Review of Consolidated Financial
Position
Cash:
The Company had $133,731 in cash
as of
December 31, 2007, compared with $216,323 at December 31, 2006, a decrease of
$82,592. This decrease in the company’s position of cash during the year ended
December 31, 2007 was due principally to payments to vendors and general
operating expenses. See further discussion under the “Liquidity and Capital
Resources” section below.
Trade Accounts
Receivable:
At the year ending December 31, 2007, the
Company established a reserve of $78,776 for a portion of the debt owed the
Company by Ultimate Racing Experience. The Company continues to pursue the
collection of the debt owed the Company by Ultimate Racing Experience.
Inventory:
At December 31, 2007,
inventory increased by
$64,739 from December 31, 2006 levels due primarily to the reclassification of
simulator parts in non-depreciated fixed assets to simulator inventory held for
sale. Simulators in inventory increased by $69,739 from December 31, 2006,
levels to $310,357 at December 31, 2007. Merchandise inventory decreased by
$5,000 from December 31, 2006, levels to $8,495 at December 31, 2007.
Notes Payable:
On
December 31, 2007, the Company had an aggregate balance of $3,689,128 for Notes
Payable. The balance consisted of $50,000 in related party agreements, $600,000
on the Ropart Note Payable, $1,286,729 on the 2004 Race Car Simulator
Corporation (“RCS”) borrowing, $122,500 on the 2005 Agreement, $671,180 on the
2006 Agreements, $475,010 in the 2007 Agreements and $483,709 on other
agreements.
Deposits on Simulator
Sales:
During
the year ending December 31, 2007, the Company recorded all or a portion of
five simulator sales transactions. This activity resulted in the decrease of
deposits on simulator sales of $7,935 to $1,011,158 as compared to the balance
at December 31, 2006.
Other Liabilities:
Accounts payable,
accrued payroll and
payroll taxes, sales taxes payable, unearned revenue, and other accrued
expenses fluctuate with the volume of business, timing of payments, and the day
of the week on which the period ends.
Review of Consolidated Results of
Operations
Revenues:
Revenues
are comprised primarily of Company store sales, revenue share sales, and
simulator leases and sales.
Revenues for the year ended December 31, 2007,
decreased $966,417 or 18%
to $4,385 million as compared with $5.351 million for the comparable period in
2006. This was the result of a combination of a strong simulator sales in the
twelve month period ending December 31, 2006, and soft sales in the twelve
month period ending December 31, 2007. Management believes that the timing of
the sales transactions will balance out over the course of the next six months,
but there can be no assurances.
Cost of Sales:
Cost
of sales as a percentage of total revenues was 19% and 24% for the year ended
December 31, 2007 and 2006, respectively. Cost of sales for the year ended
December 31, 2007, decreased by $425,300 or 34% to $835,904 compared with
$1.261 million for the comparable period in 2006. The primary reason for the
decrease in cost of sales is the soft sale of simulators in 2007.
Gross Profit:
Gross
profit as a percentage of total revenues was 81% and 76% for the year ended
December 31, 2007 and 2006, respectively. Gross profit was $3.549 million for
the year ended December 31, 2007, as compared to $4.090 million for the year
ended December 31, 2006, a decrease of $541,173 or 13%. The decrease was
primarily the result of lower simulator sales in 2007. Management believes that
the timing of the sales transactions will balance out over the course of the
next six months, but there can be no assurances.
13
General and Administrative:
General
and administrative expenses decreased $428,131 or 10% to $3.704 million for the
year ended December 31, 2007, compared to $4.132 million for the same period in
2006. The primary reasons for the decrease in general and administration was a
$159,233 decrease in payroll related expenses, a $21,098 increase in occupancy
expenses, and a net decrease in other operating expenses of $289,997. The
decrease in other operating expenses is mainly attributed to decreases in
Research & Development of $114,569, decrease in Credit Acquisition Fee of
$95,000, decrease in Depreciation of $91,997, decrease in Insurance of $31,664
and an increase in bad debt expense of $91,249.
Operating Profit:
The
Company had a $154,595 loss from operations during the year ended December 31,
2007 compared to a $41,609 loss for the same period in 2006.
Interest Expense:
Interest
expense was $626,692 and $556,245 for the year ended December 31, 2007 and
2006, respectively.
Income Taxes:
For
the year ended December 31, 2007, the Company’s income tax expense was minimal
because of the Company’s net operating loss carryforwards. For the year ended
December 31, 2007, the Company did not record a provision for income taxes. No
income tax is due for this period because the Company has net operating loss
carryforwards from prior periods that fully offset the tax provision.
Net Loss:
The
Company’s posted a net loss of $796,960 and $598,154 for the year ended
December 31, 2007 and 2006, respectively.
Liquidity and Capital Resources
The primary source of funds available to the
Company are receipts from
customers for simulator and merchandise sales in its flagship owned and
operated racing center, percentage of gross revenues from simulator races and
minimum guarantees from revenue share and lease sites, the sale of simulators,
proceeds from equity offerings including the $2,610 million received in August
2002, proceeds from debt offerings including the $700,000 in Secured Bridge
Notes and warrants issued in March 2003, the $604,000 in net proceeds from
Notes and options issued between February and June, 2004, the additional loan
of a net $100,000 from one of the existing Bridge Loan note holders, $2.9
million borrowed in December 2004, $122,000 from the 2005 Note, net proceeds of
$855,000 borrowed in September of 2006, net proceeds of $427,500 borrowed in
September of 2007, loans from shareholders, credit extended by vendors, and
possible future financings.
The Company believes that it has generated a
significant interest in
its simulators, and that some combination of revenue share agreements, lease
agreements and simulator sales agreements with both the original SMS simulator
and the new Reactor simulator will be sufficient to fund the daily operations
of the business until a larger scale, multi-site virtual league format can be
established, although there can be no assurances. Current prospects include
family entertainment centers, bowling alleys, cruise ships, sports bars and
large retailers.
The Company been pursuing for some time a form
of debt or equity
financing sufficient to eliminate cash flow concerns while the SMS simulator
inventory is placed into the market and to complete its development of the
multisite league play, although there is no assurance that such funding will
be available, or available on terms acceptable to the Company.
The Company has experienced periods of tight
cash flow due to the
unpredictability of the timing of SMS simulator sales. While management’s
preference has been to install its SMS simulator inventory into revenue share
sites in order to establish long term ongoing revenue streams, the Company’s
cash needs have required that the Company enter into purchase agreements from
time to time, and may need to continue to do so in the future.
14
During the year ending December 31, 2007, the
operating activities of
the Company used net cash of $310,260 compared to net cash used of $735,985 for
the comparable period in 2006. The drivers for the decrease in cash used from
operations can be attributed to the increase in accounts payable and the
amortization of the Dolphin financing agreement.
During the year ending December 31, 2007, the
Company used $121,143 of
net cash in investing activities compared with $84,956 of net cash used in
investing activities during the comparable period in 2006. The decrease in cash
from investing activities is primarily related to the placement of simulators
in revenue sharing sites.
During the year ending December 31, 2007, the
Company generated
$348,811 of cash from financing activities compared with $684,084 of cash
generated during the comparable period in 2006. The decrease from financing
activities is primarily related to the payments on notes.
Cash flow from all sources (operations,
investing activities and
financing activities) was insufficient to fund the company during the year
ending December 31, 2007, and resulted in an $82,592 reduction in the Company’s
cash position. This compares with $136,857 in cash reduction for all sources
for the period ending December 31, 2006.
The Company has funded its retained losses
through the initial
investment of $650,000 in May 2001, $400,000 of capital contributed in February
2002, approximately $2.610 million received in August 2002, loans from related
parties including net proceeds of $687,500 received in March, 2003, and net
proceeds received between February 2004 and June 2004 totaling $604,000,
$122,500 in loan proceeds from the sale of the 2005 Notes between October and
November, net proceeds of $845,000 in loan proceeds from the sale of the 2006
Notes in July, net proceeds of $855,000 borrowed in September of 2006, net
proceeds of $450,000 borrowed in September and October of 2007, $1.011 million
received in the form of deposits for the placement of race car simulators in
revenue share locations, or for the future purchase by third parties of race
car simulators, and credit extended by vendors.
As of December 31, 2007, the Company had cash
totaling $133,751
compared to $216,323 at December 31, 2006. Current assets totaled $672,202 at
December 31, 2007 compared to $726,018 on December 31, 2006. Current
liabilities totaled $4,528,626 on December 31, 2007 compared with $3,843,284 on
December 31, 2006. As such, these amounts represent an overall decrease in
working capital of $739,158 for the year ending December 31, 2007.
Inflation
We do not expect the impact of inflation on
our operations to be
significant.
Risk Factors
The Company is subject to certain risk factors
due to the organization
and structure of the business, the industry in which we compete and the nature
of our operations. These risk factors include the following:
15
Operating History, Operating Losses, and
Accumulated Deficit
Perfect Line, LLC was formed in June 2001 for
the purpose of acquiring
certain of the assets of SEI, a bankrupt corporation, and modifying and
improving the mall-based business model under which SEI operated, as more fully
described under Overview above. While the concept was a modification and
improvement upon the prior model, the modified mall-based business model was
only in place for less than two full years, but also proved to be unprofitable.
It is for that reason, among others, that the Company designed and implemented
a revised business model focusing on revenue share and lease agreements with
operators, and the sales of the race car simulators. Perfect Line is subject to
numerous risks, expenses, problems, and difficulties typically encountered in
establishing any business. For the 5 months ended December 31, 2001, Perfect
Line had sales of $3,533,402, and a loss of $719,854. For the year ended
December 31, 2002, Perfect Line generated net sales of $9,636,278, resulting in
a net loss of $2,189,220. For the year ended December 31, 2003, Perfect Line
had net sales of $7,557,978 generating a net loss of $3,525,581. For the year
ended December 31, 2004, Perfect Line had net sales of $5,769,104 generating a
loss of $1,235,419. For the year ended December 31, 2005, the Company had net
sales of $4,838,988 generating a loss of $1,095,074. For the year ended
December 31, 2006, the Company had net sales of $5,351,298 generating a loss of
$598,154. For the year ended December 31, 2007, the Company had net sales of $4,384,880
generating a loss of $783,367. This overall financial performance resulted in
an accumulated deficit of $10,146,669 as of December 31, 2007 for the Company.
Management believes the revenue from its owned and operated flagship site,
upcoming sales revenues from the new Reactor simulators, upcoming new sales and
installations in revenue share and lease sites and revenue from potential new
revenue streams (multi-site leagues and full size vehicle simulation
experiences), will return the Company to profitability in the near future,
although there can be no assurance. Absent some form of financing, the
servicing of debt will likely continue to hamper the Company’s ability to
achieve a net profit even though operating costs may be covered.
Dependence on Discretionary Consumer
Spending
and Competition
Much of the revenue anticipated by the Company
will ultimately be the
result of discretionary spending by consumers and from experiential marketing
budgets from major sponsors within NASCAR. If the current trepidation in the
economy continues for an extended time or worsens, either overall or in the
locations in which Company racing centers and revenue share sites are located,
the amount of discretionary spending may be reduced which would have a negative
effect on the Company results from operations and its financial position. In
addition, if the popularity of NASCAR diminishes, or if experiential marketing
budgets are reduced, it is likely that the Company will experience a similar
reduction in simulator usage, merchandise sales and mobile Reactor purchases
and leases that will have a negative impact on the Company and its future.
