we believe we offer a unique product that is easy to
differentiate from our competitors, in the future, we may not be able to
differentiate our products sufficiently from those of our competitors. If we
cannot compete successfully with our existing and future competitors, we could
experience lower sales, price reductions, loss of revenues, reduced gross
margins and reduced market share.
From time to time, we or one or more of our present or future competitors may
announce new or enhanced products or technologies that have the potential to
replace or shorten the life cycles of our existing products. The announcement of
new or enhanced products may cause customers to delay or alter their purchasing
decisions in anticipation of such products, and new products developed by our
competitors may render our products obsolete or achieve greater market
acceptance than our products.
If there is a sustained increase in demand for microprocessors, availability
might be limited and prices might increase.
Our products require microprocessors and other silicon based chips. The
microprocessor industry periodically experiences increased demand and limited
availability due to production capacity constraints. For example, there has
been a shortage in the availability of microprocessors since the middle of
1999. Increased demand for, or limited availability of, microprocessors
could substantially increase the cost of producing our products. In addition,
as a result of a shortage, we may be forced to delay shipments of our
products, or devote additional resources to maintaining higher levels of
microprocessor inventory. Consequently, we may experience substantial period-
to-period fluctuations in our cost of revenues and, therefore, in our future
results of operations.
Our products have long development cycles and we may expend significant
resources in relation to a specific project without realizing any revenues.
The development cycle for our products varies from project to project.Typically,
the projects in which we are involved are complex and require that we customize
our products to our customers' needs and specifications. We then conduct
evaluation, testing, implementation and acceptance procedures of the customized
products with the customer. Only after successful completion of these procedures
will customers place orders for our products in commercial quantities, if any.
We, therefore, cannot provide an assurance that contracts that we enter into
will result in commercial sales. As a result, we may expend financial,
management and other resources to develop customer relationships before we
become capable of recognizing any revenues.
We are dependent on a small number of suppliers for critical components, delays
or discontinuance of the supply of components may hamper our ability to produce
our products on a timely basis and cause short-term adverse effects.
The components we use in our products, including microprocessors and cards, are
supplied by third party suppliers and manufacturers. Many of these suppliers are
our sole suppliers. Although we are now in the process of securing additional
sources of supply, in the meantime, we may experience short-term adverse effects
due to delayed shipments that will delay the supply of our products to our
customers, and that may result in cancellation of orders for our products. In
addition, we do not generally have long term supply contracts under which our
suppliers are committed to supply us with components at a fixed price. Suppliers
could increase component prices significantly without warning or could
discontinue the manufacture or supply of components used in our products. We may
not be able to develop alternative sources for product components if, and as,
required in the future. Even if we are able to identify any alternative source
of supply, we may need to modify our products to be compatible with other
components, which may cause delays in product shipments, increase manufacturing
costs and increase product prices.
Because some of our suppliers are located in Europe and the Far East, we may
experience logistical problems in our supply chain, including long lead times
for receipt of products or components and shipping delays.
If we fail to hire, train and retain qualified research and development
personnel, our ability to enhance our existing products, develop new products
and compete successfully may be materially and adversely affected.
Our success depends in part on our ability to hire, train, and retain qualified
research and development personnel. Individuals who have expertise in
research and development in our industry are scarce. Competition for such
personnel is intense in the electronics industry, particularly in the United
States, and therefore hiring, training and retaining such personnel is both
time consuming and expensive. If we fail to hire, train and retain employees
with skills in research and development, we may not be able to enhance our
existing products or develop new products.
Our ability to compete depends on our continuing right to use, and our ability
to protect, our intellectual property rights.
Our technology is licensed from a major shareholder, IVI Smart (see
"Proprietary Technologies"). Our success and ability to compete depend in
large part on using our licensed intellectual property and proprietary rights
to protect the technology we use and the products we make. We rely on a
combination of patent, trademark, copyright and trade secret law, as well as
confidentiality agreements and other contractual relationships with our
employees, customers, affiliates, distributors and others.
Our licensor currently has patents pending in the United States, Europe, Japan,
and elsewhere that have not yet resulted in grants. We cannot be certain that
patents will be issued with respect to any of these pending or future patent
applications or that the scope of any future patents that are issued to our
licensor, will provide us with adequate protection for our technology and
products. Others may challenge these patents or registered trademarks. We do not
know whether any of them will be upheld as valid or will be enforceable against
alleged infringers and thus we do not know whether they will enable us to
prevent or hinder the development of competing products or technologies.
Moreover, patents provide legal protection only in the countries where they are
registered and the extent of the protection granted by patents varies from
country to country.
The measures we have taken to protect our technology and products may not be
sufficient to prevent their misappropriation by third parties or independent
development by others of similar technologies or products. Competitors may also
develop competing technology by designing around our patents and will then be
able to manufacture and sell products which compete directly with ours. In that
case, our business and operating results would be harmed. While substantially
all of our employees are subject to non-compete agreements, these agreements may
be difficult to enforce or deemed unenforceable by a court of competent
jurisdiction.
In order to protect our technology and products and enforce our patents and
other proprietary rights, we may need to initiate litigation against third
parties or defend opposition proceedings before the European Patent Office or
prosecute interference proceedings before the U.S. Patent and Trademark Office.
These legal and administrative proceedings could be expensive and occupy
significant management time and resources.
Furthermore, a successful opposition to our patent in any jurisdiction could
provide a basis for our competitors to claim that our patents in other
jurisdictions covering this technology are invalid.
Our products may infringe the intellectual property rights of others.
It is not possible to know with certainty that the manufacture and sale of our
products do not or will not infringe patents or other intellectual property
rights owned by third parties. There may, for example, be patent applications
pending at the moment, which if granted, may cover products that we have just
developed or are developing. In certain other jurisdictions there is no
publication of the subject matter of patents until the patents are issued.
Third parties may from time to time claim that our current or future products
infringe their patent or other intellectual property rights. In addition, if
third parties claim that our customers are violating their intellectual property
rights, our customers may seek indemnification from us, which could be costly,
or may terminate their relationships with us. Any intellectual property
claim could involve time-consuming and disruptive litigation and, if determined
adversely to us, could prevent us from making or selling our products, and
subject us to substantial monetary damages or require us to seek licenses.
Intellectual property rights litigation is complex and costly, and we cannot be
sure of the outcome of any such litigation. Even if we prevail, the cost of such
litigation could harm our results of operations. In addition, such litigation is
time consuming and could divert our management's attention and resources away
from our business. If we do not prevail in any litigation, in addition to any
damages we might have to pay, we might be required to discontinue the use of
certain processes, cease the manufacture, use and sale of infringing products
and solutions, expend significant resources to develop non-infringing
technology, or obtain licenses on unfavorable terms. Licenses may not be
available to us on acceptable terms or at all. In addition, some licenses are
non-exclusive and, therefore, our competitors may have access to the same
technology licensed to us. If we fail to obtain a required license or cannot
design around any third party patents or otherwise avoid infringements, we may
be unable to sell some of our products.
We are susceptible to changes in international markets and difficulties with
international operations could harm our business.
Our ability to penetrate any market whether, domestic or international, is
dependent in part on political and economic factors that we have no control
over. In addition, there are certain inherent risks in international operations
which include:
o Changes in regulatory requirements and communications standards;
o Required licenses, tariffs and other trade barriers;
o Difficulties in enforcing intellectual property rights across, or
having to litigate disputes in, various jurisdictions;
o Difficulties in staffing and managing international operations;
o Potentially adverse tax consequences; and
o The burden of complying with a wide variety of complex laws and
treaties in various jurisdictions.
If we are unable to manage the risks associated with our focus on international
sales, our business may be harmed.
We may have to adapt our products in order to integrate them into our customers'
systems or if new government regulations or industry standards are adopted or
current regulations or standards are changed.
Some of our products are subject to mandatory government regulation in the
countries in which they are used. For example, card readers that are used in
the United States require certification of compliance with regulations of the
Federal Communications Commission and in Europe of compliance with regulations
of the European Telecommunications Standards Institute regarding emission
limits of radio frequency devices. In addition, governmental certification for
the systems into which our products are integrated may be required. The
International Standards Organization is in the process of approving industry
standards regulating the transfer of data between contactless smart cards and
readers. If there is a change to government regulations or industry standards,
we may have to make significant modifications to our products and, as a result,
could incur significant costs and may be unable to deploy our products in a
timely manner.
In addition, prior to purchasing our products, some customers may require us to
receive certification that our products can be integrated successfully into
their systems or comply with applicable regulations. Receipt of these
certifications may not occur in a timely manner or at all. In some cases, in
order for our products, or for the system into which they are integrated, to be
certified, we may have to make significant product modifications. Failure to
become so certified could render us unable to deploy our products in a timely
manner or at all.
Our products may contain defects that we find only after deployment, which could
harm our reputation, result in loss of customers and revenues and subject us to
product liability claims. Our products are highly technical and deployed as part
of large and complex projects. Because of the nature of our products, they can
only be fully tested when fully deployed. Any defects in our products could
result in:
o Harm to our reputation;
o Loss of, or delay in, revenues;
o Loss of customers and market share;
o Failure to attract new customers or achieve market acceptance for our
products; and
o Unexpected expenses to remedy errors.
In addition, we could be exposed to potential product liability claims.
Currently we maintain no product liability insurance. We intend to seek product
liability insurance prior to the distribution of our products. However, we
cannot provide any assurances that we can obtain this insurance in an amount
that will be sufficient to cover any successful product liability claim or in
any amount at all or for a premium we can accept. If we self insure or if there
is any product liability claim in excess of our insurance coverage, any related
payments would have to be made out of our cash reserves, and this would harm our
business. Furthermore, the assertion of product liability claims, regardless of
the merits underlying the claim, could result in substantial costs to us, divert
management's attention away from our operations and damage our reputation and
business.
Nevada Law Permits the Limitation on Directors' Liability.
Pursuant to our Certificate of Incorporation and under Nevada law, our
directors are not liable to us or our stockholders for monetary damages for
breach of fiduciary duty, except for liability in connection with a breach
of the duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Nevada law or any transaction in which a
director has derived an improper personal benefit.
Risks Related To Our Common Shares
We are controlled by two companies.
At December 31, 2002, IVI Smart and its parent Intermarket Ventures, Inc., a
Utah corporation, collectively owned approximately 77% of our outstanding shares
of Common Stock. Accordingly, these two entities effectively have the ability
to control the outcome of all matters requiring stockholder approval, including,
but not limited to, the election and removal of directors, and any merger,
consolidation or sale of all, or substantially all, of our assets, and to
control our management and effectively have the ability affairs.
Our share price has fluctuated in the past and may continue to fluctuate in the
future.
The market price of our shares in the over-the-counter market has experienced
significant fluctuations and may continue to fluctuate significantly. For
example, between the second and third quarter of 2003, the bid price of our
common stock increased approximately 560% from $.35 to $2.30. The market price
of our shares may be significantly affected by factors such as the announcements
of agreements, new products or product enhancements by us or our competitors
and technological innovations by us or our competitors. In addition, while
we cannot assure you that any securities analysts will initiate or maintain
research coverage of our Company and our shares, any statements or changes in
estimates by analysts initiating or covering our shares or relating to the
smart card industry could result in an immediate and adverse effect on the
market price of our shares. Further, we cannot predict the effect, if any,that
market sales of shares or the availability of shares for sale will have on the
market price of the shares prevailing from time to time. Sales of a
substantial number of shares or the perception that such sales could occur
following the filing of this report, could have a material adverse effect on the
market price of our shares.
