SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT 1934:
For the Fiscal Year Ended December 31, 2000
Commission File Number: 0-30717
E-SMART TECHNOLOGIES, INC.
(Name of Small Business Issuer in its Charter)
Nevada 88-0409261
(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 [ ] No [ X ]
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 year ended December 31, 2000: $ -0-
The aggregate market value of Common Stock held by non-
affiliates at December 31, 2000 was 5,100,000. Shares of Common
Stock, $.001 par value per share, outstanding at December 31,
2000: 59,101,000 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, awareness 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
Preface
The Administrative Proceeding
On December 12, 2003, the SEC commenced an Administrative
Proceeding against e-Smart Technologies, Inc., a Nevada
corporation (the "Company" or the "Registrant"), seeking, inter
alia, to interrupt public trading in our securities (the
"Proceeding"). Pending a decision by the Administrative Law
Judge, Lillian A. McEwen (the "ALJ"), we agreed to utilize its
best efforts to prepare and file its Annual Report on Form 10-
KSB for the two fiscal years ending December 31, 2003, on or
before March 30, 2004.
However, and on March 4, 2004, Judge, published an Initial
Decision in the Proceeding. In her Initial Decision, the ALJ
found that we failed to make the required filings, as alleged,
and therefore violated Exchange Act Section 13(a) and Rules
13a-1 and 13a-13. In assessing sanctions, the ALJ found that
our violations were not only recurrent but also egregious,
lasting over three years and continuing to the present. The ALJ
added that, although we represented that we intend to bring
itself into full compliance with the periodic reporting
requirements no later than March 31, 2004, this endeavor seems
doomed. Because the ALJ was convinced that we could not readily
remedy its periodic reporting violations, she concluded that a
suspension would not sufficiently protect the investing public.
The ALJ, therefore, rendered a decision to revoke our
registration. On March 30, 2004, we filed a Form 10-KSB
covering fiscal years ending on December 31, 2002 and 2003.
On March 23, 2004, we filed a petition with the SEC for review
of the ALJ 's decision. The Registrant's petition was granted
on March 26, 2004. On March 30, 2004, the Division of
Enforcement asked that the ALJ's decision be summarily affirmed
pursuant to Rule of Practice 411(e). The Division also moved
for leave, under Commission Rule of Practice 410(d), to file a
brief in opposition to our petition for review. By June 30,
2004, we had filed all Form 10-QSB Quarterly Reports required
to be filed for the two years ended December 31, 2003. On May
17, 2004, we timely filed its Form 10-QSB Quarterly report for
the three months ended March 31, 2004.
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. On August 16, 2004, we timely filed its
Form 10-QSB Quarterly Report for the three and six months ended
June 30, 2004. On September 8, 2004, we filed an Annual Report
on Form 10-KSB for the two years ended December 31, 2002.
On October 12, 2004, the SEC ordered the administrative
proceeding brought against us remanded to the ALJ to afford her
an opportunity to reassess her sanctioning determination in
light of the circumstances of this case and our subsequent
filing of reporting record as outlined above.
On December 13, 2004, we participated at a hearing before the
ALJ. At the hearing, and with a view towards resolving the
matter through a Cease and Desist Order pursuant to Section 21C
of the Securities Exchange Act of 1934, as amended, we agreed
to file its three Form 10-QSB Quarterly Reports for the fiscal
year ended December 31, 2002, its three Form 10-QSB Quarterly
Reports for the fiscal year ended December 31, 2001, and its
Form 10-KSB Annual Report for the fiscal year ended December 31,
2000, on or before January 14, 2005. Accordingly, and on
December __, 2004, we filed our Form 10-QSB Quarterly reports
for the three, six and nine months ended March 31, 2002, June
30, 2002 and September 30, 2002, respectively, with the SEC.
On December , 2004, we filed our Form 10-QSB Quarterly reports
for the three, six and nine months ended March 31, 2001, June
30, 2001 and September 30, 2001, respectively, with the SEC.