There is considerable competition for consumer
entertainment dollars.
The Company feels its patented technology, high-traffic, premium locations,
licenses with popular NASCAR teams and tracks, and the ability to take its
driving experience to the public through the activation of mobile Reactor
experiences, create significant points of difference between the Company and
its competitors. However, there can be no assurance that these factors will be
sufficient to assure successful product development into the marketplace.
16
Significant Capital Requirements and Need
for
Additional Financing
The Company has been and continues to build
back monthly revenue share
and lease payments that were given up as a result of the asset sale of 44
simulators to Race Car Simulation Corporation in three asset purchases totaling
$2,856,600 in December, 2004 and March and April of 2005. The Company is also
recovering from the loss of approximately $1.1 million in claimed damages as
filed in its complaint against CFL and Mike Schuelke. The Company is currently
using its inventory of used SMS simulators and building new Reactor simulators
to install within revenue share, lease or purchased racing center sites to meet
the installation demand. At December 31, 2007, the Company had built, or
partially built, 192 SMS simulators, of which 77 had been sold or were in the
process of being sold, 24 were at Company owned and operated sites, 63 were in
revenue generating sites or in inventory ready to be installed in revenue
generating sites, including 2 at the Company’s engineering office, and 28 were
in the process of being repossessed by the Company from the CFL bankruptcy. In
addition, the Company had built 44 Reactor simulators with 38 installed in
mobile experiences, 5 in fixed sites or trade show application and 1 used by
Company for trades shows and rentals. Reactors are typically purchased with
advance payments that cover manufacturing costs so that no financing is
required by the Company.
Going forward, simulator sales (both SMS and
Reactor) require an
advance that will cover the manufacturing costs, so no financing is required
for these installations. Financing will be required to manufacture the revenue
share simulators that will be owed by the Company and installed into a revenue
share partner’s site. The Company continues to seek financially viable revenue
share and lease partners for financing these installations, secured by
simulators as collateral and minimum guarantee contracts.
Management has been and plans to continue to
sell SMS simulators from
its inventory base if necessary to cover cash flow needs until cash is built
back up from any combination of revenue share, lease or new Reactors, although
there can be no assurance that the demand will continue, or that the orders
will come in a timely manner to meet the Company’s cash needs. The Company sold
8 SMS simulators and 14 Reactor simulators in 2007.
The Company has a history of losses, and the
report of our independent
accountants issued in connection with the audit of our financial statements
contained a qualification raising a doubt about our ability to continue as a
going concern. The Company currently is relying on prospective debt financing
arrangements, and on simulator sales revenue using its existing simulator
inventory to offset its operating costs and debt obligations over the next 12
months, or until enough revenue share simulators are in the market to provide
sufficient to cover these costs. As such, there is risk that the financing will
not be available, or available on terms acceptable to the Company, and there is
risk that the timing of the simulator sales will not coincide with the need for
cash to cover operating expenses and note payments. If no meaningful financing
is secured by the Company in the near term, it may jeopardize the Company’s
ability to maintain agreements with creditors to hold off taking actions
against the Company for payments due
Dependence on Revenue Share Operators For
Timely Payments
The Company relies on the timely payments from
its revenue share
operators in order to meet operational cash flow needs. The Company has also
made certain performance guarantees and “most favored nations” obligations
(installation priority) to Race Car Simulation Corporation (see Part 1, Item 3
Legal Proceedings). The Company continues to incur damages from the default on
payments from CFL related to their assigned mall leases and revenue share
agreements from around the country (see Part 1, Item 3 Legal Proceedings)
17
Dependence on Updated Technology and
Licenses/Leases
The Company will likely have a need to
routinely update and upgrade its
simulation technology. If the Company is not able to retain appropriate
personnel with the skills and ability to maintain its simulators, it will
likely have a material adverse effect on the Company. The Company will also
need to routinely upgrade the appearance of the simulators to closely approximate
that of the then current NASCAR sponsors. This updating may involve significant
time and expense and, in certain instances, require additional license
agreements from new teams and/or sponsors. The Company will also need to renew
existing licensing agreements with NASCAR teams and tracks. The Company
currently has executed either contracts or term sheets with many of the
prominent NASCAR Sprint Cup teams and race tracks. The Company has incorporated
to date six NASCAR tracks and over 30 NASCAR Sprint Cup car images into its
proprietary software. The Company has the rights to many more prominent NASCAR
tracks, and plans to add tracks to its software once funded.
Dependence on Small Number of Key Management
Personnel
We do not have employment agreements with any
of our employees. Our
future success depends, in part, on the continued service of our key executive,
management, and technical personnel. If key officers or employees are unable or
unwilling to continue in their present positions, our business and our ability
to raise capital could be harmed.
Our business is especially dependent upon the
continued services of our
Chairman and Chief Executive Officer, William R. Donaldson. Should we lose the
services of Mr. Donaldson, our operations will be negatively impacted. The loss
of the services of Mr. Donaldson would have a material adverse effect upon our
business.
Officers and Directors Have Limited
Liability
and Indemnification Rights
Our officers and directors are required to
exercise good faith and high
integrity in the management of our affairs. Our articles of incorporation and
bylaws, however, provide, that the officers and directors shall have no
liability to the stockholders for losses sustained or liabilities incurred
which arise from any transaction in their respective managerial capacities
unless they did not act in good faith, engaged in intentional misconduct or
knowingly violated the law, approved an improper dividend or stock repurchase,
or derived an improper benefit from the transaction. Our articles of
incorporation and bylaws also provide for us to indemnify our officers and
directors against any losses or liabilities they may incur as a result of the
manner in which they operate our business or conduct our internal affairs,
provided that the officers and directors reasonably believe such actions to be
in, or not opposed to, our best interests, and their conduct does not
constitute gross negligence, misconduct or breach of fiduciary obligations.
Market and Capital Risks
Future issuance of Common Stock of the
Company, including the exercise
of currently outstanding Warrants and the issuance of shares to Ropart Asset
Management as part of their compensation for the 2003 Bridge Note, may lead to
dilution in the value of our common stock, a reduction in shareholder voting
power, and allow a change in control.
Stock issuances may result in reduction of
market price of our
outstanding shares of common stock. If we issue any additional shares of common
or preferred stock, proportionate ownership of our common stock and voting
power will be reduced. Further, any new issuance of common or preferred shares
may prevent a change in our control or management.
18
The Company has 10,000,000 authorized shares
of convertible preferred
stock (with zero shares outstanding) that may be issued by action of our Board
of Directors. Our Board of Directors may designate voting control, liquidation,
dividend and other preferred rights to preferred stock holders. Our Board of
Directors’ authority to issue preferred stock without shareholder consent may
have a depressive effect on the market value of our common stock. The issuance
of preferred stock, under various circumstances, could have the effect of
delaying or preventing a change in our control or other take-over attempt and
could adversely affect the rights of holders of our shares of common stock.
High-Risk Investment and Restrictions on
Marketability
Our common stock has traded on the Over-the
Counter Bulletin Board
since August 2002. The bid price of our common stock has been less than $5.00
during this period. As such, our stock is subject to the penny stock rules
adopted by the Securities and Exchange Commission that require brokers to
provide extensive disclosure to its customers prior to executing trades in
penny stocks. These disclosure requirements may cause a reduction in the
trading activity of our common stock.
Broker-dealer practices in connection with
transactions in penny stocks
are regulated by certain penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks generally are equity securities with a price
of less than $5.00. Penny stock rules require a broker dealer prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document that provides information about penny
stocks and the risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and monthly account statements showing the market value of each penny stock
held in the customer’s account. In addition, the penny stock rules generally
require that prior to a transaction in a penny stock, the broker-dealer makes a
special written determination that the penny stock is a suitable investment for
the purchaser and receives the purchaser’s written agreement to the
transaction.
Because we are subject to the penny stock
rules our shareholders may
find it difficult to sell their shares.
19
I
TEM 8. FINANCIAL
STATEMENTS
R
EPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
Interactive Motorsports and Entertainment Corp. and Subsidiaries
Indianapolis, Indiana
We have audited the consolidated balance
sheets of Interactive
Motorsports and Entertainment Corp. and Subsidiaries as of December 31, 2007
and 2006, and the related consolidated statements of operations, stockholders
equity (deficit) and cash flows for the years then ended. 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. An audit 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 consolidated financial position
of Interactive Motorsports and Entertainment Corp. and Subsidiaries as of
December 31, 2007 and 2006, and the results of their operations and their cash
flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.
We were not engaged to examine
management’s assertion about the
effectiveness of Interactive Motorsports and Entertainment Corp. and
Subsidiaries’ internal control over financial reporting as of December 31, 2007
and, accordingly, we do not express an opinion thereon.
The accompanying consolidated financial
statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 15 to the consolidated financial statements, the Company has a working
capital deficit as well as a deficit in stockholders’ equity. This raises
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to this matter are also described in Note 15. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ HJ &
Associates, LLC
Salt Lake City, Utah
June 13, 2008
20
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ending December
31
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
133,731
|
|
$
|
216,323
|
|
|
Accounts
Receivable, Net of allowance for bad debt of $78,776 in 2007 and $238,781in 2006
|
|
|
203,095
|
|
|
229,506
|
|
|
Inventory
|
|
|
319,062
|
|
|
254,322
|
|
|
Prepaid
Expenses
|
|
|
16,314
|
|
|
22,724
|
|
|
Notes
Receivable
|
|
|
—
|
|
|
3,143
|
|
|
|
|
|
|
|
|
|
|
|
Total Current
Assets
|
|
|
672,202
|
|
|
726,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment
|
|
|
|
|
|
|
|
|
Total Property
and Equipment, Net
|
|
|
858,306
|
|
|
885,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
4,442
|
|
|
28,471
|
|
|
Notes
Receivable
|
|
|
—
|
|
|
305,642
|
|
|
|
|
|
|
|
|
|
|
|
Total Other
Assets
|
|
|
4,442
|
|
|
334,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,534,950
|
|
$
|
1,945,842
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements
21
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
LIABILTIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ending December
31
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
871,649
|
|
$
|
581,281
|
|
|
Accrued Payroll
Expense
|
|
|
73,467
|
|
|
66,762
|
|
|
Accrued Sales
Tax Payable
|
|
|
41,514
|
|
|
34,360
|
|
|
Gift Cert.