Trading in shares of companies, such as ours, listed on the Pink Sheets in
general and trading in shares of technology companies in particular have been
subject to extreme price and volume fluctuations that have been unrelated or
disproportionate to operating or other performance. These factors may depress
the market price of our shares, regardless of whether or not we ever achieve
operating status.
In the event we fail to have the Initial Decision of the Administrative Law
Judge reversed on appeal, it is likely that the SEC will revoke the registration
of our common stock and completely halt trading in our shares until and unless
we file a new registration statement re-registering our common stock and comply
with any and all comments requirements imposed by the SEC.
We can not predict the further impact on the price of our shares following the
announcement of the adverse decision in the SEC Administrative Proceeding to
revoke the registration of our shares.
The March 4, 2003 decision of Administrative Law Judge Lillian A. McEwan to
revoke the registration of our common stock as a result of our alleged
violations of the periodic reporting requirements of the Exchange Act may
continue to have a material adverse effect upon the bid price of our common
stock in the over-the-counter market. If this is the case it will, in turn,
continue to impair our ability to raise working capital through the private
sales of our securities, our only current source of funds.
If our shares continue to be considered a Penny Stock, any investment in our
shares will continue to be considered a high-risk investment and continue to be
subject to restrictions on marketability.
Since the bid price of our shares continues to be below $5.00, our common shares
are deemed to be "penny stock" for the purposes of the Exchange Act. Brokers
effecting transactions in a penny stock are subject to additional customer
disclosure and record keeping obligations. The additional obligations include
disclosure of the risks associated with low price stocks, stock quote
information and broker compensation. In addition, brokers making transactions
in penny stocks are subject to additional sales practice requirements under the
Exchange Act. These additional requirements include making inquiries into the
suitability of penny stock investments for each customer or obtaining the prior
written agreement of the customer for the penny stock purchase. Because of
these additional obligations, some brokers will not effect transactions in our
securities.
Our share price could be adversely affected by future sales of our shares.
As of December 31, 2002, we had 153,771,993 shares outstanding, exclusive of
shares issuable upon exercise of outstanding warrants and shares reserved for
issuance upon the exercise of outstanding options granted to management and
others. The market price of our shares could drop as a result of sales of
substantial amounts of our shares in the public market following the exercise
of either or both of the outstanding warrants or options. This factor could also
make it more difficult to raise additional funds through future private
offerings of our shares or other securities.
We do not anticipate paying cash dividends in the foreseeable future.
We have paid no dividends on our common stock since our inception and presently
intend to continue to retain all earnings, if any, for use in our business.
Investors who anticipate the need for either immediate or future income by way
of cash dividends from their investment should refrain from investing in our
securities.
Our shareholders could experience dilution of their ownership interest if we
issue more shares that are purchased by third parties.
Under Nevada law, shareholders in public companies such as the registrant do
not have preemptive rights. This means that our shareholders do not have the
legal right to purchase shares in a new issue before they are offered to third
parties. In addition, our board of directors may approve the issuance of shares
in many instances without shareholder approval. As a result, our shareholders
could experience dilution of their ownership interest if we decide to raise
additional funds by issuing more shares and such shares are purchased by third
parties.
Conclusion
While to date there has not been a strong demand for smart cards domestically in
the USA, this trend is changing. The federal government has numerous initiatives
that require deployment of smart cards, with the Department of Defense Common
Access Card being a prime example. There is a challenge for suppliers in that
there is more than one standard and more than one type of smart card. In
addition, there is a massive installed base of infrastructure utilizing other
technologies (bar codes, magnetic stripe, etc.) that is difficult to overcome.
Today's post 9/11 world, however, demands ID verification that is fast, simple,
sure and secure. From terrorism to identity theft (one of the world's fastest
growing crimes), society requires accurate identification of each person. We
believe that at this time there is no other viable system than the Super Smart
Card(TM) operating on the BVS2(TM) platform that can make this ID verification
while still protecting privacy and civil rights.
Available Information
This is the first annual report on Form 10-KSB that we have filed, and we intend
to file Form 10-KSBs on a timely basis for all subsequent years. In addition, we
file quarterly reports on Form 10QSB, current reports on Form 8-K, amendments to
these reports, and other information with the SEC. The public may read and copy
any materials we file with the SEC at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1800-SEC-0330.
The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC.
ITEM 2. DESCRIPTION OF PROPERTY
Pursuant to an Advisory and Administrative Services Agreement effective January
1, 2001, and dated May 29, 2003 (the "ABG Agreement") with Associated Business
Group, Inc., a Nevada corporation controlled by and under common control of the
father of the co-inventor of our Super Smart Card(TM) technology ("ABG"), we
maintain our executive offices in the premises of ABG at 7225 Bermuda Road,
Suite C, Las Vegas, Nevada 89119. We utilize approximately 350 square feet of
space, have access to a copy and fax machine and telephone service. These
services are provided to us at no charge. However ABG is otherwise compensated
for its administrative services under the ABG Agreement. The ABG Agreement is
summarized under the caption Certain Transactions and Other Relationships below.
Our office facilities in Las Vegas are adequate for the purposes for which they
are intended and provide sufficient capacity to accommodate our short-term
needs.
ITEM 3. LEGAL PROCEEDINGS
A. On December 12, 2002, the SEC commenced an Administrative Proceeding against
us seeking, among other things, to interrupt public trading in our securities
(the "Proceeding"). Pending a decision by the Administrative Law Judge, we
agreed with the SEC and the judge to utilize our best efforts to prepare and
file Quarterly Reports on Form 10-QSB for the six and nine months ended June 30,
2003 and September 30, 2003, respectively; and our Annual Report on Form 10-KSB
for the two fiscal years ending December 31, 2003, on or before March 30, 2004.
Towards this end, and on November 13, 2003 and December 30, 2003, respectively,
we filed our Quarterly Reports on Form 10-QSB for the six and nine months ended
June 30, 2003 and September 30, 2003; and engaged Rosenberg Rich Baker Berman &
Company of Bridgewater, NJ to audit our financial statements for the two fiscal
years ending December 31, 2003.
Notwithstanding the foregoing, and on March 4, 2004, Lillian A. McEwan,
Administrative Law Judge, published an Initial Decision in the Proceeding. In
the decision, it was ordered: (i) that the registration of our common stock be
revoked as a result of our violations of the periodic reporting requirements of
the Exchange Act; and (ii) that the allegations in the Proceeding that we
violated Section 12b-20 of the Exchange Act be dismissed. In accordance with
applicable rules, we appealed the decision on March 24, 2004.
B. On February 27, 2003, we filed the first of an expected series of both state
and federal lawsuits in connection with, among other things, the stream of false
and malicious allegations made by certain parties against us, our President, and
one of our licensed technology's co-inventors that led to the since dismissed
complaint brought by the U.S. Attorney's Office for the Southern District of New
York our President and such co-inventor.
The initial complaint as filed by e-Smart is against named and unnamed
individuals for "Conspiracy to Interfere with Prospective Economic Advantage,
Conspiracy to Slander and Defame, Conspiracy to Breach Fiduciary Duties and for
Punitive Damages." The Complaint seeks compensatory damages of one billion
dollars in addition to unspecified punitive damages against those that lied to
the U.S. Attorney's Office in an effort to discredit our products and personnel.
This litigation is in the early stages of discovery and while we believe that we
have a meritorious case, there can be no certainty as to the outcome of same or
of our ability to eventually collect any judgment(s) awarded, if any. In light
of our lack of capital, the expense of this litigation may have an adverse
effect on our ability to conduct our proposed smart card business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Neither during the fourth quarter of the fiscal year ended December 31, 2002,
nor at any time since the December 18, 2000, Special Meeting of Stockholders did
the Registrant conduct a meeting of its stockholders pursuant to definitive
proxy materials under Regulation 14A under the Exchange Act.
On December 1, 2003, however, IVI Smart and certain other stockholders owning
approximately 77% of our issued and outstanding shares adopted resolutions by
consent pursuant to Section 78.320 of the Nevada Revised Statutes in lieu of a
meeting of our shareholders. The resolutions (i) re-elected a former director;
(ii) elected two new directors; (iii) granted to the board the power to select
independent auditors; (iv) increased the number of authorized shares of common
stock from 200 million to 300 million; (v) created the 2003 Long Term Incentive
Plan wherein 75 million shares are reserved for issuance; and (vi) granted 30
million options thereunder. The approved actions will become operative 20 days
after the mailing to our stockholders of an Information Statement that must
first be prepared and filed with the SEC. A total of 30 million five year
options were granted to our Chief Executive Officer, one of the inventors of the
Super Smart Card(TM) technology and certain employees. The options are
exercisable at a price equal to 100% of the closing bid price for our common
stock on December 1, 2003, or $1.00 per share.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Since late 1997, our common stock, our only class of trading equity securities,
has been traded in the over-the-counter market on the Pink Sheets under the
symbol "ESMT". The following table sets forth the range of high and low bid
price information for the common stock for each fiscal quarter for the past two
fiscal years as reported by the Pink Sheets LLC. High and low bid quotations
represent prices between dealers without adjustment for retail mark-ups,
markdowns or commissions, may not necessarily represent actual transactions, and
have not been adjusted for any stock dividends or splits.
HIGH BID LOW BID
Year Ended December 31, 2003:
Fourth Quarter $ 1.78 $ 1.00
Third Quarter 2.30 0.30
Second Quarter 0.35 0.10
First Quarter 0.25 0.10
Year Ended December 31, 2001:
Fourth Quarter 0.68 0.40
Third Quarter 0.91 0.35
Second Quarter 0.68 0.40
First Quarter 0.80 0.22
Since our shares began trading in the over-the-counter market in the Pink
Sheets, the prices for our shares have fluctuated widely. There may be many
factors that explain these variations. We believe that such factors include (a)
the demand for our common stock, (b) the number of shares of our common stock
available for sale, (c) developments in the smart card industry, and (d) changes
in the performance of the stock market in general, among others.
In recent years, the stock market has experienced extreme price and volume
fluctuations that have had a substantial effect on the market prices for many
small and emerging growth companies such as ours, which may be unrelated to the
operating performances of the specific companies. Some companies that have
experienced volatility in the market price of their stock have been the targets
of securities class action litigation. If we became the target of securities
class action litigation, it could result in substantial costs and a diversion of
management's attention and resources and have an adverse effect on our ability
to implement our business plan. In addition, holders of shares of our common
stock could suffer substantial losses as a result of fluctuations and declines
in the market price of our common stock.
The trading of shares of our common stock is subject to limitations set forth in
Rule 1 Sg-9 of the Exchange Act. This rule imposes sales practice requirements
on broker-dealers who sell so-called "penny stocks" to persons other than
established customers, accredited investors or institutional investors. For any
transaction involving a penny stock, unless exempt, the rules require that a
broker or dealer: (a) approve a person's account for transactions in penny
stocks; and (b) 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: (i) obtain financial information and
investment experience and objectives of the person; and (ii) make a reasonable
determination that the transactions in penny stocks are suitable for that the
person and that 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 relating to the penny stock market, which, in
highlight form, (x) sets forth the basis on which the broker or dealer made the
suitability determination; and (y) explains that the broker or dealer received a
signed, written agreement from the investor prior to the transaction. Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading, and about 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.
Holders
As of December 31, 2003, the approximate number of holders of record of shares
of our common stock, $.001 par value per share, our only class of trading
securities, was believed by management to be as follows:
Title of Class Number of Record Holders
Common Stock, $.001 par value 115
Registrant believes there are many shareholders whose securities are held in
street name with various brokerage houses. The exact number of shareholders is
unknown to us.