The filing of this report completes our agreement with the ALJ.
Retrospective Perspective
Since this Annual Report on Form 10-KSB is being filed
approximately four years after its due date, many of the events
that would have been enumerated herein, particularly the
parameters of our business model, have changed or were
materially affected by the passage of time and/or events that
occurred during 2001, 2002, 2003 and 2004. Accordingly, in the
interests of readability and the protection of investors, and
in an effort towards presenting our business in its most
accurate historical context, we have included relevant
subsequent events in this Report.
General
Our Company 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 were organized under the laws of the State of Nevada on July
15, 1997, we have limited operations, and, in accordance with
SFAS#7, we 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) converted warrants to purchase an aggregate of 2,900,000
shares of e-Smart System's common stock at $10.00 per share
into warrants to purchase an aggregate of 2,900,000 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 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 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:
- 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);
- 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;
- 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";
- 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
- 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
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:
- 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);
- 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;
- 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;
- Immediate identification Assurance & Privacy Protecti on. 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;
- 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; and
- 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.
- 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.
- 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, 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 $350,000 on research and development.
During fiscal year 2003, the Company spent approximately $900,000
on research and development.
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 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 trenches 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, 2000, we had two employees; our Chief
Executive Officer, President and Chief Finanacial 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:
- The statements may disclose our future expectations;
- The statements may contain projections of our future earnings
or our future financial condition; and
- The statements may state other "forward-looking" information.
Risks Related to Our Business
We are delinquent in filing reports with the SEC.
We are required to file annual, quarterly and special reports,
and other information (the "34 Act Filings") with the
Securities and Exchange Commission (the "SEC"). During 2004,
we filed: (i) our Form 10-KSB Annual Report for the two fiscal
years ended December 31, 2003 on March 30, 2004; (ii) Form
10-QSB Quarterly Report for the three months ended March 31,
2004 on May 17, 2004; (iii) our Form 10-QSB Quarterly Report
for the three months ended March 31, 2003 on June 30, 2004;
(iv) our 10-QSB Quarterly Report for the six months ended June
30, 2004 on August 16, 2004; (v) our Form 10-KSB Annual Report
for the fiscal year ended December 31, 2002 on September 8, 2004;
(vi) our 10-QSB Quarterly Report for the nine months ended
September 30, 2004 on November 15, 2004; and (vii) our Form
10-KSB/A Annual Report for the fiscal year ended December 31,
2003 on December 13, 2004. During 2003, we filed: (i) our Form
10-QSB Quarterly Report for the six months ended June 30, 2003
on November 13, 2003; and (ii) our Form 10-QSB Quarterly Report
for the nine months ended September 30, 2003 on December 30,
2003. Despite these filings, the SEC's Division of Enforcement
continues to assert that we remain materially delinquent in the
filing of the required 34 Act Filings.
The SEC commenced an Administrative Proceeding and the
Administrative Law Judge Ruled against us.
As previously indicated herein under Item 1. Business, 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. This matter has yet to be resolved.
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
granted patents. 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:
- Changes in regulatory requirements and communications
standards;
- Required licenses, tariffs and other trade barriers;
- Difficulties in enforcing intellectual property rights across,
or having to litigate disputes in, various jurisdictions;
- Difficulties in staffing and managing international operations;
- Potentially adverse tax consequences; and
- 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:
- Harm to our reputation;
- Loss of, or delay in, revenues;
- Loss of customers and market share;
- Failure to attract new customers or achieve market acceptance
for our products; and
- 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, 2003, 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 the registrant, 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, 2003, we had 170,707,012 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 these 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
With the filing of this report, we will have filed Annual
Reports on Form 10-KSB for the four fiscal years ended December
31, 2003, 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"). A
discussion of the Proceeding and the rulings had thereunder,
are disclosed in Item 1, Business in this Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On December 18, 2000, we conducted a Special Meeting of
Stockholders wherein the transaction with Boppers was approved
by a majority of our stockholders. Since that date, we have not
conducted 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 fiscal
year 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, 2000:
Fourth Quarter $15.25 $7.00
Third Quarter (commencing 9/1) 12.25 4.00
Second Quarter - -
First Quarter - -
Since our shares began trading in the over-the-counter market in
the Pink Sheets on September 1, 2000, 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 the registrant, 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, 2000, 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 110
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
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 out 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 2004 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. 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 took 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. Contingent upon funding, 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
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 give 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 Grace, our principal executive officer and our
principal financial officer had not carried out any 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). The implementation of
disclosure controls and procedures postdated the period covered
by this report, and have been reported in our Form 10-KSB Annual
Reports for the fiscal years ended December 31, 2002 and
December 31, 2003.