& Customer Deposits
|
|
|
29,595
|
|
|
23,248
|
|
|
Deposits on
Simulator Sales
|
|
|
1,011,158
|
|
|
1,019,093
|
|
|
Accrued
Liabilities
|
|
|
386,571
|
|
|
432,745
|
|
|
Notes Payable -
Related parties
|
|
|
50,000
|
|
|
146,000
|
|
|
Notes
payable
|
|
|
2,064,672
|
|
|
1,539,795
|
|
|
|
|
|
|
|
|
|
|
|
Total Current
Liabilities
|
|
|
4,528,626
|
|
|
3,843,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
Liabilities
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
1,574,456
|
|
|
1,957,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
6,103,082
|
|
|
5,800,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity
(Deficit)
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
10,120
|
|
|
9,640
|
|
|
Additional Paid
in Capital
|
|
|
5,582,011
|
|
|
5,498,749
|
|
|
Retained
Deficit
|
|
|
(10,160,262
|
)
|
|
(9,363,302
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
Shareholders’ Equity (Deficit)
|
|
|
(4,568,131
|
)
|
|
(3,854,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities &
Shareholders’ Equity
(Deficit)
|
|
$
|
1,534,950
|
|
$
|
1,945,842
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements
22
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ending
December 31
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Company Store
Sales
|
|
$
|
1,847,477
|
|
$
|
1,853,647
|
|
|
Revenue Share
Sales
|
|
|
387,166
|
|
|
383,523
|
|
|
Simulator
Leases
|
|
|
13,352
|
|
|
69,667
|
|
|
Sales of
Simulator Systems
|
|
|
1,954,587
|
|
|
2,827,451
|
|
|
Special Event
Sales
|
|
|
182,298
|
|
|
217,010
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
|
4,384,880
|
|
|
5,351,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
|
|
|
|
|
|
COGS -
Merchandise
|
|
|
44,742
|
|
|
45,660
|
|
|
Group Sales
Expenses
|
|
|
1,730
|
|
|
3,297
|
|
|
COGS - Sale of
Simulators
|
|
|
646,774
|
|
|
1,052,481
|
|
|
COGS –
Special Events
|
|
|
129,995
|
|
|
159,766
|
|
|
Inventory
Adjustments
|
|
|
12,663
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of
Sales
|
|
|
835,904
|
|
|
1,261,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
3,548,977
|
|
|
4,090,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & Administrative
Expenses
|
|
|
|
|
|
|
|
|
Payroll Related
Expenses
|
|
|
1,410,122
|
|
|
1,569,354
|
|
|
Occupancy
Expenses
|
|
|
1,127,894
|
|
|
1,106,796
|
|
|
Other Operating
Expenses
|
|
|
1,165,556
|
|
|
1,455,553
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating
Expenses
|
|
|
3,703,572
|
|
|
4,131,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit
(Loss)
|
|
|
(154,595
|
)
|
|
(41,609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
626,692
|
|
|
556,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss before Income Tax
Expense
|
|
|
(781,287
|
)
|
|
(597,854
|
)
|
|
|
|
|
|
|
|
|
|
|
Income Tax
Expense
|
|
|
15,673
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(796,960
|
)
|
$
|
(598,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss per share – basic
and diluted
|
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares
Outstanding
|
|
|
97,697,796
|
|
|
94,378,209
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Common Shares
Outstanding
|
|
|
114,844,790
|
|
|
107,289,006
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements
23
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Statements of Shareholders’ Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Deficit
|
|
Total
Shareholders’
Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2005
|
|
|
93,769,177
|
|
$
|
9,377
|
|
$
|
5,360,270
|
|
$
|
(8,765,148
|
)
|
$
|
(3,395,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant issued for 2006
Notes Payable
|
|
|
—
|
|
|
—
|
|
|
60,742
|
|
|
—
|
|
|
60,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for payment of Loan Interest
|
|
|
2,628,329
|
|
|
263
|
|
|
77,737
|
|
|
—
|
|
|
78,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2007
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(598,154
|
)
|
|
(390,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
96,397,506
|
|
|
9,640
|
|
|
5,498,749
|
|
|
(9,363,302
|
)
|
|
(3,854,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant issued for 2007
Notes Payable
|
|
|
—
|
|
|
—
|
|
|
11,742
|
|
|
—
|
|
|
11,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for payment of Loan Interest
|
|
|
4,801,640
|
|
|
480
|
|
|
71,520
|
|
|
—
|
|
|
72,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2007
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(796,960
|
)
|
|
(796,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2007
|
|
|
101,199,146
|
|
$
|
10,120
|
|
$
|
5,582,011
|
|
$
|
(10,160,262
|
)
|
$
|
(4,568,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements
24
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(796,960
|
)
|
$
|
(598,154
|
)
|
|
Adjustments to reconcile net loss to net
cash used by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
296,801
|
|
|
388,797
|
|
|
Amortization of notes payable discount
|
|
|
(31,382
|
)
|
|
(45,953
|
)
|
|
Amortization of Dolphin Financing
Agreement
|
|
|
(474,031
|
)
|
|
(408,382
|
)
|
|
Common stock issued for interest
|
|
|
72,000
|
|
|
78,000
|
|
|
Warrants issued related to note agreements
|
|
|
11,742
|
|
|
60,742
|
|
|
Net changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in trade accounts and
other receivable
|
|
|
27,961
|
|
|
(14,135
|
)
|
|
(Increase) decrease in inventory
|
|
|
94,243
|
|
|
(45,869
|
)
|
|
Decrease in prepaid expenses and other
assets
|
|
|
6,409
|
|
|
50,590
|
|
|
Increase in intangibles
|
|
|
—
|
|
|
—
|
|
|
Decrease in deposits
|
|
|
24,029
|
|
|
—
|
|
|
Increase (decrease) in accounts payable
|
|
|
492,831
|
|
|
(65,100
|
)
|
|
Increase in accrued payroll and payroll
taxes
|
|
|
6,705
|
|
|
10,344
|
|
|
Increase in sales tax payable
|
|
|
7,154
|
|
|
22,343
|
|
|
Increase in gift certificates and customer
deposits
|
|
|
6,347
|
|
|
624
|
|
|
Increase (decrease) in accrued expenses
|
|
|
(46,174
|
)
|
|
68,176
|
|
|
(Decrease) in deposits on simulator sales
|
|
|
(7,935
|
)
|
|
(238,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used by Operating Activities
|
|
|
(310,260
|
)
|
|
(735,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(138,781
|
)
|
|
(197,987
|
)
|
|
Sale of property and equipment
|
|
|
17,637
|
|
|
113,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used by Investing Activities
|
|
|
(121,143
|
)
|
|
(84,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of notes payable
|
|
|
599,080
|
|
|
950,000
|
|
|
Payments of notes payable
|
|
|
(250,268
|
)
|
|
(265,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
|
348,811
|
|
|
684,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECREASE
IN CASH
|
|
|
(82,592
|
)
|
|
(136,857
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH,
BEGINNING OF PERIOD
|
|
|
216,323
|
|
|
353,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
END OF PERIOD
|
|
$
|
133,731
|
|
$
|
216,323
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements
25
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
For the
Year Ended
December 31
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW
DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
289,055
|
|
$
|
165,372
|
|
|
Cash paid for income taxes
|
|
$
|
15,673
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF
NON-CASH TRANSACTIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services and interest
|
|
$
|
72,000
|
|
$
|
78,000
|
|
|
Warrants sold
|
|
$
|
11,403
|
|
$
|
60,742
|
|
The accompanying notes are an integral part
of these consolidated financial statements
26
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements
NOTE 1 - BASIS OF
PRESENTATION
|
|
|
|
|
Interactive
Motorsports and Entertainment Corp was incorporated in Indiana and began
operations on August 3, 2002. Perfect Line, Inc. was also incorporated in
Indiana, and began operations on August 2, 2002.
|
|
|
|
|
|
Effective
August 2, 2002, Pacific International Holding, Inc., a Utah corporation
(“PIH”), which was originally organized in 1986, changed its state of
domicile and name by merging with and into Interactive Motorsports and
Entertainment Corp. (the surviving entity), an Indiana corporation (the
“Company”), pursuant to an Agreement and Plan of Reorganization. Per the
merger agreement, each share of PIH common stock outstanding immediately
prior to the effective date of the merger was cancelled and converted into
four shares of Interactive Motorsports and Entertainment Corp. common stock.
Although it had been in a variety of businesses for over 15 years, at the
time of the merger, PIH had limited operations.
|
|
|
|
|
|
Subsequent
to the merger and effective as of the same date, the Company acquired
pursuant to a Plan and Agreement of Exchange all of the issued and
outstanding shares of common stock and preferred stock of Perfect Line, Inc.,
an Indiana corporation (“Perfect Line”), from the Perfect Line shareholders
in exchange on a “share-for-share” basis for shares of the Company’s common
stock and preferred stock. As a result of the share exchange, the Perfect
Line shareholders held as of August 2, 2002 Company shares representing
approximately eighty-two percent (82%) of the Company’s capital stock. Also
effective as of August 2, 2002, the members of the Board of Directors of
Perfect Line were elected to replace the members of the Company’s Board of
Directors and the executive officers of Perfect Line became the executive
officers of the Company.
|
|
|
|
|
|
Interactive
Motorsports and Entertainment Corp, through its wholly owned subsidiary,
Perfect Line, Inc. (the Company), (1) owns and operates one flagship racing
center featuring 12 SMS simulators and offering licensed NASCAR-branded
entertainment products, (2) has ongoing revenue share agreements with third
parties allowing them use of our NASCAR racing simulators and proprietary
software, (3) sells its simulators and licenses its proprietary software to
third parties, and (4) leases its simulators and its proprietary software to
third parties.. The cornerstone of the Company’s revised business model
includes the expansion of the revenue share and lease base of operators, the
prospect of offering the race center operators a multi-player, multi-site
virtual racing league concept and the sale or lease of it new Reactor
simulators for mobile marketing applications. In revenue sharing, the Company
enters into an agreement whereby the Company is entitled to an agreed
percentage of the revenue generated by the simulator, subject to a minimum
due each month.
|
|
|
|
|
|
As
Perfect Line had revenues, operations, and business activity, for financial
reporting purposes, Perfect Line is considered the acquirer, and therefore
the predecessor, and the Company is considered the acquiree for accounting
and reporting purposes. Due to the fact that the merger is being treated as a
reverse acquisition, the equity of the Company has been recapitalized for
financial reporting purposes. The operations of Interactive Motorsports and
Entertainment Corp. have been included in consolidation from August 2, 2002
until December 31, 2007.
|
|
|
|
|
|
All
information in this Form 10-K/A is presented from the perspective of
Interactive Motorsports and Entertainment Corp. and its subsidiary Perfect
Line and not from the perspective of PIH.
|
27
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
|
|
|
The
Company’s financial statements are prepared using accounting principles
generally accepted in the United States of America applicable to a going
concern which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has historically
incurred losses, which raises substantial doubt about the Company’s ability
to continue as a going concern. The accompanying financial statements do not
include adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result from the outcome of this uncertainty.
|
|
|
|
|
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
|
|
|
|
|
a.
USE OF ESTIMATES
|
|
|
|
|
|
The
preparation of 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 the 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.
|
|
|
|
|
|
b.
SIGNIFICANT ESTIMATES
|
|
|
|
|
|
The
most significant estimates made by management are determining the estimated useful
lives of the fixed assets, determining the obsolescence of merchandise
inventory, and assessing the realization of deferred tax benefits relating to
the Company’s net operating loss carry forwards.
|
|
|
|
|
|
c.
CONSOLIDATION
|
|
|
|
|
|
The
consolidated financial statements at December 31, 2007 and 2006 include the
accounts of the Company and its wholly owned operating subsidiaries, Perfect
Line, Inc. and Race Car Simulators. Intercompany transactions and balances
have been eliminated in consolidation.
|
|
|
|
|
|
d.
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
For
purposes of the statement of cash flows, the Company considers all demand
deposit balances and all highly liquid debt instruments purchased with
maturity of three months or less to be cash equivalents.
|
|
|
|
|
|
e.
CONCENTRATION OF RISK
|
|
|
|
|
|
The
Company maintains a demand deposit account where the balance in the account
may at times exceed the FDIC insurance limits of $100,000. At December 31,
2007, the amount exceeding the FDIC limit was $33,731.
|
|
|
|
|
|
f.
