10-K 1 k12312000.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission file number 33-7764-C Interactive Gaming and Communications Corp. Inc. Exact name of registrant as specified in charter) Delaware (State or other jurisdiction of incorporation or organization) 23-2838676 (I.R.S. Employer Identification No.) 1220 Valley Forge Road Bldg #19, Valley Forge PA 19462 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 941-0305 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001/par value per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X ] No [] As of May 24, 2001, there were 23,084,903 shares of the Registrant's common stock outstanding. The aggregate market value of the Registrant's voting stock held by nonaffiliates of the Registrant was approximately $2,263,772 computed at the closing price for the Registrant's common stock on the NASD Bulletin Board on May 24, 2001 TABLE OF CONTENTS Page PART I 1. Business 1 2. Properties 4 3. Legal Proceedings 4 4. Submission of Matters to a Vote of Securities Holders 5 PART II 5. Market Price for Registrant's Common Equity and Related Stockholder Matters 6 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 7. Financial Statements 10 8. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure 10 PART III 9. Directors, Executive Officers, Promoters and Control Persons 10 10. Executive Compensation 10 11. Security Ownership of Certain Beneficial Owners and Management 10 12. Certain Relationships and Related Transactions 10 PART IV 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 10 Signatures 11 PART I ITEM I. DESCRIPTION OF BUSINESS GENERAL HISTORY AND ORGANIZATION Interactive Gaming & Communications Corp. formerly, Sports International Ltd. the("Company") was incorporated in the state of Delaware in June 1986 under the name of "Entertainment Tonight Video Express Ltd." to develop a market for the home delivery of video cassette rentals, which effort was abandoned in November 1987. From December 1987 until August 1994, the Company did not conduct any operations, transactions or business activities. In August 1994, the Company began negotiations to acquire Sports International, Ltd. (Antigua) and its business from the stockholders of Sports International, Ltd. (Antigua), and successfully closed the transaction in October 1994, in accordance with its Plan of Reorganization. PLAN OF REORGANIZATION At the Special Meeting of Shareholders held on September 9, 1994, the shareholders of the Company approved a Plan of Reorganization which required; (1) the reverse split of one (1) for four (4) shares of the common stock of the Company; (2) the acquisition of Sports International, Ltd. (Antigua) by the exchange of Stock and Notes; (3) the election of former officers and directors of Sports International, Ltd. (Antigua) to the Board of Directors of the Company, and (4) the amendment of the Company's Certificate of Incorporation changing the Company's name from Entertainment Tonight Video Express Ltd. to Sports International, Ltd. Effective March 27, 1996, the Company changed its name to Interactive Gaming & Communications Corp. to reflect its expanding operations. ACQUISITION - EXCHANGE OF STOCK AND NOTES None NATURE OF OPERATIONS The Company is a holding company publicly trading on the National Association of Securities Dealers Automated Over the Counter (OTC)Market Bulletin Board under the trading symbol "IGAC". Intersphere Communications, Ltd. (PA) ("Intersphere") and Interactive Gaming Corp. (Delaware) ("IGC"). Each of the Company's subsidiaries provides several unique and proprietary products and services to the emerging Internet, national and international marketplaces. The Company is responsible for supplying its subsidiaries with administrative and management assistance, accounting, consulting and necessary funding to complete projects or initiate endeavors. Intersphere is a software development, marketing and Internet 215: Communications Company specializing in the Internet market. Intersphere developed the LiveAction Gaming Platform (formerly known as WiseGuy) wagering system, the first wagering system that allows casino race & sports books to take a wager from a customer over the Internet. The LiveAction Gaming Platform was first used by the Company in 1995. Intersphere's revenues are derived from Web Page Development and Design, traditional advertising, licensing of the LiveAction Gaming Platform and the development of other related gaming software products and B to B Internet solutions. INDUSTRY SEGMENTS The gaming industry is comprised of five separate service industries: (1) traditional pari-mutuel wagering on horse and dog racing; (2) casino and riverboat gambling; (3) lotteries; (4) charitable organization gambling (Bingo and Las Vegas Nights); and (5) sports book. The Company operates in all of the above segments via the Internet/Intranet, telecommunications and broadband video streaming utilizing proprietary software developed by its subsidiaries and joint venture affiliates. The Company derives its revenues from licensing fees and royalties on its products, advertising revenue from its portal web sites and Internet related Business to Business development and design services. MARKETING The Company primarily advertises its products and services during peak periods of sporting events (September through April) in both gaming and gambling related magazines and newspapers. The success of increased revenues is directly dependent upon the amount of advertising in both conventional and Internet markets. INTELLECTUAL PROPERTY The Company currently holds no patents. However, the Company has applied for US Trademark registration for several of its software products and marketing. GOVERNMENT REGULATION None FUTURE DEVELOPMENTS The Company plans to develop an Internet/Intranet based pari-mutuel wagering system for the thoroughbred horse racing and greyhound racing industry. The system, when completed, will offer to pari-mutuel operators