Changes in Internal Controls
None.
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 Age and
of Present Position & Office Director
Name Term With the Company Since
------------ ---------- ------------------------ --------
Mary A. Grace One year President, Chief 59
12/13/04 Executive Officer, Chief 3/01
Financial Officer and
Director
Tamio Saito One year Chief Technical 56
12/31/04 Officer and Director 10/03
Terry N.Christensen One year Director 62
11/30/03 7/01
F. Bo Zarnegin One year Director 43
11/30/03 3/01
David C. Williams One year Director 54
12/31/04 3/01
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 April 2001
and October 2000, 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 has been one of our directors since 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, 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. Mr. Christensen became
ineligible for re-election to our Board in December, 2003, as
he failed to attend any board meetings during 2003.
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 these properties 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. Mr. Zarnegin became ineligible for re-election to
our Board in December, 2003, as he failed to attend any Board
meetings during 2003.
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 &
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 Elliott 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 have 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 fiscal year ended December 31, 2000, no compensation
was paid to, accrued or set aside for any of our executive
officers or directors.
Summary Compensation Table
Summary Compensation Table
Name and Annual Compensation
Position Year Salary Bonuses Other
---------------- ------ -------- --------- --------
Mary A. Grace, 2000 $ - - -
President, CEO,
CFO and Director
Tamio Saito, CTO, 2000 - - -
and Director
David Williams, 2000 - - -
Director
Thomas J. Volpe, 2000 - - -
Advisory Board
Member
Terry N. Christensen, 2000 - - -
Director
F. Bo Zarnegin, 2000 - - -
Director
Totals 2000 $000,000 - -
Long Term Compensation
Name and Awards Payments
Position Year Stock Option LTIP Other
---------------- ---- ------ -------- --------- --------
Mary A. Grace, 2000 - - - -
President, CEO,
CFO and Director
Tamio Saito, CTO, 2000 - - - -
and Director
David Williams, 2000 - - - -
Director
Thomas J. Volpe, 2000 - - - -
Advisory Board
Member
Terry N. Christensen, 2000 - - - -
Director
F. Bo Zarnegin, 2000 - - - -
Director
Totals 2000 - - - -
Option/SAR Grant Table
During the fiscal year ended December 31, 2000, no options or
stock appreciation rights were granted to any of our officers,
directors or anyone else. Messrs. Saito and Williams; and the
options granted to Tamio Saito were approved by Mary Grace and
David Williams.
Aggregate Option/SAR Exercises and Fiscal Year-End Option/SAR
Value Table
During the fiscal year ended December 31, 2000, no stock options
or freestanding SAR's were exercised.
Long-Term Incentive Plans - Awards in Last Two Fiscal Years
None
Warrants
During the fiscal year ended December 31, 2000, we did not issue
any common stock purchase warrants.
Compensation of Directors
During the fiscal year ended December 31, 2000, we did not pay
any compensation or remuneration to anyone.
Employment Contracts and Termination of Employment, and Change
in Control Arrangements
None.
