UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
COMMISSION FILE NUMBER 0-23100
IDEA SPORTS ENTERTAINMENT GROUP, INC.
(Exact name of small business issuer in its charter)
DELAWARE 22-2649848
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
4514 COLE AVE, SUITE 200
DALLAS, TEXAS 75205
(Address of Principal Executive Office) (Zip Code)
P.O. BOX 26, SANTEE, SOUTH CAROLINA 29142
(Former Address of Principal Executive Office) (Zip Code)
ISSUER'S TELEPHONE NUMBER (817) 675-4319
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.0001 PAR VALUE
(TITLE OF EACH CLASS)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X]; No [ ].
Check if 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 __.
State issuer's revenues for its most recent fiscal year. $ 0
As of March 31, 2006, the registrant had outstanding 231,398,982 shares of its
common stock, par value of $.0001, its only class of voting securities. The
aggregate market value of the shares of common stock of the registrant held by
non-affiliates on March 31, 2006, was $1,052,380 based on the closing price on
the OTC Bulletin Board on that date. (See Item 5).
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Report except those
Exhibits so incorporated as set forth in the Exhibit index.
Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [X].
IDEA SPORTS ENTERTAINMENT GROUP, INC.
TABLE OF CONTENTS
FORM 10-KSB
Part I
Page
PART I
Item 1 Description of Business 3
Item 2 Description of Property 6
Item 3 Legal Proceedings 6
Item 4 Submission of Matters to a Vote of Security Holders 6
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 7
Item 6 Management's Discussion and Analysis or Plan of Operation 8
Item 7 Financial Statements 14
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 35
Item 8A Controls and Procedures 35
Item 8B Other Information 36
PART III
Item 9 Directors and Executive Officers of the Registrant 37
Item 10 Executive Compensation 39
Item 11 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 41
Item 12 Certain Relationships and Related Transactions 42
Item 13 Exhibits 43
Item 14 Principal Accountant Fees and Services 43
>From time to time, we may publish forward-looking statements relative to such
matters as anticipated financial results, business prospects, technological
developments and similar matters. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. The following
discussion and analysis should be read in conjunction with the report on the
Consolidated Financial Statements and the accompanying Notes to Consolidated
Financial Statements appearing later in this report. All statements other than
statements of historical fact included in this Annual Report on Form 10-KSB are,
or may be deemed to be, forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange
Act of 1934, as amended. Important factors that could cause actual results to
differ materially from those discussed in such forward-looking statements
include, but are not limited to, the following: our current liquidity needs, as
2
described in our periodic reports; changes in the economy; our inability to
raise additional capital; our involvement in potential litigation; volatility of
our stock price; the variability and timing of business opportunities; changes
in accounting policies and practices; the effect of internal organizational
changes; adverse state and federal regulation and legislation; and the
occurrence of extraordinary or catastrophic events and terrorist acts. These
factors and others involve certain risks and uncertainties that could cause
actual results or events to differ materially from management's views and
expectations. Inclusion of any information or statement in this report does not
necessarily imply that such information or statement is material. We do not
undertake any obligation to release publicly revised or updated forward-looking
information, and such information included in this report is based on
information currently available and may not be reliable after this date.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Idea Sports Entertainment Group, Inc. (together with its subsidiaries,
hereinafter referred to as the "Company", "Idea Sports", "we" or "us"), is a
holding company with four wholly owned subsidiaries, Maxx Motorsports, Inc.
("Maxx"), Idea Management Group, Inc. ("IMGI"), World Championship Poker, Inc.
("Poker") and Strategic Gaming Consultants, LLC, ("Gaming").
On April 24, 2006, we filed a Definitive Information Statement pursuant to
Section 14C which provided that effective May 15, 2006; 1) the name of the
Company would be changed to Healthsport, Inc.; 2) the Company's issued and
outstanding shares would be reverse-split one share for each 200 shares; and 3)
the Company's Certificate of Incorporation would be restated to reflect these
amendments. These amendments were approved by the Company's Board of Directors
and in writing by 52.33% of the Company's shareholders on March 31, 2006.
Idea Sports Entertainment Group, Inc., a Delaware corporation, was originally
incorporated on July 25, 1985 as Horizon Capital Corp. We were known as
Reconversion Technologies, Inc. until May 1, 2000, at which time our name was
changed to Logisoft Corp. On May 15, 2001, we changed our name from Logisoft
Corp. to Team Sports Entertainment, Inc. and on November 8, 2004, we changed our
name to Idea Sports Entertainment Group, Inc.
ELECTROLYTE STRIP
-----------------
On April 19, 2005, we entered into a joint development agreement with InnoZen,
Inc. ("InnoZen") to jointly develop a film strip product containing electrolytes
to replenish the body while under physical stress (the "electrolyte strip").
InnoZen had experience in the formulation, development, manufacturing and sale
of edible thin strips containing drug active ingredients. We have the ability to
assist in obtaining endorsements for the electrolyte strips by well-known
athletes and coaches. We contributed $115,500 in cash and 250,000 shares of our
common stock, valued at $19,191 using the Black-Scholes valuation model, for our
50% interest in the joint venture. We would be required to issue an additional
250,000 shares of our common stock upon completion of the development of a
saleable product.
3
As of September 30, 2005, the joint venture had completed a product formulation
of an acceptable thin film prototype containing electrolytes and had completed
laboratory stability testing for the oral dosage product. The joint venture
produced initial electrolyte strips capable of holding a deliverable load of
electrolytes equal to approximately one fluid ounce of most recognized sports
drinks. The electrolyte strips were produced for flavor testing with initial
flavors to be lemon-lime, orange and sour orange.
InnoZen has been unable to complete a saleable product and all joint venture
funds have been expended as of December 31, 2005.
On March 29, 2006, we entered into a Unit Purchase Agreement with the majority
of the unit holders of Health Strip Solutions, LLC, ("Health Strip"), a Nevada
limited liability corporation, to acquire 80% of Health Strip in exchange for
100,000,000 shares of our $.0001 par value common stock. The seller has the
right to rescind this transaction by May 31, 2006, if we are unable to cause a
minimum of $4,000,000 of our outstanding liabilities to convert into our common
stock by May 15, 2006. Health Strip has use rights to patented process
technology for the formulation and for the manufacture of a thin film
electrolyte strip. In addition, Health Strip has tentative agreements in place
for the marketing and distribution of our strip. Health Strip, through its
manufacturing agreement has the process technology to manufacture thin film
strips to deliver an electrolyte product.
IMGI
----
On September 9, 2004, we acquired all of the issued and outstanding common stock
of IMGI in exchange for warrants to acquire 15,000,000 shares of our common
stock at an exercise price of $.10 per share. In addition, in the event IMGI
generates $2,000,000 in gross revenue within 36 months of closing, the sellers
of IMGI would receive additional warrants to acquire 15,000,000 shares of our
common stock at an exercise price of $.10. IMGI is a South Carolina corporation
organized on July 28, 2004 and had no prior operations. Accordingly, this
transaction was valued at $1,200, which was the amount the sellers of IMGI paid
for IMGI's common stock.
POKER
-----
On June 28, 2005, we issued 3,850,000 shares of our common stock, which were
valued at $295,544 using the Black-Scholes valuation model, to acquire Poker,
whose principal asset is the rights to a proprietary fantasy football format,
with the working title, Vegas Roll'em(TM) Fantasy Football ("Vegas Roll'em").
Poker recorded the investment of $295,544 as goodwill.
In January 2005, the Rules of Competition for Vegas Roll'em received a copyright
from the United States Copyright Office. This format allows live filming of the
high stakes action as it unfolds. Each player will have a roll of the dice to
determine which of his players will make up his team. According to the Fantasy
Sports Trade Association, fantasy football was played by nearly fifteen million
participants last year. This internet-based phenomenon has created a four
billion dollar industry.
We began our initial sales during the quarter ended September 30, 2005 and
believed we had commenced operations and completed our development stage as of
that date. However, due to delays encountered in developing a functional
website, which delayed the date for commencing sales, we determined we would not
have sufficient participants to have a viable program during the 2005 season.
Accordingly, we returned all fees collected and cancelled the program. We have
4
re-instituted the development stage for our business from the original inception
date of September 9, 2004. While we may still pursue the project for the 2006
season, our principal focus is on the agreement with Health Strip. Accordingly,
we elected to impair our investment in the goodwill associated with Poker to the
$50,000 amount we have determined to be the fair value of the investment.
TELEVISION PROGRAMS
-------------------
On October 15, 2004, we acquired two television programs entitled "America's Top
Drivers" and "Women's Racing League" in exchange for warrants to acquire
1,750,000 shares of our common stock at an exercise price of $.10 per share. The
transaction was valued at $65,458 using the Black-Scholes option pricing model.
As of December 31, 2005, we were unable to locate a venue to produce the shows.
Accordingly, we fully impaired our investment of $65,458.
On September 28, 2005, we completed the modification of our television program
purchase agreement in order to recognize the compensation element of the
agreement. The warrants to acquire 1,750,000 shares of our common stock at $.10
per share were cancelled and we issued 3,600,000 shares of our common stock to
the seller of the programs. The 3,600,000 shares of common stock were valued at
$251,640, utilizing the Black-Scholes valuation model. The $251,640 was reduced
by the original calculated value of the warrants, which were cancelled, of
$65,458 and a net consulting fee expense of $186,182 was recorded.
GAMING
------
On October 27, 2004, we acquired all of the issued and outstanding memberships
of Gaming in exchange for warrants to acquire 750,000 shares of our common stock
at an exercise price of $.10 per share. In addition, in the event Gaming
generates $2,000,000 in gross revenue within 36 months of closing, the sellers
of Gaming would receive additional warrants to acquire 750,000 shares of our
common stock at an exercise price of $.10. Gaming is a Nevada limited liability
corporation organized on September 7, 2004. Gaming had no prior operations and
has no assets. Accordingly, the transaction was recorded with no value. Gaming
is not currently active and has not had any activity since its inception.
MAXX
----
Maxx, through its wholly owned subsidiary, Team Racing Auto Circuit, LLC, a
Delaware limited liability company ("TRAC"), planned to develop, own, operate
and sanction an automotive racing league designed to provide content for
television and tracks while expanding the existing base of racing fans. We were
in the development stage since our inception on May 15, 2001, and did not
establish sources of revenue sufficient to fund the development of business and
pay operating expenses, resulting in a net loss of $15,054,021 from inception
through December 31, 2003. Accordingly, on August 26, 2003, our Board of
Directors unanimously approved a plan to immediately discontinue our racing
operation.