Dividends
To the best of management's knowledge and belief, we have never paid a dividend;
and no dividends are expected to be paid at least until we achieve a full year
of profitable operations. Until then, earnings, if any, will be retained and
used to finance the development and expansion of our business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Over the next 12 months we expect to continue our marketing and research and
development efforts with a view towards placing our first system in operation
and proving the viability of our Super Smart Card(TM) technology. While there
can be no assurance, we are looking forward to the sale and deployment of two
systems during this period encompassing an expected aggregate of approximately
15 million Super Smart Cards(TM).
Additionally, based on our recently executed Cooperation agreement with Guo Xin
Well-tel Technology Co., Ltd., and EarthNetMedia Trading Co., Ltd., two entities
in the PRC, we have agreed to form a joint venture company in the PRC. The
purpose of the joint venture will be to obtain a business license allowing it to
effectuate mass distribution of the Super Smart Card(TM) and the operation of
the BVS2(TM) throughout the PRC. Towards this end, we intend to seek an export
license from the U.S. Commerce Department to deliver our products and systems to
China. Given our history of having our prior PRC agreement rejected by the U.S.
Commerce Department, there can be no assurance that this license will be
forthcoming in the foreseeable future or at any time.
Since present management assumed control in 2000, our only source of funds has
been private placements of our equity securities to accredited investors. We
presently are dependent upon private investors and expect this dependence to
continue until such time after the sale of our first system that we generate
sufficient income to cover our operating costs. As of the date of this Report,
we expect that this dependence will continue until at least the fourth quarter
of 2004; and based upon our current and planned 2004 rate of operating
commitments, that we will require approximately $2,500,000 in additional
subscriptions during this period. There can be no assurance that we will
continue to be able to rely upon this source of funds. This is especially true
in light of the Initial Decision of the Administrative Law Judge to revoke the
registration of our common stock and the possibility that, if our appeal of the
initial decision fails, the SEC will suspend or permanently halt the trading in
our common stock. Such an outcome would deprive investors in our securities of a
short term exit strategy and will increase the difficulty of continuing to raise
money in this fashion. This in turn would have a material adverse effect on our
ability to transition out of the development stage. Accordingly, on March 23,
2004, we petitioned the SEC for a review of this Initial decision.
Our ability to maintain what we believe to be the state-of-the-art quality of
our Super Smart Card(TM) technology is dependent upon our on going research and
development to improve our products functionality and durability and to reduce
their cost of manufacture. In addition, we are constantly trying to find and
develop new products that enhance the functionality of our BVS2(TM) platform.
This research and development is an integral part of our operating commitments
for 2003 and as such, is dependent upon funds from subscribers. Accordingly, it
is subject to the same risks enumerated in the preceding paragraph.
We are constantly acquiring equipment in connection with our research and
development activities. Our planned 2004 budget is approximately $1,000,000 for
such acquisitions, but could change depending on a number of factors, including
upon our rate of accomplishment. In connection with the anticipated sale of one
or more systems, we will need to lease additional space for an operations and
testing center for certain customers, we will need to lease a liaison office
near their offices as a condition of contract. We are taking over the research
and development center space in San Jose, California in 2004.
Commencing January 1, 2004, we began the integration of the San Jose research
and development center and its staff and operations into our Company. As a
result, we plan to hire between six and ten new employees. In addition, and
commencing upon the first sale of one of our systems, we anticipate that: (i) we
will be required to retain an additional six to ten employees to perform
administrative, logistics and quality control functions; and (ii) we will need
to open a local liaison office with an administrative and clerical staff of two
or three persons.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on the Company's financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
Forward Looking Statements:
This discussion includes "Forward-Looking Statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Any
statements that express or involve discussions with respect to predictions,
expectations, beliefs, plans, projections, objectives, assumptions or future
events or performance (often, but not always, using words or phrases such as
"expects" or "does not expect", "is expected", "anticipates" or "does not
anticipate", "plans", "estimates" or "intends", or stating that certain actions,
events or results "may", "could", "would", "might" or "will" be taken, occur or
be achieved) are not statements of historical fact and may be considered
"forward looking statements". Such statements are included, among other places
in this Form 10-KSB, in the sections entitled "Management's Discussion and
Analysis," and "Description of Business". Forward-looking statements are based
on expectations, estimates and projections at the time the statements are made
that involve a number of risks and uncertainties which could cause actual
results or events to differ materially from those presently anticipated.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can offer no assurance that such expectations will
prove to have been correct.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data required by this item appear as
Exhibit 99.3 hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 12, 2001, and as reported in our Form 8-K Current Report filed on
October 23, 2001, we engaged Bloom & Co., LLP, independent certified public
accountants ("Bloom & Co."), as our independent certified public accountants
commencing with the audit of our financial statements for the fiscal year ended
December 31, 2000. Notwithstanding this engagement, Bloom & Co. never commenced
any work on our behalf. Accordingly, and as previously disclosed in this Report,
we have not filed audited financial statements since our audited financial
statements for the period January 1, 1999 (inception) to December 31, 1999, as
prepared by G. Brad Beckstead, independent certified public accountant.
Bloom & Co., never prepared any auditor's report with respect to any of our
financial statements. In addition, and to the best of present management's
knowledge and belief, during our two most recent fiscal years and the subsequent
interim periods preceding the change there has been no disagreements with Bloom
& Co., on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures. Similarly, we and Bloom & Co. did
not have substantive discussions regarding the application of accounting
principles to specified transactions, either complete or proposed, or the type
of audit opinion that might be rendered on our financial statements.
On November 30, 2003, we engaged Rosenberg Rich Baker Berman & Company of
Bridgewater, New Jersey as our independent certified public accountants to
examine our financial statements for the fiscal year ended December 31, 2003.
The change of accountants referenced herein was approved by our Board of
Directors and a majority of our stockholders.
ITEM 8-A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-KSB, Mary
A. Grace, our principal executive officer and our principal financial officer
carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act). Ms. Grace concluded that our disclosure
controls and procedures, which were completely inadequate only months ago, had
begun to show signs of substantial improvement. Ms. Grace further concluded that
within one additional operating quarter, our disclosure controls and procedures
are expected to be effective: (i) in timely alerting the Company to material
information required to be included in our periodic SEC reports; and (ii) to
ensure that information required to be disclosed by us in reports that we intend
to file or submit under the Exchange Act are recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms. 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.
Changes in Internal Controls
We made no significant changes in our evolving internal controls or in other
factors that could significantly affect these controls including any corrective
actions with regard to significant deficiencies and material weaknesses,
subsequent to the date of the evaluation of those controls by our Chief
Executive and Chief Financial Officer.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth: (1) names and ages of all persons who presently
are and who have been selected as our directors; (2) all positions and offices
with us held by each such person; (3) the term or office of each person named as
a director; and (4) any period during which he or she has served as such:
Duration and Date
of Expiration Position & Office Age and
Name of Present Term with the Company Director Since
---- ------------------ ---------------- --------------
Mary A. Grace One year President,
Chief Executive Officer, 59
12/13/04 Chief Financial Officer
and Director 3/01
Tamio Saito One year Chief Technical Officer 56
and Director 10/03
12/31/04
Terry N. Christensen One year Director 62
7/01
11/30/03
F. Bo Zarnegin One year Director 43
3/01
11/30/03
David C. Williams One year Director 54
3/01
12/31/04
There is no understanding or arrangement between any directors or any other
person or persons pursuant to which such individual, was or is to be, selected
as one of our directors or as a nominee.
Employment Agreements
We have not entered into any written employment agreements with any of our
executive officers except Mary A. Grace, with whom we executed a Compensation
Settlement Agreement on November 15, 2003. Additional information concerning
this agreement is set forth herein under the caption Certain Relationships and
Related Transactions.
Business Experience
The following is a brief account of the experience of each of our directors and
executive officers:
Mary A. Grace has been one of our directors since March 2001, and has also
served as our President, Chief Executive Officer and Chief Financial Officer
since that date. Between October 2000 and April 2001, Ms. Grace has served in
the same capacities for IVI -Smart Technologies, Inc., a privately owned
Delaware corporation and our parent. Between December 1997 and the current date,
Ms. Grace served as Chairman, President and Chief Executive Officer of
Intermarket Ventures, Inc., a publicly owned Utah corporation and parent of
IVI-Smart Technologies, Inc. From July 1996, until its acquisition in November
1996, Ms. Grace served as the founder and a director of China Hi Tech American
Telecommunications Ltd., a corporation engaged in international
telecommunications. Between 1995 and 1996, Ms. Grace was one of the founders and
an executive officer of Asia American Tele-Communications Corporation, a
corporation engaged in telephony infrastructure development in Sichuan Province
of the Peoples Republic of China. This company was sold to Metromedia Asia
Corporation, a subsidiary of Metromedia International Group, Inc., in 1997.
Between 1993 and 1995, Ms. Grace was a founding partner and director of Asian
Infrastructure Development Co., Ltd. and Solution Technologies, Ltd.,
corporations that became engaged in infrastructure development in the People's
Republic of China.
David C. Williams has been one of our directors since March 2001. Mr. Williams,
has been a practicing attorney since 1976. From 1976 until 1979 he was employed
by the US Department of the Treasury. Subsequently he was engaged in the private
practice of law in the state of New York with an emphasis on various aspects of
international commercial transactions and international business operations.
From 1988 through 2001, Mr. Williams was a founding and managing partner of the
law firm, Neville, Petersen & Williams, a New York law firm specialized in
international transactions. He has substantial knowledge of U.S. and foreign
import and export controls and requirements. He has assisted clients in
establishing foreign operations in various industries including the textile,
apparel, automotive, telecommunication, electronic and retailing industries. He
has personally negotiated joint venture agreements with foreign partners and
structured domestic and foreign operations to comply with governmental
requirements and to minimize taxes and duties. He has substantial experience in
all aspects of international commercial transactions including logistics,
finance and intellectual property rights. Mr. Williams received a Bachelor of
Arts degree from Union College in 1973, and a Juris Doctor degree from Albany
Law School, Union University School of Law in 1976.
Tamio Saito became a member of our Board of Directors in October 2003, and will
serve only until the election of the next director to our board. Mr. Saito also
served and continues to serve as our Chief Technical Officer, since inception.
Mr. Saito is also the Chief Technical Officer of our parent, Intermarket
Ventures, Inc., and its affiliates. Mr. Saito joined the group with over 21
years of experience at Toshiba where he served in various positions, including
Marketing Manager in the Semiconductor Division, Group Leader and Senior
Research Scientist in the R&D Center as well as Manager of Technology for the
Computer Division. Mr. Saito was the leading inventor at Toshiba with over 400
inventions and 50 US patents. Mr. Saito's inventions include, among other
things: the Smart Card, the Thermal Printer, the 3-D Display, the 5th generation
CT Scanner, the 3-D CT Scanner, the Image Sensor, Amorphous Silicon TFT/Sensor
devices, Poly-Silicon TFT devices, the Digital Camera, Ti etching, Plasma
Deposition Equipment, Switching Regulator, and Liquid Cooling System. Mr. Saito
pioneered Sub-Nano-Second Signal Propagation, reflection theory and
Fractal-Entropy interconnection theory in MPU, Memory, PCB and computers and he
performed groundbreaking R&D work in high-end supercomputer technology including
high speed circuitry analysis and Gallium Arsenic cross talk analysis and in
semiconductor R&D work including simultaneous noise analysis. Mr. Saito has
published over 50 papers at IEEE and other conferences and has published over 24
industrial professional books. Mr. Saito has a degree in Physics from Tohoku
University in Japan.
