SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-25521
INC.UBATOR CAPITAL, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 88-0407731
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9777 Wilshire Boulevard, Suite 718, Beverly Hills, CA 90212
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(310) 205-6080
----------------------------------------------------
(Registrant's telephone number, including area code)
Former name, former address and former fiscal year,
if changed since last report: N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
---- -----
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of November 17, 2000, the
issuer had 19,355,000 shares of common stock, $0.001 per value, issued and
outstanding.
Transitional Small Business Disclosure Format Yes No X
---- -----
1
<PAGE>
INC.UBATOR CAPITAL, INC. AND SUBSIDIARIES
FORM 10-QSB
SEPTEMBER 30, 2000
INDEX
Page No
PART I Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statement of Cash Flows................................3
Consolidated Statement of Stockholders' Equity.....................4
Consolidated Balance Sheet..........................................5
Consolidated Statement of Operations................................6
Notes to Consolidated Financial Statements.........................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations or Plan of Operation....................14
PART II Other Information
Item 1: Legal Proceedings..................................................20
Item 2: Changes in Securities..............................................20
Item 3: Defaults Upon Senior Securities....................................20
Item 4: Submission of Matters to a Vote of Security Holders................20
Item 5: Other Information..................................................20
Item 6: Exhibits and Reports on Form 8-K...................................20
2
<PAGE>
PART I. FINANCIAL INFORMATION
Inc.Ubator Capital, Inc.
(Formerly Shanecy, Inc.)
(A Development Stage Enterprise)
INC.UBATOR CAPITAL, INC.
(Formerly Shanecy, Inc.)
(A Development Stage Enterprise)
Consolidated Statement of Cash Flows
(Unaudited)
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Period from
incorporation on Six months Six months
May 31, ended ended
1994 to Sept. 30, Sept. 30,
Sept. 30, 2000 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,835,734) $ (1,769,880) $ (90)
Items not involving cash:
Common shares issued for services 182,700 - -
Payment of expense for stock options 150,000 - -
Equity losses 498,359 498,359 -
Changes in non-cash operating working capital:
Decrease (increase) in prepaids (25,800) 12,112 -
Decrease (increase) in interest receivable (44,064) (44,064) -
Decrease in refundable deposits - 150,000 -
Increase in accounts payable and
accrued liabilities 1,202,636 746,856 -
-------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (871,903) (406,616) (90)
Cash flows from investing activities:
Notes receivable (3,695,000) (3,695,000) -
Investment in eCard Solutions, Inc. (250,000) - -
Distributions from Eikos Acquisition Limited 425,700 277,200 -
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities (3,519,300) (3,417,800) -
Cash flows from financing activities:
Notes payable 326,570 (63,430) -
Issuance of common shares 28,700 -
Issuance of preferred shares 1,500,000 1,500,000
Note payable, Starfish Group, LLC 2,559,765 2,559,765 -
Advances from related parties, net (23,832) (182,613) -
-------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities 4,391,203 3,813,722 -
-----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in cash - (10,694) (90)
Cash, beginning of period - 10,694 122
-----------------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ - $ 0 $ 32
===================================================================================================================================
</TABLE>
3
<PAGE>
INC.UBATOR CAPITAL, INC.
(Formerly Shanecy, Inc.)
(A Development Stage Enterprise)
Consolidated Statement of Stockholders' Equity
(Unaudited)
(Expressed in U.S. Dollars)
Period from incorporation on May 31, 1994 to September 30, 2000
<TABLE>
<CAPTION>
Common Common
shares to be shares to be Additional
Common Par Preferred Par authorized authorized paid-in Accumulated
shares value shares value and issued and issued capital deficit
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 14, 1994
Shares issued 100,000 $ 1 $ - $ - $ - $ - $ 99 $ -
------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1995 100,000 1 - - 99 -
July 31, 1995
Shares issued 37,000 - - - - 3,700 -
Net loss, year ended March 31, 1996 - - - - - - - (100)
------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 137,000 1 - - - - 3,799 (100)
Net loss, year ended March 31, 1997 - - - - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 137,000 1 - - - - 3,799 (100)
December 2, 1997
Acquisition of equity of
Thesseus in Eikos - - - - 7,177,500 - - -
February 28, 1998
Shares issued for services 100,000 1 - - - - 99 -
February 28, 1998
Forward share split 45:1 10,428,000 105 - - - - (105) -
Net loss, year ended March 31, 1998 - - - - - - - (100)
------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 10,665,000 107 - - 7,177,500 - 3,793 (200)
September 30, 1998
Eikos distributions - - - - (370,462) - - -
October 7, 1998
Change par value from $0.00001 to
$0.001 - 10,558 - - - - (3,793) (6,765)
Net loss, year ended March 31, 1999 - - - - - - - (3,578)
------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 10,665,000 10,665 - - 6,807,038 - - (10,543)
September 14, 1999
Cancellation of shares (9,000,000) (9,000) - - - - 9,000 -
September 16, 1999
Forward share split 2:1 1,665,000 1,665 - - - - - (1,665)
September 28, 1999
Forward share split 1.5:1 1,665,000 1,665 - - - - - (1,665)
November 10, 1999
Eikos distributions - - - - (214,544) - - -
November 11, 1999
Shares issued on acquisition of
CASA@Home, Inc. and Eikos
Acquisition Limited 3,500,000 3,500 - - 6,592,494 - - -
December 17, 1999
Shares issued - 50,000 for cash,
200,000 for services 250,000 250 - - - - 124,750 -
December 30, 1999
Share dividend 8,745,000 8,745 - - - - - (8,745)
January 10, 2000
Shares issued for services 40,000 40 - - - - 19,960 -
January 18, 2000
Acquisition of investments in eCard
Solutions, Inc. (formerly Brunswick
Capital Partners, Inc.) and InfoBase
Direct Marketing Services, Inc.