ACCOUNTS RECEIVABLE
|
|
|
|
|
|
Account
receivables are carried at original invoice amount less an estimate made for
doubtful accounts based on a review of all outstanding amounts on a quarterly
basis. Management determines the allowance for doubtful accounts by
identifying troubled accounts and using historical experience applied to an
aging of accounts. Account receivables are written off when deemed
uncollectible. Recoveries of trade receivables previously written off are
offset against the allowance when received. At December 31, 2007 and 2006 the
Accounts Receivable balances of $203,095 and $229,506 are net of a $78,776
and $238,781 reserves for uncollectible accounts related to old receivables.
|
28
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
|
|
|
|
|
g. PROPERTY AND EQUIPMENT
|
|
|
|
|
|
The Company records its
property and equipment at cost and once in service, depreciates it using the
straight-line method over the estimated useful lives of the respective asset
classes as follows:
|
|
|
|
|
|
Computer Hardware/Software
3 Years, Furniture, Fixtures, and Equipment 5 to 7 Years
|
|
|
|
|
|
h. LONG-LIVED ASSETS
|
|
|
|
|
|
Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability
is measured by comparison of the carrying amount to future net undiscounted
cash flows expected to be generated by the related asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount exceeds the fair market value of the
assets. To date, no adjustments to the carrying amount of long-lived assets
have been required.
|
|
|
|
|
|
i. MERCHANDISE INVENTORY
|
|
|
|
|
|
Merchandise inventories
are carried at the lower of cost or market as determined by the first-in,
first-out (FIFO) method. The Company reduces the stated value of inventory
for excess quantities or obsolescence in an amount equal to the difference
between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. If actual future
demand or market conditions are less favorable than those projected by
management, additional reductions in stated value may be required.
|
|
|
|
|
|
j. MANUFACTURING INVENTORY
|
|
|
|
|
|
Manufacturing inventories
are carried at the lower of cost or market as determined by the first-in,
first-out method. These inventories consist of completed simulators that are
ready to be installed in a site, as well as various components of our
simulation system that have not been allocated to a specific site.
|
|
|
|
|
|
k. INVENTORY
|
|
|
|
|
|
Inventory consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended December 31,
|
|
|
|
|
|
|
|
Inventory
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
Merchandise Inventory
|
|
$
|
9,996
|
|
$
|
17,496
|
|
|
Simulators Inventory
|
|
|
196,756
|
|
|
158,462
|
|
|
Manufacturing Inventory
|
|
|
113,810
|
|
|
82,364
|
|
|
Inventory Reserve
|
|
|
(1,500
|
)
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Inventory
|
|
$
|
319,062
|
|
$
|
254,322
|
|
|
|
|
|
|
|
|
|
|
29
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
|
|
|
|
l.
CONSTRUCTION IN PROGRESS
|
|
|
|
|
|
The Company records all costs associated with the acquisition of
components and build out of new sites in Construction in Progress. Once the
site build is completed, costs associated with the build are recognized as a
cost of sale or capitalized as Property and Equipment, and are depreciated as
noted in paragraph (f) above.
|
|
|
|
|
|
m. DIVIDENDS
|
|
|
|
|
|
The Company has not paid any dividends and any dividends that may
be
paid in the future will depend upon the financial requirements of the Company
and other relevant factors. The Company does not presently intend to pay
dividends at any point in the foreseeable future.
|
|
|
|
|
|
n. REVENUE RECOGNITION AND UNEARNED REVENUE
|
|
|
|
|
|
The Company recognizes revenue for its services at the time the
services have been rendered. In the case of gift certificates and customer
deposits for group events, these amounts are deferred and recognized when the
associated services are rendered or upon expiration. During 2003 the Company
began a program of selling some of its new or used simulators. The Company
has outstanding as of December 31, 2007, deposits of $1,011,158 relating to
these sales. The Company’s policy is to recognize revenue on a percentage of
completion bases throughout the procurement and installation process until
all terms of the contract have been met and no obligations remain for the
Company to perform. The percentage of completion for any given sales contract
is determined by the ratio of costs incurred to date to the total estimated
cost for each site build. Costs incurred consist of purchased components,
outside services, and outside contract labor cost.
|
|
|
|
|
|
On December 31, 2004, March 31, 2005 and April 15, 2005, the
Company
and its two subsidiaries entered into an agreement to sell 44 of its race car
simulators. The purchase price of $1,536,600, $720,000 and $600,000
respectively was paid in cash by the date of the agreement. In addition to
transferring title to the simulators, the Company sold a management agreement
to provide services for the term of the contract and sold 5,161,500,
1,080,000 and 900,000 common stock warrants, respectively, which are
exercisable for 5 years at $0.10 per warrant. The purchase agreement is being
treated as a borrowing in accordance with the guidance provided in paragraphs
21-22 of the Statement of Financial Accounting Standards No. 13 (SFAS 13).
The purchase price is being amortized over a five year term with an annual
rate of 15%.The annual amortization of the Dolphin borrowing decreased notes
payable and increased net income by $474,031 and $408,382 for 2007 and 2006,
respectively. The annual revenue recognized was $706,432 and $706,432 for
2007 and 2006, respectively, and was offset by an interest expense of
$232,401 and $298,050 for 2007 and 2006, respectively.
|
|
|
|
|
|
o. NET LOSS PER SHARE
|
|
|
|
|
|
The computation of net loss per share of common stock is based on
the
weighted average number of shares outstanding during the periods presented.
The Company calculates loss per share pursuant to Statement of Financial
Accounting Standards No. 148 (“SFAS 148”), Earnings Per Share. Basic loss per
share is computed based upon the weighted average number of common shares
issued and outstanding during each year. Diluted loss per share amounts
assumes conversion, exercise, or issuance of all potential common stock
instruments (stock options, warrants and convertible preferred stock).
Potentially dilutive securities including preferred stock, warrants and stock
options are excluded from diluted loss per share during net loss periods
because these securities would be anti-dilutive. The Company has excluded
12,494,414 of dilutive instruments at December 31, 2007.
|
30
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
|
|
|
|
p. INCOME
TAXES
|
|
|
|
|
|
Deferred income taxes are provided using the liability method
whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of the changes in tax laws and rates
of the date of enactment.
|
|
|
|
|
|
When tax returns are filed, it is highly certain that some
positions
taken would be sustained upon examination by the taxing authorities, while
others are subject to uncertainty about the merits of the position taken or
the amount of the position that would be ultimately sustained. The benefit of
a tax position is recognized in the financial statements in the period during
which, based on all available evidence, management believes it is more likely
than not that the position will be sustained upon examination, including the
resolution of appeals or litigation processes, if any. Tax positions taken
are not offset or aggregated with other positions. Tax positions that meet
the more-likely-than-not recognition threshold are measured as the largest
amount of tax benefit that is more than 50 percent likely of being realized
upon settlement with the applicable taxing authority. The portion of the
benefits associated with tax positions taken that exceeds the amount measured
as described above is reflected as a liability for unrecognized tax benefits in
the accompanying balance sheet along with any associated interest and
penalties that would be payable to the taxing authorities upon examination.
|
|
|
|
|
|
Interest and penalties associated with unrecognized tax benefits
are
classified as additional income taxes in the statement of income.
|
|
|
|
|
|
q. ADVERTISING
|
|
|
|
|
|
Advertising expenses were $53,140 and $57,751 for the years ended
December 31, 2007 and 2006, respectively.
|
|
|
|
|
|
r. WARRANTY POLICY DISCLOSURE
|
|
|
|
|
|
The Company accrues a liability on the warranty of simulators sold
for the cost of future repairs. In general the warranty covers the cost of
parts, labor and travel for a predetermined period of time ranging from six
months to two years. The warranty is determined by the Company on a per
contract basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
Warranty Period
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
31,212
|
|
$
|
18,314
|
|
|
|
2009
|
|
|
6,371
|
|
|
11,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,583
|
|
$
|
29,736
|
|
|
|
|
|
|
|
|
|
|
|
31
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3 -
EQUITY TRANSACTIONS AND COMMON STOCK WARRANTS
|
|
|
|
|
Common Stock
|
|
|
|
|
|
On September 11, 2006, the Company issued 1,818,484 shares of
common
stock per the terms of the Secured Bridge Notes due December 31, 2003 (Note
5). Total interest expense associated with this issuance was $60,000.
|
|
|
|
|
|
On December 9, 2006, the Company issued 809,845 shares of common
stock per the terms of the Secured Bridge Notes initially due December 31,
2003 (Note 5). Total interest expense associated with this issuance was
$18,000.
|
|
|
|
|
|
On July 6, 2007, the Company issued 2,602,282 shares of common
stock
per the terms of the Secured Bridge Notes due December 31, 2003 (Note 5).
Total interest expense associated with this issuance was $42,000.
|
|
|
|
|
|
On December 28, 2007, the Company issued 2,199,358 shares of common
stock per the terms of the Secured Bridge Notes due December 31, 2003 (Note
5). Total interest expense associated with this issuance was $30,000.
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
On December 31, 2004, March 31, 2005 and April 15, 2005, the
Company
and its two subsidiaries entered into agreements to sell 44 of its race car
simulators to a single buyer. The sale is accounted for as a borrowing in
accordance with the guidance provided in paragraphs 21-22 of SFAS 13.
|
|
|
|
|
|
Simultaneous to this transaction, the Company sold the buyer
5,161,500, 1,080,000 and 900,000 common stock warrants, respectively, which
are exercisable for 5 years from the date of the transaction at $0.10 per
warrant. Using the Black Scholes valuation model, the Company determined the
value of these warrants to be $287,308, $47,123 and $39,269, respectively,
assuming a risk-free interest rate of 3.95% over a period of 5 years.
|
|
|
|
|
|
On July 14, 2006, the Company entered into Note and Warrant
Purchase
and Security agreements to sell $950,000 15% (increased to 16% on September
21, 2007) notes in aggregate principal amount of its Secured Notes due August
1, 2010. Simultaneous to this transaction, the Company sold the buyer
2,375,000 common stock warrants, which are exercisable for five years from
the date of the transaction at $0.10 per warrant. Using the Black Scholes
valuation model, the Company determined the value of these warrants to be
$60,742, assuming a risk-free interest rate of 4.96% over a period of four
years.
|
|
|
|
|
|
On September 21, 2007 and October 4, 2007, the Company entered into
Note and Warrant Purchase and Security agreements to sell $500,000 16% notes
in aggregate principal amount of its Secured Notes due September 27, 2011.
Simultaneous to this transaction, the Company sold the buyer 1,250,000 common
stock warrants, which are exercisable for five years from the date of the
transaction at $0.10 per warrant. Using the Black Scholes valuation model,
the Company determined the value of these warrants to be $11,742, assuming a
risk-free interest rate of 4.13% over a period of five years.
|
32
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4 -
PROPERTY AND EQUIPMENT
|
|
|
|
|
Property and
equipment was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Machinery
and Equipment
|
|
$
|
1,798,340
|
|
$
|
1,625,117
|
|
|
Revenue
share installation costs
|
|
|
358,729
|
|
|
289,339
|
|
|
Office
Furniture, Fixtures and Equipment
|
|
|
44,466
|
|
|
47,545
|
|
|
Patents
|
|
|
22,700
|
|
|
22,700
|
|
|
Software
|
|
|
791,864
|
|
|
791,864
|
|
|
|
|
|
|
|
|
|
|
|
Total Property
and Equipment
|
|
|
3,019,979
|
|
|
2,776,565
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
2,161,673
|
|
|
1,890,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and
Equipment, net
|
|
$
|
858,306
|
|
$
|
885,711
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense for the years ended December 31, 2007 and 2006 was $296,801 and
$388,797 respectively.