BUSINESS OF THE COMPANY
As noted above under Business Development, we have been involved in a number of
projects primarily involved in the sports and entertainment area. While we may
devote resources to some of the other projects, we expect to focus all of our
immediate time and resources on development of an electrolyte strip through our
Health Strip investment.
5
EMPLOYEES
At December 31, 2005 and 2004, we had one part-time employee and one full-time
employee, respectively.
ITEM 2. DESCRIPTION OF PROPERTY
The Chief Executive Officer currently provides office space in Dallas, Texas
without cost to us.
ITEM 3. LEGAL PROCEEDINGS
On February 18, 2004, four Georgia shareholders filed suit in the Superior Court
of Fulton County against the Company's former CEO, William G. Miller of
Alpharetta, Georgia. The suit alleged breach of contract, wrongful conversion of
company monies, mismanagement, breach of fiduciary duty and fraud on the part of
the defendants while serving the Company in 2001 and 2002. The suit contended
Idea Sport's shareholders suffered market losses in excess of $50 million. Also
named in the action was Jon Pritchett, who was president of the Company while
Miller was CEO.
On May 3, 2004, Miller, Pritchett and three other individuals filed several
derivative and individual claims against the Company, its Directors and certain
of its shareholders in the Court of Chancery of the State of Delaware in and for
New Castle County, C.A. No. 413-N. The Company filed a counterclaim against
Miller and Pritchett on November 24, 2004.
On March 15, 2005, all parties to the litigation agreed to dismiss with
prejudice all claims and counterclaims. The final settlement was approved by the
court in Georgia on September 20, 2005, and by the court in Delaware on
September 21, 2005.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2005.
6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our $0.0001 par value per share common stock is traded in the over-the-counter
market and is quoted on the National Association of Securities Dealers ("NASD")
Over-The Counter Bulletin Board ("OTCBB") under the symbol "ISPO.OB." Prior to
November 8, 2004, we were quoted on the OTCBB under the symbol "TSPT.OB;" prior
to May 18, 2001, we were quoted on the OTCBB under the symbol "LGST;" and prior
to May 1, 2000, were quoted on the OTCBB under the symbol "RTTK."
The following table sets forth the quarterly high and low daily bids for our
common stock as reported by the OTCBB for the two years ended December 31, 2005.
The bids reflect inter-dealer prices without adjustments for retail mark-ups,
mark-downs or commissions and may not represent actual transactions.
High Low
---- ---
2005:
Fourth quarter $.07 $.02
Third quarter $.10 $.03
Second quarter $.16 $.07
First quarter $.29 $.07
2004:
Fourth quarter $.31 $.03
Third quarter $.13 $.01
Second quarter $.02 $.01
First quarter $.03 $.01
The OTCBB is a quotation service sponsored by the NASD that displays real-time
quotes and volume information in over-the-counter ("OTC") equity securities. The
OTCBB does not impose listing standards or requirements, does not provide
automatic trade executions and does not maintain relationships with quoted
issuers. A company traded on the OTCBB may face loss of market makers and lack
of readily available bid and ask prices for its stock and may experience a
greater spread between the bid and ask price of its stock and a general loss of
liquidity with its stock. In addition, certain investors have policies against
purchasing or holding OTC securities. Both trading volume and the market value
of our securities have been, and will continue to be, materially affected by the
trading on the OTCBB.
HOLDERS
At March 31, 2006, there were 456 holders of record of our common stock, an
undetermined number of which represent more than one individual participant in
securities positions with us.
7
DIVIDENDS
We have never paid cash dividends on our common stock and intend to utilize
current and future resources to implement our new plan of operations. Therefore,
it is not anticipated that cash dividends will be paid on our common stock in
the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes certain information as of December 31, 2005, with
respect to compensation plans (including individual compensation arrangements)
under which our common stock is authorized for issuance:
NUMBER OF SECURITIES TO BE
ISSUED UPON EXERCISE OF WEIGHTED AVERAGE EXERCISE NUMBER OF SECURITIES
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING REMAINING AVAILABLE FOR
PLAN CATEGORY WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS FUTURE ISSUANCE
------------- ------------------- ---------------------------- ---------------
Equity compensation plans approved
by security holders (1) 1,500,000 $ 1.00 1,500,000
Equity compensation plans not
approved by security holders (2) 21,500,000 .13 -
---------- --------- ---------
Total 23,000,000 $ .19 1,500,000
========== ========= ==========
(1) All options are granted under the Company's 2000 Stock Option Plan
("Plan"), which authorizes the grant of options to purchase an
aggregate of 3,000,000 shares and was approved by stockholders in
April 2001.
(2) The 21,500,000 securities are represented by warrants with
exercise prices ranging from $.10 to $1.00. The Board of Directors
has approved the increase in authorized shares available under the
Plan. This increase in authorized shares requires stockholder
approval.
The material features of the Plan, the data for which is summarized under the
equity compensation plans approved by security holders in the table above, and
its warrant arrangements are summarized in Note 6 to the consolidated financial
statements that appear in Item 7.
RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company, which has been in the development stage for its planned racing
operation since its inception, May 15, 2001, did not establish sources of
revenue sufficient to fund the development of business and pay operating
expenses, resulting in a net loss of $15,054,021 from inception through December
31, 2003. On August 26, 2003, our Board of Directors unanimously approved a plan
to immediately discontinue our racing operation. Since August 26, 2003 and until
September 9, 2004, we have been attempting to find a suitable acquisition
candidate. On September 9, 2004, with the acquisition of IMGI, we completed one
development stage, which had been included in discontinued operations, and
commenced a new development stage operation.
8
ELECTROLYTE STRIP
-----------------
On April 19, 2005, we entered into a joint development agreement with InnoZen,
Inc. ("InnoZen") to jointly develop a film strip product containing electrolytes
to replenish the body while under physical stress (the "electrolyte strip").
InnoZen had experience in the formulation, development, manufacturing and sale
of edible thin strips containing drug active ingredients. We have the ability to
assist in obtaining endorsements for the electrolyte strips by well-known
athletes and coaches. We contributed $115,500 in cash and 250,000 shares of our
common stock, valued at $19,191 using the Black-Scholes valuation model, for our
50% interest in the joint venture. We would be required to issue an additional
250,000 shares of our common stock upon completion of the development of a
saleable product.
As of September 30, 2005, the joint venture had completed a product formulation
of an acceptable thin film prototype containing electrolytes and had completed
laboratory stability testing for the oral dosage product. The joint venture
produced initial electrolyte strips capable of holding a deliverable load of
electrolytes equal to approximately one fluid ounce of most recognized sports
drinks. The electrolyte strips were produced for flavor testing with initial
flavors to be lemon-lime, orange and sour orange.
InnoZen has been unable to complete a saleable product and all joint venture
funds have been expended as of December 31, 2005.
On March 29, 2006, we entered into a Unit Purchase Agreement with the majority
of the unit holders of Health Strip Solutions, LLC, ("Health Strip"), a Nevada
limited liability corporation, to acquire 80% of Health Strip in exchange for
100,000,000 shares of our $.0001 par value common stock. The seller has the
right to rescind this transaction by May 31, 2006, if we are unable to cause a
minimum of $4,000,000 of our outstanding liabilities to convert into our common
stock by May 15, 2006. Health Strip has use rights to patented process
technology for the formulation and for the manufacture of a thin film
electrolyte strip. In addition, Health Strip has tentative agreements in place
for the marketing and distribution of our strip. Health Strip, through its
manufacturing agreement has the process technology to manufacture thin film
strips to deliver an electrolyte product.
IMGI
----
On September 9, 2004, we acquired all of the issued and outstanding common stock
of IMGI in exchange for warrants to acquire 15,000,000 shares of our common
stock at an exercise price of $.10 per share. In addition, in the event IMGI
generates $2,000,000 in gross revenue within 36 months of closing, the sellers
of IMGI would receive additional warrants to acquire 15,000,000 shares of our
common stock at an exercise price of $.10. IMGI is a South Carolina corporation
organized on July 28, 2004 and had no prior operations. Accordingly, this
transaction was valued at $1,200, which was the amount the sellers of IMGI paid
for IMGI's common stock.
POKER
-----
On June 28, 2005, we issued 3,850,000 shares of our common stock, which were
valued at $295,544 using the Black-Scholes valuation model, to acquire Poker,
whose principal asset is the rights to a proprietary fantasy football format,
with the working title, Vegas Roll'em(TM) Fantasy Football ("Vegas Roll'em").
Poker recorded the investment of $295,544 as goodwill.
9
In January 2005, the Rules of Competition for Vegas Roll'em received a copyright
from the United States Copyright Office. This format allows live filming of the
high stakes action as it unfolds. Each player will have a roll of the dice to
determine which of his players will make up his team. According to the Fantasy
Sports Trade Association, fantasy football was played by nearly fifteen million
participants last year. This internet-based phenomenon has created a four
billion dollar industry.
We began our initial sales during the quarter ended September 30, 2005 and
believed we had commenced operations and completed our development stage as of
that date. However, due to delays encountered in developing a functional
website, which delayed the date for commencing sales, we determined we would not
have sufficient participants to have a viable program during the 2005 season.
Accordingly, we returned all fees collected and cancelled the program. We have
re-instituted the development stage for our business from the original inception
date of September 9, 2004. While we may still pursue the project for the 2006
season, our principal focus is on the agreement with Health Strip. Accordingly,
we elected to impair our investment in the goodwill associated with Poker to the
$50,000 amount we have determined to be the fair value of the investment.
TELEVISION PROGRAMS
-------------------
On October 15, 2004, we acquired two television programs entitled "America's Top
Drivers" and "Women's Racing League" in exchange for warrants to acquire
1,750,000 shares of our common stock at an exercise price of $.10 per share. The
transaction was valued at $65,458 using the Black-Scholes option pricing model.
As of December 31, 2005, we were unable to locate a venue to produce the shows.
Accordingly, we fully impaired our investment of $65,458.
On September 28, 2005, we completed the modification of our television program
purchase agreement in order to recognize the compensation element of the
agreement. The warrants to acquire 1,750,000 shares of our common stock at $.10
per share were cancelled and we issued 3,600,000 shares of our common stock to
the seller of the programs. The 3,600,000 shares of common stock were valued at
$251,640, utilizing the Black-Scholes valuation model. The $251,640 was reduced
by the original calculated value of the warrants, which were cancelled, of
$65,458 and a net consulting fee expense of $186,182 was recorded.