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 Owner of Class
--------------------------- ---------------------- ------------
IVI Smart Technologies, Inc. 128,590,052 77(1)
7225 Bermuda Road, Suite C
Las Vegas, Nevada 89119
Wayne Drizin 31,575,000(2) 19(2)
7225 Bermuda Road, Suite C
Las Vegas, Nevada 89119
Mary A. Grace 34,150,000(3) 21(3)
117 East 57th Street, Apt 24G
New York, NY 10022
Tamio Saito 22,500,000(4) 13(4)
1810 Old Oakland Road, #F
San Jose, California 95131
(1) Does not include options subsequently 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, CA 95131 2,500,000(3) 1.5(3)
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'
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, NV 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
As previously indicated in Item 1. of this Report, we
experienced a change in control of the Registrant on December
27, 2000.
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
NUMBER OF NUMBER OF SECURITIES
SECURITIES TO BE REMAINING AVAILABLE FOR
ISSUED UPON WEIGHTED AVERAGE FUTURE ISSUANCES UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION
OUTSTANDING OUTSTANDING OPTIONS PLANS (EXCLUDING
OPTIONS, WARRANTS, WARRANTS, AND SECURITIES 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 77% 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 ours.
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 file an Information Statement with the SEC,
complies 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 2001, 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 $.885 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,
2000, we did not file any reports on Form 8-K.
ITEM 14. PRINCIPLE ACCOUNTANT FEES AND SERVICES
Audit Fees
We did not pay any fees to any accountant during the fiscal year
ended December 31, 2000.
Audit-Related Fees
None.
Tax Fees
None.
All Other Fees
None.
SIGNATURES
In accordance with the Exchange Act, this report has been signed
below by the following persons on our behalf 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 , 2004
By: /s/ Tamio Saito
Tamio Saito, Director
Dated: December , 2004
By: /s/ David C. Williams
David C. Williams, Director
Dated: December , 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, 2000;
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 , 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 Annual Report of e-Smart Technologies, Inc.
on Form 10-KSB for the fiscal year ended December 31, 2000, as
filed with the Securities and Exchange Commission on December ,
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 , 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, 2000
ITEM 7. FINANCIAL STATEMENTS
Page
Financial Statements
Balance Sheet 39
Statements of Operations 40
Statements of Cash Flows 41
Statement of Shareholders' Equity 42
Notes to the Financial Statements 43
e-SMART TECHNOLOGIES, INC.
(A Development Stage Company)
BALANCE SHEET
[Unaudited]
December 31,
2000
Assets
Current assets -
Cash $ 632
-----------
Total current assets 632
Super Smart License, at cost 58,600
-----------
Total assets $ 59,232
-----------
Liabilities and Shareholders' Equity
Current liabilities - $ --
-----------
Total current liabilities --
-----------
Shareholders' Equity -
Common Stock, par value $.001 per share,
300,000,000 authorized, 59,101,000 and
59,101,000 issued and outstanding,
respectively 59,101
Additional paid in capital 3,075
Deficit accumulated during the development stage (2,944) (2,944)
-----------
Total shareholders' equity 59,232
-----------
Total liabilities and shareholders' equity $ 59,232
===========
See notes to condensed financial statements.
e-SMART TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
[Unaudited]
July 15, 1997
(Inception of
Development
Stage to
December 31,
2000 2002
----------- -----------
Revenue $ -- $ --
----------- -----------
Expenses:
Research and development -- --
Selling, general and administrative 2,944 2,944
----------- -----------
Total operating expenses 2,944 2,944
----------- -----------
Loss before provision for taxes (2,944) (2,944)
Provision for taxes - -
----------- -----------
Net Loss $ (2,944) $ (2,944)
=========== ===========
Loss Per Share -
basic and fully-diluted $ (0.00) $ (0.00)
=========== ===========
Weighted Average Number of
Common Shares Outstanding 59,101,000 59,101,000
=========== ===========
See notes to condensed financial statements
e-SMART TECHNOLOGIES, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
[Unaudited]
July 15, 1997
(Inception of
Development
Stage to
December 31,
2000 2002
----------- -----------
Cash flows of operating activities
Net loss $ (2,944) $ (2,944)
Adjustments to reconcile net loss to net
cash used by operations:
Amortization expense -- --
----------- -----------
Net cash used by operating activities (2,944) (2,944)
----------- -----------
Cash Flows From Investing Activities
Smart Card License Acquired (58,600) (58,600)
----------- -----------
Net Cash Used In Investing Activities (58,600) (58,600)
----------- -----------
Cash flows of financing activities
Issuance of common shares for license 58,600 58,600
----------- -----------
Net cash provided by financing activities 58,600 58,600
----------- -----------
Net (decrease) in cash (2,944) (2,944)
Cash at beginning of period 3,576 3,576
----------- -----------
Cash at end of period $ 632 $ 632
=========== ===========
See notes to condensed financial statements.