NOTE 5 - DEBT
AND CREDIT ARRANGEMENTS
|
|
|
|
|
On February 2, 2004 and June 6, 2004, Perfect Line, Inc. issued
notes
bearing an interest rate of 9.6% payable in the total amount of $750,000.
Each note came with an option to purchase common shares of the Company equal
to the amount of notes purchased divided by the fair market value of the
Company’s stock on the date of issuance. The notes became due on February 2,
2005, and $260,000 of the notes was paid in full at that time. A note holder
of an additional $344,000 of the notes elected to receive a cash payment of
$16,000 and exercise options granted with the note purchase for full payment
of the note per the terms of the 2004 Agreement. The note holder of the final
$146,000 in notes has been repaid $58,500 as of April 17, 2007, and the
balance was assigned to two unrelated third parties, one in the amount of
$75,000 and the other in the amount of $12,500. The term of the note was
extended by 24 months, and the pre-payment terms were amended to reflect that
there will be no pre-payment option, while all other terms remained the same,
including the expiration of the option 30 days past the maturity date.
|
|
|
|
|
|
On December 31, 2004, March 31, 2005 and April 15, 2005, the
Company
entered into three Asset Purchase Agreements with Race Car Simulation Corp.(“RCSC”),
a subsidiary of Dolphin Direct Equity Partners, LP (“Dolphin”), pursuant to
which it sold forty-four (44) of its race car simulators that were located in
existing revenue share locations, or had been installed in new revenue share
sites. The sale is accounted for as a borrowing in accordance with the
guidance provided in paragraphs 21-22 of SFAS 13. While this transaction
generated an aggregate purchase price of $2,856,600, it also depleted monthly
revenue share payments to the Company generated by the simulators that were
sold. In May of 2007, RCSC filed a complaint against National Tour, Inc. and
its chief executive officer, Johnny Capels, personally. RCSC claimed that
National Tour, backed by a personal guarantee by Johnny Capels, owed the company
at least $193,000 in lease payments plus interest and other costs under the
lease agreements between the parties. The lease agreements involve twelve
(12) of the Company’s simulators which were part of the 44 considered a
“borrowing” under GAAP guidelines, and may be a contingent liability for the
Company under the terms of its guarantee to RCSC under the asset purchase
agreement. The Company has an obligation under a Performance Guarantee clause
of their agreement with RCSC to guarantee certain contracted revenue share or
lease payments through 2007, and also has the obligation to find new revenue
share or lease partners for the RCSC simulators under a ‘Most Favored
Nations” clause in the agreement with RCSC In November of 2007, the Company
removed an additional 8 of RCSC’s SMS simulators from the Syracuse, NY site
to Incredible Pizza sites in Oklahoma City, OK and Dallas, TX (four in each
site). See Part 1, Item 3 Legal Proceedings for details on the complaint
filed by RCSC.
|
33
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5 - DEBT
AND CREDIT ARRANGEMENTS (continued)
|
|
|
|
|
Pursuant to the Note and Option Purchase Agreement and Security
Agreement dated November 2005 (“2005 Agreement”), the Company issued notes
bearing an interest rate of 12% payable in the total amount of $122,500.
These notes were issued between October 13, 2005 and November 4, 2005. Each
note came with an option to purchase common shares of the Company equal to
the amount of notes purchased divided by the exercise price of the option.
The notes were due on October 1, 2007, and the Company has asked the note
holders to extend the note under the same terms until additional funding is
in place. There is no assurance that one or more of the note holders will not
demand payment.
|
|
|
|
|
|
The value of the options was amortized to interest expense over
their
life which expired on November 1, 2007. Amortization of option discount for
the options related to the 2005 Agreement of $6,226 and $7,831 was included
in interest expense for the twelve months ended December 31, 2007 and 2006,
respectively.
|
|
|
|
|
|
On July 14, 2006, the Company entered into Note and Warrant
Purchase
and Security Agreements with ten (10) investors in a private placement which
is exempt from the registration provisions of the Securities Act of 1933, as
amended, pursuant to Reg. D and Rule 506 adopted thereunder. The Notes,
totaling $950,000,were issued by Perfect Line, will be fully paid down July
17, 2010, and bear interest at a rate of 16% per annum (increased from 15% on
September 21, 2007) for the total interest amount over the four year period
of $326,194. The principle balance of the notes on December 31, 2007, was
$671,180. Each note came with an option to purchase common shares of the
Company equal to two and one half times the amount of notes purchased divided
by the exercise price of the option. The principle and interest on the Notes
are payable weekly over a four year term and are secured by a first security interest
in 20 of the simulators owned by Perfect Line.
|
|
|
|
|
|
The value of the options will be amortized to interest expense over
their life which expires on July 13, 2010. Amortization of option discount
for the options related to the 2006 Agreement of $15,180 and $6,958 was
included in interest expense for the years ended December 31, 2007, and
December 31, 2006, respectively.
|
|
|
|
|
|
On April 12, 2007, the Company
entered into a Mutual Release and Settlement Agreement with Mall of Georgia,
LLC. The terms of the agreement released the Company from any future lease
obligations at the site and set the financial settlement was payable in six
(6) installments between May, 2007 and June, 2008. On December 31, 2007, the
balance due was $177,346, and a $20,000 payment due in December had been
missed. $95,580 is directly attributable to Perfect Line with the remainder
of the note attributable to unpaid rent due from lease assignee, Checker Flag
Lightning, LLC.. The
Company has filed a Motion for Partial Summary Judgment against Checker Flag
Lightning, LLC in the amount of $357,352. See Part I, Item 3, Legal
Proceedings for more details.
|
34
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5 - DEBT
AND CREDIT ARRANGEMENTS (continued)
|
|
|
|
|
On September 25, 2007 and October 4, 2007, the Company entered into
Note and Warrant Purchase and Security Agreements with ten (10) investor in a
private placement which is exempt from the registration provisions of the Securities
Act of 1933, as amended, pursuant to Reg. D and Rule 506 adopted thereunder.
The Notes, totaling $500,000, were issued by Perfect Line, will be fully paid
down September 27, 2011 and bear interest at a rate of 16% per annum for the
total interest amount over the four (4) year period of $176,443. The
principle balance of the notes on December 31, 2007, was $475,009. Each note
came with an option to purchase common shares of the Company equal to two and
one half times the amount of notes purchased divided by the exercise price of
the option. The principle and interest on the Notes are payable weekly over a
four year term and are secured by a first security interest in 8 of the
simulators owned by Perfect Line.
|
|
|
|
|
|
The value of the options will be amortized to interest expense over
their life which expires on September 27, 2012. Amortization of option
discount for the options related to the 2007 Agreement of $735 was included
in interest expense for the year ended December 31, 2007.
|
|
|
|
|
|
On October 31, 2007, Perfect Line and MOAC Mall Holdings, LLC, the
Mall of America landlord, agreed to a stipulation agreement whereby Perfect
Line signed a promissory note totaling $310,553 payable in seven (7) payments
between December 15, 2007 and October 1, 2008. On December 31, 2007, the
December 15 payment of $53,467 had not been made.
|
35
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5 - DEBT
AND CREDIT ARRANGEMENTS (continued)
|
|
|
|
|
Notes Payable consisted of the following at December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Note payable
to investor bearing interest at 12%, due at an undetermined date in 2007.
Secured by certain simulators of the Company and a personal guaranty of the
President of the Company.
|
|
$
|
600,000
|
|
$
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
to individuals, bearing interest at 12%,
due October 1, 2008. Secured by certain simulators of the Company.
|
|
|
122,500
|
|
|
122,500
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
to a landlord, payable in six (6) installments, due June 2008.
|
|
|
177,346
|
|
|
95,580
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
to a landlord, payable in seven (7) installments, due October 2008.
|
|
|
310,554
|
|
|
108,091
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
to individuals, bearing interest at 9.6%, due April 17 2009. Secured by
certain simulators of the Company.
|
|
|
87,500
|
|
|
87,500
|
|
|
|
|
|
|
|
|
|
|
|
Borrowing
transaction with RCS bearing imputed interest at 15%, 5 year term.
|
|
|
1,286,728
|
|
|
1,760,761
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
to individuals, bearing interest at 16%, due July 13, 2010. Secured by
certain simulators of the Company.
|
|
|
671,180
|
|
|
870,644
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
to individuals, bearing interest at 16%, due September 13, 2011. Secured by
certain simulators of the Company.
|
|
|
475,010
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Less: unamortized
discount & debt offering costs
|
|
|
(91,691
|
)
|
|
(60,310
|
)
|
|
|
|
|
|
|
|
|
|
|
Total Notes
Payable
|
|
|
3,639,128
|
|
|
3,497,266
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Current Portion
|
|
|
(2,064,672
|
)
|
|
(1,539,795
|
)
|
|
|
|
|
|
|
|
|
|
|
Total Notes
Payable – Long Term Portion
|
|
$
|
1,574,455
|
|
$
|
1,957.471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
maturities of notes payable as of December 31,
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
2,064,672
|
|
|
|
|
|
2009
|
|
|
1,089,402
|
|
|
|
|
|
2010
|
|
|
383,526
|
|
|
|
|
|
2011
|
|
|
101,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Notes
Payable
|
|
$
|
3,639,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6 -
LICENSING AND CONSULTING AGREEMENTS
|
|
|
|
|
The Company has licensing agreements with several NASCAR race teams
and race tracks that expire on various dates between December 31, 2007
and December 31, 2009.
|
NOTE 7 - RENT
COMMITMENTS
|
|
|
|
|
The Company rents various office and retail space under long-term,
non-cancelable operating leases, some of which include renewal options,
expiring on various dates through 2010. The Company also leases certain
office equipment pursuant to a non-cancelable operating lease with terms of
three years. Rent expense approximated $1,012,729, and $1,017,071 for the
years ended December 31, 2007 and 2006, respectively.
|
|
|
|
|
|
At December 31, 2007, the future minimum rental payments required
under all non-cancelable operating leases were as follows:
|
|
|
|
|
|
|
|
|
|
Payable In
|
|
All
Rental Payments
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
539,137
|
|
|
|
2009
|
|
|
542,091
|
|
|
|
2010
|
|
|
377,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Required
Rental Payments
|
|
$
|
1,459,040
|
|
|
|
|
|
|
|
|
NOTE 8 -
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
From time to time, the Company may be party to various legal
actions
and complaints arising in the ordinary course of business. The Company’s
subsidiary Perfect Line, Inc. filed a complaint in the US District Court
Southern District of Indiana on December 6, 2006, against Checker Flag
Lightning, LLC and Mike Schuelke, seeking a Declaratory Judgment, Injunctive
Relief and Damages for failing to make the required payments (at least
$559,119) under certain lease agreements between Checker Flag Lightning and
Perfect Line. On April 18, 2007, the Company filed a Motion for Partial
Summary Judgment in the amount of $357,372 against CFL on Counts II and VI of
the Complaint (amounts that are owed since January 1, 2006). CFL filed its
response to the Summary Judgment and did not dispute the amounts due to
Perfect Line, however the case has been stayed pending the outcome of the
Bankruptcy Proceedings as described below.
|
|
|
|
|
|
A Petition for Involuntary Bankruptcy was filed by Perfect Line
against CFL on June 11, 2007. CFL filed a motion to dismiss the case based
upon an insufficient number of creditors. The Michigan Court allowed more
time for additional creditors to join the Petition, and the Involuntary
Petition was granted and a trustee has been appointed, and is proceeding to
administer the estate. Perfect Line has a first position security interest in
6 SMS simulators at the Gurnee Mills location related to a $400,000 note with
CFL, and has made an offer to the bankruptcy trustee for 22 SMS simulators
that were in CFL sites. Another 8 SMS simulators that the Company owns are in
the Jordan Creek site, and will be installed in future revenue producing
sites.
|
37
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8 - COMMITMENTS AND
CONTINGENCIES (continued)
|
|
|
|
|
Checkered
Flag Lightning was a lease assignee of Perfect Line for the Riverchase
Galleria racing center in Birmingham, Alabama. Since CFL vacated this space
in June of 2007, the landlord for this space informed Perfect Line in July of
2006 of CFL’s failure to pay an amount due at the end of 2006 of $204,380.