GAMING
------
On October 27, 2004, we acquired all of the issued and outstanding memberships
of Gaming in exchange for warrants to acquire 750,000 shares of our common stock
at an exercise price of $.10 per share. In addition, in the event Gaming
generates $2,000,000 in gross revenue within 36 months of closing, the sellers
of Gaming would receive additional warrants to acquire 750,000 shares of our
common stock at an exercise price of $.10. Gaming is a Nevada limited liability
corporation organized on September 7, 2004. Gaming had no prior operations and
has no assets. Accordingly, the transaction was recorded with no value. Gaming
is not currently active and has not had any activity since its inception.
10
MAXX
----
Maxx, through its wholly owned subsidiary, Team Racing Auto Circuit, LLC, a
Delaware limited liability company ("TRAC"), planned to develop, own, operate
and sanction an automotive racing league designed to provide content for
television and tracks while expanding the existing base of racing fans. We were
in the development stage since our inception on May 15, 2001, and did not
establish sources of revenue sufficient to fund the development of business and
pay operating expenses, resulting in a net loss of $15,054,021 from inception
through December 31, 2003. Accordingly, on August 26, 2003, our Board of
Directors unanimously approved a plan to immediately discontinue our racing
operation.
GOING CONCERN FACTORS--LIQUIDITY
We have not established sources of revenues sufficient to fund the development
of business, projected operating expenses and commitments for fiscal year 2005.
We have been in the development stage since our inception, May 15, 2001, and
have accumulated a net loss of $15,054,021 through December 31, 2003. We have
ceased our plans to begin a racing league and all operations have been
discontinued. This discontinued operation had a loss of $28,960 and $671,289
during the year ended December 31, 2005 and 2004, respectively.
Since August 26, 2003, we attempted to locate and negotiate with a business
entity for the merger of that target business into Idea Sports. As discussed
above, we acquired new development stage businesses commencing on September 9,
2004. Since September 9, 2004, we have incurred losses in the amount of
$1,877,465 and $344,616, in 2005 and 2004, respectively. A group of the note
holders have agreed to advance funds on a limited basis to allow us to attempt
to develop a business capable of generating revenues sufficient to fund
projected operating expenses and commitments. However, there can be no assurance
that the group of note holders will be able to continue to provide sufficient
funding to develop our current business plan.
In addition, our current liabilities exceed our assets by approximately
$4,850,000, and $229,934 of our convertible promissory notes payable obligations
are in default. The remaining balances of the convertible promissory notes in
the total amount of $4,300,375, as amended, are due on June 30, 2006. Pursuant
to the acquisition of Health Strip, we are required to convert at least
$4,000,000 of our outstanding liabilities into our common stock by May 15, 2006.
It is our intention to convert substantially all of our outstanding liabilities
into common stock. However, there can be no assurance that this will be
accomplished by that date.
These conditions raise substantial doubt about our ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that may result from the outcome of these uncertainties.
DISCONTINUED OPERATIONS
We have been in the development stage since our inception, May 15, 2001, and we
did not establish sources of revenue sufficient to fund the development of
business and pay operating expenses, resulting in a net loss of $15,054,021 from
inception through December 31, 2003. As a result of the continuing losses, on
August 26, 2003, our Board of Directors unanimously approved a plan to
immediately discontinue our racing operation. This discontinued operation had a
loss of $28,960 and $671,289 during the year ended December 31, 2005 and 2004,
respectively. While we do not expect any additional liability, we were a party
to a racing car design and construction agreement, a team sales brokerage
agreement and a broadcasting agreement which have not been formally cancelled.
11
NEW ACCOUNTING STANDARDS
Accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.
CRITICAL ACCOUNTING POLICIES
The SEC issued Financial Reporting Release No. 60, "Cautionary Advice Regarding
Disclosure about Critical Accounting Policies" ("FRR 60"), suggesting companies
provide additional disclosure and commentary on their most critical accounting
policies. In FRR 60, the SEC defined the most critical accounting policies as
the ones that are most important to the portrayal of a company's financial
condition and operating results, and require management to make its most
difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition and
based on our current status as a development stage company, Idea Sports' most
critical accounting policies include the valuation of intangibles, which affects
their amortization and impairment calculations and stock-based compensation. The
methods, estimates and judgments Idea Sports uses in applying these most
critical accounting policies have a significant impact on the results it reports
in its consolidated financial statements.
INTANGIBLE ASSET VALUATION - The determination of the fair value of certain
acquired assets and liabilities is subjective in nature and often involves the
use of significant estimates and assumptions. Determining the fair values and
useful lives of intangible assets especially requires the exercise of judgment.
Idea Sports may use its common stock to acquire assets and will use the
Black-Scholes valuation method or another acceptable method to determine a
valuation for the stock used in an acquisition. The Black-Scholes valuation
method calculates a volatility factor for the stock price and extrapolates a
valuation using these criteria. This valuation method has generally proven
effective for companies with established markets for their common stock;
however, due to the lack of an established trading market for Idea Sports, a
development stage company, in the opinion of management, this may result in an
unduly high valuation for the stock.
STOCK-BASED COMPENSATION - We record stock-based compensation to outside
consultants at fair value in general and administrative expense. Historically,
we have not recorded expenses relating to stock options granted to employees
with an exercise price greater than or equal to market price at the time of
grant. We have reported pro-forma net loss and loss per share in accordance with
the requirements of SFAS 123 and SFAS 148. This disclosure shows net loss and
loss per share as if we had accounted for our employee stock options under the
fair value method of those statements. Pro-forma information is calculated using
the Black-Scholes pricing method on the date of grant. This option valuation
model requires input of highly subjective assumptions. Because our employee
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing model does
not necessarily provide a reliable single measure of fair value of our employee
stock options. We did not have any stock-based compensation during 2005 and
2004; however, we did have option compensation in 2003 and expect to have option
compensation in the future.
12
In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment"
(SFAS 123(R)). Among other things, SFAS 123(R) requires expensing the fair value
of stock options, previously optional accounting. For transition, upon adoption
on January 1, 2006, SFAS 123(R) would require expensing any unvested options and
will also require us to change the classification of certain tax benefits from
option deductions to financing rather than operating cash flows.
OTHER - The Company expects revenue recognition and other financial estimates to
become critical as business develops in the future.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any material off-balance sheet arrangements.
13
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of Idea Sports Entertainment Group, Inc.
and Subsidiaries (a development stage company) together with the report thereon
of Creason & Associates, P.L.L.C. for the years ended December 31, 2005 and 2004
and the period from inception (September 9, 2004) through December 31, 2005, is
set forth as follows:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm:
Creason & Associates, P.L.L.C. 15
Consolidated Balance Sheet 16
Consolidated Statements of Operations 17
Consolidated Statements of Stockholders' Deficit 18
Consolidated Statements of Cash Flows 19-20
Notes to Consolidated Financial Statements 21-34
14
CREASON & ASSOCIATES, P.L.L.C.
7170 S. Braden Ave., Suite 100
Tulsa, OK 74136-6333
Phone: 918-481-5355 Fax: 918-481-5771
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Idea Sports Entertainment Group, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Idea Sports
Entertainment Group, Inc. and Subsidiaries (a development stage company) as of
December 31, 2005, and the related consolidated statements of operations,
stockholders' deficit and cash flows for the years ended December 31, 2005 and
2004, and the period from inception (September 9, 2004) through December 31,
2005. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Idea Sports
Entertainment Group, Inc. and Subsidiaries (a development stage company) at
December 31, 2005, and the results of their operations and their cash flows for
the years ended December 31, 2005 and 2004, and the period from inception
(September 9, 2004) through December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that Idea Sports Entertainment Group, Inc. and Subsidiaries (a development stage
company) will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, Idea Sports Entertainment Group, Inc. and
Subsidiaries have acquired new non-operating businesses and have ceased its
plans to begin a racing league for which all operations have been discontinued.
In addition, current liabilities of Idea Sports Entertainment Group, Inc. and
Subsidiaries exceed its assets by approximately $4,850,000, and several of its
convertible promissory notes payable obligations are in default. These
conditions raise substantial doubt about Idea Sports Entertainment Group, Inc.
and Subsidiaries' ability to continue as a going concern. Management's plans
regarding these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that may result from the outcome of
these uncertainties.
/s/ Creason & Associates, P.L.L.C.
Tulsa, Oklahoma
May 10, 2006
15
IDEA SPORTS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,348
------------
Total current assets 1,348
------------
Computer equipment, net of accumulated depreciation of $372 1,491
Goodwill, net 50,000
------------
Total assets $ 52,839
============
LIABILITIES AND STOCKHOLDERS' DEFICT
CURRENT LIABILITIES:
Accounts payable $ 5,527
Due to related party 291,913
Accrued expenses 5,500
Accrued interest payable 68,244
Convertible promissory notes 4,530,309
------------
Total liabilities 4,901,493
------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock: $2.75 par value; authorized 2,000,000 shares
no shares issued and outstanding --
Common stock: $.0001 par value; authorized 500,000,000 shares;
131,517,782 shares issued and 131,398,982 shares outstanding 13,140
Additional paid-in capital 17,408,684
Common stock warrants 1,200
Accumulated deficit (22,271,678)
------------
Total stockholders' deficit (4,848,654)
------------
Total liabilities and stockholders' deficit $ 52,839
============
See accompanying notes to consolidated financial statements.
16
IDEA SPORTS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2005 AND 2004 AND DEVELOPMENT STAGE
FROM INCEPTION (SEPTEMBER 9, 2004), THROUGH DECEMBER 31, 2005
FROM INCEPTION
YEARS ENDED (9/9/2004)
DECEMBER 31, THROUGH
--------------------------------- DECEMBER 31,
2005 2004 2005
------------- ------------- -------------
CONTINUING OPERATIONS
Selling, general and administrative expenses $ 1,030,861 $ 247,361 $ 1,278,222
Asset impairments 311,002 -- 311,002
Equity in joint venture loss 134,691 -- 134,691
Interest expense 400,911 97,255 498,166
------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS (1,877,465) (344,616) (2,222,081)
------------- ------------- -------------
DISCONTINUED OPERATIONS
Loss from discontinued operations (28,960) (671,289) --
Income tax benefit -- -- --
------------- ------------- -------------
LOSS FROM DISCONTINUED OPERATIONS (28,960) (671,289) --
------------- ------------- -------------
NET LOSS $ (1,906,425) $ (1,015,905) $ (2,222,081)
============= ============= =============
NET LOSS PER SHARE, BASIC AND DILUTED
Continuing operations $ (0.02) $ -- $ (0.02)
Discontinued operations -- (0.01) --
------------- ------------- -------------
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.02) $ (0.01) $ (0.02)
============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 117,189,020 68,339,789 108,053,149
============= ============= =============
See accompanying notes to consolidated financial statements.