the ability to Broadband video stream its live races to its customer while at the same time making a wager. The system will be designed to replace existing pari-mutuel systems while at the same time interface with existing systems until replacement can be effectively accomplished. The finished product will be marketed to Horse tracks, Greyhound tracks and Jai-Lai facilities worldwide through its subsidiary IGC. EMPLOYEES As of December 2000, the Company had 4 full-time employees: 1 software engineer; 1 marketing personnel; 2 HTML writer. The Company also utilizes full-time and part-time consultants on an as-needed basis. None of the company's employees are represented by a labor union and the Company believes its relations with its employees are satisfactory. BACKLOG The nature of the Company's business does not involve any backlog. INSURANCE The Company maintains general liability and workers' compensation insurance, which covers injury to employees. COMPETITION Many segments of the Internet, Internet gaming and pari-mutuel wagering industry are characterized by intense competition, with a large number of companies and syndicates offering similar wagering systems, Business to Business and Internet solutions. These entities, in most instances, have vastly greater resources than the Company. The Company estimates that there are several companies that offer similar Internet/intranet casino race & sports book products. However, since the majority of these enterprises are privately owned, and 330: financial information is not publicly available, the Company is unable to evaluate its position among its competitors. ITEM 2. DESCRIPTION OF PROPERTIES Leases The Company leases office space in Valley Forge, Pennsylvania on a month to month basis. Rental expense under operating leases was $ 41,023 and $ 46,088 in 2000 and 1999, respectively. ITEM 3. LEGAL PROCEEDINGS In May, 2001, the Company was named as a defendant in the 351: United States Bankruptcy Court, District of New Jersey in connection with the alleged fraudulent transferor of assets in connection with the contemplated business combination of the Company with an entity whose principal assets were formerly owned by Century Industries, Inc. The Company denies liability in all respects and vigorously intends to defend. In addition, the Company believes that the outcome of the litigation will not in any event have a material adverse effect on the Company's financial condition or results of operations. The Company has filed suit against International Gaming to collect payments due under a $4,990,000 note representing payment for the capital stock of Sports International, Inc. and Global Casinos, Inc. (Note 19). International Gaming has filed an Answer and Counterclaim asserting there were material misstatements, misrepresentations 365: and omissions from the warranties and representations provided under the Stock Purchase Agreement between the two Companies. The 367: Company has been advised by competent legal counsel that they will receive a judgment, though collection of the amount owed is still uncertain. The Company was sued by, among others, Empire Corporation ("Empire"), who claimed the Company improperly terminated an alleged Joint Venture Agreement, appropriated certain funds belonging to Empire under the agreement and otherwise refused to pay monies due to Empire. Empire also asserted claims of fraud and breach of fiduciary duty. An answer, new matter and counterclaim has been filed by the Company asserting that the Agreement had been properly terminated and that funds are due the Company from Empire. Empire claims damages in excess of $160,000 as well as punitive damage in the amount of $1,000,000. The Company's counterclaim seeks damages in excess of $95,000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None PART II ITEM 5. MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS After the Company completed a Plan of Reorganization, its Common Stock resumed trading on the National Association of Securities Dealers Automated Over the Counter Market (OTC) Bulletin Board on December 19, 1994, under the trading symbol "SBET". The following table sets forth high and low closing sales prices (in dollars) for the Company's Common Stock, as reported on the Bulletin Board, since trading resumed. 2000 1999 1998 High Low High Low High Low First Quarter 2.25 .18 .21 .13 Second Quarter 0.8438 0.1094 .875 .35 .16 .11 Third Quarter 0.1875 0.125 1.25 .3125 .44 .13 Fourth Quarter 0.0938 0.0156 1.41 .49 .08 .05 On May 24, 2001 the last reported sales price for the Common Stock was $0.03. On May 24, 2001 the Company had approximately 1550 shareholders. DILUTION AND ABSENCE OF DIVIDENDS The Company has not paid any cash dividends on its common stock in the past and does not anticipate paying any such cash dividends in the foreseeable future. Earnings, if any, will be retained to finance future growth. The Company may issue shares of its common stock in private and/or public offerings to obtain financing, capital, or to acquire other businesses that can improve the performance and growth of the Company. Issuance/sales of substantial amounts of common stock could adversely affect prevailing market prices in the Common Stock of the Company. DESCRIPTION OF THE COMPANY'S SECURITIES Common Stock The authorized capital stock of the Company consists of 75,000,000 shares, $.001 par value ("Common Stock"), of which 23,084,903 shares are issued and outstanding as at May 24, 2000. Approximately 10,807,369 shares of Common Stock issued in connection with the reverse merger acquisition, conversion of Notes, and for 520: certain services and the gaming license are "restricted" shares, as such term is used in Rule 144 of the Securities Act of 1933, as amended. The holders of Common Stock are entitled to one vote per share for the election of directors and all other purposes and do not have cumulative voting rights. The holders of Common Stock are entitled to receive dividends