(2,000,000 shares) - - - - - 2,000 6,642,787 -
January 24, 2000
Payment for share options - - - - - - 150,000 -
February 14, 2000
Shares issued for services 125,000 125 - - - - 62,375 -
Net loss, year ended
March 31, 2000 - - - - - - - (1,062,077)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 17,655,000 17,655 - - 6,592,494 2,000 7,008,872 (1,084,695)
Shares issued to Thesseus International
Asset Fund for Eikos Acquisition,
eCard and InfoBase 2,000,000 2,000 8,500,000 8,500 (6,592,494) (2,000) 6,583,994 -
July 6th, 2000
Shareholder loan converted to
B preferred stock 1,000,000 1,000 999,000
September 22, 2000
Issued Series D preferred stock 1,300 1 500,299
Retired common stock (300,000) (300)
Net loss, six months ended
September 30, 2000 - - - - - - - (1,769,880)
------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 19,355,000 19,355 9,501,300 9,501 - - 15,092,165 (2,854,575)
====================================================================================================================================
</TABLE>
4
<PAGE>
INC.UBATOR CAPITAL, INC.
(Formerly Shanecy, Inc.)
(A Development Stage Enterprise)
Consolidated Balance Sheet
(Unaudited)
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
September 30 March 31
2000 2000
-----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ - $ 10,694
Interest Receivable 44,064 -
Receivable from related parties 163,360 24,540
Refundable deposits - 150,000
Prepaids 25,800 37,912
-------------------------------------------------------------------------------------------------------------------------
233,224 223,146
Note receivable, ThemeWare 3,695,000 -
Investments 13,314,722 14,090,281
Intellectual capital 2,000 2,000
-----------------------------------------------------------------------------------------------------------------------------
$ 17,244,946 $ 14,315,427
-----------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 1,202,636 $ 455,779
Payable to related parties 139,530 183,322
Note payable to eCard Solutions, Inc. 750,000 750,000
Note payable, Starfish Group, LLC 2,559,765 -
Notes payable 326,570 390,000
-------------------------------------------------------------------------------------------------------------------------
4,978,500 1,779,102
Stockholders' equity:
Share capital:
Authorized:
150,000,000 common shares with par value of $0.001
25,000,000 preferred shares with par value of $0.001
Issued and fully paid:
8,500,000 (March 31 - nil) Series A, non-redeemable,
voting, convertible preferred shares 8,500 -
1,000,000 (March 31 -nil) Series B, non-redeemable,
non-voting, 8% cumulative
convertible preferred shares 1,000 -
1,300 (March 31 -nil) Series D, redeemable, non-
voting, convertible preferred shares 1 -
------------------------------------------
9,501 -
19,355,000 (March 31 - 17,665,000) common shares 19,355 17,655
Common shares to be authorized and issued - 2,000
Preferred shares to be authorized and issued - 6,592,494
Additional paid-in capital 15,092,165 7,008,872
Deficit accumulated during the development stage (2,854,575) (1,084,695)
------------------------------------------------------------------------------------------------------------------
12,266,446 12,536,326
$ 17,244,946 $ 14,315,427
=========================================
</TABLE>
5
<PAGE>
INC.UBATOR CAPITAL, INC.
(Formerly Shanecy, Inc.)