Approximately half of this amount was a previous Perfect Line obligation that
was to be paid by CFL under the terms of the revenue share agreement between
the parties, and the other half were more recent CFL defaults. In July of
2007, the landlord did release the 8 SMS simulators and related assets that
were in this mall site to the Company, and they were removed and stored in
the Company’s warehouse for future installations. The landlord’s attorney
asked the Company for proposed settlement terms at the time the simulators
were removed, and Company proposed a payment plan for $109,000 of the amount
in question. The Company did not receive a response to the proposal, and on
March 11, 2008 (over 7 months after the proposal was submitted), the Company
received a complaint from the landlord asking for CFL and Perfect Line to pay
rents and other charges totaling $1,166,557. The Company is in final stages
of a settlement agreement with the Plaintiff whereby the settlement amount
will be $101,000, and will be paid over 12 months.
|
|
|
|
|
|
On December 31, 2004, March 31, 2005 and April
15, 2005, the Company
entered into three Asset Purchase Agreements with Race Car Simulation
Corp.(“RCSC”), a subsidiary of Dolphin Direct Equity Partners, LP
(“Dolphin”), pursuant to which it sold forty-four (44) of its race car
simulators that were located in existing revenue share locations, or had been
installed in new revenue share sites. The sale is accounted for as a
borrowing in accordance with the guidance provided in paragraphs 21-22 of
SFAS 13. While this transaction generated an aggregate purchase price of
$2,856,600, it also depleted monthly revenue share payments to the Company
generated by the simulators that were sold. In May of 2007, RCSC filed a
complaint against National Tour, Inc. and its chief executive officer, Johnny
Capels, personally. RCSC claimed that National Tour, backed by a personal
guarantee by Johnny Capels, owed the company at least $193,000 in lease
payments plus interest and other costs under the lease agreements between the
parties. The lease agreements involve twelve (12) of the Company’s simulators
which were part of the 44 considered a “borrowing” under GAAP guidelines, and
may be a contingent liability for the Company under the terms of its
guarantee to RCSC under the asset purchase agreement. The Company has an
obligation under a Performance Guarantee clause of their agreement with RCSC
to guarantee certain contracted revenue share or lease payments through 2007,
and also has the obligation to find new revenue share or lease partners for
the RCSC simulators under a ‘Most Favored Nations” clause in the agreement
with RCSC In November of 2007, the Company removed an additional 8 of RCSC’s
SMS simulators from the Syracuse, NY site to Incredible Pizza sites in
Oklahoma City, OK and Dallas, TX (four in each site). The Company and RCSC
had been in discussions of how best to resolve the guaranteed payments due
under their agreement when on February 24, 2008, the Company received a
complaint from Dolphin and RCSC seeking $685,667 and other damages from a
breach of the Performance Guarantee, Most Favored Nations and Non-Competition
clauses of the agreements between the parties. The Company filed its answer
to the complaint on March 24, 2008, refuting many of the claims. The Company
plans to vigorously defend the claims, and will argue that the payments
guaranteed under the Performance Guarantee will be paid to Dolphin on a
delayed basis due to an unforeseen bankruptcy of one of its customers, and
unforeseen market conditions. The Company has recently proposed a settlement
agreement to Dolphin whereby their investment and anticipated return is paid
in fully by May of 2010. This is accomplished by selling 12 of the RCSC
simulators prior to that date.
|
|
|
|
|
|
On June 2, 2008, the Company received a
complaint from Universal
Studios, LLC as a result of defaulting on a $25,000 payment due on March 1,
2008. The Plaintiff is seeking $194,000, which is the $150,000 due plus
penalties. They have called seeking a settlement agreement, but no settlement
offer has been drafted at this time.
|
|
|
|
|
|
As of the filing of this Annual Report on Form
10-K/A, the Company is
not aware of any other material legal actions directed against the Company.
|
38
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9 -
RELATED PARTY NOTES PAYABLE
|
|
|
|
|
|
|
Note payable
to the President of the Company, bearing interest at 12%
per annum. Due December 31, 2008.Secured by certain assets of the Company.
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Related Parties Notes Payable
|
|
$
|
50,000
|
|
|
|
|
|
|
|
NOTE 10 - INCOME TAXES
|
|
|
|
|
Deferred
taxes are provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely that not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
|
|
|
|
|
|
Net
deferred tax assets consist of the following components as of December 31,
2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
NOL Carryover
|
|
$
|
2,841,100
|
|
$
|
2,623,550
|
|
|
Depreciation
|
|
|
70,000
|
|
|
66,550
|
|
|
R&D Credit Carryforward
|
|
|
11,482
|
|
|
|
|
|
Related Party Accruals
|
|
|
7,220
|
|
|
|
|
|
Accrued Vacation
|
|
|
21,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
|
30,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
(2,982,482
|
)
|
|
(2,690,100
|
)
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Asset
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income from continuing
operations for the years ended December 31, 2007 and 2006 due to the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Book loss
|
|
$
|
(310,815
|
)
|
$
|
(233,280
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss on the Sale of Assets
|
|
|
1,965
|
|
|
(4,705
|
)
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
—
|
|
|
19,735
|
|
|
|
|
|
|
|
|
|
|
|
Meals and Entertainment
|
|
|
1.925
|
|
|
1,450
|
|
|
|
|
|
|
|
|
|
|
|
Stock for services/options
expense
|
|
|
28,080
|
|
|
30,320
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
278,845
|
|
|
186,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
39
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10 - INCOME TAXES
(continued)
|
|
|
|
|
At
December 31, 2007, the Company had net operating loss carryforwards of
approximately $7,285,000 that may be offset against future taxable income
from the year 2007 through 2024. No tax benefit has been reported in the
December 31, 2007 financial statements since the potential tax benefit is
offset by a valuation allowance of the same amount.
|
|
|
|
|
|
Due
to the change in ownership provisions of the Tax Reform Act of 1986, net
operating loss carryforwards for Federal income tax reporting purposes are
subject to annual limitations. Should a change in ownership occur, net
operating loss carryforwards may be limited as to use in the future years.
|
|
|
|
|
|
The
Company or one of its subsidiaries files income tax returns in the U.S.
federal jurisdiction, and various states and foreign jurisdictions. With few
exceptions, the Company is no longer subject to U.S. federal, state and
local, or non-U.S. income tax examinations by tax authorities for years
before 2004
|
|
|
|
|
|
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
on January 1, 2007.
|
|
|
|
|
|
The
Company’s policy is to recognize interest accrued related to unrecognized tax
benefits in interest expense and penalties in operating expenses.
|
|
|
|
|
NOTE
11 - RECENT ACCOUNTING PRONOUNCEMENTS
|
|
|
|
|
|
None
|
|
|
|
|
NOTE
12 - ACCRUED LIABILITIES
|
|
|
|
|
|
Accrued
Liabilities consisted of the following at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Back rent
owed to a landlords previously operated by Checker Flag
Lightning, Inc. The Company is in negotiation to resolve this liability.
|
|
$
|
125,835
|
|
|
125,835
|
|
|
|
|
|
|
|
|
|
|
|
Vacation pay
accrual
|
|
|
56,270
|
|
|
55,442
|
|
|
Accrued
warrant expenses on sold simulators
|
|
|
37,583
|
|
|
29,736
|
|
|
Accrued
licensing fees
|
|
|
72,000
|
|
|
110,750
|
|
|
Accrued
property taxes
|
|
|
30,240
|
|
|
29,500
|
|
|
Accrued
purchases
|
|
|
29,371
|
|
|
60,500
|
|
|
Accrued
interest
|
|
|
24,500
|
|
|
—
|
|
|
Accrued
miscellaneous expenses
|
|
|
10,580
|
|
|
20,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Accrued Liabilities
|
|
$
|
386,379
|
|
|
432,745
|
|
|
|
|
|
|
|
|
|
|
40
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 13 - DEPOSITS ON
SIMULATOR SALES
|
|
|
|
|
Deposits on simulator sales
consist of the following on December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Number
of Units
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roltex Group*
|
|
8
Simulators
|
|
$
|
531,000
|
|
|
Tonne Management*
|
|
4
Simulators
|
|
|
222,000
|
|
|
DGI, Inc.
|
|
Other
|
|
|
77,325
|
|
|
Charlotte
|
|
4
Simulators
|
|
|
90,000
|
|
|
Wings Warehouse
|
|
4
Simulators
|
|
|
30,833
|
|
|
Heartland Entertainment
|
|
2
Simulators
|
|
|
20,000
|
|
|
Story Stores
|
|
2
Simulators
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits on
simulator sales
|
|
|
|
$
|
1,011,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The Company has not been in recent communication with the principles of
Roltex Group and Tonne Management in regards to the completion of the related
contracts
|
NOTE 14 – CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
|
|
|
|
In
March of 2007, DGI, Inc., an Indiana corporation managed by and under
majority ownership of William R. Donaldson, purchased fourteen (14) Reactor
simulators for $574,000 from Perfect Line and subsequently leased the
simulators to Sprint Nextel (12) and Toyota (2). Mr. Donaldson is the
Chairman and Chief Executive Officer of the Company.
|
NOTE 15 – GOING CONCERN
|
|
|
|
|
Since
inception, the Company has financed its operations through debt financing and
proceeds generated from offerings of its stock. The proceeds from these
transactions have been used primarily to fund research and development costs,
and selling, general and administrative expenses.
|
|
|
|
|
|
The
Company has incurred substantial net operating losses since inception and
negative cash flows from operating activities through December 31, 2007
resulting in an accumulated deficit of $10.2 million. During fiscal year
2007, cash decreased from $216,323 to $133,731, largely due the continued
interest paid on debt.
|
|
|
|
|
|
The
Company recorded a net loss of $796,960 in fiscal year 2007. As of December
31, 2007, the Company had $133,731 in cash to fund operations.
|
|
|
|
|
|
The
Company is dependent on available cash and operating cash flow to finance
operations and meet its other capital needs. If such sources are not
sufficient, alternative funding sources may not be available. The Company
believes that cash on hand plus the additional liquidity that it expects to
generate from operations will be sufficient to cover its working capital
needs and fund expected capital expenditures over at least the next twelve
months.
|
41
INTERACTIVE MOTORSPORTS AND ENTERTAINMENT
CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 15 – GOING CONCERN
(continued)
|
|
|
|
|
The
Company has a history of losses, and the report of our independent
accountants issued in connection with the audit of our financial statements
contained a qualification raising a doubt about our ability to continue as a
going concern. The Company currently is relying on prospective debt financing
arrangements, and on simulator sales revenue using its existing simulator
inventory to offset its operating costs and debt obligations over the next 12
months, or until enough revenue share simulators are in the market to provide
sufficient to cover these costs. As such, there is risk that the financing
will not be available, or available on terms acceptable to the Company, and
there is risk that the timing of the simulator sales will not coincide with
the need for cash to cover operating expenses and note payments. If no
meaningful financing is secured by the Company in the near term, it may
jeopardize the Company’s ability to maintain agreements with creditors to
hold off taking actions against the Company for payments due.
|
NOTE 16 – SUBSEQUENT EVENTS
|
|
|
|
|
On
January 18, 2008, the Company entered into a Second Lease Amendment, Security
Agreement Amendment and Early Expiration Agreement with Universal CityWalk.