when, as, and if declared by the Board of Directors and, in the event of the liquidation by the Company, to receive prorata all assets remaining after payment of debts and expenses. Holders of the Common Stock do not have any pre-emptive or other right to subscribe for or purchase additional shares of capital stock. All the outstanding shares of Common Stock are fully paid and non-assessable. SALE OF UNREGISTERED COMMON STOCK AND COMMON STOCK WARRANTS Effective June 26, 1996, the Company entered into a stock and warrant purchase agreement with a software developer and issued 375,000 shares of restricted common stock for $750,001 and a common stock purchase warrant for $1,000. The common stock purchase warrant is for 100,000 shares at a purchase price of $1.00 per share and expires on June 30, 2001. The Company's private offering represented 3.3% of the outstanding common stock at June 26, 1996. On October 11, 1996, the Company issued 254,474 shares of restricted common stock in settlement of accounts payable of $508,947 incurred in the development of the "Virtual Casino" software. On June 30, 1997, the Company issued 29,250 shares of restricted common stock in settlement of service of $42,000 rendered in the development of the "Virtual Casino" software. On May 25,1999 the company issued a warrant for 4,000,000 shares of the Company's common stock at a purchase price of $0.01 per share and expires on December 31, 2004. The warrants were issued in connection with the Company's sale Gamblenet Technologies, Ltd. ("Gamblenet") for $2,600,000 consisting of $140,000 in cash and a five year note for $2,500,000. On December 30, 1999 the Company issued 7,500,000 shares of restricted common stock pursuant to an agreement entered into on June 22, 1999 with Century Industries, Inc. ("Century"). The agreement calls for certain control block shareholders of Century to sell to the Company 53.26% of Century's issued and outstanding Class A shares in exchange for the Company's common stock. As of May 24, 2000 the deal has not been completed. However, the Company anticipates the finalization of the Century acquisition to take place in the immediate future. Preferred Stock In May 1995, the shareholders approved an amendment of the Company's Certificate of Incorporation to authorize the issuance of up to 10,000,000 shares of preferred stock. The amendment permits the Board of Directors to issue from time to time authorized but unissued shares of preferred stock and to fix and determine the terms, limitations, relative rights and preferences of such shares. On December 30,1999 the company's Board of Directors, in connection with the Century control block acquisition, have approved the issuance of 1,000,000 shares of Series A Voting Convertible Preferred stock with each share having the equivalent of fifteen (15) common stock votes. The shares may be converted into shares of the Company at 15 shares Common stock for every 1 share Preferred. At December 31, 1999, no preferred stock of the Company had been issued. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000 AND 1999 The continuing operations for the Company as restated for both years and as discussed prospectively herein reflect licensing fees, royalties and other revenues earned from traditional advertising sources 603: and Internet related development and design fees. Accordingly, such revenues for 1999 were $1,199,400 as compared to $666,123 for 2000. The decrease in revenues for 2000 resulted from a decrease in software licensing agreements. Licensing and royalties fees for gaming and software licenses accounted for 65% of the revenues in 1999. The remaining revenues were generated from advertising and other Internet related services. Expenses from continuing operations decreased from $1,675,305 in 1999 to $ 1,353,394 mainly as a result of a reduction in personal for ongoing system development and decreased charges for depreciation and doubtful accounts in 1999 amounting to $313,496. In addition, in 1999 the Company obtained computer equipment under noncancelable leases. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital deficit increased by $ 352,136, from $1,203,035 in 2000 to $850,899 in 1999. The increase was a result of trying to develop further casino games. Further cost reductions and anticipated revenue growth from licensing as described in the Prospective Outlook discussion that follows should contribute to a gradual increase in the working capital deficit. If the outlook for greater revenues and reduced expenditures does not meet its goals, then the Company will seek joint venture partners or private placement funding to obtain capital to meet current working capital demands. The continuation of the Company in its present form is dependent upon its ability to obtain additional financing, if needed, and the eventual achievement of sustained profitable operations. Although there can be no assurances that the Company will be able to obtain such financing in the future, the Company did demonstrate its ability to obtain such financing in 1996 with its strategic alliances 636: to develop new proprietary products and the sale of Sports and Casinos in 1998. However, there are no assurances that management's future actions will be successful or, if they are not successful, that the Company would be able to continue as a going concern. INFLATION Inflation has not had a significant impact on the Company's comparative results of operations. PROSPECTIVE OUTLOOK Certain matters discussed in this section contain forward-looking statements, including without limitation, statements containing the Company's future revenue and earnings. These forward-looking statements involve risks and uncertainties, which could cause actual results to differ materially from those projected. On February 23, 1999, the Company and Century Industries, Inc. ("Century") entered into a joint effort agreement and formed Gamblenet Technologies, Ltd. ("Gamblenet"). The Company