Terry N. Christensen has been one of our directors since July 2001. In 1969,
Christensen joined the Los Angeles law firm, Wyman, Bautzer, Finell, Rothman &
Kuchel, as an associate. In 1971, Christensen became a partner and during the
period, 1985-1986, Christensen served as the managing partner of the firm. In
1987, Christensen left the law firm and became President of Kirk Kerkorian's
wholly owned company, Tracinda Corporation. Tracinda owned the majority interest
in MGM/UA Communications and while Christensen was President, Tracinda entered
into a number of transactions including the formation of MGM Grand Air and the
planning and formation of the new MGM Grand, Inc. In May, 1988, Christensen
formed the law firm, now known as Christensen, Miller, Fink, Jacobs, Glaser,
Weil & Shapiro, LLP. Starting with 14 attorneys, the firm has grown to 120
attorneys with departments in all areas normally associated with a general
business practice. Christensen has been managing partner of the firm since its
inception. Christensen's other activities include serving on the board of
directors of four public companies, including Mr. Kerkorian's MGM Mirage, Inc.
Christensen received his Bachelor of Arts Degree, with honors, from Stanford
University in 1962 and his Juris Doctorate from the University of California in
1965. At USC, he served on the Law Review and graduated Order of the Coif. After
law school, Christensen went on active duty in the Marine Corps. He rose to the
rank of Captain and served primarily in the Judge Advocate General Corps with
the Fifth Marine Division.
F. Bo Zarnegin has been one of our directors since March of 2001. Mr. Zarnegin
began his career as a real estate developer in West Los Angeles and Beverly
Hills. Over time, Mr. Zarnegin was able to acquire parcels of land and
functionally obsolete properties and turn them into lucrative investments. Among
his many accomplishments, Mr. Zarnegin together with his family, developed and
own the Peninsula Hotel in Beverly Hills, one of fewer than a handful of Five
Star, Five Diamond Hotels in the United States.
Directorships
Except as disclosed, each of our directors has indicated to us that he is not
presently a director in any other company with a class of securities registered
pursuant to Section 12 of the Exchange Act or subject to the requirements of
Section 15(d) of such act or any investment company registered under the
Investment Company Act of 1940.
Certain Significant Employees
We do not presently employ any person as a significant employee who is not an
executive officer but who makes or is expected to make a significant
contribution to our business. Notwithstanding the foregoing, Mr. Wayne Drizin
and Mr. Takashi Aida, both of whom are consultants to our Company, have and
continue to make a significant contributions to our business, especially in
connection with the developments that have taken place since the end of 2003.
The following is brief account of the experience of Mr. Drizin and Mr. Aida.
Additional information concerning our business relationship with Mr. Drizin is
set forth under Item 12. Certain Relationships and Related Transactions.
Wayne Drizin. In December 1996, IVI, the parent of IVI Smart, our parent,
entered into a five year business, marketing, technology and corporate finance
consulting and advisory agreement with Emerald Sea Investments S.A., a
non-affiliated corporation, that provides, among other terms, that Mr. Drizin
perform various services to IVI. Since that time, Mr. Drizin has served in a
number of different capacities for IVI and its affiliates and subsidiaries,
including but not limited to, Head of Business Development, Chief Negotiator,
System Architect and Chief Representative. In addition, Mr. Drizin is the
co-inventor of the Super Smart Card(TM) technology and the principal creator of
the BVS2(TM) platform and related applications. This agreement has been
transferred to Mr. Drizin and extended for an additional five years and now runs
through 2006. Prior thereto since 1990, Mr. Drizin has been a business
consultant providing advice and relationships on a worldwide basis to diverse
companies seeking technical, financial, structuring and business advice across a
broad range of industries, including but not limited to telecommunications,
manufacturing, power generation and finance. In 1996, Mr. Drizin was a founder
of Telpac International, Ltd., then, an international telecommunications
company. In 1982, Mr. Drizin was one of the founders of Welfin S.A., a Swiss
based, merchant bank, specialized in the without recourse financing of exports
on a global basis. Mr. Drizin served as Welfin's managing director until 1990.
While with Welfin S.A., Mr. Drizin expanded its business activities from merely
financing to include shipping and trading (physical commodities). By combining
these three enterprises under one umbrella and operating them as an integrated
business, Mr. Drizin caused Welfin S.A. to rapidly grow into a highly
profitable, multinational organization that maintained offices in nine
countries. In 1988, Mr. Drizin orchestrated the sale of Welfin S.A. to a
Swiss-based multi-national banking group indirectly wholly owned by the Chalabi
Family including Mr. Ahmed Chalabi (a prominent member of the Iraqi National
Congress).
In September of 2000, the U.S. Attorney's Office in Phoenix, Arizona charged Mr.
Drizin with six counts of wire fraud in connection with certain share
transactions involving the predecessors of IVI that allegedly took place during
1996 and 1997. In October 2003, and after a trial by jury, Mr. Drizin was found
not guilty of four counts and found guilty of two counts of wire fraud. Legal
counsel for Mr. Drizin is filing an appeal and advised us that based on his
review of the government's case and the evidence presented at trial, he
anticipates that the conviction will be reversed.
Takashi Aida has been employed by our affiliate, Big Bang Technologies, Inc.
("BBT"), since 2000. Prior to that since 1990, Mr. Aida was employed by a number
of companies in Japan including such firms as Nikon Computer Control and Hitachi
Software Development Co. Ltd. In the course of his employment with BBT, Mr. Aida
was assigned to the e-Smart Technologies, Inc. project as a software designer.
Mr. Aida is a co-inventor of the Company's technology, having made a number of
inventions that have been incorporated into the Super Smart Card(TM) and the
BVS2(TM) platform and for which the Company has patents pending.
Advisory Board
We have formed an advisory board to aid, assist and advise our Board of
Directors regarding the smart card industry, technological developments, and
related matters. The committee is currently made up of four members. No member
of the Advisory Board is presently receiving any monetary compensation from us.
However, and as indicated herein under Item 10, Executive Compensation, we have
granted options to members of the Advisory Board under the 2003 Long Term Plan.
The following is a brief summary of the experience of the members of the
Advisory Board.
Thomas J. Volpe is our Advisory Board Chairman. Mr. Volpe until recently was
Senior Vice President, Financial Operations, of The Interpublic Group of
Companies, Inc., Vice President and Treasurer of Colgate-Palmolive Company and a
Principal of Deloitte, Haskins & Sells. At Interpublic, Mr. Volpe was
responsible for the worldwide treasury management of this $7 billion company,
including financial analysis, budgeting, approval of all investments, and the
financing of mergers and acquisitions worldwide. He performed corporate
controller functions, and conducted comprehensive strategic analyses and plans
for the successful integration of acquired companies into the parent company.
Mr. Volpe was in charge of Interpublic's global enterprise Y2K security risk
analysis, as well as the implementation and coordination of the Y2K security
protection needed throughout the company's operations in 160 countries. During
his tenure at Colgate, Mr. Volpe forged domestic and international banking
relationships, negotiated unique global credit and financing arrangements,
supervised an investment portfolio of $500 million, restructured $750 million of
pension assets, and designed an international risk program constituting captive
insurance operations including safety, security and loss prevention.
Eugene P. Beard recently retired as Vice Chairman, Finance and Operations, of
The Interpublic Group of Companies, Inc., a worldwide advertising and marketing
communications group with 400 offices in 120 countries, over 50,000 employees
and revenues of more than $6 billion. A former Interpublic Group board member,
and Chairman of its Finance Committee, Mr. Beard's retirement is effective at
the end of 2003. Mr. Beard also serves on the boards of directors of Brown
Brothers Harriman; Bessemer Trust Company; Mattel & Company and the Mattel
Foundation; as well as MARC USA. As a member of the Advisory Council for Ethics
and the Professions at Harvard's John F. Kennedy School of Government, Mr. Beard
established the Beard Graduate and Faculty Fellowship programs for Ethics in the
Professions. He also founded the Beard Center for Leadership and Ethics in
Business at Pittsburgh's Duquesne University. Mr. Beard has been featured as an
expert commentator and profiled in a number of media outlets, including Global
Finance's CFO Superstars, Investor Relations, Treasury Magazine, Forbes,
Corporate Finance, Institutional Investor and BusinessWeek. He has also appeared
on CNBC News and PBS's Nightly Business Report.
Ronald E. Blaylock is the founder, Chairman and Chief Executive Officer of
Blaylock & Partners, L.P, a New York City based financial service firm offering
institutions expertise in equity sales and trading, asset management, equity
research, fixed income sales and trading, and investment banking. The firm also
has offices in San Francisco, Austin, Chicago and Atlanta. Mr. Blaylock, who
earned his MBA at the New York University Stern School of Business, held senior
management positions with Paine Webber Group and CitiGroup before launching
Blaylock & Partners in 1993. In his 20-year career on Wall Street, Mr. Blaylock
has worked with a diverse range of corporate clients and institutional
investors. As CEO of Blaylock & Partners, his leadership resulted in a number of
unique industry achievements including being listed as the Corporate Capital
Raiser of the Year by Corporate Finance Magazine in 1999. In 2003, Black
Enterprise Magazine listed the firm in the top women/minority investment banks.
In addition, the firm was ranked among the top 20 investment banking firms in
the United States for underwriting investment grade debt for 1999, 2000 and
2001. Blaylock also has a strong presence in the equity markets having been a
co-manager of the four largest U.S. IPOs to date. Blaylock & Partners is also
well regarded for its experience and highly ranked research analysts. Mr.
Blaylock earned his BS at Georgetown University where he was a member of the
first NCAA Final Four basketball team. He serves on the Board for the National
Association of Basketball Coaches, the New York University Board of Trustees,
and serves on the board of the American General Life Insurance Company of New
York, Radio One, and W.R. Berkley. His other charitable board work includes the
American Ballet Theatre, the Inner-City Scholarship Fund, and Prep for Prep.
Elliot H. Cole is a senior partner with the firm of Patton Boggs, LLP
(Washington, DC), Mr. Cole has practiced corporate law in the nation's capitol
for over 40 years, more than 30 of those years as a partner at Patton Boggs.
Patton Boggs, through nearly four decades of practice, has established a
reputation for cutting-edge advocacy by working closely with the US Congress and
regulatory agencies in Washington. Patton Boggs, for example, has participated
in the formation of every major multilateral trade agreement considered by
Congress. The firm is a leader in merging public policy expertise getting
results in both Washington and throughout the world. The firm is led by partners
with extensive backgrounds in government service and with strong ties to both
major political parties in order to be effective on Capitol Hill. In addition,
Mr. Cole's expertise includes the representation of early-stage companies. As a
counselor of start-ups through mezzanine and later-stage financing, he assists
with bringing along to maturity companies in a wide range of businesses. His
broad-based contacts with financiers and investors have provided capital and
management assistance to a number of firm's clients over the years. Mr. Cole
serves on the boards of numerous business, community and social organizations,
and has been a trustee of his alma mater, Boston University, for over 20 years.
John J. DeLucca is currently Executive Vice President and CFO or the REL
Consultancy Group, a private international consulting company. Previously, he
served as Executive Vice President, Finance and Administration, and CFO of Coty
Inc., where he was responsible for all global finance and administration
operations, including accounting, strategic planning, corporate development, all
treasury, audit and control functions, legal information technology systems, tax
and administration. Prior to that he served as RJR Nabisco, Inc.'s Senior Vice
President and Treasurer where he was responsible for all corporate finance and
treasury activities, including capital markets, banking, derivatives/swaps,
foreign exchange, risk management, pension fund management and cash management.