(A Development Stage Enterprise)
Consolidated Statements of Operations
(Unaudited)
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
Period from
incorporation on Six months Six months Three months Three months
May 31, ended ended ended ended
1994 to Sept. 30 Sept. 30 Sept. 30 Sept. 30
Sept. 30, 2000 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Interest $ 46,052 $ 45,472 $ - $ 44,166 $ -
Foreign exchange 2,550 2,550 - 1,056 -
-------------------------------------------------------------------------------------------------------------------------
48,602 48,022 - 45,222 -
Expenses:
Accounting and audit 134,000 61,500 - 27,500 -
Administration fees to
Thesseus Services Inc. 190,765 120,000 - 60,000 -
Consulting 774,903 340,565 - 187,000 -
Credit card fees and expenses 45,055 15,611 - - -
Equipment leasing 3,356 3,356 - 2,524 -
Interest 56,596 56,596 - 49,082 -
Legal 830,824 465,936 - 282,741 -
Marketing 59,361 50,727 - 39,657 -
Miscellaneous 16,478 8,898 90 3,249 60
Payroll 137,305 99,320 - 48,991 -
Printing 36,018 17,186 - 13,170 -
Regulatory filings 11,859 8,293 - 3,053 -
Rent 48,231 48,231 - 29,736 -
Stock transfer fees 6,470 804 - 804 -
Telephone 14,978 10,908 - 4,262 -
Travel 19,779 11,612 - 1,440 -
-------------------------------------------------------------------------------------------------------------------------
2,385,978 1,319,543 90 753,211 60
---------------------------------------------------------------------------------------------------------------------------------
Net loss before equity losses 2,337,376 1,271,521 90 707,989 60
Equity losses 498,359 498,359 - 249,560 -
---------------------------------------------------------------------------------------------------------------------------------
Net loss $ 2,835,735 $ 1,769,880 $ 90 $ 957,549 $ 60
=================================================================================================================================
Basic loss per share $ 0.30 $ 0.09 $ 0.00 $ 0.05 $0.00
=========================================================================================================================
</TABLE>
6
<PAGE>
1. Significant accounting policies:
(a) Basis of presentation:
These consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United
States for interim financial statements. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for a complete set of financial
statements. The results of operations for the interim periods presented
are not necessarily indicative of the results that will be realized for
the complete fiscal year. These financial statements should be read in
conjunction with the audited consolidated financial statements and
notes thereto for the fiscal year ended March 31, 2000 filed under
cover of the Company's annual report on Form 10-KSB.
(b) Unaudited interim financial information:
The interim financial information as at September 30, 2000 and for each
of the six month and three month periods ended September 30, 2000 and
1999 is unaudited; however, such financial information reflects all
adjustments, consisting solely of normal recurring adjustments, that
are, in the opinion of management, necessary for a fair presentation of
the results for the periods presented.
(c) Going-concern assumption:
These financial statements have been prepared in accordance with
generally accepted accounting principles in the United States that are
applicable to a going concern, which assume that the Company will
continue its operations and be able to satisfy its obligations as they
come due through the next year. As at September 30, 2000, the Company
has a working capital deficiency of $4,745,276, incurred a loss during
the six months then ended of $1,769,880, including a loss of $957,549
in the second quarter, and has not generated a profit since
incorporation. Future operations of the Company depend upon the
continued financial support of stockholders and common controlled
companies. Management is of the opinion that the going concern
assumption is appropriate, and is currently evaluating different
alternatives to increase the Company's capital.
7
<PAGE>
1. Significant accounting policies (continued):
(d) Earnings (loss) per share:
Basic per share amounts are calculated based on the weighted average
number of shares outstanding, and give retroactive effect to the stock
splits, stock dividend and share cancellation as if they had happened
at the beginning of the periods presented. Net earnings (loss) per
share is computed using the weighted average number of common shares
outstanding during each period, as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Six months ended September 30 19,640,246 1,828,770
Three months ended September 30 19,625,652 1,990,761
From incorporation on May 31, 1994 to September 30 9,489,248 N/A
</TABLE>
Fully diluted earnings (loss) per share has not been disclosed as the
effect of the exercise of options, warrants and the conversion of
convertible preferred shares would be anti-dilutive.
(e)Comparative figures:
Certain of the comparative figures have been reclassified to conform
with the presentation adopted in the current period.
2. Note receivable, Themeware:
On May 22, 2000, the Company entered into a term sheet to acquire all of
the outstanding capital stock of ThemeWare Corporation ("ThemWare") in
exchange for $135.0 million of the Company's common stock and a commitment
to invest a total of $5.0 million in ThemeWare, of which $1.0 million was
invested upon signing the term sheet on June 2, 2000. A further $1.0
million was to be invested on the signing of definitive agreements, which
was to take place in August, 2000, and $1.0 million is to be invested upon
the Securities and Exchange Commission's declaration that the registration
statement on Form S-4 concerning this transaction is effective. The final
$2.0 million is to be invested within twelve months of the closing of the
transaction
On August 25, 2000, the definitive agreements were signed. Subsequently,
the date for the investment payment that was due on signing was modified by
letter agreement and $1.5 million was advanced in accordance with the
modification. As at September 30, 2000, the Company has advanced a total of
$3.695 million. In return, ThemeWare executed a promissory note in favour
of the Company. The note bears interest at 8%, with both principal and
interest payable on demand. As the note is to be converted to equity on
closing of the acquisition, it has been classified as a long-term asset in
the accompanying consolidated balance sheet.
In accordance with the definitive agreements, both ThemeWare and the
Company continue to work toward a timely consummation of the acquisition,
but there is no assurance that the acquisition will be consummated.
Related to this proposed transaction, the Company signed a financing
commitment effective June 27, 2000 with GrayBox, LLC, who agreed, subject
to certain conditions, to invest $5 million in the Company to facilitate
completion of the ThemeWare acquistion. A principal condition of that
financing commitment was that the ThemeWare acquisition be closed by
October 6, 2000, which has not happened. Accordingly that financing
commitment expired.