and Century each own 50% of Gamblenet's initially outstanding common shares. In exchange for the Company's 50% interest, the Company licensed certain gaming and software licenses to Gamblenet along with 4,000,000 restricted shares of the Company's Common Stock, which have been reserved for, but have not been issued. On June 22, 1999, the Company entered into a majority acquisition and parent/subsidiary relationship agreement with Century Industries, Inc. ("Century"). The agreement calls for certain control block shareholders of Century to sell to the Company 53.26% of Century's issued and outstanding shares in exchange for 7,500,000 shares of the Company's common stock. The Company expects to complete the transaction in the immediate future. The Company will focus its efforts on software development such as pari-mutuel wagering platform for Internet/Intranet horse racing and licensing its proprietary products and exclusive licensing privileges for future revenues. The Company has effectively exited the Internet gaming business involving the acceptance of customers' wagers with the sale of its gaming subsidiaries Sports and Casinos in March 1998 and will be engaged principally in its gaming and entertainment software development business. ITEM 7. FINANCIAL STATEMENTS The Financial Statements attached to this Report on Form 10KSB as pages F1 - F20 are incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUTNING AND FINANCIAL DISCLOSURES None ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS ITEM 10. EXECUTIVE COMPENSATION ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL SHAREHOLDERS The table below sets forth information as to each person owning of record or who was known by the Company to own beneficially more than 5% of the 23,134,903 shares of issued and outstanding Common Stock of the Company as of December 31, 2000 and information as to the ownership of the Company's Common Stock by each of its directors and executive officers and by the directors and executive officers as a group. Except as otherwise indicated, all shares are owned directly, and the persons named in the table have sole voting and investment power with respect to shares shown as beneficially owned by them. Name and Address of Beneficial Owner Nature of Ownership Number of shares Percent Michael F. Simone 4065 RedBud Lane Doylestown, PA 18901 Common Stock Direct 4,487,713 19.4% Joseph Mustilli 1220 Valley Forge Road Valley Forge, PA 19482 Common Stock 1,000.000 0.4% Lawrence Elliot Hirsch Park Town Place #1111 22nd & Parkway Philadelphia, PA 19104 Common Stock 1,000,000 0.4% Harvey A. Carr 1220 Valley Forge Road Valley Forge, PA 19482 Common Stock 300,000 0.01% All Executive Officers and Directors, as a Group (4 Persons) 6,787,713 24.4% PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K SIGNATURES Pursuant to the requirements of section 13 or 15(2) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Interactive Gaming and Communications Corp. Dated: May 24th, 2001 By: /s/ Lawrence Elliott Hirsch Lawrence Elliott Hirsch President and Chief Executive Officer SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FINANCIAL STATEMENTS AND SCHEDULES DECEMBER 31, 2000 AND 1999 FORMING A PART OF ANNUAL REPORT PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934 INTERACTIVE GAMING & COMMUNICATIONS CORP. INTERACTIVE GAMING & COMMUNICATIONS CORP. Index to Financial Statements Page Report of Independent Certified Public Accountants F-3 Consolidated Balance Sheet at December 31, 2000 and 1999 F-4 Consolidated Statements of Losses for the two years ended December 31, 2000 and 1999 F-5 Consolidated Statements of Stockholders' Equity for the two years ended December 31, 2000 and 1999 F-6 Consolidated Statement of Cash Flows for the two years ended December 31, 2000 and 1999 F-7 Notes to Consolidated Financial Statements F-8 - F-19 STEFANOU & COMPANY, LLP CERTIFIED PUBLIC ACCOUNTANTS 1360 Beverly Road Suite 305 McLean, VA 22101-3621 703-448-9200 703-448-3515 (fax) Philadelphia, PA REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Interactive Gaming & Communications Corp. Valley Forge, Pennsylvania 777: We have audited the accompanying consolidated balance sheet of Interactive Gaming & Communications Corp. and its subsidiaries at December 31, 2000 and 1999 and the related consolidated statements of losses, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted 910: auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 788: In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Interactive Gaming & Communications Corp. and its subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business. As discussed in Note B to the financial statements, the Company has negative working capital at December 31, 2000 and negative cash flows from operations for the years ended December 31, 2000 and 1999 . The Company will need to seek other financing or generate sufficient cash flows to pay the current liabilities of continuing operations. The Company incurred a loss from continuing operations of $ 687,255 in 2000 and $ 443,372 in 1999 and there is no assurance that profitable operations will be achieved in the future. These factors, among others, raise substantial doubt abo t the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ STEFANOU & COMPANY, LLP Stefanou & Company, LLP Certified Public Accountants McLean, Virginia May 14, 2001 F-3 INTERACTIVE GAMING & COMMUNICATIONS CORP. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 2000 1999 ASSETS Current assets: Cash and equivalents $ - $ 47,301 Accounts receivable, net of allowance for doubtful accounts of $ 0 and $ 25,550, respectively 2,975 18,798 Other accounts receivable - 6,460 Total current assets 2,975 72,559 Property and equipment, at cost, net of accumulated depreciation and amortization 144,710 224,585 Other assets: Systems development costs, net of accumulated amortization 1,037,399 1,202,616 Gaming and software licenses, net of accumulated amortization 303,916 342,537 Security deposits and other assets - 1,118 $ 1,489,000 $ 1,843,415 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Cash disbursed in excess of available balances $ 8,734 $ - Current portion of long-term debt (Note E) 258,740 352,714 Current portion of capitalized lease obligation (Note H) 39,166 21,747 Accounts payable and accrued expenses 899,370 548,997 Total current liabilities 1,206,010 923,458 Long term debt, less current liabilities ( Note E) - 81,026 Long term portion of capitalized lease ( Note H) - 36,713 STOCKHOLDERS' EQUITY : Preferred stock, 10,000,000 shares authorized none issued - - Common stock, $0.001 par value, 75,000,000 shares authorized, 23,134,903 issued and outstanding at December 31, 2000; 23,084,903 shares issued and outstanding at December 31, 1999 23,135 23,085 Additional paid-in capital 5,462,839 7,464,184 Subscription and note receivable (1,875,000) (4,044,322) Deficiency in retained earnings (3,327,984) ( 2,640,729) Total stockholders' equity 282,990 802,218 $ 1,489,000 $ 1,843,415 See accompanying notes to consolidated financial statements F-4 INTERACTIVE GAMING & COMMUNICATIONS CORP. CONSOLIDATED STATEMENTS OF LOSSES FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 2000 1999 Revenues: Software licensing and fees $ 666,123 $ 1,199,400 Operating expenses: Selling, general and administrative 1,042,667 1,350,359 Interest expense 27,120 37,000 Depreciation and amortization 283,607 287,946 1,353,394 1,675,305 Other Income Interest income and other income 16 32,533 16 32,533 Loss from continuing operations, before income taxes, discontinued operations and extraordinary item (687,255) (443,372) Provision for income taxes - - Loss from continuing operations, before continued operations and extraordinary item (687,255) (443,372) Loss before extraordinary item - (443,472) Extraordinary item- forgiveness of debt, net of related income taxes - 115,509 Net Loss $ (687,255) $ (327,863) Net loss per common share ( Note J): Basic and diluted: Loss from continuing operations $ (0.03) $ (0.02) Extraordinary income 0.00 0.00 Net loss per share $ (0.03) $ (0.02) Weighted average common shares outstanding: (Basic and assuming dilution) 23,097,400 18,696,615 See accompanying notes to consolidated financial statements F-5 INTERACTIVE GAMING & COMMUNICATIONS CORP. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 Common Shares Amount Additional Paid In Capital Deficiency in Retained Earnings Note Receivable Total Balance at December 31, 1998 13,701,290 $ 13,701 $ 2,676,296 $ (2,312,866) $ - $ 377,131 Sale of warrant ( Note I) 2,628,000 (2,169,322) 458,678 Shares issued in exchange for services 1,883,613 1,884 292,388 - - 294,272 Shares issued in connection with acquisition ( Note K) 7,500,000 7,500 1,867,500 - (1,875,000) - Net loss, 1999 - - - (327,863) - (327,863) Balance at December 31, 1999 23,084,903 23,085 7,464,184 (2,640,729) (4,044,322) 802,218 Warrants issued in exchange for debt - - 165,527 - - 165,527 Shares issued in exchange for services 50,000 50 2,450 - - 2,500 Write-off of subscription receivable (Note I) - - (2,169,322) - 2,169,322 - Net loss. 2000 - - - (687,255) - (687,255) Balance at December 31, 2000 23,134,903 $ 23,135 $ 5,462,839 $ (3,327,984) $ (1,875,000) $ 282,990 See accompanying notes to consolidated financial statements F-6 INTERACTIVE GAMING & COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 2000 1999 Cash flows from operating activities: Net loss $ (687,255) $ (327,863) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 283,607 287,946 Common stock issued for services 2,500 294,272 (Increase) decrease in assets: Accounts receivable 15,823 (11,864) Other assets 7,578 1,118 Increase (decrease) in liabilities, Accounts payable and accrued expenses 350,192 (442,125) Net cash (used in)provided by operating activities (27,555) (198,516) Cash flows from investing activities: Purchase of equipment and software - (276,291) Net cash used in investing activities - (276,291) Cash flows from (used) financing activities: Cash disbursed in excess of available bank balances 8,734 - Payments of notes payable (175,000) (190,479) Proceeds from notes payable, net 165,814 187,718 Proceeds form capital lease obligation, net - 60,483 Payments of capitalized leases, net (19,294) Proceeds from warrant - 458,678 Net cash from (used in) financing activities (19,746) (516,400) Increase (decrease) in cash (47,301) 41,593 Cash at beginning of year 47,301 5,708 Cash at end of year $ - $ 47,301 Supplemental disclosures of cash flow information Cash paid during the year for interest $ 26,774 $ 26,774 Cash paid during the year for taxes - - Warrants issued in exchange for debt 165,527 - Common stock issued for services 2,500 294,272 Assets purchased under capital lease obligation, net - 60,483 See accompanying notes to consolidated financial statements F-7 INTERACTIVE GAMING & COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE A- SUMMARY OF ACCOUNTING POLICIES A summary of accounting policies applied in the preparation of the accompanying consolidated financial statements follows. Basis of Presentation The consolidated financial statements include the accounts of Interactive Gaming & Communications C orp., the "Company" and its wholly- owned subsidiaries, Play For Fun, Inc., Global Gaming Corp ("Global") and Intersphere Communications, Ltd. (PA Corp.) ("Intersphere"). Significant intercompany transactions have been eliminated in consolidation. Financial Instruments The carrying amounts of cash, accounts receivable, notes payable, long-term debt, and accounts payable approximate fair value at December 31, 2000 and 1999. System Development Costs The Company capitalizes the cost of developing certain software products it plans to market in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" (Note D). Amortization is computed on an individual product basis and is the greater of: (a) the ratio of current gross revenues for a product to the total amount and anticipated