17
IDEA SPORTS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2005 AND 2004
Deficit
Accumulated
Common Stock Additional Common During the
---------------------- Paid-in Stock Accumulated Development
Shares Par Value Capital Warrants Deficit Stage Total
------------ --------- ------------ --------- -------------- ------------- -------------
Balance at December 31, 2003 63,782,412 $ 6,378 $15,874,618 $ - $ (4,295,327) $(15,054,021) $ (3,468,352)
Discontinued operations - - - (15,054,021) 15,054,021 -
Issuance of common stock warrants for:
Acquisition of IMGI and Gaming - - - 1,200 - - 1,200
Acquisition of television programs - - - 65,458 - - 65,458
Issuance of common stock for:
Amount due related party 850,000 85 21,915 - - - 22,000
Accrued interest 20,000,000 2,000 198,000 - - - 200,000
Net loss - - - - (671,289) (344,616) (1,015,905)
------------ --------- ------------ --------- -------------- ------------- -------------
Balance at December 31, 2004 84,632,412 8,463 16,094,533 66,658 (20,020,637) (344,616) (4,195,599)
Issuance of common stock for:
Convertible notes payable 36,066,570 3,607 613,846 - - - 617,453
Acquisition of joint venture investment 250,000 25 19,166 19,191
Acquisition of World Championship
Poker 3,850,000 385 295,159 - - - 295,544
Cash proceeds 3,000,000 300 134,700 - - - 135,000
Services 3,600,000 360 185,822 - - - 186,182
Cancellation of warrants - - 65,458 (65,458) - - -
Net loss - - - - (28,960) (1,877,465) (1,906,425)
------------ --------- ------------ --------- -------------- ------------- -------------
Balance at December 31, 2005 131,398,982 $ 13,140 $17,408,684 $ 1,200 $ (20,049,597) $ (2,222,081) $ (4,848,654)
============ ========= ============ ========= ============== ============= =============
See accompanying notes to consolidated financial statements.
18
IDEA SPORTS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004 AND DEVELOPMENT STAGE
FROM INCEPTION (SEPTEMBER 9, 2004), THROUGH DECEMBER 31, 2005
FROM INCEPTION
YEARS ENDED (9/9/2004)
DECEMBER 31, THROUGH
----------------------------- DECEMBER 31,
2005 2004 2005
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,906,425) $(1,015,905) $(2,222,081)
Loss from discontinued operations (28,960) (671,289) --
----------- ----------- -----------
Loss from continuing operations (1,877,465) (344,616) (2,222,081)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation 372 -- 372
Asset impairments 311,002 -- 311,002
Equity in joint venture loss 134,691 -- 134,691
Common stock issued for services 186,182 -- 186,182
Change in assets and liabilities:
Prepaid expenses -- 35,662 --
Accounts payable (24,419) 19,575 (42,142)
Advances from related parties 341,250 29,500 370,750
Accrued expenses 433,690 366,404 532,206
----------- ----------- -----------
Net cash from continuing operations (494,697) 106,525 (729,020)
----------- ----------- -----------
Net cash used in discontinued operations (163,002) (428,264) (163,002)
----------- ----------- -----------
Net cash used in operations (657,699) (321,739) (892,022)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of computer equipment -- (1,863) (1,863)
Investment in joint venture (115,500) -- (115,500)
----------- ----------- -----------
Net cash used in investing activities (115,500) (1,863) (117,363)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds 644,356 236,425 880,781
Loan repayment (7,500) -- (7,500)
Sale of common stock 135,000 -- 135,000
Cash received in acquisition of IMGI -- 1,200 1,200
----------- ----------- -----------
Net cash provided by financing activities 771,856 237,625 1,009,481
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,343) (85,977) 96
CASH AND CASH EQUIVALENTS, beginning of period 2,691 88,668 1,252
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,348 $ 2,691 $ 1,348
=========== =========== ===========
See accompanying notes to consolidated financial statements.
19
IDEA SPORTS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 2005 AND 2004 AND DEVELOPMENT STAGE
FROM INCEPTION (SEPTEMBER 9, 2004), THROUGH DECEMBER 31, 2005
FROM INCEPTION
YEARS ENDED (9/9/2004)
DECEMBER 31, THROUGH
---------------------- DECEMBER 31,
2005 2004 2005
--------- -------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ 270 $ -- $ 270
Income taxes -- -- --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for:
Investment in World Championship Poker $295,544 $ -- $295,544
Investment in joint venture 19,191 -- 19,191
Convertible notes 472,301 -- 472,301
Accounts payable 47,937 -- 47,937
Accrued interest 97,215 200,000 297,215
Due to related party -- 22,000 22,000
Issuance of common stock warrants for:
Acquisition of IMGI and Gaming -- 1,200 1,200
Acquisition of television programs -- 65,458 65,458
Cancellation of common stock warrants 65,458 -- 65,458
Issuance of convertible notes for accrued interest 590,279 -- 590,279
Issuance of convertible notes for accounts payable
and accrued expenses 503,800 -- 503,800
See accompanying notes to consolidated financial statements.
20
IDEA SPORTS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Idea
Sports Entertainment Group, Inc. ("Idea Sports") and its wholly owned
subsidiaries, Idea Management Group, Inc. ("IMGI"), World Championship
Poker, Inc. ("Poker"), Strategic Gaming Consultants, LLC ("Gaming") and
Maxx Motorsports, Inc. (Maxx) and its wholly owned subsidiary, Team
Racing Auto Circuit, LLC (TRAC), collectively referred to as "the
Company" or "the Companies". All significant inter-company balances and
transactions have been eliminated in consolidation. Development of the
Company's film strip product containing electrolytes represents the
continuing operations of the Company and the primary current
development stage operation.
Maxx, through its wholly owned subsidiary, TRAC, planned to develop,
own, operate and sanction an automotive racing league (the League)
designed to provide content for television and tracks while expanding
the existing base of racing fans. Accordingly, the operations of the
Companies were presented as those of a development stage enterprise,
from its inception (May 15, 2001) as prescribed by Statement of
Financial Accounting Standards (SFAS) No. 7, "Accounting and Reporting
by Development Stage Enterprises." On August 26, 2003, the Board of
Directors of the Company unanimously approved a plan to immediately
discontinue its racing operation. Accordingly, all prior operations
from this business activity are classified as discontinued operations
in the accompanying consolidated financial statements.
Idea Sports acquired IMGI, Poker and Gaming, all of which are
non-operating development stage enterprises within the meaning of SFAS
No. 7. Accordingly, the costs associated with the new development stage
activities have a new inception date of September 9, 2004, and all
prior development stage costs associated with the discontinued
automotive racing league have been transferred to accumulated deficit.
The Company follows the AICPA SOP 98-5, "Reporting on the Costs of
Start-Up Activities" in accounting for its start-up activities.
ORGANIZATION AND NATURE OF BUSINESS
Idea Sports, a Delaware corporation, is a holding company with four
wholly owned subsidiaries.
IMGI is a concept development company that internally creates projects
in the fields of professional sports, motion pictures, publishing,
licensed merchandise and other entertainment products for distribution
into the global marketplace.
21
After an unsuccessful attempt to develop its electrolyte strip product
in a joint venture with InnoZen, Inc. ("InnoZen"), on March 31, 2006,
the Company acquired 80% of Health Strip Solutions, LLC ("Health
Strip") to complete the development of a saleable product. All funds in
the InnoZen joint venture had been expended as of December 31, 2005.
See Note 2.
On June 28, 2005, the Company acquired Poker (see Note 2). The Company
initiated sales of a proprietary fantasy football format during
September 2005 and believed it had completed the development stage on
that date. However, as a result of the late start in marketing the
program, the Company returned all fees collected and cancelled the
season. The Company re-instituted the development stage for its
businesses from the original inception date of September 9, 2004. While
the Company may elect to operate the fantasy football program for the
2006 season, the principal focus of the Company will be on development
of the electrolyte strip with Health Strip. Accordingly, the Company
impaired the goodwill associated with Poker to the $50,000 amount which
was determined to be the fair value of the investment.
The Company acquired two television programs during 2004. As of
December 31, 2005, the Company was unable to locate a venue to produce
the shows. Accordingly, the Company fully impaired its investment.
Gaming was assigned no value when acquired and is currently inactive.
Maxx, a South Carolina corporation, through its wholly owned
subsidiary, TRAC, planned to develop, own, operate, and sanction an
automotive racing league designed to provide content for television and
tracks while expanding the existing base of racing fans. This operation
was discontinued on August 26, 2003.
On November 8, 2004, the Company changed its name from Team Sports
Entertainment, Inc. ("Team Sports") to Idea Sports Entertainment Group,
Inc. On May 15, 2001, Team Sports changed its name from Logisoft Corp.
to Team Sports Entertainment, Inc.
GOING CONCERN
The Company has not established sources of revenues sufficient to fund
the development of business, projected operating expenses and
commitments for fiscal year 2006. The Company, which has been in the
development stage since its inception, May 15, 2001, has accumulated a
net loss of $15,054,021 through December 31, 2003. The Company ceased
its plans to begin a racing league and all operations have been
discontinued. This discontinued operation had a loss of $28,960 and
$671,289 during the years ended December 31, 2005 and 2004,
respectively.
Since August 26, 2003, the Company attempted to locate and negotiate
with a business entity for the merger of that target business into the
Company. As discussed above, the Company has acquired new development
stage businesses commencing on September 9, 2004. Since September 9,
2004, the Company has incurred losses in the amount of $2,222,081. A
group of the note holders have agreed to advance funds on a limited
basis to allow the Company to develop a business capable of generating
revenues sufficient to fund projected operating expenses and
commitments. However, there can be no assurance that the group of note
holders will be able to continue to provide sufficient funding to
develop the Company's current business plan.
22
In addition, current liabilities of the Company exceed its assets by
approximately $4,850,000, and $229,934 of its convertible promissory
notes payable obligations are in default. The remaining balances of the
convertible promissory notes in the total amount of $4,300,375, as
amended, are due on June 30, 2006. Pursuant to the acquisition of
Health Strip, the Company is required to convert at least $4,000,000 of
its outstanding liabilities into its common stock by May 15, 2006. It
is the Company's intention to convert substantially all of its
outstanding liabilities into common stock. However, there can be no
assurance that this will be accomplished by that date.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do
not include any adjustments that may result from the outcome of these
uncertainties.
CASH AND CASH EQUIVALENTS
The Company considers all cash on hand, cash in banks and all highly
liquid debt instruments purchased with a maturity of three months or
less to be cash and cash equivalents.
REVENUE RECOGNITION
Revenue from product sales is recognized when the related goods are
shipped and all significant obligations have been satisfied. Revenue
from services is recognized when the services are performed. No revenue
has been recognized.