8
<PAGE>
3. Convertible secured promissory note payable, Starfish Group, LLC:
During, the second quarter the Company received advances from the Starfish
Group, LLC totaling $2,559,765 The principal balance, together with
interest at 10% per annum, is repayable in full on December 31, 2000. One
of the principals of Starfish is a director of Inc.ubator and the other is
the CEO of Themeware. While this note is outstanding, the Company is
restricted from obtaining any debt, equity or other financing unless it is
applied to the repayment of this note. As security for this note, the
Company has granted the lender a security interest in certain of the
Company's existing assets as well as in any stock, debt or equity interest
in any other corporation. For a period of one year from the date of an
event of default (as defined), the lender will have the right to convert
amounts owing under the note into the most senior class of Preferred Stock
of the Company that is convertible into common stock of the Company, as
determined by the sole discretion of the lender, which common stock must
then be registered pursuant to the Securities Act of 1933 within 90 days of
the conversion. Upon default, for each $1 million, and on a pro-rata basis
for any amount less than $1 million, the lender would be entitled to common
stock equal to 5% of the Company's issued common stock calculated on a
fully diluted basis.
4. Shareholder loan:
On May 30, 2000, the Company received a loan from a shareholder who is a
brother of a director of the Company. The loan bore interest at 8% payable
quarterly in arrears commencing September 1, 2000 and principal was to be
payable in full on July 1, 2001. Subsequently, on July 7, 2000, the
shareholder converted this loan into 1,000,000 non-voting, non-redeemable,
Series B, 8% cumulative preferred shares in return for 50,000 two year
warrants each entitling the holder to acquire one common share for $2.50.
The preferred shares are convertible into 250,000 common shares, subject to
anti-dilution provisions.
5. Preferred shares:
(a) Series A:
At September 30, 2000, the Series A Convertible Preferred Shares have
undeclared dividends in arrears of $184,168.
(b) Series B:
At September 30, 2000, the Series B Preferred Shares (note 4) have
undeclared dividends of $18,630
(c) Series C:
On October 8, 2000, the Board authorized the creation of Series C Preferred
Shares. As at September 30, 2000, no Class C Preferred Shares have been
issued.
(d) Series D:
On September 22, 2000, the Company created and issued 1,300 Series D
Preferred Shares with a stated value of $1,000 each, which are generally
non-voting and not entitled to dividends, for $500,000 cash plus the return
of 300,000 then outstanding Common Shares of the Company. The Series D
Preferred Shares are convertible at any time, in an amount equal to the
stated value of the Series D Preferred Shares together with an Additional
Amount calculated on a daily basis at a rate of 4.5% per annum, into Common
Shares of the Company based on a value of 80% of the then current market
value of the Company's Common Shares, to a maximum of $1.50 per Common
Share. At any time after the first anniversary of their issuance, the
Company may redeem each Class D Preferred Share at a price equal to the
greater of $1,400 plus the Additional Amount and the market price of the
Common Shares, into which such Class D Preferred Share could then be
converted.
9
<PAGE>
6. Equity losses:
eCard Solutions, Inc. ("eCard") incurred losses of $314,335 for the six
months ended June 30, 2000, including $175,193 in the second quarter. This
amount, along with amortization of the excess of cost over net assets
acquired for the six months of $51,893, including $25,947 in the second
quarter, is reflected in equity losses in the Consolidated Statements of
Operations. Commencing April 1, 2000, a total excess of $1,037,863 is being
amortized over ten years.
InfoBase Direct Marketing Services, Inc. ("InfoBase") incurred losses of
$113,741 for the six months ended June 30, 2000, including $39,225 in the
second quarter. This amount, along with amortization of the excess of cost
over net assets acquired for the six months of $18,390, including $9,195 in
the second quarter, is reflected in equity losses in the Consolidated
Statements of Operations. Commencing April 1, 2000, a total excess of
$367,791 is being amortized over ten years.
10
<PAGE>
7. Stock options and warrants:
(a) Stock Option Plan:
During fiscal 2000, the 1999 Stock Option Plan (the "Plan") was
approved by the stockholders, whereby common shares of the Company may
be issued to designated employees, officers and directors pursuant to
the Plan, as approved by the Compensation Committee or the Board of
Directors. Subject to stockholder approval of an increase in the
authorized share capital of the Company, as at March 31, 2000, the
Company had granted, pursuant to the Plan, options to purchase an
aggregate of 10,500,000 common shares to certain officers and directors
at exercise prices of between $0.04 and $2.00 per share. On April 24,
2000, the stockholders approved an increase in the authorized share
capital of the Company, which was formalized with the filing of an
amended and restated certificate of incorporation on June 1, 2000.