The agreement released the Company from any future obligations under the
lease and allowed the Company to vacate the premises on February 15, 2008.
The parties agreed to a settlement and release fee to be paid in installments
between February 15 and July 1, 2008. The first $25,000 was paid in January,
and the second $25,000 was due on March 1 and has been delayed (See Item 3.
Legal Proceedings).
|
|
|
|
|
|
On
February 6, 2008, the Company entered into a Second Amended and Restated
Secured Bridge Note with Ropart Asset Management due December 31, 2008 and
increased the note amount from $600,000 to $800,000, and the collateral was
increased by 2 SMS simulators.
|
|
|
|
|
|
Payments
on notes due in first quarter of 2008 with Mall of Georgia and Mall of
America had been missed, and the Company was in communication with both
landlords seeking more time to complete proposed financing before making
payments. The landlords have been agreeable as of this filing, but there is
no assurance that their agreeable position will continue until payments are
made.
|
42
I
TEM 9. CHANGES IN AND DISAGREEMENTS
WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
I
TEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and
Procedures.
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Our disclosure controls and procedures were designed to provide reasonable
assurance that the controls and procedures would meet their objectives.
As
of December 31, 2007, we carried out the evaluation of the effectiveness of our
disclosure controls and procedures as defined by Rule 13a-15(e) under the
Exchange Act under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer.
Due to an identified material weakness as described in Management’s Report on
Internal Controls Over Financial Reporting in Item 9A(b) below, our Chief
Executive Officer and Chief Financial Officer concluded that, as of December
31, 2007, our disclosure controls and procedures were not effective to provide
reasonable assurance that information we are required to disclose in reports
that we file or submit under the Exchange Act is: (i) recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules
and forms, and (ii) accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure. Notwithstanding the
existence the identified material weaknesses in internal controls, we believe
that the consolidated financial statements fairly present, in all material
respects, our consolidated balance sheet as of December 31, 2007 and our
consolidated statements of operations, stockholders’ equity and cash flows for
the years ended December 31, 2007 and 2006 in conformity with GAAP.
(b)
Management’s Report on Internal Control Over Financial Reporting
Our
management, under the supervision of the Chief Executive Officer and Chief
Financial Officer, is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP. Internal control over financial
reporting includes policies and procedures that:
(1) pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of our assets;
(2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that our
receipts and expenditures are being made only in accordance with authorization
of our management and directors; and
43
(3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisitions, use or disposition of our assets that could have a material
effect on our financial statements.
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented
or detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design safeguards to reduce,
though not eliminate, this risk.
Using
the guidelines set forth in the report
Internal Control-Integrated Framework
published by the Committee of Sponsoring Organizations of the Treadway
Commission, known as COSO, management has concluded that our internal control
over financial reporting was not effective as of December 31, 2007 due to existence
of a material weakness in our internal controls.
A
material weakness is a control deficiency, or a combination of control
deficiencies, that result in a more than remote likelihood that a material
misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis. Our management, in consultation with
our independent registered public accounting firm, concluded that a material
weakness existed in the following area as of December 31, 2007:
|
|
|
|
|
|
•
|
Lack
of segregation of duties within the accounting department due to the small
size of the Company and the small size of the accounting staff.
|
|
|
|
Management
is actively seeking to remediate this material weakness in the following
manner:
|
|
|
|
|
|
|
•
|
As
the Company grows and generates capital available for staffing increases, a
priority will be staffing the accounting department to a level such that
reports are reviewed and responsibilities are strategically divided among
multiple persons.
|
Notwithstanding
the existence any material weaknesses in internal controls, we believe that the
consolidated financial statements fairly present, in all material respects, our
consolidated balance sheet as of December 31, 2007 and our consolidated
statements of operations, stockholders’ equity and cash flows for the years
ended December 31, 2007 and 2006 in conformity with GAAP.
This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Our management’s report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of
the SEC that permit us to provide only our management’s report in this annual
report.
There has been
no change in our internal control over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
44
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
The
Board of Directors and Executive Officers of the Company consist of the persons
named in the table below. Vacancies in the Board of Directors may only be
filled by the Board of Directors by majority vote at a Board of Director’s
meeting, or at a shareholders meeting at which stockholders holding a majority
of the issued and outstanding shares of capital stock are present. Each
director shall be elected for the term of one year, and until his or her
successor is elected and qualified, or until his earlier resignation or
removal. The bylaws provide that we have at least one director. The directors
and executive officers of the Company are as follows:
|
|
|
|
|
|
|
|
|
Name
|
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William R.
Donaldson
|
|
51
|
|
Chairman, Chief Executive
Officer, and Secretary
|
|
Carl L.
Smith, Sr.
|
|
66
|
|
Director
|
|
Cary Agajanian
|
|
65
|
|
Director
|
Mr.
Donaldson has been a major influence in the international racing industry for
over 25 years. He served as the Executive Vice President of the Indianapolis
Motor Speedway (“IMS”), the largest spectator stadium in the world, and
concurrently served as President of IMS subsidiaries, IMS Properties and IMS
Events. At IMS, he was on the executive management team that initiated such
events as the NASCAR Brickyard 400, Indy FanFest, the Senior PGA Tournament
held at Brickyard Crossing, the Indy 200 at Walt Disney World, and the launch
of the Indy Racing League. Donaldson also managed the Inaugural NASCAR Sprint
Cup event at Las Vegas Motor Speedway, and he managed the launch of the Petit
Le Mans at Road Atlanta, and the American and European Le Mans Series. He has
extensive experience with domestic and international television broadcasting.
He has a Bachelor of Arts degree from DePauw University in Greencastle,
Indiana.
Mr.
Smith is a successful entrepreneur, whose business interests and ownerships
have over his professional life, spanned a wide variety of products and
services. With over 38 years of experience in business development, marketing,
sales and finance, he provides a diverse level of knowledge and expertise to
the Company. He was the founder of Catalyst Marketing Corporation, a public
company that, under his leadership, grew to become one of the most successful
telecommunications marketing agencies for products and services of industry
giant, MCI, which was later acquired by WorldCom. In 1991, he co-founded Tampa
Bay Financial, Inc., a former venture capital firm that specialized in
micro-cap, first stage corporate investments and, one year later, was selected
as a member of the prestigious “Who’s Who of American Business Executives”. Mr.
Smith has successfully engineered the turn around and revitalization of several
troubled public companies and has also been involved in capitalizing and taking
many young private companies public through a reverse merger strategy.
Mr.
Agajanian literally grew up in the sport of auto racing, with his family running
racing teams and racetracks. He now owns Motorsports Management International,
a multi-faceted company that is an industry leader in the areas of event
representation, corporate consulting, and sponsorship negotiation. For the past
10 years, Mr. Agajanian has served on Motorsports boards such as the Automobile
Competition Committee of the United States (ACCUS), the American Motorcyclist
Association (AMA, Vice-Chairman) and United States Auto Club (USAC) Properties.
Mr. Agajanian’s company has been involved in securing hundreds of sponsorship
arrangements and is the only company in the United States to offer star race
drivers premium representation services in corporate structures, pension
benefits, trusts and estates and contract negotiation. NASCAR SPRINT Cup star
Tony Stewart has been represented by Motorsports Management International, and
Agajanian also previously represented Jeff Gordon. Mr. Agajanian’s car
ownership division has entered cars in the Indianapolis 500 for 36 consecutive
years and now owns one of the premier teams in the NASCAR Busch Series.
45
The Company has no standing
or separate audit committee, but rather the entire Board of Directors functions
as the audit committee. The Board of Directors has determined that due to the
size of the board of directors, and the limited resources of the Company, it is
in the Company’s best interest to have the entire board function as the audit
committee.
Our Executive Officers are
elected by the Board on an annual basis and serve at the discretion of the
Board.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires that our executive
officers, directors and persons who beneficially own more than 10% of the
Company’s Common Stock to file initial reports of ownership and reports of
changes in ownership with the SEC. Such persons are required by SEC regulations
to furnish us with copies of all Section 16(a) forms filed by such persons.
Based
solely on our review of such forms furnished to us and representations from
certain reporting persons, filing requirements applicable to our executive
officers, directors and more than 10% stockholders have been complied with
during the twelve months ending December 31, 2007
Code of Ethics
The Company has adopted a Code of Ethics which is applicable to all
officers, directors and employees of the Company. A copy of the Code of Ethics
is available on the Company’s website which is www.smsonline.com under the
investor relations button. The Company will forward, without charge, a copy of
the Code of Ethics to any person requesting a copy. Requests should be directed
to Interactive Motorsports and Entertainment Corp. Attn: Code of Ethics at 5624
W. 73
rd
Street, Indianapolis, Indiana, 46278.
ITEM 11.
EXECUTIVE COMPENSATION
The
following table sets forth information concerning the compensation paid to all
persons serving as the Company’s chief executive officer and the Company’s most
highly compensated executive officers other than its chief executive officer
who were serving as executive officers at December 31, 2007 and whose annual
compensation exceeded $100,000 during such year (collectively, the “Named
Executive Officers”).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
Compensation Table
|
|
|
Name and
Principal
Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Stock
awards
|
|
Option
awards
|
|
Nonequity
Incentive
plan
compensation
|
|
Nonequity
Nonqualified
Deferred
compensation
earnings
|
|
All Other
Compensation
(2)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William R. Donaldson,
Chairman and CEO
|
|
2007
|
|
$
|
150,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
$
|
8,518
|
|
|
$
|
158,518
|
|
|
|
2006
|
|
$
|
150,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
$
|
7,513
|
|
|
$
|
157,513
|
|
|
|
|
|
(2)
|
Includes cost of medical
and life insurance.
|
Because
the Company has not granted stock options or other equity awards to employees to
date, the equity awards table is not included in this document.
46
Director Compensation
Directors
of the Company are currently not paid for their services; however, the Company
is considering establishing a compensation plan utilizing stock awards versus
cash payments in 2008.
Because
the Company has not compensated directors to date, the equity awards table is
not included in this document.
Indemnification for Securities Act
Liabilities
Indiana
law authorizes, and the Company’s Bylaws provide for, indemnification of the
Company’s directors and officers against claims, liabilities, amounts paid in
settlement and expenses in a variety of circumstances. Indemnification for
liabilities arising under the Act may be permitted for directors, officers and
controlling persons of the Company pursuant to the foregoing or otherwise.