future gross revenues for the product or (b) the straight-line method over the estimated economic life of the product. The Company is using an estimated economic life of ten years. Gaming and Software Licenses Through its subsidiaries Global and Intersphere, the Company licenses its gaming operations and sports wagering software The Company has valued these licensing agreements at their fair value as determined by the present value of anticipated future cash flows. Amortization is provided using the straight-line method over 10 to 12 years and was $ 38,591 and $ 42,247 in 2000 and 1999 , respectively. Accumulated amortization at December 31, 2000 was $81,732. Revenue Recognition Software revenue is recognized when an arrangement exists, installation has occurred, fees are determinable and collection is probable. F-8 INTERACTIVE GAMING & COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE A- SUMMARY OF ACCOUNTING POLICIES (continued) Property and Equipment For financial statement purposes, property and equipment are depreciated using the straight-line method over their estimate d useful lives (five years for furniture, fixtures and equipment). . Depreciation and amortization expense for 2000 and 1999 was $ 287,942 and $ 31,770, respectively. An accelerated method of depreciation is used for tax purposes. Property and equipment at December 31, 2000 and 1999 is comprised of the following: 2000 1999 Furniture and fixtures $ 19,521 $ 19,521 Machinery & equipment 269,161 269,161 Computer software 4,780 4,780 Transportation equipment 97,789 97,789 391,251 391,251 Less: accumulated depreciation and amortization (246,541) (166,666) $ 144,710 $ 224,585 Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 19 1, "Accounting for Income Taxes." Under the method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets, and liabilities are measured using the enacted tax rates expected to be in effect when the differences are settled. Cash Equivalents For purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity date of three months or less to be cash equivalents. Long-Lived Assets The Company accounts for its long-lived assets under the provision of Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-Lived assets and for Long-Lived Assets to be Disposed of (SFAS 121). F-9 INTERACTIVE GAMING & COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE A- SUMMARY OF ACCOUNTING POLICIES (continued) The Company's long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long- lived assets based upon forecasted undercounted cash flows. Should an impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate dispositi on of the asset. Stock Based Compensation The Company accounts for stock based compensation using the intrinsic value method prescribed in Accounting Principle Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" with respect to options and warrants granted to employees. Advertising The Company follows the policy of charging the costs of advertising to expenses incurred. Advertising costs charged to expenses in 2000 and 1999 was $ 42,364 and $ 27,437, respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly actual results could differ from those estimates. The Company has recognized the value of its gaming and software licensing agreements based on the anticipated future revenues. Additionally, the Company believes that certain capitalized software development 1710: costs are also recoverable through anticipated future revenues. These anticipated future revenues are management's best estimates of future cash flows to be derived from these products. The Company's value of these products is based on certain assumptions management has made based on information available at December 31, 2000. Capitalized software development costs of approximately $ 1,652,149 at December 31, 2000 are still under development and realization will be dependent upon the ability to market the software. It is reasonably possible that these estimates and assumptions may change within one year from the balance sheet date based on changes in operations and revenues. Concentrations of Credit Risk Financial instruments and related items which potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with high credit qua lity institutions. F-10 INTERACTIVE GAMING & COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE A- SUMMARY OF ACCOUNTING POLICIES (continued) At times, such investments may be in excess of the FDIC insurance limit. The Company has a broad customer base and it routinely assesses the financial strength of its customers. The Company periodically reviews its trade receivables in determining its allowance for doubtful accounts. The allowances for doubtful accounts was $ 0 and $25,550 at December 31, 2000 and 1999, respectively.. Earnings Per Share The Company has adopted Statement of Financial Accounting Standard No. 128, "Earnings Per Share," specifying the computation, presentation and disclosure requirements of earnings per share information. Basic earnings per share has been calculated based upon the weighted average number of common shares outstanding. Stock options and warrant's have been excluded as common stock equivalents in the diluted earnings per share because they are either antidilutive, or their effect is not material. Comprehensive Income Statement of Financial Accounting Standards No.130, "Reporting Comprehensive Income" ("SFAS 130"), establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFA S 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company adopted SFAS 130 during the year ended December 31, 1998 and has no items of comprehensive income to report. New Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pension and Other -Post Employment Benefits ("SFAS 132") in the year ended December 31, 1999. SFAS No. 132 establishes disclosure requirements regarding pension and post employment obligations. SFAS No. 132 does not effect the Company as of December 31, 1999. The Company adopted