The following table summarizes the status of options outstanding under
the Plan:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Stock options Weighted
outstanding average price
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, March 31, 2000 10,500,000 0.42
Granted during the six months ended September 30, 2000 - -
Exercised during the six months ended September 30, 2000 - -
Forfeited during the six months ended September 30, 2000 - -
------------------------------------------------------------------------------------------------------------------------------------
Outstanding, September 30, 2000 10,500,000 $ 0.42
------------------------------------------------------------------------------------------------------------------------------------
Exercisable, September 30, 2000 10,500,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table provides details of options outstanding at
September 30, 2000:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Number Number
outstanding Weighted Weighted exercisable Weighted
Range of September 30 average life average September 30 average
exercise price 2000 remaining price 2000 price
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$0.04 to $0.045 8,500,000 4.1 $ 0.045 8,500,000 $ 0.045
$2.00 2,000,000 9.2 2.00 2,000,000 2.00
------------------------------------------------------------------------------------------------------------------------------------
10,500,000 5.1 $ 0.42 10,500,000 $ 0.42
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Plan provides that the Compensation Committee or the Board of
Directors may determine vesting or exercisability of any option
granted, but, if not otherwise determined, options will vest and be
exercisable at the date of grant. The 10,500,000 options granted will
terminate on the earlier of five or ten years after the date of
issuance or ninety days after the optionee ceases to be affiliated with
the Company.
11
<PAGE>
7. Stock options and warrants (continued):
(b) Other options:
The Company has issued options to an unrelated party, which are not
covered by the 1999 Stock Option Plan, for consideration of $150,000.
These options were granted on January 24, 2000, are for 500,000 common
shares, have an exercise price of $7.00 and are exercisable for two
years from the date of grant.
(c) Warrants to purchase shares:
On February 4, 2000, the Company signed an Investment Banking Agreement
with Donner Corp. Pursuant to this agreement the Company issued, on
February 8, 2000, 12,500 warrants to purchase common shares at $12.00
per share. The agreement also stipulated the issuance of three
additional tranches as follows:
o 12,500 warrants exercisable at $14.00, to be issued
immediately after the first day that the Company's Common
Stock closes at or above $25.00; and
o 12,500 warrants exercisable at $16.00, to be issued
immediately after the first day that the Company's Common
Stock closes at or above $35.00; and
o 12,500 warrants exercisable at $18.00, to be issued
immediately after the first day that the Company's Common
Stock closes at or above $45.00.
All of the warrants covered by this agreement are no longer exercisable
after November 1, 2003.
On May 12, 2000, in consideration for obtaining a listing on the
Frankfurt Stock Exchange and for ongoing long-term market making
sponsorship services, the Company issued Berliner Freiverkehr warrants
to purchase 200,000 shares of its Common Stock, with an exercise price
of $7.00 per share, for a two year term commencing on May 12, 2000.
On May 16, 2000, the Company appointed Sabre Communications, Inc. as a
management advisor with responsibility for investor relations, and
issued them 200,000 cashless warrants bearing a strike price of $4.00
per share exercisable for two years after November 15, 2000.
On May 22, 2000, the Company engaged Quadrant Investment Bankers, Inc.
as financial advisor and placement agent and issued them warrants to
purchase 100,000 shares at $4.00 per share, exercisable for two years
after November 22, 2000.
12
<PAGE>
8. Commitment:
In August, 2000, the Company entered into a Consulting Agreement with
Graybox, LLC that provides for the payment of:
(a) A retainer of $12,000 per month;
(b) A financing fee equal to 10% of the gross proceeds received by
or on behalf of the Company as proceeds of any debt, equity or
other financing which is found, arranged or materially
advanced by GrayBox, LLC during the term of the agreement;
(c) An acquisition fee equal to 10% of the purchase price for any
acquisition GrayBox, LLC obtains or materially advances for
the Company;
(d) A general transaction fee, in the form and amount then
customary, reasonable and appropriate for transactions of the
same type as determined by the parties through reasonable good
faith negotiation, for any other transaction which GrayBox,
LLC obtains or materially advances.
This agreement continues indefinitely until terminated by either party,
with or without cause, on 5 days prior written notice.
9. Supplementary cash flow information:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Period from
incorporation on Six months Six months
May 31, 1994 ended ended
to September 30, September 30, September 30,
2000 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-cash investing and financing activities:
Common shares issued to unrelated
parties on acquisition of CASA $ 2,000 $ - $ -
Common shares issued to Thesseus on
acquisition of EAL 1,500 - -
Eikos distributions received by Thesseus
on behalf of the Company 585,006 - -
Preferred shares authorized and issued to
Thesseus on acquisition of EAL 6,592,494 - -
Common shares issued for services * 182,500 - -
Common shares authorized and
issued to Thesseus on acquisition of
investments in eCard and InfoBase 6,644,787 - -
Note payable to eCard for investment
in Series B preferred shares (750,000) - -
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Net of cancellation.
13
<PAGE>
10. Contingencies:
(a)eCard:
On May 24, 2000, eCard delivered the Company a notice of default on its
obligation. As at September 30, 2000, none of the remaining instalment
payments on the note have been made and the shares and initial investment
are subject to forfeiture under the Company's agreement with eCard,
although management has indicated an ongoing intention as of the date of
these financial statements, on the part of both parties, to renegotiate the
terms of the Company's investment commitment. If Inc.ubator's negotiations
with eCard are not successful, eCard could retain the $250,000 already paid
and Inc.ubator could be required to return all of the Series B preferred
shares and write-off that $1,000,000 investment net of the unpaid balance
of the note.