STOCK OPTION PLANS
Until December 31, 2005, Idea Sports applied the intrinsic value-based
method of accounting prescribed by Accounting Principles Board Opinion
No. 25 (APB No. 25), "Accounting for Stock Issued to Employees," and
related interpretations, in accounting for its stock option plan. As
such, compensation expense would be recorded on the date of grant only
if the current market price of the underlying stock exceeded the
exercise price.
SFAS No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123),
requires the Company to disclose pro forma information regarding option
grants made to its employees. SFAS No. 123 specifies certain valuation
techniques that produce estimated compensation charges that are
included in the pro forma results below. These amounts have not been
reflected in the Company's consolidated statements of operations,
because APB No. 25 specifies that no compensation charge arises when
the price of the employees' stock options equal the market value of the
underlying stock at the grant date, as in the case of options granted
to Idea Sports employees, board of directors, advisory committee
members, and consultants.
There were no option grants to employees during the two years ended
December 31, 2005. Accordingly, pro forma disclosure is not required.
23
In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based
Payment" (SFAS 123(R)). Among other things, SFAS 123(R) requires
expensing the fair value of stock options, previously optional
accounting. For transition, upon adoption on January 1, 2006, SFAS
123(R) would require expensing any unvested options and will also
require us to change the classification of certain tax benefits from
option deductions to financing rather than operating cash flows.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because Idea Sports employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion
the existing models do not necessarily provide a reliable single
measure of the fair value of Idea Sports' options.
DEFERRED INCOME TAXES
Deferred income taxes are provided for temporary differences between
financial and tax reporting in accordance with the liability method
under the provisions of SFAS No. 109, "Accounting for Income Taxes." A
valuation allowance is recorded to reduce the carrying amounts of
deferred tax assets unless management believes it is more likely than
not that such assets will be realized.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share are calculated under the provisions of
SFAS No. 128, "Earnings per Share" ("SFAS No. 128"), which established
new standards for computing and presenting earnings per share. SFAS No.
128 requires Idea Sports to report both basic earnings per share, which
is based on the weighted-average number of common shares outstanding,
and diluted earnings per share, which is based on the weighted-average
number of common shares outstanding plus all potential dilutive shares
outstanding. At December 31, 2005 and 2004, all exercisable common
stock equivalents were antidilutive and are not included in the
earnings (loss) per share calculations. Accordingly, basic and diluted
earnings per share are the same for all periods presented.
ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on the
consolidated financial statements upon adoption.
24
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is recorded using the straight-line method
over the estimated useful lives of the respective assets (two to five
years). Maintenance and repairs are charged to operations when
incurred. Betterments and renewals are capitalized. When property and
equipment are sold or otherwise disposed of, the asset account and
related accumulated depreciation account are relieved, and any gain or
loss is included in operations.
FAIR VALUE DETERMINATION
Financial instruments consist of cash, marketable securities,
promissory notes receivable, accounts payable, accrued expenses and
short-term borrowings. The carrying amount of these financial
instruments approximates fair value due to their short-term nature or
the current rates at which the Company could borrow funds with similar
remaining maturities.
GOODWILL
The Company records goodwill and intangible assets arising from
business combinations in accordance with SFAS No. 141 "Business
Combinations" ("SFAS 141") which requires that the purchase method of
accounting be used for all business combinations initiated after June
30, 2001. SFAS 141 also specifies the criteria applicable to intangible
assets acquired in a purchase method business combination to be
recognized and reported apart from goodwill.
The Company accounts for goodwill and intangible assets in accordance
with SFAS 142. In accordance with SFAS 142, the Company no longer
amortizes goodwill. SFAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead
be tested at least annually for impairment. SFAS 142 also requires that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values,
and be reviewed for impairment. The Company recorded goodwill
impairment of $245,544 associated with its investment in Poker.
FILM AND TELEVISION COSTS
The Company defers film and television production costs, including
direct costs, production overhead, development costs and interest. The
Company does not defer costs of exploitation, which principally
comprise costs of film and television program marketing and
distribution. The Company amortizes deferred film and television
production costs, as well as associated participation and residual
costs, on an individual production basis using the ratio of the current
period's gross revenues to estimated total remaining gross revenues
from all sources and such costs are stated at the lower of amortized
cost or fair value. The Company defers the costs of acquired broadcast
material and amortizes these costs when the associated programs are
broadcast and such costs are stated at the lower of amortized cost or
net realizable value. The Company has not yet commenced amortizing its
film costs and as of December 31, 2005, the Company was unable to
locate a venue to produce its shows. Accordingly, the Company fully
impaired its investment of $65,458.
JOINT VENTURE
On April 19, 2005, the Company entered into a joint development
agreement to jointly develop a film strip product containing
electrolytes to replenish the body while under physical stress. See
Note 2. The Company contributed $115,500 in cash and 250,000 shares of
its common stock, valued at $19,191 for its 50% interest in the joint
venture. The Company does not exercise control of the joint venture.
Accordingly, the Company's interest in the joint venture is accounted
for on the equity method.
25
ADVERTISING COSTS
Idea Sports expenses advertising costs as incurred. Idea Sports
recorded advertising costs of $32,282 for the year ended December 31,
2005 and none during the year ended December 31, 2004.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
NOTE 2. ACQUISITIONS
------------
ELECTROLYTE STRIP
-----------------
On April 19, 2005, the Company entered into a joint development agreement with
InnoZen, Inc. ("InnoZen") to jointly develop a film strip product containing
electrolytes to replenish the body while under physical stress (the "electrolyte
strip"). InnoZen had experience in the formulation, development, manufacturing
and sale of edible thin strips containing drug active ingredients. The Company
has the ability to assist in obtaining endorsements for the electrolyte strips
by well-known athletes and coaches. The Company contributed $115,500 in cash and
250,000 shares of its common stock, valued at $19,191 using the Black-Scholes
valuation model, for its 50% interest in the joint venture. The Company would be
required to issue an additional 250,000 shares of its common stock upon
completion of the development of a saleable product.
As of September 30, 2005, the joint venture had completed a product formulation
of an acceptable thin film prototype containing electrolytes and had completed
laboratory stability testing for the oral dosage product. The joint venture
produced initial electrolyte strips capable of holding a deliverable load of
electrolytes equal to approximately one fluid ounce of most recognized sports
drinks. The electrolyte strips were produced for flavor testing with initial
flavors to be lemon-lime, orange and sour orange.
InnoZen has been unable to complete a saleable product and all joint venture
funds have been expended as of December 31, 2005.
On March 29, 2006, the Company entered into a Unit Purchase Agreement with the
majority of the unit holders of Health Strip Solutions, LLC, ("Health Strip"), a
Nevada limited liability corporation, to acquire 80% of Health Strip in exchange
for 100,000,000 shares of the Company's $.0001 par value common stock. The
seller has the right to rescind this transaction by May 31, 2006, if the Company
is unable to cause a minimum of $4,000,000 of its outstanding liabilities to
convert into the Company's common stock by May 15, 2006. Health Strip has use
rights to patented process technology for the formulation and for the
manufacture of a thin film electrolyte strip. In addition, Health Strip has
tentative agreements in place for the marketing and distribution of the strip.
Health Strip through its manufacturing agreement has the process technology to
manufacture thin film strips to deliver an electrolyte product.
26
IMGI
----
On September 9, 2004, the Company acquired all of the issued and outstanding
common stock of IMGI, a South Carolina corporation, in exchange for warrants to
acquire 15,000,000 shares of the Company's common stock at an exercise price of
$.10 per share. In addition, in the event IMGI generates $2,000,000 in gross
revenue within 36 months of closing, the sellers of IMGI would receive
additional warrants to acquire 15,000,000 shares of the Company's common stock
at an exercise price of $.10 and had no prior operations. Accordingly, this
transaction was valued at $1,200, which was the amount the sellers of IMGI paid
for IMGI's common stock.
POKER
-----
On June 28, 2005, the Company issued 3,850,000 shares of its common stock, which
were valued at $295,544 using the Black-Scholes valuation model, to acquire
Poker, whose principal asset is the rights to a proprietary fantasy football
format, with the working title, Vegas Roll'em(TM) Fantasy Football ("Vegas
Roll'em"). The Company recorded the investment of $295,544 as goodwill on the
books of Poker.
In January 2005, the Rules of Competition for Vegas Roll'em received a copyright
from the United States Copyright Office. This format allows live filming of the
high stakes action as it unfolds. Each player will have a roll of the dice to
determine which of his players will make up his team. According to the Fantasy
Sports Trade Association, fantasy football was played by nearly fifteen million
participants last year. This internet-based phenomenon has created a four
billion dollar industry.
The Company began its initial sales and commenced operations during the quarter
ended September 30, 2005. However, due to delays encountered in developing a
functional website which delayed the date for commencing sales, the Company
determined it would not have sufficient participants to have a viable program
during the 2005 season. Accordingly, the Company returned all fees collected and
cancelled the program. While the Company may still pursue the project for the
2006 season, its principal focus is on the agreement with Health Strip.
Accordingly, the Company elected to impair its investment in the goodwill
associated with Poker to the $50,000 amount it had determined to be the fair
value of the investment.
TELEVISION PROGRAMS
-------------------
On October 15, 2004, the Company acquired two television programs entitled
"America's Top Drivers" and "Women's Racing League" in exchange for warrants to
acquire 1,750,000 shares of the Company's common stock at an exercise price of
$.10 per share. The transaction was valued at $65,458 using the Black-Scholes
option pricing model. As of December 31, 2005, the Company was unable to locate
a venue to produce the shows. Accordingly, the Company fully impaired its
investment of $65,458.
On September 28, 2005, the Company completed the modification of its television
program purchase agreement in order to recognize the compensation element of the
agreement. The warrants to acquire 1,750,000 shares of the Company's common
stock at $.10 per share were cancelled and the Company issued 3,600,000 shares
of its common stock to the seller of the programs. The 3,600,000 shares of
common stock were valued at $251,640, utilizing the Black-Scholes valuation
model. The $251,640 was reduced by the original calculated value of the
warrants, which were cancelled, of $65,458 and a net consulting fee expense of
$186,182 was recorded.
27
GAMING
------
On October 27, 2004, the Company acquired all of the issued and outstanding
memberships of Gaming, a Nevada limited liability company, in exchange for
warrants to acquire 750,000 shares of the Company's common stock at an exercise
price of $.10 per share. In addition, in the event Gaming generates $2,000,000
in gross revenue within 36 months of closing, the sellers of Gaming would
receive additional warrants to acquire 750,000 shares of the Company's common
stock at an exercise price of $.10. Gaming had no prior operations and has no
assets. Accordingly, the transaction was recorded with no value. Gaming is not
currently active and has not had any activity since its inception.