Prior thereto, he served as Managing Director and CFO of Hascoe & Associates,
President and CFO of the Lexington Group and Sr. VP, Finance & Managing Director
of The Trump Group. Mr. DeLucca is a member of the boards of directors and
serves as Chairman of the Audit Committees of the Company, Horizon Natural
Resources and ITC Deltacom. He is also currently on the board of directors of
Enzo Biochem, Inc and formerly a member of the boards of directors and Chairman
of the Audit Committee of Edison Controls Corporation. Former directorships
include Kash n Karry (sold to Food Lion); Nature's Food Centers (sold to General
Nutrition Centers); Emperor Clock Company; and RKO Century Warner Theaters (sold
to Cinema Odeon). Mr. DeLucca is active as a guest speaker/lecturer for many
financial institutions, including Merrill Lynch, Bank of America, Deutsche Bank,
Sumitomo Bank, Ltd., Banque Paribas, Canadian Imperial Bank of Commerce, Pace
University, Standard & Poor's and NYU Stern School of Business.
Family Relationships
No family relationship exists between any of our directors or executive offices.
Involvement in Certain Legal Proceedings
Except as indicated above, no event listed in Sub-paragraphs (1) through (4) of
Subparagraph (d) of Item 401 of Regulation S-B, has occurred with respect to any
of our present executive officers or directors or any nominee for director
during the past five years which is material to an evaluation of the ability or
integrity of such director or officer.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act, as amended, requires our executive officers
and directors and persons who own more than 10% of a registered class of our
equity securities, to file with the SEC initial statements of beneficial
ownership, reports of changes in ownership and annual reports concerning their
ownership, of common stock and other of our equity securities on Forms 3, 4, and
5, respectively. Executive officers, directors and greater than 10% shareholders
are required by SEC regulations to furnish us with copies of all Section 16(a)
reports they file. To the best of our knowledge, none of our executive officers
or directors has complied with all Section 16(a) filing requirements applicable
to them during our most recent fiscal year. However, and in connection with our
program to bring ourselves current, each of our directors, executive officers
and 5% stockholders have agreed to make all requisite Exchange Act filings as
promptly as possible.
Audit Committee Financial Expert
During 2003, the Company did not maintain an Audit Committee because we had an
insufficient number of qualified outside directors. Moreover, the Company had
not designated an Audit Committee Financial Expert. Until the Company is able
to obtain directors and officer liability insurance for its board of directors,
it is unlikely that we will be able to attract the qualified persons necessary
to fulfill these functions. The Chairman of our advisory board, Mr. Thomas
Volpe, has already announced that he is ready to join the Company's board as
soon as director and officer liability insurance is obtained.
Code of Ethics
The Company has not yet adopted a Code of Ethic that applies to its principle
executive officer, principal financial officer, principle accounting officer or
controller, or persons performing similar functions, but intends to do so in the
near future.
ITEM 10. EXECUTIVE COMPENSATION
Aggregate Compensation Covered
During the three fiscal years ended December 31, 2003, the aggregate
compensation paid to, accrued or set aside for any of our executive officers or
directors was $300,000.
Summary Compensation Table
Annual Compensation
-----------------------------------
Name and Position Year Salary Bonuses Other
------------------ ----- ------------ -------- -----
Mary A. Grace, 2001 $ --(1) -- --
President, CEO, 2002 --(1) -- --
CFO and Director 2003 300,000(1) -- --
Tamio Saito, CTO, 2001 --(2) -- --
and Director 2002 --(2) -- --
2003 --(2) -- --
David Williams, 2001 -- -- --
Director 2002 -- -- --
2003 -- -- --
Thomas J. Volpe, 2001 -- -- --
Advisory board 2002 -- -- --
Member 2003 -- -- --
Terry N.Christensen, 2001 -- -- --
Director 2002 -- -- --
2003 -- -- --
F. Bo Zarnegin, 2001 -- -- --
Director 2002 -- -- --
2003 -- -- --
Totals 2001 -- -- --
2002 -- -- --
2003 $300,000 -- --
Summary Compensation Table
Long Term Compensation
------------------------------------
Awards Payments
----------------- ---------------
Name and Position Year Stock Options LTIP Other
------------------ ----- ------ ------- ----- -----
Mary A. Grace, 2001 -- -- -- --
President, CEO, 2002 -- -- -- --
CFO and Director 2003 -- -- -- --
Tamio Saito, CTO, 2001 -- -- -- --
and Director 2002 -- -- -- --
2003 -- -- -- --
David Williams, 2001 -- -- -- --
Director 2002 -- -- -- --
2003 -- -- -- --
Thomas J. Volpe, 2001 -- -- -- --
Member advisory board 2002 -- -- -- --
2003 -- -- -- --
Terry N.Christensen, 2001 -- -- -- --
Director 2002 -- -- -- --
2003 -- -- -- --
F. Bo Zarnegin, 2001 -- -- -- --
Director 2002 -- -- -- --
2003 -- -- -- --
Totals 2001 -- -- -- --
2002 -- -- -- --
2003 -- -- -- --
(1) Does not include a settlement of $450,000 referenced in a November 15, 2003,
written Compensation Settlement Agreement with Mary A. Grace, our President,
Chief Executive Officer and Chief Financial Officer. Pursuant to this agreement,
we agreed to pay Ms. Grace a salary of $250,000 per year commencing on January
1, 2004. In consideration for Ms. Grace's releasing us from our obligation to
accrue her former salary of $250,000 per year net of approximately $300,000 of
expenses paid on Ms. Grace's behalf during the period or $750,000 for the three
years ending December 31, 2003, we agreed to pay to Ms. Grace a preferred
distribution of 50% of future profits limited to $450,000. In addition, and in
consideration for our return to Ms. Grace of certain of her marketable
securities, Ms. Grace released us from any prior obligations under a
contemplated agreement to purchase such securities. Finally, we agreed that the
approximate $300,000 in expenses we paid on Ms. Grace's behalf would be deemed
to be a loan and deductible only from the amount she is entitled to receive
under the Compensation Settlement Agreement up to a maximum of $100,000 per
year, commencing in the first year following the year in which we first receive
sufficient income from operations.
(2) Does not include an aggregate of $-0-, $-0- and $310,000, paid to Big Bang
Technologies, Inc., a California corporation controlled by and under common
control of Tamio Saito ("BBT"), respectively, during the fiscal year ended
December 31, 2003. The payments were made pursuant to a Research and Development
Services Agreement dated May 29, 2003 ( the "BBT Agreement"). Additional
information concerning the BBT Agreement is set forth herein under the caption
Certain Relationships and Related Transactions.
Option/SAR Grant Table
On February 13, 2002, our Board of Directors granted 58,500,000 stock options to
our officers, directors and three consultants. An aggregate of 30,000,000
options were granted to officers and directors. The options are exercisable at a
price equal to 100% of the closing bid price for our common stock on February
13, 2002, or $.41 per share. Fifty percent of the options vested and became
exercisable one year after grant, thirty percent vested and became exercisable
two years after grant (i.e., after February 12, 2004), and the balance vest and
become exercisable after February 12, 2005. The options granted to Mary Grace
were unanimously approved by Messrs. Saito and Williams; and the options granted
to Tamio Saito were approved by Mary Grace and David Williams.
The following table contains information concerning the options granted by us on
February 13, 2002:
Option/SAR Grants During 2002
NUMBER OF % OF TOTAL EXERCISE
SECURITIES OPTIONS/SARS OR
UNDERLYING GRANTED TO BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL YEARS ($/SJ) DATE
----- ---------- ------------- ----------- ----------
Mary A. Grace 19,500,000 33% $ .41 2/13/07
Tamio Saito 10,500,000 18% $ .41 2/13/07
Wayne Drizin 24,500,000 42% $ .41 2/13/07
Roger M. Rosenberg 2,500,000 4% $ .41 2/13/07
George Sobol 2,000,000 3% $ .41 2/13/07
On December 1, 2003, the holders of 133,765,052 shares of our common stock,$.001
par value per share, out of 168,298,239 shares issued and outstanding and
entitled to vote, representing an approximate 79% majority of all of our
outstanding shares (the "2003 Majority Stockholders") adopted resolutions by
consent pursuant to Section 78.320 of the Nevada Revised Statutes in lieu of a
meeting of our stockholders. One of the resolutions was the approval of the
2003 Long Term Incentive Plan (the "2003 Plan") wherein an aggregate of
75,000,000 shares of our common stock will be reserved for issuance of
options, stock appreciation rights ("SARs"), dividend equivalents, restricted
stock, performance shares and units (collectively referred to as "Awards")
under the 2003 Plan.
On various dates between February 11, 2003, and September 26, 2003, we issued
options to purchase an aggregate of 7,500,000 shares to the five members of our
Advisory Board, two attorneys and two consultants. The exercise prices were
$.25 with respect to 5,000,000 options, $.50 with respect to 2,000,000 options
and $.75 with respect to the remaining 500,000 options. All but 1,000,000 of the
options veste d upon grant. Of the remaining options, 100,000 vested on grant,
200,000 vested on February 12, 2004, 300,000 vest on February 12, 2005, and the
balance vest on February 12, 2006.
On December 1, 2003, our Board of Directors granted 30,550,000 Incentive Stock
Options under the Plan. The options are exercisable at a price equal to 100% of
the closing bid price for our common stock on December 1, 2003, or $1.00 per
share. None of the options will vest or become exercisable until the 20th day
after we file an Information Statement with the SEC, comply with any and all
comments raised by the SEC, and mail the Information Statement to our
stockholders. Accordingly, there can be no assurance that any of the options
will ever become exercisable.
The following table contains information concerning the options granted by us
under the 2003 Plan:
Option/SAR Grants Under The Plan During 2003
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEARS ($/SH) DATE
---------------- ------------ ------------ ----------- ---------
Wayne Drizin 6,925,000 23% $ 1.00 12/1/08
Mary A. Grace 12,075,000(1) 39% $ 1.00 12/1/08
Tamio Saito 9,500,000 32% $ 1.00 12/1/08
Three employees 1,000,000 3% $ 1.00 12/1/08
Anthony R. Russo 1,000,000 3% $ 1.00 12/1/08
Media Consultants 50,000 - $ 1.00 12/1/08
(1) Pursuant to a November 15, 2003, Compensation Settlement Agreement with Mary
A. Grace, our President, Chief Executive Officer and Chief Financial Officer,
Ms. Grace is only entitled to exercise 3,900,000 options per year during the
five-year term of the agreement and to accumulate non-exercised Options.
We have not granted SARs or any other Awards under the 2003 Plan.
Aggregate Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
During the fiscal year ended December 31, 2003, no stock options or freestanding
SAR's were exercised.
Performance
or other
Period Until
Number of Maturation
Name Shares or Payout
---- --------- -------------
Mary A. Grace 31,575,000 5 Years
Wayne Drizin 31,425,000 5 Years
Tamio Saito 20,000,000 5 Years
Three Employees 1,000,000 5 Years
Four Advisory Board Members 500,000 5 Years
Two Attorneys 1,500,000 5 Years
Three Consultants 7,000,000 5 Years
Media Consultants 50,000 5 Years
Extimated future
Payouts Under Non-Stock
Price-Based Plans(#)
------------------------------------------
Name Threshold Target Maximum
---- ------------- ------ ---------
Mary A. Grace 0 0 0
Wayne Drizin 0 0 0
Tamio Saito 0 0 0
Three Employees 0 0 0
Four Advisory Board Members 0 0 0
Two Attorneys 0 0 0
Three Consultants 0 0 0
Media Consultants 0 0 0
Warrants
During the fiscal year ended December 31, 2003, we issued warrants to purchase
an aggregate of 845,120 shares of our common stock at between $.50 and $1.00 per
share. All of the warrants are fully vested and expire on February 10, 2006. No
warrants have been exercised or cancelled, and no warrants were issued to any of
our officers, directors or employees.