However, the Company has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
Stock Options and Warrants
The Company does not
currently have a stock option plan.
Compensation Committee Interlocks
and Insider Participation
No
executive officers of the Company serve on the Compensation Committee (or in a
like capacity) for the Company or any other entity.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain
Beneficial Owners
The
following table sets forth certain information with respect to the beneficial
ownership of our Common Stock as of February 29, 2008 for each person or entity
that is known by us to beneficially own more than 5 percent of our Common
Stock. As of June 13, 2008, the Company had 105,503,910 shares of Common Stock
outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and
Address of Beneficial Owner
|
|
Amount of
Beneficial
Ownership
|
|
Nature of
Ownership
|
|
Percent
of
Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William R. Donaldson,
Carmel, IN
|
|
|
17,753,209
|
|
|
Direct
|
|
|
15.46
|
%
|
|
Vikki Cook, Sarasota, FL
|
|
|
10,207,933
|
|
|
Direct
|
|
|
8.89
|
%
|
|
Ropart Asset Management
Fund, LLC
|
|
|
10,075,311
|
|
|
Direct
|
|
|
8.77
|
%
|
|
James Matheny, Cary, NC
|
|
|
8,691,151
|
|
|
Direct
|
|
|
7.57
|
%
|
|
Dolphin Direct Equity
Partners, LP
(a)
|
|
|
7,141,500
|
|
|
Direct
|
|
|
6.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
53,869,104
|
|
|
|
|
|
49.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Dolphin Direct Equity
Partners, LP (Dolphin) is the beneficial owner of 5,161,500 and 1,980,000
warrants that expire December 31, 2009 and March 31, 2010, respectively, and
are exercisable at any time prior to expiration. The calculation used to
determine The Percent of Class attributable to Dolphin assumes all the
warrants held by Dolphin are exercised. The totals include Dolphin’s
beneficial ownership of shares pursuant to the Warrants which are exercisable
within 60 days.
|
47
Security Ownership of Management
The
following table sets forth certain information with respect to the beneficial
ownership of our Common Stock as of February 29, 2008 for each of our directors
and each of our Named Executive Officers, and all directors and executive
officers as a group. As of June 13, 2008, the Company had 105,503,910 shares of
Common Stock outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
Name,
Position and Address of Beneficial Owner
|
|
Amount of
Beneficial
Ownership (1)
|
|
Nature of
Ownership
|
|
Percent
of
Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William R. Donaldson,
Chairman, Chief Executive Officer, and Secretary; Carmel, Indiana
|
|
|
17,753,209
|
|
|
Direct
|
|
|
15.46
|
%
|
|
Carl L. Smith, Director;
Sarasota, Florida
|
|
|
—
|
|
|
n/a
|
|
|
—
|
|
|
Cary Agajanian, Director;
Los Angeles, California
|
|
|
—
|
|
|
n/a
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,753,209
|
|
|
|
|
|
15.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Executive Officers & Directors as a
Group (3 persons)
|
|
|
17.753,209
|
|
|
|
|
|
15.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Beneficial ownership is determined in accordance with SEC rules and generally
includes holding voting and investment power with respect to the securities.
Shares of Common Stock subject to options or warrants currently exercisable, or
exercisable within 60 days, are deemed outstanding for computing the percentage
of the total number of shares beneficially owned by the designated person, but
are not deemed outstanding for computing the percentage for any other person.
Change in Control
We
are not currently engaged in any activities or arrangements that we anticipate
will result in a change in control of the Company.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 10, 2003, the Company issued to a related
party a total of $50,000 of Secured Bridge Note as previously disclosed in that
Form 8-K filed on March 13, 2003. This note was issued to Mr. William R.
Donaldson, the Chairman and Chief Executive Officer of the Company.
In December of 2006, DGI, Inc., an Indiana
corporation managed by and under majority ownership of William R. Donaldson,
purchased ten (10) Reactor simulators for $370,000 from Perfect Line and
subsequently leased the simulators to Sprint Nextel (6) and Toyota (4). Mr.
Donaldson is the Chairman and Chief Executive Officer of the Company.
In March of 2007, DGI, Inc., an Indiana corporation
managed by and under majority ownership of William R. Donaldson, purchased
fourteen (14) Reactor simulators for $574,000 from Perfect Line and
subsequently leased the simulators to Sprint Nextel (12) and Toyota (2). Mr.
Donaldson is the Chairman and Chief Executive Officer of the Company.
DGI also has a refundable deposit on future
simulators with Perfect Line in the amount of $77,325 as of December 31, 2007,
48
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
Fees
for audit services from HJ and Associates for the years ended December 31, 2007
and December 31, 2006 were $46,000 and $55,000, respectively. Those auditing
fees included fees associated with the annual audit, reviews of quarterly
reports on Form 10-Q and procedures required by GAAP and GAAS.
Audit-Related Fees
There
were no fees for audit-related services from HJ and Associates for the years
ended December 31, 2007 and December 31, 2006.
Tax Fees
Fees
from HJ and Associates for tax services, including fees for review of the
consolidated federal income tax return for the years ended December 31, 2007
and December 31, 2006 were $2,700 and $6,155, respectively.
All Other
Fees
No
fees were billed by HJ and Associates for the fiscal years ending December 31,
2007 and December 31, 2006, other than those specified above.
49
PART IV
ITEM 15.
EXHIBITS, Financial Statement Schedules
|
|
|
|
|
A.
|
Exhibits.
|
|
|
|
|
|
|
3(i)
|
Articles of Incorporation
1
|
|
|
3(ii)
|
By-Laws
1
|
|
|
10.1
|
Form of Secured Bridge
Notes
2
|
|
|
10.2
|
Form of Procurement
Contract
3
|
|
|
10.3
|
Form of Master Revenue
Sharing Agreement
3
|
|
|
10.4
|
Asset Purchase Agreement
with Race Car Simulation Corporation, a portfolio company of Dolphin Direct
Equity Partners, LP
4
|
|
|
10.5
|
Asset Purchase Agreement
with Checker Flag Lightning, LLC (“CFL”), a Michigan limited liability
corporation
5
|
|
|
10.6
|
Form of 2006 Secured
Promissory Note
6
|
|
|
10.7
|
Form of 2006 Common Stock
Purchase Warrant
6
|
|
|
10.8
|
Form of 2007 Secured
Promissory Note
6
|
|
|
10.9
|
Form of 2007 Common Stock Purchase
Warrant
6
|
|
|
11.1
|
Computation of Earnings
(Loss) Per Share
|
|
|
21.1
|
Subsidiaries
|
|
|
31.1
|
Certification of William
R. Donaldson as Chief Executive Officer and Chief Financial Officer pursuant
to Rule 13a-14 of the Security Exchange Act of 1934.
|
|
|
32.1
|
Certification of William
R. Donaldson as Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
|
|
|
32.2
|
Certification of William
R. Donaldson as Chief Financial Officer and Treasurer pursuant to 18 U.S.C.
Section 1350.
|
|
|
|
|
|
|
1) Incorporated by
reference from Form 10-QSB filed on November 16, 2002
|
|
|
2) Incorporated by
reference from Form 8-K filed on March 13, 2003
|
|
|
3) Incorporated by
reference from Form 10-QSB filed on May 17, 2004
|
|
|
4) Incorporated by
reference from Form 8-K filed on January 6, 2005
|
|
|
5) Incorporated by
reference from Form 8-K filed on January 6, 2006
|
|
|
6) sIncorporated by
reference from Form 10-QSB filed on November 16, 2007
|
|
|
|
|
|
B.
|
Reports on
Form 8-K.
|
|
|
|
|
|
|
None
|
|
50
PRE-APPROVAL
POLICY FOR AUDIT AND NON-AUDIT SERVICES
The
Company
does not have a standing audit committee, and the full Board performs all
functions of an audit committee, including the pre-approval of all audit and
non-audit services before the Company engages an accountant. All of the
services rendered to the Company by HJ & Associates, LLC after March 18,
2004 were pre-approved by the Board of Directors of the Company.
The
Company
contemplates working with its legal counsel to establish formal pre-approval
policies and procedures for future engagements of the Company’s accountants.
The new policies and procedures will be detailed as to the particular service,
will require that the Board or an audit committee thereof, if one is
established, be informed of each service, and will prohibit the delegation of
pre-approval responsibilities to management. It is currently anticipated that
the Company’s new policy will provide (i) for an annual pre-approval, by the
Board or audit committee, of all audit, audit-related and non-audit services
proposed to be rendered by the independent auditor for the fiscal year, as
specifically described in the auditor’s engagement letter, and (ii) that
additional engagements of the auditor, which were not approved in the annual
pre-approval process, and engagements that are anticipated to exceed previously
approved thresholds, will be presented on a case-by-case basis, by the Chairman
of the Board of Directors, for pre-approval by the Board or audit committee,
before management engages the auditors for any such purposes. The new policy
and procedures may authorize the Board or audit committee to delegate, to one
or more of its members, the authority to pre-approve certain permitted
services, provided that the estimated fee for any such service does not exceed
a specified dollar amount (to be determined). All pre-approvals shall be
contingent on a finding, by the Board, audit committee, or delegate, as the
case may be, that the provision of the proposed services is compatible with the
maintenance of the auditor’s independence in the conduct of its auditing
functions. In no event shall any non-audit related service be approved that
would result in the independent auditor no longer being considered independent
under the applicable rules and regulations of the Securities and Exchange Commission.
There
were no fees in 2007 which were not pre-approved by the Board of Directors. All
services described above under the captions “Audit Fees”, “Audit Related Fees”
and “Tax Fees” were approved by the Board of Directors pursuant to SEC
Regulation S-X, Rule 2-01(c)(7)(i).
51
EXHIBIT INDEX
EXHIBITS:
52
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INTERACTIVE
MOTORSPORTS AND ENTERTAINMENT CORP.
|
|
|
|
|
|
|
Date: November 17, 2008
|
By:
|
/s/
William R. Donaldson
|
|
|
|
|
|
|
|
|
|
William R. Donaldson
|
|
|
|
|
Chairman of the Board and
Chief Executive Officer
|
|
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
|
Date: November 17, 2008
|
By:
|
/s/
William R. Donaldson
|
|
|
|
|
|
|
|
|
|
William R. Donaldson
|
|
|
|
|
Chairman of the Board and
Chief Executive Officer
|
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
Date: November 17, 2008
|
By:
|
/s/
William R. Donaldson
|
|
|
|
|
|
|
|
|
|
William R. Donaldson
|
|
|
|
|
Chief Financial Officer
and Treasurer
|
|
|
|
|
(Principal
Financial Officer)
|
|
|
|
|
|
|
|
Date: November 17, 2008
|
By:
|
/s/ Carl
L. Smith
|
|
|
|
|
|
|
|
|
|
Carl L. Smith
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
Date: November 17, 2008
|
By:
|
/s/ Cary
Agajanian
|
|
|
|
|
|
|
|
|
|
Cary
Agajanian
|
|
|
|
|
Director
|
53
Interactive Motorsports ... (GM) (USOTC:IMTS)
Historical Stock Chart
From May 2024 to Jun 2024
Interactive Motorsports ... (GM) (USOTC:IMTS)
Historical Stock Chart
From Jun 2023 to Jun 2024