e-SMART TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENT OF SHAREHOLDERS' EQUITY
[Unaudited]
Additional Retained
Common Stock Paid-in Earnings
Shares Amount Capital (Deficit) Total
Balance, July 15, 1997
(Inception of Development
Period) 501,000 $ 501 $ 3,075 $ -- $ 3,576
Issuance of shares for
licensed technology 58,600,000 $ 58,600 $ -- $ -- $ 58,600
Net income (loss) -- -- -- (2,944) (2,944)
---------------------------------------------------
Balance, December 31, 2000 59,101,000 $ 59,101 $ 3,075 $(2,944) $ 59,232
---------------------------------------------------
See Notes to condensed 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 engaged in the
business of developing proprietary systems that can positively
authenticate end users of the system while protecting
information residing therein. The Company is devoting most of
its efforts to raising capital and research and development of
its licensed Smart Card technology.
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
will be charged to operations as incurred. At December 31, 2000,
such costs amounted to $-0-.
License Costs. The Company licenses 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 commencing in 2001.
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 16,016,200 in 2001. The underlying fair
value of the common shares amounted to $0.114 and $0.009 per
share, respectively.
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 be 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
The Company has licensed the exclusive manufacturing and
marketing rights to certain Smart Card technology from IVI Smart
Technologies, Inc. The licensed territory includes North
America and the Pacific Rim for a period of 20 years. The
aggregate acquisition cost of the licensed territory, 128,600,000
common shares at $.001 par value, paid 58,600,000 shares in 2000
and 70,000,000 shares in 2001, will be amortized over the term of
the agreement commencing in 2001.
Amortization expense for the year ended 2000 was $-0-. For each
year of the next five years, amortization expense is estimated
to be $6,430 per annum.
4. INCOME TAXES
The Company's total deferred tax asset and valuation allowance
are as follows at December 31, 2000:
July 15, 1997
(Inception of
Development
Stage) to
December 31,
2000 2000
---------------------------
Total deferred tax asset, current $ 500 $ 500
Less valuation allowance: (500) (500)
------- -------
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, 2002 are as follows:
2002 2001
Tax benefit 34% 34%
Surtax exemption (17) (17)
Valuation allowance (17) (17)
------ ------
Effective tax rate -0-% -0-%
====== ======
At December 31, 2000, the Company has available $2,944 of net
operating losses to carry forward which may be used to reduce
future federal taxable income and expire December 31, 2018.
5. COMMON STOCK
At December 31, 2000, of the Company's 300,000,000 authorized
shares, $.001 par value, there were 59,101,000 shares issued and
outstanding. No options, option plans, or warrants to purchase
any shares were issued or outstanding.
6. DEPENDENCE UPON CONTROL PERSONS
In connection with its acquisition of its Smart Card Technology
License and its subsequent expansion, the Registrant issued IVI
Smart Technologies, Inc. ("IVI") 58,600,000 common shares in
2000 and another 70,000,000 shares in 2001. At December 31,
2000, IVI owns 99% of the Registrant's outstanding common shares.
Accordingly, IVI and its majority owner, Intermarket Ventures,
Inc., are in a position to affect materially the Registrant's
efforts in commercialization the licensed technology, and in the
accessing the capital related thereto, assuming the Company's
mission is ultimately successful.
7. 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.