Compensation of Directors
On various dates between February 11 and September 26, 2003, the Company
verbally agreed to compensate each of our Advisory Board members at the rate of
$30,000 per year payable in shares of our common stock. The exercise price of
our initial grants was arbitrarily determined by the Registrant's Board of
Directors. However, the exercise price of all future options will be based on
our market value on the date of grant. Except for the foregoing and pursuant to
the Compensation Settlement Agreement with Mary Grace, none of our directors
received any compensation pursuant to any standard or other arrangement.
Employment Contracts and Termination of Employment, and Change in Control
Arrangements
Except for our President, Mary A. Grace, none of our executive officers was
employed pursuant to the terms of an employment agreement with us.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owner
The information is furnished as of December 31, 2003, as to the number of shares
of our Common Stock, $.001 par value per share, owned beneficially, or known by
us to own beneficially, more than 5% of any class of such security:
Name and Address Amount and Nature Percentage
of Beneficial Owner of Beneficial Ownership of Class
-------------------------------- ----------------------- -----------
IVI Smart Technologies, Inc.
7225 Bermuda Road, Suite C
Las Vegas, Nevada 89119 70,000,000 42(1)
Intermarket Ventures, Inc. 58,590,052 35(1)
7225 Bermuda Road, Suite C
Las Vegas, NV 89119
Wayne Drizin
7225 Bermuda Road, Suite C
Las Vegas, Nevada 89119 31,575,000(2) 19(2)
Mary A. Grace
117 East 57th Street, Apt 24G
New York, NY 10022 34,150,000(3) 21(3)
Tamio Saito
1810 Old Oakland Road, #F
San Jose, California 95131 22,500,000(4) 13(4)
(1) Does not include options granted to management and the co-inventor of our
Super Smart Card(TM) technology to acquire an aggregate of 85,000,000 shares of
our common stock granted on February 13, 2002 and December 1, 2003. As
previously indicated, an aggregate of 30,000,000 of these options will not vest
or become exercisable until the 20th day after an Information Statement has been
sent to stockholders.
(2) Includes options to acquire an aggregate of 31,425,000 shares of our common
stock granted on February 13, 2002 and December 1, 2003. As previously
indicated, an aggregate of 6,925,000 of these options will not vest or become
exercisable until the 20th day after an Information Statement has been sent to
stockholders.
(3) Includes options to acquire an aggregate of 31,575,000 shares of our common
stock granted on February 13, 2002 and December 1, 2003. As previously
indicated, an aggregate of 12,075,000 of these options will not vest or become
exercisable until the 20th day after an Information Statement has been sent to
stockholders.
(4) Includes options to acquire an aggregate of 20,000,000 shares of our common
stock granted on February 13, 2002 and December 1, 2003. As previously
indicated, an aggregate of 9,500,000 of these options will not vest or become
exercisable until the 20th day after an Information Statement has been sent to
stockholders.
Security Ownership of Management
The following information is furnished as of December 31, 2003, as to the number
of shares of our Common Stock, $.001 par value per share owned beneficially by
each of our executive officers and directors and by all of our executive
officers and directors as a group:
Name and Address Amount and Nature Percentage
of Beneficial Owner of Beneficial Ownership of Class
-------------------------------- ----------------------- -----------
Mary A. Grace
117 East 57th Street, Apt 24G
New York, NY 10022 2,675,000(1) 1.5(2)
Tamio Saito
1810 Old Oakland
Road, #F
San Jose, California 95131 2,500,000(3) 1.5(3)
David C. Williams
8 Brook Lane
Courtland Manor, NY 10567 300,000 --
Terry N. Christensen
10250 Constellation Blvd.
19th Floor
Los Angeles, CA 90076 -- --
F. Bo Zarnegin
9882 S. Santa Monica Blvd.
Beverly Hills, CA 90211 1,300,000(4) --
All Officers and Directors as
a Group of five persons 5,475,000 3(2)(3)(4)
(1) Does not include: (i) an aggregate of 1,100,000 shares owned of record by
James Michael Phelan; or (ii) an aggregate of 1,300,000 shares owned of record
by John Daniel Phelan, each adult sons of Mary Grace, neither of whom reside
with her; or (iii) an aggregate of 200,000 shares owned of record by David N.
Phelan, Ms. Grace's former spouse from whom she has been divorced since 1975.
Ms. Grace disclaims beneficial ownership of the shares owned by her former
husband and her adult children.
(2) Does not include options to acquire an aggregate of 29,000,000 shares of our
common stock granted on February 13, 2002 and December 1, 2003. As previously
indicated, an aggregate of 9,500,000 of these options will not vest or become
exercisable until the 20th day after an Information Statement has been sent to
stockholders.
(3) Does not include options to acquire an aggregate of 20,000,000 shares of our
common stock granted on February 13, 2002 and December 1, 2003. As previously
indicated, an aggregate of 9,500,000 of these options will not vest or become
exercisable until the 20th day after an Information Statement has been sent to
stockholders.
(4) Comprised of shares owned of record by the F. Bo Zarnegin Family Trust, of
which Mr. Zarnegin serves as the Trustee. Mr. Zarnegin disclaims beneficial
ownership of the shares owned by the F. Bo Zarnegin Family Trust. A person is
deemed to be the beneficial owner of securities that can be acquired by such a
person within 60 days from Record Date, upon exercise of options, warrants or
convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that options, warrants and convertible securities that
are held by such a person (but not those held by any other person) and are
exercisable within 60 days from that date have been exercised. Unless otherwise
noted, we believe that all persons named in the table have sole voting and
investment power with respect to all shares of our voting securities
beneficially owned by them.
Wayne Drizin, the co-inventor of our Super Smart Card(TM) technology, is a
consultant and not a member of our management team. Notwithstanding the
foregoing, the following is information concerning Mr. Drizin's equity ownership
in our Company:
Name and Address Amount and Nature Percentage
of Beneficial Owner of Beneficial Ownership of Class
------------------- ----------------------- ----------
Wayne Drizin
7225 Bermuda Road, Suite C
Las Vegas, Nevada 89119 150,000(1) --(1)
(1) Does not include options to acquire an aggregate of 31,425,000 shares of our
common stock granted on February 13, 2002 and December 1, 2003. As previously
indicated, an aggregate of 6,925,000 of these options will not vest or become
exercisable until the 20th day after an Information Statement has been sent to
stockholders.
Changes in Control
There have been no changes in control of the Company during the fiscal year
ended December 31, 2003.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of December 31, 2003, with respect
to compensation plans (including individual compensation arrangements) under
which our common stock is authorized for issuance, aggregated as follows: (i)
all compensation plans previously approved by security holders; and (ii) all
compensation plans not previously approved by security holders.
Equity Compensation Plan Information
SECURITIES
REMAINING AVAILABLE
NUMBER OF FOR FUTURE
SECURITIES TO BE ISSUANCES UNDER
ISSUED UPON WEIGHTED AVERAGE EQUITY COMPENSATION
EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING
OUTSTANDING OUTSTANDING OPTIONS, SECURITIES
OPTIONS, WARRANTS, WARRANTS, AND REFLECTED IN
AND RIGHTS(b) RIGHTS(b) COLUMN (a)(c)
------------------ ------------------- -------------------
Equity
compensation
plans approved
by security
holders 85,000,000 $ .62 45,000,000
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Approximately 42% of our common shares are owned by IVI Smart (the "Licensor")
which is the sole owner of all of the Super Smart Card(TM) technology licensed
to us in November 2000 for a 20 year term for commercialization throughout Asia
and the United States. Mary A. Grace, our President, Chief Executive Officer and
Chief Financial Officer, is a director, executive officer and principal
stockholder of IVI. Tamio Saito, our Chief Technology Officer, is also an
executive officer and principal stockholder of IVI.
The biometric fingerprint sensor incorporated in the Super Smart Card(TM) was
developed by BioSensor LLC, a Hawaiian limited liability company ("BioSensor"),
pursuant to a Confidential Technology Assignment and License Agreement dated as
of May 1, 2003, with the Licensor (the "License Agreement"). Pursuant to the
License Agreement, IVI Smart granted to BioSensor the exclusive right to utilize
certain of IVI Smart's patent pending biometric fingerprint sensor technology to
develop into a commercial sensor; and BioSensor granted to IVI Smart the
exclusive rights to any sensor developed, produced and manufactured by
BioSensor. In consideration for the licenses, IVI Smart agrees to pay a royalty
to BioSensor equal to $.35 for each Super Smart Card(TM) sold or distributed by
IVI Smart; and BioSensor issued 50,000,000 Common Units to IVI Smart. No other
Common Units were issued by Biosensor. Accordingly, Biosensor is a wholly owned
subsidiary of IVI Smart and an affiliate of the Registrant.
Wayne Drizin, the co-inventor of our Super Smart Card(TM) technology and of our
BVS2(TM) platform and associated applications, has been serving as a consultant
to us since our inception. In lieu of salary and other remuneration, we have
agreed to issue options to Mr. Drizin to purchase an aggregate of 31,425,000
shares of our common stock. On February 13, 2002, 31,425,000 options were
granted at $.41 per share; and 6,925,000 were granted on December 1, 2003 at
$1.00 per share. None of the options granted in 2003 will vest or become
exercisable until the 20th day after we filed an Information Statement with the
SEC, comply with any and all comments raised by the SEC, and mails the
Information Statement to our stockholders. Accordingly, there can be no
assurance that any of the 2003 options will ever become exercisable.
Pursuant to a Research and Development Services Agreement effective January 1,
2001, and dated May 29, 2003 (the "BBT Agreement"), the Company engaged Big Bang
Technologies, Inc., a California corporation controlled by and under common
control of Tamio Saito, a co-inventor of the Super Smart Card(TM) technology and
the BVS2(TM) platform ("BBT"), as our research and development co-coordinator,
administrator and personnel provider. BBT was also engaged to provide us with
state of the art software development, testing, laboratory and other services
related to our smart card technology, and the services of Tamio Saito as our
Chief Technology Officer.
The BBT Agreement, which provides for mutual confidentiality and non-compete
protection, is for a term of one year, and is thereafter automatically renewed
for successive one year terms unless sooner terminated in accordance with its
provisions. In consideration for BBT's services, we agreed to promptly pay
monthly invoices submitted by BBT. During the fiscal year ended December 31,
2003, we paid BBT an aggregate of $310,000 and $730,750, respectively, under the
BBT Agreement.
Pursuant to an Advisory and Administrative Services Agreement effective January
1, 2001, and dated May 29, 2003 (the ABG Agreement"), we engaged Associated
Business Group, Inc., a Nevada corporation controlled by the father of Wayne
Drizin, a co-inventor of our Super Smart Card(TM) technology and the BVS2(TM)
platform ("ABG"), as the principal administrative services provider for us.
Pursuant to the ABG Agreement, we engaged ABG to administer the receipt of
investor's funds, to pay expenses and to perform other necessary and related
administrative services. ABG also agreed to utilize its best efforts to and has
covered temporary shortfalls in our cash receipts.
The ABG Agreement, which provides for mutual confidentiality and non-compete
protection, is for a term of one year, and is thereafter automatically renewed
for successive one year terms unless sooner terminated in accordance with its
provisions. In consideration for ABG's services, we agreed to pay ABG a fee of
$10,000 per month subject to ABG's right to convert the same into restricted
shares of our common stock at a conversion price equal to 75% of the mean
between the closing bid and asked prices for our common stock on the day before
the date ABG elects to convert. In December 2002, ABG converted its $120,000 in
accrued fees into an aggregate of 200,000 shares of our common stock at $.60 per
share. In December 2002, ABG converted its $120,000 in accrued fees into an
aggregate of 347,827 shares of our common stock at $.345 per share. In December
2003, ABG converted its $120,000 in accrued fees into an aggregate of 135,593
shares of our common stock at $.855 per share.