Statement of Financial Standards No. 133, Accounting for Derivative Instruments and for Hedging Activities ("SFAS No. 133") in the year ended December 31, 1999. SFAS No. 133 requires that certain derivative instruments b e recognized in balance sheets at fair value and for changes in fair value to be recognized in operations. Additional guidance is also provided to determine when hedge accounting treatment is appropriate whereby hedging gains and losses are offset by losses and gains related directly to the hedged item. SFAS No. 133's impact on the Company's consolidated financial statements is not expected to be material as the Company has not historically used derivative and hedge instruments. F-11 INTERACTIVE GAMING & COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE A- SUMMARY OF ACCOUNTING POLICIES (continued) In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (" SAB 101"), Revenue Recognition in Financial Statements, which will become effective December 31 2000. The Company does not expect the standard to have a materia l effect on its financial condition or operating results. In March 2000, the Financial Accounting Standards Board issued interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of APB No. 25 for (a) the definition of employee for purposes of applying APB No. 25, (b) the criteria for determin ing whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 2, 2000 but certain conclusions cover specific events th at occur after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have an affect on the Company's financial statements but may impact the accounting for grants or awards in future periods Reclassifications Certain balances and amounts in the 1999 financial statements have been reclassified to conform with the 2000 presentation. NOTE B- BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES The accompanying statements have been prepared on a going concern basis, which contemplates the realizatio n of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements during the years ended December 31, 2000 and 1999 , the Company incurred loses from operations of $ 687,255 and $ 443,372, respectively. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's existence is dependent upon management's ability to develop profitable operations and resolve it's liquidity problems. Management anticipates the Company will attain profitable status and improve it liquidity through the continued developing, marketing and selling of its products and additional equity investment in the Company. The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern. The Company had a working capital deficiency of $ 1,203,035 at December 31, 2000 , and negative cash flows from operating activities of $ 27,555 and $ 198,516 in 2000 and 1999, respectively. The Company continues to seek other financing or generate sufficie nt cash flows to pay the current liabilities of continuing operations. These factors, among others, indicate the Company's ability to continue in existence is dependent F-12 INTERACTIVE GAMING & COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE B- BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES (continued) upon favorable governmental regulations, its ability to achieve adequate profitable operations and/or obtain additional debt or equity financing. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets amounts that might be necessary should the Company be unable to continue in existence. Management anticipates generating revenue and cash flows from its software licensing agreements. Additionally, management plans to continue to refine its operations, control expenses, evaluate alternative methods to conduct its business, and seek available and attractive sources of debt or equity financing through a combination of a private placement , and sharing of development costs, or other resources. There can be no assurance that the Company's efforts will be successful. If operations and cash flows continue to improve through these efforts, management believes that the Company can continue to operate. However, no assurance can be given that management's actions will result in profitable operations or the resolution of its liquidity problems. NOTE C- RELATED PARTY TRANSACTIONS Included in accounts payable and accrued expenses is $ 99,045 and $55,369 at December 31, 2000 and 1999, respectively, which represents advances from stockholders or officers of the Company. No formal agreements or repayment terms exist. In December 1999, the Company issued an aggregate of 5,000,000 warrants to purchase the Company's common stock at $.001 per share to certain Company shareholders who had previously advance funds to the Company in exchange for those obligations totaling $ 165,527. NOTE D- SYSTEMS DEVELOPMENT COSTS In May 1995, the Company signed a definitive letter of intent with a major software developer to produce and mark et a "Virtual Casino" by offering its customers the opportunity to play classic casino games, such as blackjack, craps, roulette, baccarat and slot machine games, on their personal computers using the Internet World Wide Web, with the Company managing the wagering. Additionally in September 1996, the Company entered into a software development and licensing agreement with another software developer to develop a "Global Casino" to provide services similar to the above on a state-of-the- art operating platform. After the economic and technical feasibility of the projects had been established, the Company began funding them. Costs incurred subsequent to the establishment of technological feasibility and directly related to the project have been capitalized. Capitalized project costs were $1,652,149 at December 31, 2000. The "Global Casino" project was completed in 1997 and amortization expense was $ 119,104 and $ 165,215 in 2000 and 1999, respectively. Accumulated amortization was $ 284,319 at December 31, 2000. As management has made estimates in determining the net realizable value of system development costs, it is reasonably possible that these values will change in the near term. F-13 INTERACTIVE GAMING & COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE E- LONG TERM DEBT Long-term debt at December 31, 2000 and 1999 consists of the following: 2000 1999 Bank loan payable in monthly installments of accrued interest at the bank's prime lending rate plus 1% .The note is unsecured and guaranteed by a Company officer and Director. $ 199,929 $ 195,980 Bank loan payable in monthly installments of $ 4,606, plus accrued interest at the bank's prime lending rate plus 1.5% The note is guaranteed by a Company officer and Director and collateralized by 1,000,000 shares of company stock owned by the Company's President. 