NOTE 3. DISCONTINUED OPERATIONS
-----------------------
Maxx, a South Carolina corporation, through its wholly owned subsidiary, TRAC,
planned to develop, own, operate, and sanction an automotive racing league
designed to provide content for television and tracks while expanding the
existing base of racing fans.
The Company, which has been in the development stage since its inception, May
15, 2001, did not establish sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,054,021 from inception through December 31, 2003. Accordingly, on August 26,
2003, the Board of Directors of the Company unanimously approved a plan to
immediately discontinue its racing operation.
The Company realized losses from its discontinued operations of $28,960 and
$671,289 in 2005 and 2004, respectively. The loss in 2005 related to the legal
costs associated with settlement of litigation, net of related payables
discharged in the settlement.
28
NOTE 4. CONVERTIBLE PROMISSORY NOTES
----------------------------
Activity in convertible promissory notes for the two years ended December 31,
2005 is as follows:
Accrued
Principal Interest
Balance, January 1, 2004 $ 3,035,250 $ 185,288
Loan proceeds 236,425 --
Accrued interest -- 370,429
Interest paid with common stock -- (200,000)
----------- -----------
Balance, December 31, 2004 3,271,675 355,717
Loan proceeds 644,356 --
Accrued interest -- 400,291
Accounts payable and accrued expenses exchanged for
convertible notes 503,800 --
Accrued interest included in amended notes 590,279 (590,279)
Convertible notes retired for common stock (472,301) (97,215)
Repayment of loan (7,500) (270)
----------- -----------
Balance, December 31, 2005 $ 4,530,309 $ 68,244
=========== ===========
As of January 1, 2004, the Company had received loan proceeds in the amount of
$3,035,250, on which $185,288 in accrued interest was unpaid. These loan
proceeds had been utilized in the Company's discontinued auto racing operations.
In September 2004, to induce certain note holders to loan additional funds to
the Company, the Company issued 20,000,000 shares of its common stock in
exchange for $200,000 in accrued interest owed these note holders. The Company
received additional loans from note holders in the amount of $236,425 after the
acquisition of IMGI.
During 2005, the Company received loan proceeds of $644,356 from these note
holders and exchanged accounts payable and accrued expenses of $503,800 for
amended convertible promissory notes. In addition, $590,279 in accrued interest
was included in the principal of these amended note agreements; a $7,500 loan
was repaid in cash; and $472,301 in principal, $97,215 in accrued interest and
$47,937 in associated legal costs were repaid through issuing 36,066,570 shares
of the Company's common stock. The Company did not make the quarterly interest
payments due on September 1, 2003 and December 1, 2003, or any of the quarterly
interest payments due during 2005 or 2004. At December 31, 2005, note agreements
with a resulting principal balance of $4,300,375 were amended and are now due
June 30, 2006, including interest of 12%, payable monthly commencing on January
31, 2006. Accrued interest has not been paid. The remaining notes in the
principal amount of $229,934 are in default and the default rate of interest is
12% since the default occurred.
29
NOTE 5. INCOME TAXES
Idea Sports has not recorded a deferred tax benefit or expense for the years
ended December 31, 2005 and 2004, as all net deferred tax assets have a full
valuation allowance.
Actual income tax expense applicable to earnings before discontinued operations
and income taxes is reconciled with the "normally expected" federal income tax
as follows:
2005 2004
---- ----
"Normally expected" income tax benefit $ 648,200 $ 345,400
Increase (decrease) in taxes resulting from:
State income taxes net of federal income
tax benefit 62,900 33,500
Nondeductible meals and entertainment (1,200) (1,500)
Valuation allowance (709,900) (377,400)
--------- ---------
Actual income tax expense $ -- $ --
========= =========
The net deferred taxes at December 31, 2005, are comprised of the following:
Net operating loss carryforward $ 15,561,200
Start-up cost carryforward 827,600
Capital loss carryforward 13,800
------------
16,402,600
Valuation allowance (16,402,600)
------------
Net deferred tax asset $ -
============
Idea Sports has available unused net operating loss carryforwards and
capitalized start-up costs of $43,938,000 which will expire in various periods
from 2007 to 2025, some of which may be limited as to the amount available on an
annual basis.
NOTE 6. COMMON STOCK OPTIONS AND WARRANTS
---------------------------------
In April 2000, Idea Sports adopted its 2000 Stock Option Plan (the Plan) and the
Company's Board of Directors approved the same. Idea Sports shareholders
approved the Plan in April 2001. The Plan was established to advance the
interests of Idea Sports and its stockholders by attracting, retaining and
motivating key personnel. The Board of Directors, or a committee that it
appoints, is authorized to grant options to purchase the common stock of Idea
Sports, not to exceed an aggregate of 3,000,000 shares. The Board of Directors,
or a committee that it appoints, is also authorized to establish the exercise
price and vesting terms of individual grants under the Plan. In 2001, the Board
of Directors approved a proposal to increase the number of authorized shares
available under the Plan not to exceed an aggregate of 7,500,000 shares. In
April 2003, the Board of Directors approved a proposal to increase the number of
shares available under the Plan to 15,200,000 shares. In January 2005, the Board
of Directors approved a proposal to increase the number of shares available
under the Plan to 23,000,000. None of these proposals have been approved by the
shareholders.
30
Options granted under the Plan may be either "incentive stock options" intended
to qualify as such under the Internal Revenue Code, or "non-qualified stock
options." Idea Sports expects that most options granted pursuant to the Plan
will be subject to vesting over a three or four-year period, such as 25%
increments on each annual grant date anniversary, during which the optionee must
continue to be an employee of Idea Sports. The Board or the committee, if
applicable, may choose to impose different vesting requirements or none at all.
Options outstanding under the Plan have a maximum term of up to ten (10) years.
The Plan also provides that all options that are not vested will become vested
upon a change in control, unless the options are either assumed or substituted
with equivalent options. In addition, unvested options become vested, after a
change in control, if an optionee is subject to involuntary termination other
than for cause during that optionee's remaining vesting period after a change in
control. The Plan further provides that all options will be forfeited 90 days
after employment terminates.
A summary of stock option activity under the Plan during the years ended
December 31, 2005 and 2004 is as follows (forfeitures in 2004 are a result of
the settlement of the litigation with Miller, which did not occur until March
2005).
2005 2004
----------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
Outstanding, beginning of year 1,500,000 $ 1.00 10,900,000 $ .89
Granted -- -- -- --
Exercised -- -- -- --
Forfeited -- -- (9,400,000) .87
--------- ----------
Outstanding, end of year 1,500,000 $ 1.00 1,500,000 $ 1.00
========= ==========
Options exercisable at year end 1,500,000 $ 1.00 1,500,000 $ 1.00
Shares available for grant -- -- -- --
As of December 31, 2005 and 2004, warrants to acquire 21,500,000 shares and
18,250,000 shares, respectively, have been approved by the Board of Directors
but have not been approved by the Shareholders.
On September 9, 2004, the Company issued 15,000,000 warrants to acquire its
common stock at $.10, which expire on August 31, 2007, to acquire IMGI. See Note
2.
On October 15, 2004, the Company issued 1,750,000 warrants to acquire its common
stock at $.10, which expire on November 15, 2007, to acquire two television
programs. See Note 2. These warrants were cancelled as a part of a share
issuance for compensation during 2005.
31
On November 15, 2004, the Company issued 750,000 warrants to acquire its common
stock at $.10, which expire on November 15, 2007, to acquire Gaming. See Note 2.
On January 20, 2005, the Company issued 5,000,000 warrants to acquire its common
stock at $.10 per share, which expire on January 20, 2008, for services.
As a part of its issue of 28,977,000 shares of its common stock on May 15, 2001
for $7,244,250 in cash, Idea Sports also issued warrants to purchase 14,488,500
shares of its common stock at a purchase price of $1.00 per share. These
warrants expire three (3) years from the effective date of the Securities and
Exchange Commission registration of the 28,977,000 shares of common stock. The
Company has not completed a registration of the common stock; accordingly, the
effective date has not yet started. As a part of the Miller litigation
settlement, warrants to acquire 13,738,500 shares of our common stock were
terminated, leaving a balance of 750,000 outstanding.
NOTE 7. COMMON STOCK
------------
COMMON STOCK - The Company is authorized to issue up to 500,000,000 shares of
common stock with a par value of $.0001. At December 31, 2005, 131,517,782
shares were issued and 131,398,982 shares were outstanding. See Note 11.
PREFERRED STOCK--The Company is authorized to issue up to 2,000,000 shares of
Series A non-voting, cumulative preferred stock with a par value of $2.75. At
December 31, 2005, no preferred stock was issued or outstanding.
A 6% cumulative dividend would be payable quarterly to stockholders of record on
the last day of the month prior to the dividend date. The Series A preferred
stock has a liquidation preference over Idea Sports common stock as well as any
other classes of stock established by Idea Sports.
NOTE 8. RELATED PARTY TRANSACTIONS
--------------------------
In 2005 and 2004, the Company had various transactions with related parties,
primarily its board members and officers. The following is a summary of those
transactions:
2005 2004
---- ----
Payable to current and former officers and board members $ 291,913 $ 304,556
Consulting expenses - 107,500
Legal fees owed to a shareholder and creditor - 83,836
In addition, see Note 4 for convertible promissory notes.
32
2005 TRANSACTIONS
-----------------
In September 2005, the courts approved the settlement of the litigation with the
Company's former CEO, William G. Miller, as discussed in Note 10. As a result of
this settlement, the Company recognized a loss from discontinued operations in
2005 of $28,960, which is net of $247,055 in accrued amounts previously due
related parties which were forgiven.
The Company's CEO until June 30, 2005, received compensation of $45,000 during
2005. In addition, during 2005, Godley Morris Group LLC ("GMG"), a company 50%
owned and managed by this former CEO, received rent of $9,000 and $291,913 was
recorded in amounts due related parties for additional reimbursements claimed by
GMG.
2004 TRANSACTIONS
-----------------
On September 9, 2004, the Company issued 15,000,000 warrants to acquire its
common stock at $.10 per share for the acquisition of IMGI. The Company's former
CEO, its former Chairman of the Board of Directors and a former Advisory
Director each received 5,000,000 warrants.
Administrative expenses include payments to GMG of $40,000 for office expense
reimbursement; consulting fees to the Company's former Chairman of the Board of
Directors in the amount of $45,000; and consulting fees and payroll to the
Company's former Advisory Director in the amount of $37,500. In addition, the
Company paid GMG $9,000 for office rent.
A related party received 850,000 shares of the Company's common stock in
exchange for $22,000 which the Company owed him.