On December 1, 2003, IVI and certain other holders comprising approximately 77%
of our issued and outstanding shares adopted resolutions by consent pursuant to
Section 78.320 of the Nevada Revised Statutes in lieu of a meeting of our
shareholders. The resolutions (i) re-elected a former director; (ii) elected two
new directors; (iii) granted to the board the power to select independent
auditors; (iv) increased the number of authorized shares of common stock from
200 million to 300 million; (v) created the 2003 Long Term Incentive Plan
wherein 75 million shares are reserved for issuance; and (vi) granted 30 million
options thereunder. The approved actions will become operative 20 days after the
mailing to our stockholders of an Information Statement that must first be
prepared and filed with the SEC. A total of 30 million five year options were
granted to our Chief Executive Officer, one of the inventors of the Super Smart
Card(TM) technology and certain employees. The options are exercisable at a
price equal to 100% of the closing bid price for our common stock on December 1,
2003, or $1.00 per share.
On November 15, 2003, we entered into a written Compensation Settlement
Agreement with Mary A. Grace, our President, Chief Executive Officer and Chief
Financial Officer. Pursuant to the agreement, we agreed to pay Ms. Grace a
salary of $250,000 per year commencing on January 1, 2004. In consideration for
Ms. Grace's releasing us from our obligation to accrue her former salary of
$250,000 per year or $750,000 net of $300,000 in expenses that we paid on Ms.
Grace's behalf for the three years ending December 31, 2003, we agreed to pay to
Ms. Grace a preferred distribution of 50% of future profits limited to $450,000.
In addition, and in consideration for our return to Ms. Grace of certain of her
marketable securities, Ms. Grace released us from any prior obligations under a
contemplated agreement to purchase such securities.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
3(i) Articles of Incorporation of Boppers Holdings, Inc., filed July 15, 1997,
as amended August 11, 2000, as further amended December 22, 2000.
3(ii) Bylaws of e-Smart Technologies, Inc.
10(a) Exclusive Use and Distribution Agreement, dated as of October 26, 2001,
by and between IVI Smart Technologies, Inc. & e-Smart Technologies, Inc.
10(b) Exclusive Use and Distribution Agreement, dated as of September 1, 2000,
between Intermarket Ventures, Inc. and e-Smart Systems, Inc.
10(c) Notice and Consent, dated as of January 1, 2001, to that certain
Exclusive Use and Distribution Agreement, dated as of September 1, 2000,
between Intermarket Ventures, Inc. and e-Smart Systems, Inc.
10(d) Exclusive Use and Distribution Agreement, dated as of September 6, 2001,
by and between IVI Smart Technologies, Inc. and e-Smart Technologies,
Inc.
10(e) Exclusive Use and Distribution Agreement, dated August 27, 2000, by and
between e-Smart Systems, Inc. and Newco (i.e.,e-Smart City Card Co. Ltd.,
a Chinese JV company).
10(f) Advisory and Occupancy Services Agreement, dated May 29, 2003, but
retroactively effective to January 1, 2001, by and between Associated
Business Group, Inc. and e-Smart Technologies, Inc.
10(g) Compensation Settlement and Employment Agreement, dated as of November
15, 2003, by and between e-Smart Technologies, Inc. and Mary A. Grace.
10(h) Research and Development Services Agreement, dated as of January 1, 2001,
and reduced to writing on May 29, 2003, by and between Big Bang
Technologies, Inc and e-Smart Technologies, Inc.
10(i) E-Smart Technologies, Inc. 2003 Long Term Incentive Plan adopted December
1, 2003.
10(j) Master Teaming Agreement, dated as of February 27, 2004, by and between
Samsung SDS Co., Ltd. and e-Smart Korea, Inc.
10(k) Cooperation Agreement, dated February 27, 2004, by and among e-Smart
Technologies, Inc., Guo Xin Well-tel Technology Co., Ltd., and
EarthNetMedia Trading Corporation.
10(l) Mutual Cooperation Agreement, dated February 25, 2004, by and between
Daewoo International Corporation and e-Smart Korea, Inc.
31.1 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1 Financial Statements.
Reports on Form 8-K
During the last quarter of the fiscal year ended December 31, 2003, we did not
file any reports on Form 8-K.
ITEM 14. PRINCIPLE ACCOUNTANT FEES AND SERVICES
Audit Fees
On November 30, 2003, we engaged Rosenberg Rich Baker Berman & Company ("RRBB")
as our principal accountants to audit our annual financial statements for the
fiscal year ended December 31, 2003. However, we did not pay any fees to
RRBB during the fiscal year ended December 31, 2003. Subsequent to this date, we
paid RRBB $3,189 and expect to incur $11,181 in additional fees for professional
services rendered in connection with this audit.
Audit-Related Fees
There were no fees billed to us in fiscal year 2003 for professional services of
RRBB for assurance and related services reasonably related to the performance of
audit or review of our financial statements and not reported in the previous
paragraph.
Tax Fees
There were no fees billed to us in fiscal year 2002 for professional services of
RRBB for tax compliance and related tax services.
All Other Fees
There were no fees billed to us in fiscal year 2002for services rendered by RRBB
other than the services described in the previous three paragraphs.
The engagement of RRBB to render audit or non-audit services requires the prior
approval of our Board of Directors since we do not yet have an audit committee
of our Board of Directors.
SIGNATURES
In accordance with the Exchange Act, this amended report has been signed
below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Dated: December 13, 2004
e-Smart Technologies, Inc.
By: /s/ Mary A. Grace
------------------------------
Mary A. Grace, President,
Chief Executive Officer, and
Chief Financial Officer
Pursuant to the requirements of the Exchange Act, this Report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
By: /s/ Mary A. Grace
------------------------
Mary A. Grace, Director
Dated: December 13, 2004
By: /s/ Tamio Saito
Tamio Saito, Director
Dated: December 13, 2004
By: /s/ David C. Williams
-----------------------------
David C. Williams, Director
Dated: December 13, 2004
EXHIBIT 31.1
E-SMART TECHNOLOGIES, INC.
CERTIFICATIONS PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Mary A. Grace, the Registrant's Chief Executive and Chief Financial Officer,
certify that:
1. I have reviewed this Annual Report of e-Smart Technologies, Inc. on
Form 10-KSB for the fiscal year ended December 31, 2003;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this
report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 3a-15(f) and 15d-15(f)) for the Registrant and
have:
a) Designed and recently commenced the implementation of such disclosure
controls and procedures, or caused such disclosure controls and
procedures to be designed under my supervision, to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this report is being
prepared; and
b) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation.
Date: December 13, 2004
/s/ Mary A. Grace
Chief Executive Officer
and Chief Financial Officer
EXHIBIT 32.1
E-SMART TECHNOLOGIES, INC.
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment to the Annual Report of e-Smart Technologies,
Inc. on Form 10-KSB for the fiscal year ended December 31, 2003, as filed
with the Securities and Exchange Commission on December 13, 2004 (the "Report"),
the undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of e-Smart Technologies, Inc.
Date: December 13, 2004
/s/ Mary A. Grace
Chief Executive Officer
and Chief Financial Officer
Exhibit 99.1
e-Smart Technologies, Inc.
(A Development Stage Company)
Financial Statements
December 31, 2003
e-Smart Technologies, Inc.
(A Development Stage Company)
Index to the Financial Statements
December 31, 2003
Page
Independent Auditors' Report
Financial Statements
Balance Sheets
Statements of Operations
Statements of Cash Flows
Statement of Shareholders' Equity
Notes to the Financial Statements
Independent Auditors' Report
To the Board of Directors and Shareholders of
e-Smart Technologies, Inc. (A Development Stage Company)
We have audited the balance sheets of e-Smart Technologies, Inc. (A Development
Stage Company) as of December 31,2003 and the related statements of operations,
shareholders' equity and cash flows for the year then ended..These financial
statements are the responsibility of the Company's management.Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of e-Smart Technologies, Inc. (A
Development Stage Company) as of December 31, 2003, and the results of their
operations, and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in the notes to the financial statements, the Company is in the
development stage. The development of the Company's technology and its success
of future operations is dependent upon the Company's ability to meet its future
financing requirements. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
December 13, 2004
e-Smart Technologies, Inc.
(A Development Stage Company)
Balance Sheets
December 31
2003 2002
---- ----
Assets
Current Assets
Cash $ 14,096 $ 1,069
Due from Associated Business
Group, a related party 31,334 40,000
45,430 41,069
License of Smart Card Technology,
net of amortization 109,310 115,740
Deposits - e-Smart Korea Group 151,000 --
Total Assets $ 305,740 $ 156,809
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 397,081 $230,395
Notes payable 80,000 150,000
Accrued expenses 38,853 14,603
Total Liabilities 515,934 394,998
Shareholders' Equity (Deficiency)
Common Stock, $0.001 par value,
300 million shares authorized,
170,707,012 and 153,772,993 shares
issued and outstanding in 2003
and 2002,respectively 170,707 153,772
Additional paid in capital 59,497,446 22,714,779
Deficit accumulated during
the development stage (59,878,347) (23,106,740)
Total Shareholders' Equity
(Deficiency) (210,194) (238,189)
Total Liabilities and Stockholders'
Equity (Deficiency) $ 305,740 $ 156,809
See notes to the financial statements.
e-Smart Technologies, Inc.
(A Development Stage Company)
Statements of Operations
July 15, 1997
(Inception of
Year ended December 31 Development Stage)
to December 31,
2003 2002 2003
---- ---- ---------
Revenue $ -- $ -- $ --
-------- --------- --------
Expenses
Research and development 730,750 310,000 1,040,750
Selling, and administrative 1,841,635 1,160,559 3,147,774
Issuance of stock options
for services 34,170,000 21,476,000 55,646,000
---------- --------- ----------
Total operating expenses 36,742,385 22,946,559 59,834,524
---------- --------- ----------
Loss from operations (36,742,385) (22,946,559) (59,827,524)
Interest expense 28,972 12,101 41,073
---------- ---------- ----------
Loss before provision for
income taxes (36,771,357) (22,958,660) (59,875,597)
Provision for income taxes 250 2,500 2,750
Net Loss (33,771,607) (22,961,160) (59,878,347)
========== ========== ==========
Loss Per Share $ (0.23) $ (0.16) $ (0.51)
======= ====== ======
Weighted Average Number
of Shares Outstanding 161,172,213 147,960,402 116,832,333
=========== ========== ==========
See notes to the financial statements.
e-Smart Technologies, Inc.