(b) Legal action:
On August 24, 2000, a legal action was commenced against the
Company by Incubator Capital Group, LLC ("ICGL") in the United States
District Court for the Southern District of New York. The claims are
purportedly based on the trademark rights of ICGL, for the Company's use of
the name "Incubator Capital" and its use of the domain name
www.incubatorcapitalcorp.com. ICGL has filed a complaint that includes
causes of action for False Designation of Origin, Unfair Competition,
Federal Dilution, State Dilution and Deceptive Acts and Practices, which
seeks injunctive relief and damages in an unspecified amount. This matter
is in its early stages, as the Company and ICGL currently are in dispute
regarding procedural issues, whereby the Company claims that is was not
properly served with a summons and complaint. ICGL has taken the position
that service was effected, and that it will seek a default judgment for
failure to file a responsive pleading. The Company intends to vigorously
defend the action. The outcome of the litigation is uncertain and cannot be
predicted at this time. Any adverse result could have a material adverse
affect on the business of the Company.
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Item 2. Management's Discussion and Analysis of Financial Condition and Result
of Operations or Plan of Operation Forward Looking Statements
When used in this Form 10-QSB, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"projected," or similar expressions are intended to identify "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including but not limited to, lack of operating history, need for additional
financing and history of losses. Such factors, which are discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, could affect Inc.ubator Capital, Inc.'s ("Inc.ubator" or the
"Company") financial performance and could cause the Company's actual results
for future periods to differ materially from any opinion or statements expressed
herein with respect to future periods. As a result, the Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made.
General
The Company has a limited operating history upon which to base an
evaluation of its business. The Company's business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in new and rapidly evolving markets. In addition, because the Company
acquires significant interests in companies which concentrate on businesses
using the Internet to provide products and services primarily to the small to
medium sized business market, many of which generate net losses, it is
experiencing, and expects to continue to experience, significant volatility in
its operating results. The Company does not know when or if it will report net
income, and it expects that it will report net losses in many quarters for the
foreseeable future.
The Company intends to evaluate, on an ongoing basis, the carrying
value of its ownership interests in and advances to the companies it invests in
("Operating Companies") for possible impairment, based on achievement of
business plan objectives, the financial condition and prospects of the Operating
Companies and other relevant factors. Such factors may be financial or
non-financial in nature.
Effect of Accounting Methods
The various interests that Inc.ubator acquires in its Operating
Companies are accounted for under the equity, consolidation or cost method. The
applicable accounting method is generally determined based on the Company's
voting interest in the Operating Companies. In the future, the presentation of
the Company's financial statements may differ from period to period, primarily
due to whether or not it applies the consolidation method or the equity method.
This could result if its voting interest in a company either rises above or
drops below 50%. See Note 2 (b) of the notes to the Company's audited
Consolidated Financial Statements previously filed in the Form 10K-SB for a
detailed discussion of these accounting methods.
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Results of Operations for the Six Months Ended September 30, 2000
The six month period ended September 30, 2000 continues to reflect
start-up results only as Inc.ubator began operations November 11, 1999, a period
of approximately ten months.
The Company's reported results of operations include all amounts for
the parent company, Inc.ubator, and its wholly-owned subsidiary companies,
[email protected], Inc. ("CASA"), Eikos Acquisition Limited, ("EAL"), and Shanecy
Holdings, Inc. ("SHI"). All three subsidiaries were either formed or acquired
recently and/or have limited operations. CASA is as yet inactive, while EAL and
SHI are holding entities and as such, their operating expenses were not a
material part of the operating expenses of the consolidated entity for the six
months ended September 30, 2000 or since the Company began operations. SHI does
however account for its investments in InfoBase Direct Marketing Services, Inc.
("InfoBase") and eCard Solutions, Inc. ("eCard Solutions") on the equity basis
and recorded total equity losses for the six months ended September 30, 2000 of
$498,359, which represents approximately 30% of the loss for the consolidated
entity. Since the Company commenced its new business strategy in November 1999,
comparisons to the same period of the prior year are not relevant.
During the six months ended September 30, 2000, the Company's focus has
been on furthering the completion of the definitive agreements relating to the
acquisition of ThemeWare, the Company's first major acquisition. In addition,
management has continued to explore various alternatives to raise capital. As a
result, costs of operation for the period continued to center around legal,
consulting, audit and administrative matters. The Company reported a net
operating loss of $1,770,000, or $0.09 per share, for the six months ended
September 30, 2000 and $957,549, or $0.05 per share for the three months ended
September 30, 2000.
Revenue. The Company reported total revenue of $48,000 for the six
months ($45,000 - 3 months) ended September 30, 2000, which represents primarily
interest on funds advanced to ThemeWare. As reflected in Note 2 (d) of the
Company's audited Consolidated Financial Statements included in the Form 10-KSB,
the Company accounts for payments received from Eikos Management LLC ("Eikos")
under the Mutual Business Development Agreement (the "MBDA") on a cost recovery
basis and hence no revenue will be recognized until the carrying value of the
asset has been reduced to zero.