NOTE 9. CONTINGENCIES
-------------
The Company, which has been in the development stage since its inception, May
15, 2001, did not establish sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,054,021 from inception through December 31, 2003. As a result of the
continuing losses, on August 26, 2003, the Board of Directors of the Company
unanimously approved a plan to immediately discontinue its racing operation.
This discontinued operation had a loss of $28,960 and $671,289 during the years
ended December 31, 2005 and 2004, respectively. While the Company does not
expect any additional liability, the Company had agreements in place for racing
car design and construction, team sales brokerage and broadcasting which have
not been formally terminated.
NOTE 10. LEGAL MATTERS
-------------
On February 18, 2004, four Georgia shareholders filed suit in the Superior Court
of Fulton County against the Company's former CEO, William G. Miller of
Alpharetta, Georgia. The suit alleged breach of contract, wrongful conversion of
company monies, mismanagement, breach of fiduciary duty and fraud on the part of
the defendants while serving the Company in 2001 and 2002. The suit contended
Idea Sport's shareholders suffered market losses in excess of $50 million. Also
named in the action was Jon Pritchett, who was president of the Company while
Miller was CEO.
33
On May 3, 2004, Miller, Pritchett and three other individuals filed several
derivative and individual claims against the Company, its Directors and certain
of its shareholders in the Court of Chancery of the State of Delaware in and for
New Castle County, C.A. No. 413-N. The Company filed a counterclaim against
Miller and Pritchett on November 24, 2004.
On March 15, 2005, all parties to the litigation agreed to dismiss with
prejudice all claims and counterclaims. The final settlement was approved by the
court in Georgia on September 20, 2005, and by the court in Delaware on
September 21, 2005.
NOTE 11. SUBSEQUENT EVENTS
-----------------
On March 29, 2006, the Company entered into a Unit Purchase Agreement with the
majority of the unit holders of Health Strip to acquire 80% of Health Strip in
exchange for 100,000,000 shares of the Company's $.0001 par value common stock.
The seller has the right to rescind this transaction by May 31, 2006, if the
Company is unable to cause a minimum of $4,000,000 of its outstanding
liabilities to convert into the Company's common stock by May 15, 2006. Health
Strip has use rights to patented process technology for the formulation and for
the manufacture of the thin film electrolyte strip. In addition, Health Strip
has tentative agreements in place for the marketing and distribution of the
strip. Health Strip has the process technology and has a manufacturing agreement
with one of the four companies using patented technology to manufacture thin
film strips to deliver the Company's electrolyte product.
On April 24, 2006, the Company filed a Definitive Information Statement pursuant
to Section 14C which provided that effective May 15, 2006; 1) the name of the
Company would be changed to Healthsport, Inc.; 2) the Company's issued and
outstanding shares would be reverse-split one share for each 200 shares; and 3)
the Company's Certificate of Incorporation would be restated to reflect these
amendments. These amendments were approved by the Company's Board of Directors
and in writing by 52.33% of the Company's shareholders on March 31, 2006.
34
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 22, 2005, the Company dismissed its former principal accountant, Guest
& Company, P.C., ("Guest") Certified Public Accountants, of Tulsa, Oklahoma and
engaged Creason & Associates, P.L.L.C., ("Creason") Certified Public
Accountants, of Tulsa, Oklahoma, as its principal accountants. The decision to
change accountants was approved by the Board of Directors of the Company and was
required due to the purchase of Guest by Creason.
During the fiscal year ended December 31, 2003 and the subsequent interim
periods, there were no disagreements with the former accountant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
the former accountant would have caused him to make reference in connection with
his report to the subject matter of the disagreement, and Guest & Company, P.C.
has not advised the Company of any reportable events as defined in paragraph (A)
through (D) of Regulation S-K Item 304(a)(1)(v).
Guest's audit report for the fiscal year ended December 31, 2003, and Note 1 to
the corresponding financial statements, contained a modification regarding the
Company's ability to continue as a going concern due to the Company not having
commenced operations and its total liabilities and commitments exceeded current
assets available to fund operations and such audit report stated these factors
raised "substantial doubt" about the Company's ability to continue as a going
concern. The audited financial statements of the Company for the fiscal year
ended December 31, 2003, did not include any adjustments in respect of the going
concern modification. Other than the going concern modification, the audit
report of Guest on the financial statements of the Company for the fiscal year
ended December 31, 2003, and any subsequent interim period, did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principles.
During the year ended December 31, 2003, and through March 22, 2005, the Company
did not consult with Creason regarding any of the matters or events set forth in
Item 304(a)(2)(i) and (ii) of Regulation S-K.
ITEM 8A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports that are filed or submitted under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in the
reports that are filed under the Exchange Act is accumulated and communicated to
management, including the principal executive officer, as appropriate to allow
timely decisions regarding required disclosure. Under the supervision of and
35
with the participation of management, including the principal executive officer,
the Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as of December 31, 2005, and, based on its
evaluation, our principal executive officer has concluded that these controls
and procedures are effective. The Company discontinued its racing operations in
August 2003 and subsequently retained a third-party consultant to assist in
determining required disclosures. The Company was delayed in completing its
required filing of Form 10-KSB due to the resignation of its Chief Executive
Officer on March 30, 2006.
(b) Changes in Internal Controls
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation described above, including any corrective actions with regard to
significant deficiencies and material weaknesses.
ITEM 8B. OTHER INFORMATION
Pursuant to General Instruction B of Form 8-K, any reports previously or in the
future submitted under Item 2.02 (Results of Operations and Financial Condition)
are not deemed to be "filed" for the purpose of Section 18 of the Securities
Exchange Act of 1934 and the Company is not subject to the liabilities of that
section, unless the Company specifically states that the information is to be
considered "filed" under the Exchange Act or incorporates it by reference into a
filing under the Securities Act or Exchange Act. If a report on Form 8-K
contains disclosures under Item 2.02, whether or not the report contains
disclosures regarding other items, all exhibits to such report relating to Item
2.02 will be deemed furnished, and not filed, unless the registrant specifies,
under Item 9.01 (Financial Statements and Exhibits), which exhibits, or portions
of exhibits, are intended to be deemed filed rather than furnished pursuant to
this instruction. The Company is not incorporating, and will not incorporate, by
reference these reports into a filing under the Securities Act of 1933, as
amended, or the Exchange Act of 1934, as amended.
36
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following section sets forth the names, ages and current positions with the
Company held by the Directors, Executive Officers and Significant Employees;
together with the year such positions were assumed. There is no immediate family
relationship between or among any of the Directors, Executive Officers or
Significant Employees, and the Company is not aware of any arrangement or
understanding between any Director or Executive Officer and any other person
pursuant to which he was elected to his current position. Each Executive Officer
will serve until he or she resigns or is removed or otherwise disqualified to
serve, or until his or her successor is elected and qualified.
Each Director will serve until he or she resigns or is removed or otherwise
disqualified to serve or until his or her successor is elected. The Company
currently has one Director. The Board of Directors does not expect to appoint
additional Directors until a potential acquisition is identified.
DATE FIRST
NAME AGE POSITION ELECTED/APPOINTED
---- --- -------- -----------------
Terry Washburn 52 Director, May 2001 - Director
CEO and March 2006 - CEO
President
Ross Silvey 78 Director, March 2006 - Director
Chairman of
Audit Committee
Jason Freeman 30 Director March 2006 - Director
Charles W. Clark 56 CEO and July 2005 until
President March 2006
Until March 2006
TERRY WASHBURN, Director since May 2001, Chief Executive Officer from April 2001
to August 2001 and since March 30, 2006. Dr. Washburn is the President of
Eurovest, Inc., a private venture capital firm, which specializes in private
placement of capital as well as providing consulting services in strategic
planning, business development and organizational management. Dr. Washburn
earned a Bachelor of Business Administration from the University of Oklahoma, a
Master of Divinity from the Southwestern Baptist Theological Seminary in Ft.
Worth, Texas and a Doctor of Ministry from the Fuller Theological Seminary in
Pasadena, California.
ROSS SILVEY, was appointed as an outside Director of the Company on March 25,
2006. Mr. Silvey has owned and operated franchised automobile businesses,
finance companies and insurance companies for over thirty years. Mr. Silvey has
taught as an adjunct or full-time professor most of the courses in the upper
division and MBA programs at Tulsa University, Oral Roberts University, Langston
37
University and Southern Nazarene University. His formal education is an MBA from
the Harvard Business School. He has also been awarded the Ph.D. degree from the
Walden Institute of Advance Studies. Mr. Silvey serves as an outside Director
and Chairman of the Audit Committee for Global Beverage Solutions, Inc.
Additionally, Mr. Silvey is also Chairman of our Audit Committee.
JASON FREEMAN, was appointed as an outside Director of the Company on March 25,
2006. Mr. Freeman is the owner and president of Routh Stock Transfer, Inc. Mr.
Freeman has been instrumental in assisting with investor relations development,
business plan/marketing plan development, and strategic business planning for
private and public companies. He also has 7 years experience with marketing and
management in the retail industry. Mr. Freeman has also consulted with various
companies, both public and private, on ways to be more efficient in their use of
capital and manpower, assisting management and sales staff in mapping out plans
and strategies for companies to reach specific goals and thresholds. Mr. Freeman
graduated from Texas A&M University at Commerce in 1998 and is president and a
director of Sagauro Holdings, Inc. and a director of Interim Capital
Corporation.
CHARLES W. CLARK was appointed Chief Executive Officer of the Company effective
July 1, 2005, and resigned on March 30, 2006. Mr. Clark owns and manages Exit 98
Properties whose holdings include several lodging facilities, Santee National
Golf Club, and various other real estate properties. Mr. Clark created and
operates Golf Santee, LLC, which in ten years became the largest golf packager
in South Carolina outside the Myrtle Beach area. Mr. Clark is a director of
South Carolina Bank and Trust, the third largest bank in South Carolina.
AUDIT COMMITTEE
The Board of Directors had determined that Terry Washburn met the requirements
of a financial expert and served as Chairman of the Audit Committee until his
appointment as CEO on March 30, 2006. Ross Silvey was appointed to the Board of
Directors on March 25, 2006, and became Chairman of the Audit Committee on March
30, 2006. Mr. Silvey is independent as specified in Item 7(d)(3)(iv) of Schedule
14A under the Exchange Act.
The small business issuer has a separately designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Exchange Act, which
was made up of Mr. Washburn until March 30, 2006, and by Mr. Silvey since March
30, 2006.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers, directors and persons who own more than ten
percent of the Company's common stock to file initial reports of ownership and
changes in ownership with the SEC. Additionally, SEC regulations require that
the Company identify any individuals for whom one of the referenced reports was
not filed on a timely basis during the most recent fiscal year or prior fiscal
years. To the Company's knowledge, based solely on a review of reports furnished
to it, Mr. Clark and Mr. Washburn did not timely file their required Form 5 for
fiscal 2005.