(A Development Stage Company)
Statements of Cash Flows
July 15, 1997
(Inception of
Year ended December 31 Development Stage)
to December 31,
2003 2002 2003
---- ---- ---------
Cash Flows From Operating Activities
Net Loss $(36,771,607)$(22,961,160)$(59,878,347)
Adjustments to reconcile net loss to
net cash used in operating activities:
Issuance of stock options for services 34,170,000 21,476,000 55,646,000
Issuance of common stock for services 81,250 85,594 166,844
Amortization expense 6,430 6,430 19,290
Changes in Assets and Liabilities:
Decrease (increase)in due from
related party 8,667 (40,000) (31,333)
(Increase) deposits (151,000) (151,000)
Increase in accounts payable 166,685 230,395 397,080
Increase in accrued expenses 24,250 14,603 38,853
Net Cash Provided by (Used in)
Operating Activities (2,465,325) (1,188,138) (3,792,613)
Cash Flows From Investing Activities
Cash used for intangible assets -- -- (128,600)
Net Cash (Used in) Investing Activities -- -- (128,600)
Cash Flows From Financing Activities
Proceeds from stock issuances 2,548,532 1,039,125 3,855,309
Proceeds from borrowings 50,000 150,000 200,000
Repayment of borrowings (120,000) -- (120,000)
Provided by Financing Activities 2,478,352 1,189,125 3,935,309
Net Increase in Cash at Beginning of Period 1,069 82 --
Cash at End of Period 14,096 1,069 14,096
========= ========= =========
Supplemental Disclosures of Cash
Flow Information
Cash paid during the year for:
Interest $ 28,972 $ 12,101 $ 41,073
========== ========= ==========
Income taxes $ 250 $ 2,500 $ 2,750
========== ========= ==========
Supplemental Schedule of Non-Cash
Investing Activities
Issuance of stock for services $ 81,250 $ 85,594 $ 166,844
Issuance of stock options for
services $34,170,000 $21,476,000 $55,646,000
========== ========= ==========
See notes to the financial statements.
e-Smart Technologies, Inc.
(A Development Stage Company)
Statement of Shareholders' Equity (Deficiency)
Common Stock Additional
Paid-In
Shares Amount Capital
----------- ---------- ------------
Balance, January 1, 2002 145,117,200 $145,117 $ 122,715
Issuance of shares for cash 7,903,967 7,904 1,031,221
Issuance of shares for services 750,826 751 84,843
Issuance of stock options for
services -- -- 21,476,000
Net income (loss) -- -- --
Balance, December 31, 2002 153,771,993 153,772 22,714,779
Issuance of shares for cash 16,497,519 16,498 2,531,854
Issuance of shares for services 437,500 437 80,813
Issuance of stock options for
services -- -- 34,170,000
Net income (loss) -- -- --
Balance, December 31, 2003 170,707,012 $170,707 $59,497,446
=========== ======== ===========
e-Smart Technologies, Inc.
(A Development Stage Company)
Statement of Shareholders' Equity (Deficiency)
Retained
Earnings
(Deficit) Total
--------- -------
Balance, January 1, 2002 $(145,580) $ 122,252
Issuance of shares for cash -- 1,039,125
Issuance of shares for services -- 85,594
Issuance of stock options for
services -- 21,476,000
Net income (loss) (22,961,160) (22,961,160)
Balance, December 31, 2002 (23,106,740) (238,189)
Issuance of shares for cash -- 2,548,352
Issuance of shares for services -- 81,250
Issuance of stock options for services -- 34,170,000
Net income (loss) (36,771,607) (36,771,607)
Balance, December 31, 2003 $(59,878,347) $ (210,194)
=========== ==========
See notes to the financial statements.
e-Smart Technologies, Inc.
(A Development Stage Company)
Notes to the Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization.
e-Smart Technologies, Inc. (the Company) is a Delaware corporation organized in
July 1997 under the name of Boppers Holdings, Inc. The Company changed its
name to e-Smart Technologies, Inc. on October 20, 2000.
The Company is a development stage company devoting most of its efforts to
raising capital and research and development of its licensed Smart Card
technology.
In October of 2000 the Company acquired e-Smart Systems, Inc., a Nevada
corporation in exchange for 58,600,000 common shares and licensed the Smart Card
technology from Intermarket Ventures, Inc. for 70,000,000 common shares. As a
result of the exchange, the Company owns the exclusive manufacturing and
marketing rights to the Smart Card technology for North America and the Pacific
Rim.
Use of Estimates.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the period. Actual
results could differ from those estimates.
Net Loss Per Share.
Loss per share, in accordance with the provisions of Financial Accounting
Standards Board No. 128, "Earnings Per share", is computed by dividing the net
loss by the weighted average number of common shares outstanding during the
period. Any common stock equivalents outstanding during the period would have
had an anti-dilutive effect.
Research and Development Costs.
Research and development costs are charged to operations as incurred and
amounted to $730,750 and $310,000 in 2003 and 2002, respectively.
License Costs.
On October 20, 2000, the Company licensed the Smart Card technology. The
technology was purchased for an aggregate of 128,600,000 common shares of the
Company valued at $0.001 per share or $128,600 as the total agreed upon
consideration. The cost of the license is being amortized over its twenty year
term on a straight line basis.
Securities Issued for Services.
The Company accounts for stock issued for services under the intrinsic value
method. For stock issued for services, the fair market value of the company's
stock on the date of stock issuance is used. The Company has adopted Statement
of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation". The statement generally suggests, but does not require, stock-
based compensation transactions to be accounted for based on the fair value of
the services rendered or the fair value of the equity instruments issued,
whichever is more reliably measurable. Securities issued for services to a
related party amounted to 750,826 in 2002 and 437,500 in 2003. The underlying
fair value of the common shares amounted to $0.114 and $0.186 per share,
respectively.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
In accordance with the provisions of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"), deferred taxes are recognized
for operating loses that are available to offset future taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to realized. The Company incurred net operating
losses for financial-reporting and tax-reporting purposes. Accordingly, the
benefit from income taxes has been offset by a valuation allowance against the
related deferred tax asset.
2. CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances in financial institutions which are insured
by the Federal Deposit Insurance Corporation up to $100,000. Balances in these
accounts may, at times, exceed the federally insured limits.
3. LICENSES
By virtue of the merger with e-Smart Systems, Inc. in October 2000, the Company
has licensed the exclusiv e manufacturing and marketing rights to certain Smart
Card technology from Intermarket Ventures, Inc. The licensed territory includes
North America and the Pacific Rim for a period of 20 years. The acquisition cost
of the licensed territory, 128,600,000 common shares at $.001 par value, is
being amortized over the term of the agreement.
4. DEPOSITS
At December 31, 2003, the Company had advanced $151,000 to South Korean counsel
for the purpose of forming and capitalizing a South Korean corporation to
facilitate its planned new business operations in the Pacific Rim during 2004.
The new corporation will be styled e-Smart Korea, Inc.
5. NOTES PAYABLE
Notes payable consist of the following:
2003 2002
Unsecured obligations bearing interest at 20%
initially due January 31, 2004, extended to
July 31, 2004 $ 30,000 $150,000
Unsecured demand obligation with interest at 10% 50,000 --
Total $ 80,000 $150,000
======== ========
e-Smart Technologies, Inc.
(A Development Stage Company)
Notes to the Financial Statements
6. ACCRUED EXPENSES
Accrued expenses are as follows:
2003 2002
Interest $ 36,103 $ 12,103
Franchise taxes 2,750 2,500
-------- ------
Total $ 38,853 $ 14,603
======== ======
7. INCOME TAXES
The Company's total deferred tax asset and valuation allowance are as follows at
December 31, 2003:
2002 2001
Total deferred tax asset, current $1,040,000 $ 593,000
Less valuation allowance (1,040,000 (593,000
--------- ----------
Net deferred tax assets, current $ -- $ --
========= =========
The differences between income tax benefits in the financial statements and the
tax benefit computed at the U.S. Federal statutory rate of 34% at December 31,
2003 are as follows:
2003 2002
---- ----
Tax benefit 34% 34%
Valuation allowance (34) (34)
-------- -------
Effective tax rate -0-% -0-%
======== =======
At December 31, 2003, the Company has available $4,000,000 of net operating
losses to carry forward which may be used to reduce future federal taxable
income and expire December 31, 2023.
8. COMMON STOCK
On December 1, 2003, the Company's majority shareholders authorized the
Company's common stock to be increased from 200,000,000 to 300,000,000, approved
the creation of the 2003 Incentive Stock Option Plan in the aggregate amount of
75,000,000 shares and the grant of 30,000,000 options thereunder, subject to the
filing of an information statement with the remaining shareholders. Accordingly,
at December 31, 2003 the Company had 170,707,012 common shares outstanding,
options to acquire 30,550,000 common shares at an exercise price of $1.00 per
share pursuant to the 2003 Plan, and options to acquire 59,000,000 common shares
at an exercise price of $.41 per share pursuant to the 2001 Plan. In addition,
there were outstanding w arrants to purchase 1,096,701 common shares at a price
ranging from $.50 to $1.00 expiring through February 2006.
At December 31, 2002, of the Company's 300,000,000 authorized shares, $.001 par
value, there were 153,771,993 shares outstanding and options to purchase
59,000,000 shares at an exercise price of $.41 pursuant to the 2001 Plan.
Additionally, there were warrants outstanding to purchase 820,000 common shares
at $1.00 expiring through February 2006.
e-Smart Technologies, Inc.
(A Development Stage Company)
Notes to the Financial Statements
9. COMMON STOCK (continued)
A brief summary of the stock option activity for the years ended December 31,
2003 and 2002 pursuant to the terms of both plans is set forth below:
Number of Weighted Average
Options Exercise Price
Options in thousands:
Options outstanding January 1, 2002
Granted 59,000 $ 0.41
Exercised - -
Expired - -
Options outstanding at January 21, 2003 59,000 0.41
Granted 30,000 1.00
Exercised - -
Expired - -
Options outstanding December 31, 2003 89,000 $ 0.61
====== =======
The fair value of the options granted in 2003 and 2002 were $21,416,000 and
$34,170,000, respectively. The fair value was determined as of the date of the
grant using the Black-Scholes stock option pricing model, based on the
following assumptions: annual expected return of 0%, annual volatility of 188%
in 2003 and 194.1% in 2002, based upon a risk-free interest rate of 2.4% in 2003
and 3.6% in 2002.
The per share fair value of stock options granted during 2003 and 2002 were
$1.14 and $0.36, respectively. The per share contractual remaining life of the
options outstanding at December 31, 2003 and 2002 were 5 years and 5 years,
respectively.
8. RELATED PARTY TRANSACTIONS
The Company receives research, development and technological support from an
entity that is controlled by the Company's majority shareholder. Amounts paid by
the Company for such services amounted to $730,750 in 2003 and $310,000 in 2002.
The Company receives administrative support services from an entity that is
indirectly controlled by the Company's majority shareholder. Amounts paid for
such services amounted to $120,000 in 2003 and $120,000 in 2002. Additionally,
the Company was due $31,334 and $40,000 from this entity at December 31, 2003
and 2001, respectively.
10. DEPENDENCE UPON CONTROL PERSONS
Intermarket Ventures, Inc. and its majority-owned subsidiary, IVI Smart
Technologies, Inc. ("Intermarket") collectively own 77% of the Company's
outstanding common shares. Accordingly, Intermarket is in a position to
materially influence the direction of the Company, its efforts in raising the
additional capital critical to its success, and the strategies employed in
commercialization of the licensed technology, assuming the Company's mission is
ultimately successful.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, related party receivable, accrued expenses and notes payable are subject
to fair value adjustments.
The carrying amount approximates fair value because of the short term maturity
of these instruments.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
information and information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
12. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for new variable interest entities created or acquired after January
31, 2003. For variable interest entities created or acquired prior to February
1, 2003, the provisions of FIN 46 must be applied for the first interim or
annual period beginning after June 15, 2003. The adoption of FIN 46 did not
have a significant impact on the Company's results of operations or financial
position.
In April 2003, the FASB issued SFAS Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities", which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
This Statement is effective for contracts entered into or modified after June
30, 2003, except for certain hedging relationships designed after June 30, 2003.
Most provisions of this Statement should be applied prospectively. The adoption
of this statement is not expected to have a significant impact on the Company's
results of operations or financial position.
In May 2003, the FASB issued SFAS Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities, if applicable. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period of adoption,
The adoption of this statement is not expected to have a significant impact on
the Company's results of operations or financial position.