Expenses. The Company had expenses of $1,319,543 for the six months
($753,211 - 3 months) ended September 30, 2000 of which consulting and legal
fees represented $340,565 ($187,000 - 3 months), and $465,936 ($282,741 - 3
months), respectively. The Company's expenses related to the commencement of
operations as a public company, the acquisitions of the companies discussed
herein and the preparation of securities documents. Expenses also included audit
and accounting expenses of $61,500 and an administration fee payable to Thesseus
Services Ltd., a subsidiary of Thesseus International Asset Fund NV
("Thesseus"), of $120,000.
Financial Condition
At September 30, 2000, the Company's assets were comprised primarily of
the investments, notes receivable and intellectual property described below.
CASA and Eikos Acquisition. On November 11, 1999, the Company acquired
100% of CASA from K. Washington-Galanis Investments, LLC and 100% of the stock
of EAL from Thesseus. The carrying value of assets acquired in the transactions
is $6,170,294 as of September 30, 2000 and is reflected as "Investments" and
"Intellectual capital" in the consolidated balance sheet. See Note 4 of the
audited Consolidated Financial Statements for the year ended March 31, 2000
previously filed in Form 10K-SB, for a description of these investments.
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eCard Solutions and InfoBase Acquisition. On January 18, 2000, the
Company acquired interests in eCard Solutions and InfoBase Direct Marketing from
Thesseus, a related party. The investments were transferred at book values
previously recorded by Thesseus totaling $6,644,787 and are reflected in
"Investments" in the consolidated balance sheet attached, net of equity losses
of $498,359 reflected in the statement of operations for the six months.
On March 13, 2000, eCard Solutions created two separate series of
preferred shares. The then existing 400 preferred shares acquired were
reclassified as Series A and have a total redemption value equal to the
$6,276,996 carrying value acquired. Additionally, the Company committed to
invest $1.0 million in eCard Solutions through the acquisition of one million
Series B preferred shares in eCard Solutions. Payment was to be made in four
equal installments of $250,000 on March 13, April 13, May 12 and June 12, 2000.
At March 31, 2000, $250,000 had been paid and the balance of $750,000 was
reflected as a note payable in the consolidated financial statements. In the
first quarter, Inc.ubator management determined that the interests of its
shareholders would best be served by attempting to restructure this transaction
so as to eliminate any future payments for the Series B preferred stock. As of
September 30, 2000, Inc.ubator and eCard Solutions were still in negotiations
but had not yet reached formal agreement on this matter. If Inc.ubator's
negotiations with eCard Solutions are unsuccessful, eCard Solutions could retain
the $250,000 already paid and Inc.ubator could be required to return all of the
Series B preferred shares acquired from eCard Solutions, which would have a
negative impact on the Company's financial condition and results of operations.
The Company had a working capital deficiency of $4.75 million and an
accumulated deficit of $2.85 million at September 30, 2000.
Liquidity and Capital Resources
A major objective of Inc.ubator is to raise sufficient capital to fund
growth, fulfill Inc.ubator's business strategy and meet all cash requirements
with cash and short term equivalents.
The primary source of cash to date has been loans and preferred equity
financing from related parties and distributions from EAL pursuant to the MBDA.
The Company has also raised $500,000 through a private placement for its Series
D preferred stock. Under the terms of the private placement of the Series D
preferred stock, IIG Equities Fund NV purchased 1,300,000 shares of Series D
preferred stock from the Company in exchange for total consideration of
$1,300,000 in the form of $500,000 in cash and 300,000 shares of the Company's
common stock. Such Series D preferred Stock is convertible into shares of Common
Stock of the Company. The primary use of cash has been for general and
administrative expenses, the initial installment of $250,000 made to e-Card
Solutions to fund the partial payment for the Series B preferred shares and the
$3.7 million advanced to ThemeWare to date. At September 30, 2000, Inc.ubator
had no cash on hand. Inc.ubator expects negative cash flows from operations to
continue for the foreseeable future, as it continues to develop and implement
its business strategy.
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<PAGE>
During the six months ended September 30, 2000, the Company's
operations were financed primarily through a note payable from an affiliated
company owned by Kevin Washington, a director of the Company and David
Bergstein, the Chief Executive Officer of Themeware, Starfish Group, LLC
($2,559,765), the return of a refundable deposit ($150,000) short-term accounts
payable ($747,000), the issuance of preferred stock ($1,500,000) and cash flow
from the Company's 49.5% interest in Eikos, which the Company holds through its
wholly-owed subsidiary, EAL ($277,200). Through this investment, the Company has
to date been eligible to receive up to $37,125 per month pursuant to the terms
of the MBDA. Since June 1, 2000, also pursuant to the terms of the MBDA, the
Company is eligible to receive up to an additional $12,375 per month in credit
card receivables or $11,137 in cash, the method of payment being solely at the
option of the Credit Store. These additional payments have been accrued in the
accounts but are unpaid as at September 30, 2000. Credit Store has indicated
that they wish to pay by way of credit cards. The initial $1.0 million payment
to ThemeWare was financed by a short-term loan from a stockholder who is the
brother of a director of the Company. The loan was subsequently converted to
equity in July 2000. Reference is made to note 10 (f) of the Consolidated
Financial Statements of the Company for its year ended March 31, 2000 included
in the Form 10-KSB for a more detailed description of this transaction. The
Company has used share for share exchanges in connection with its acquisitions.