38
CODE OF ETHICS
The Company had intended to adopt a code of ethics to apply to its principal
executive officer, principal financial officer, principal accounting officer and
controller, or persons performing similar functions; however, the Company
discontinued its race operations in August 2003 and has determined it should
wait until it made an acquisition before adopting a code of ethics. The Company
has completed a number of acquisitions since September 2004, and expects to
include the adoption of a code of ethics on its agenda during 2006.
ITEM 10. EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors deliberates executive
compensation matters to the extent they are not delegated to the Chief Executive
Officer.
SUMMARY COMPENSATION TABLE
The following table shows the compensation of the Company's Chief Executive
Officer and each executive officer whose total cash compensation exceeded
$100,000 for the three years ended December 31, 2005.
ANNUAL COMPENSATION
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ---- ------ ----- ------------
Terry Washburn (CEO since 2005 N/A N/A N/A
March 30, 2006) 2004 N/A N/A N/A
2003 N/A N/A N/A
Charles W. Clark (CEO from 2005 $ - $ - $ -
July 2005 until March 30, 2006) 2004 N/A N/A N/A
2003 N/A N/A N/A
William C. Morris (CEO from 2005 $ 45,000 $ - $ 291,913
August 2004 until June 2005)(1) 2004 $ 45,000 $ - $ 49,000
2003 N/A N/A N/A
Terry Hanson (CEO from 2005 N/A N/A N/A
September 2003 until August 2004 $ 24,000 - -
2004) COO and President from 2003 $ 127,500 - -
August 2002 until August 2004)
Charles Bradshaw (CEO from 2005 N/A N/A N/A
August 2002 through August 2004 N/A N/A N/A
2003) 2003 $ - - -
39
(1) In 2005, GMG claimed reimbursement for expenses in the amount of $291,913,
which is included in amounts due related parties at December 31, 2005. In 2004,
GMG was paid $15,000 for reimbursement of office expenses and $9,000 for office
rent. In addition, $25,000 for additional office expense reimbursement is
included in accounts payable at December 31, 2004.
LONG TERM COMPENSATION AWARDS
None
OPTION/SAR GRANTS IN LAST FISCAL YEAR
During the year ended December 31, 2005, the Company did not have any option/SAR
grants.
The Company does not have a long term incentive plan.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the Money
Shares Options/SARs at Options/SARs at
Acquired FY-End (#) FY-End ($)
On Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
Terry Washburn - $ - - $ -
Charles W. Clark - $ - - $ -
William C. Morris - $ - 5,000,000 $ -
Terry Hanson - $ - - $ -
Charles Bradshaw - $ - - $ -
DIRECTOR COMPENSATION
Directors do not currently receive compensation for the meetings they attend. It
is anticipated that Directors will receive some form of compensation when the
Company becomes better funded.
EMPLOYMENT AGREEMENTS
None.
REPRICING OPTIONS
The Company did not adjust or amend the exercise price of stock options or SAR's
previously awarded during the year ended December 31, 2005.
40
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table indicates all persons who, as of March 31, 2006, the most
recent practicable date, are known by the Company to own beneficially more than
5% of any class of the Company's outstanding voting securities. As of March 31,
2006, there were 231,398,982 shares of the Company's common stock outstanding.
Except as otherwise indicated below, to the best of the Company's knowledge,
each person named in the table has sole voting and investment power with respect
to the securities beneficially owned by them as set forth opposite their name.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
NAME AND ADDRESS OF AMOUNT AND NATURE OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNER % OF CLASS
-------------- ---------------- ---------------- ----------
Common David Roberts 100,000,000 43.22%
124 Duck Pond Road
Columbia, SC 29223
SECURITY OWNERSHIP OF MANAGEMENT
The following table indicates the beneficial ownership of the Company's voting
securities of all Directors of the Company and all Executive Officers who are
not Directors of the Company, and all officers and directors as a group, as of
March 31, 2006, the most recent practicable date. As of March 31, 2006, there
were 231,398,982 shares of the Company's common stock outstanding. Except as
otherwise indicated below, to the best of the Company's knowledge, each person
named in the table has sole voting and investment power with respect to the
securities beneficially owned by them as set forth opposite their name. All
options are currently exercisable, unless otherwise indicated.
NAME AND ADDRESS OF AMOUNT AND NATURE OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNER % OF CLASS
-------------- ---------------- ---------------- ----------
Common Terry Washburn - -
3407 Langley Hill
Colleyville, Texas 76034
Common Charles W. Clark 3,060,000 1.3%
P.O. Box 26
Santee, SC 29142
Common Ross Silvey - -
11005 Anderson Mill Road
Austin, Texas
Common Jason Freeman - -
5700 W. Plano Pkwy, Ste 1000
Plano, Texas 75093
Common All officers and directors as a 3,060,000 1.3%
Group (4 persons)
41
EQUITY COMPENSATION PLAN INFORMATION
This table provides certain information as of December 31, 2005, with respect to
our equity compensation plan:
NUMBER OF
SECURITIES
AWARDED PLUS
NUMBER OF
SECURITIES
TO BE ISSUED NUMBER OF
UPON EXERCISE SECURITIES
NUMBER OF OF OPTIONS, TO BE ISSUED NUMBER OF
SECURITIES WARRANTS OR UPON EXERCISE SECURITIES
AUTHORIZED RIGHTS OF OUTSTANDING REMAINING
FOR ISSUANCE GRANTED OPTIONS, AVAILABLE
UNDER THE DURING LAST WARRANTS OR FOR FUTURE
NAME OF PLAN PLAN FISCAL YEAR RIGHTS ISSUANCE
------------ ---- ----------- ------ --------
Logisoft Corp. 2000
Stock Option Plan 3,000,000 - 1,500,000 1,500,000
Amendments to Logisoft
Corp. 2000 Stock Option
Plan (1) 20,000,000 - - -
---------- --------- --------- ---------
23,000,000 - 1,500,000 1,500,000
========== ========= ========= =========
(1) The Board of Directors has approved the increase from 3,000,000 shares to
23,000,000 shares authorized for issuance by the Plan.
The amendments to the Logisoft Corp. 2000 Stock Option Plan have not been
approved by the shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
2005 TRANSACTIONS
-----------------
In September 2005, the courts approved the settlement of the litigation with the
Company's former CEO, William G. Miller, as discussed in note 10. As a result of
this settlement, the Company recognized a loss from discontinued operations in
2005 of $28,960, which is net of $247,055 in accrued amounts previously due
related parties which were forgiven.
42
The Company's CEO until June 30, 2005, received compensation of $45,000 during
2005. In addition, during 2005, Godley Morris Group LLC ("GMG"), a company 50%
owned and managed by this former CEO, received rent of $9,000 and $291,913 was
recorded in amounts due related parties for additional reimbursements claimed by
GMG.
2004 TRANSACTIONS
-----------------
On September 9, 2004, the Company issued 15,000,000 warrants to acquire its
common stock at $.10 per share to acquire IMGI. The Company's current CEO, its
former Chairman of the Board of Directors and a former Advisory Director each
received 5,000,000 warrants.
Administrative expenses include payments to Godley Morris Group LLC, an
affiliate of the CEO, of $40,000 for office expense reimbursement; consulting
fees to the Company's former Chairman of the Board of Directors in the amount of
$45,000; and consulting fees and payroll to the Company's former Advisory
Director in the amount of $37,500. In addition, the Company paid Godley Morris
Group LLC $9,000 for office rent.
A related party received 850,000 shares of the Company's common stock in
exchange for $22,000 which the Company owed him.
ITEM 13. EXHIBITS
See Exhibit Index on Page 45.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees - The aggregate fees billed as of April 30, 2006 for professional
services rendered by the Company's accountant was $17,326 for the audit of the
Company's annual financial statements for the fiscal year ended December 31,
2005, including quarterly reviews. The Company's accountant billed $17,000 for
the audit of fiscal 2004 and review of Forms 10-QSB for fiscal 2004.
Audit-Related Fees - None.
Tax Fees - None for 2005 or 2004.
All Other Fees - Other than the services described above, no other fees were
billed for services rendered by the principal accountant during fiscal 2005 or
fiscal 2004.
Audit Committee Policies and Procedures - Not applicable.
If greater than 50 percent, disclose the percentage of hours expended on the
principal accountant's engagement to audit the registrant's financial statements
for the most recent fiscal year that were attributed to work performed by
persons other than the principal accountant's full-time, permanent employees -
Not applicable.
43
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IDEA SPORTS ENTERTAINMENT GROUP, INC.
May 10, 2006 /s/ Terry Washburn
---------------------------------------
Terry Washburn, President and CEO
(equivalent of Chief Financial Officer)
In accordance with 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.
May 10, 2006 /s/ Terry Washburn
---------------------------------------
Terry Washburn, Director, President and
CEO
May 10, 2006 /s/ Ross Silvey
---------------------------------------
Ross Silvey, Director
May 10, 2006 /s/ Jason Freeman
---------------------------------------
Jason Freeman, Director
44
EXHIBITS HAVE BEEN OMITTED FROM THIS COPY. COPIES OF EXHIBITS MAY BE OBTAINED
FROM IDEA SPORTS ENTERTAINMENT GROUP, INC. (THE "COMPANY") UPON REQUEST AND
PAYMENT OF THE COMPANY'S COSTS IN FURNISHING SUCH COPIES. COPIES MAY ALSO BE
OBTAINED FROM THE SECURITIES AND EXCHANGE COMMISSION FOR A SLIGHT CHARGE. (The
foregoing is not applicable to the original(s) hereof.)
EXHIBIT INDEX
Securities and
Exchange
Commission Page
Exhibit No. Type of Exhibit Number
2 Plan of acquisition, reorganization, arrangement, N/A
liquidation, or succession
3(i) Articles of incorporation N/A
3(ii) By-laws N/A
4 Instruments defining the rights of holders, incl. Indentures N/A
9 Voting trust agreement N/A
10 Material contracts N/A
11 Statement re: computation of per share earnings Item 7
16 Letter on change in certifying accountant N/A
18 Letter on change in accounting principles N/A
21 Subsidiaries of the Registrant Item 1
22 Published report regarding matters submitted to vote N/A
23 Consent of experts and counsel N/A
24 Power of Attorney N/A
31 Certification pursuant to 18 U.S.C. Section 1350
Section 302 of the Sarbanes-Oxley Act of 2002 46
32 Certification pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002 47
45