During fiscal 2000, the Company issued 4.0 million shares (as adjusted for the
stock split) of common stock to an entity controlled by two directors in
connection with the acquisition of CASA. The Company also agreed to issue 5.0
million shares (as adjusted for the stock split) of its common stock to Thesseus
in connection with the acquisition of EAL, eCard Solutions and InfoBase.
At September 30, 2000, the Company had a working capital deficit of
approximately $4.75 million. The Company anticipates that it will require
substantial additional financing to fund its ongoing operations and has secured
commitments for a portion of those requirements. Further, the Company is
currently exploring various options to alter its capital structure, raise
additional capital and amend its business plan going forward. The Company
currently anticipates it will need to raise approximately $30.0 million over the
next 12 to 18 months in order to fund its obligations to ThemeWare, to implement
its business strategy, including the funding of further acquisitions, and to
fund operating expenses. There can be no assurance, however, that additional
funding will be available or, if available, that it will be available on terms
acceptable to the Company. If adequate funds are not available, it may not be
able to continue. There can be no assurance that the Company will be able to
raise additional cash if its cash resources are exhausted. The Company's ability
to arrange such financing in the future will depend in part upon the prevailing
capital market conditions as well as the Company's business performance. A major
objective of Inc.ubator is to raise sufficient capital to fund growth, fulfill
Inc.ubator's business strategy and meet all cash requirements with cash and
short term equivalents.
Current Initiatives and Recent Developments
On May 22, 2000, the Company entered into a term sheet to acquire all
of the outstanding capital stock of ThemeWare in exchange for $135.0 million of
the Company's common stock and a commitment to invest a total of $5.0 million in
ThemeWare, of which $1.0 million was invested on signing the term sheet. A
further $1.0 million is to be invested on the signing of definitive agreements,
which is to take place in August, 2000, and $1.0 million is to be invested upon
the Securities and Exchange Commission's declaration that the registration
statement on Form S-4 concerning this transaction is effective. The final $2.0
million is to be invested within twelve months of the closing of the
transaction.
The definitive agreements were signed on August 25, 2000. Subsequent to
the signing of the definitive agreements, the date for the investment payment
that was to be due on signing was modified by letter agreement and $1.5 million
in investment payments were made in accordance with the modification. As of
September 30, 2000 the Company had made total advances to ThemeWare of $
3,695,000.
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Related to this proposed transaction, effective June 27, 2000, the
Company signed a financing commitment with a third party investor who has
agreed, subject to certain conditions, to invest $5,000,000 in the Company to
facilitate completion of the ThemeWare acquisition. A principal condition of the
financing commitment was that the acquisition be closed by October 6, 2000. The
acquisition was not consummated by October 6, 2000 and as a result, the
financing commitment expired.
In accordance with the definitive agreements, both ThemeWare and the
Company continue to work toward a timely consummation of the acquisition but no
assurance can be given that the acquisition will in fact be consummated. IBTR is
currently obligated to file a registration statement with the SEC which
registers the shares of common stock to be issued to the ThemeWare shareholders.
In accordance with the terms of the definitive agreements $3.00 is the minimum
price that IBTR shares can be issued to Themeware and thus if the stock price is
below $3.00 per share at the time the registration statement becomes effective
no assurance can be given that the acquisition will in fact be consummated.
On September 12, 2000, Mr. Jason Galanis stepped down as President and
Chief Operating Officer of the Company for personal reasons. As of the date of
this document, no replacement has yet been named. Mr. Galanis still remains a
major shareholder of the Company and a member of the Company's Board of
Directors.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Incubator Capital Group, LLC. v. Incubator Capital, Inc.
On August 24, 2000, a legal action was commenced against the Company by
Incubator Capital Group, LLC ("ICGL") in the United States District Court for
the Southern District of New York. The claims are purportedly based on the
trademark rights of ICGL, for the Company's use of the name "Incubator Capital"
and its use of the domain name www.incubatorcapitalcorp.com. ICGL has filed a
complaint that includes causes of action for False Designation of Origin, Unfair
Competition, Federal Dilution, State Dilution and Deceptive Acts and Practices,
which seeks injunctive relief and damages in an unspecified amount. This matter
is in its early stages, as the Company and ICGL currently are in dispute
regarding procedural issues, whereby the Company claims that is was not properly
served with a summons and complaint, and ICGL has taken the position that
service was effected, and that it will seek a default judgment for failure to
file a responsive pleading. The Company intends to vigorously defend the action.
The outcome of the litigation is uncertain and cannot be predicted at this time.
Any adverse result could have a material adverse affect on the business of the
Company.
.
Item 2. Change in securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
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27.1 Financial Data Schedule
20
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Signature
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INC.UBATOR CAPITAL, INC.
Dated: November 20, 2000 By: /s/ Michael Bodnar
------------------
Michael Bodnar
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
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27.1 Financial Data Schedule
22