58,811 68,403 Shareholder loan payable in monthly installments of $950 including interest at 9.75 % per annum, unsecured - 41,444 Shareholder loan payable in monthly installments of $950 including interest at 9.75 % per annum, unsecured - 41,848 Shareholder demand note payable, interest at bank prime lending rate, plus 1.5%, unsecured - 86,065 258,740 433,740 Less current portion 258,740 352,714 Long-term debt $ - $ 81,026 F-14 INTERACTIVE GAMING & COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE F- INCOME TAXES The Company has adopted Financial Accounting Standard number 109 which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax base s of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant. For income tax reporting purposes, the Company's aggregate unused net operating losses approximate $ 3,200,000 which expire through 2015. The deferred tax asset related to the carryforward is approximately $ 1,088,000. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earning hist ry of the Company, it is more likely than not that the benefits will be realized. Components of deferred tax assets as of December 31, 2000 are as follows: Non Current: Net operating loss carryforward $ 1,088,000 Valuation allowance (1,088,000) Net deferred tax asset $ - NOTE G-STOCK OPTION PLANS The following table summarizes the changes in options outstanding and the related prices for the shares of the Company's common stock issued to a former Officer of the Company . Number Weighted Average Number of of shares Exercise Price Shares Exercisable Outstanding at December 31, 1998 50,000 $ - 50,000 Granted - - Exercised - - - Cancelled (50,000) - (50,000) Outstanding at December 31, 1999 - - - Granted - - - Exercised - - - Cancelled - - - Outstanding at December 31, 2000 - - - F-15 INTERACTIVE GAMING & COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE G-STOCK OPTION PLANS (continued) The fair value of the options at the date of grant was ominal. The options were not exercised . Accordingly, no compensation expense related to the options granted has been recognized by the Company. In June 1996, the Company entered into a stock and warrant purchase agreement with a software develope and issued 375,000 shares of restricted common stock for $750,001 and a common stock purchase warrant for $1,000. The common stock purchase warrant is for 100,000 shares at a purchase price of $1.00 per share and expires on June 30, 2001. The warrant is outstanding at December 31, 2000. NOTE H-COMMITMENTS As of December 31, 2000, the Company had computer equipment and software purchased under non-cancelabl e leases with an original cost of $ 67,393 included in the Company's consolidated balance sheet. Depreciation and amortization of $ 13,478 and $5,616 has been charged to operations in 2000 and 1999, respectively. The Company is in default under the terms of the lease and the aggregate balance due of $ 39,166 is included in current liabilities at December 31, 2000. Litigation In May, 2001, the Company was named as a defendant in the United States Bankruptcy Court, District of New Jersey in connection with the alleged fraudulent transferor of assets in connection with the contemplated business combination of the Company with an entity whose principal assets were formerly owned by Century Industries, Inc. The Company denies liability in all respects and vigorously intends to defend. In addition, the Company believes that the outcome of the litigation will not, in any event, have a material adverse effect on the Company's financial condition or results of operations. F-16 INTERACTIVE GAMING & COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE H-COMMITMENTS (continued) The Company was sued by, among others, Empire Corporation ("Empire"), which claimed the Compa ny improperly terminated an alleged Joint Venture Agreement, appropriated certain funds belonging to Empire under the agreement and otherwise refused to pa y monies due to Empire. Empire also asserted claims of fraud and breach of fiduciary duty. An answer, new matter and counterclaim has been filed by the Company asserting that the Agreement had been properly terminated and that funds are due the Company from Empire. Empire claims damages in excess of $160,000 as well as punitive damage in the amount of $1,000,000. The Company's counterclaim seeks damages in excess of $95,000. In the opinion of management, the ultimate outcome of this case in unknown. Other litigation The Company, in the normal course of business, is subject to litigation and is presently involved as a defendant in several lawsuits. In the opinion of management, the ultimate outcome of these cases is unknown and any exposure to liability, if any, cannot be estimated at this time. Consequently, no amounts have been accrued at December 31, 2000. NOTE I- DISPOSITION OF GAMBLENET TECHNOLOGIES, LTD. In February 1999, the Company and Century Industries, Inc. ("Century") formed Gamblenet Technologies, Ltd. ("Gamblenet"). The Company and Century each owned 50% of Gamblenet's initially outstanding common shares. In exchange for t he Company's 50% interest in Gamblenet, the Company licensed certain gaming and software licenses to Gamblenet and, as further consideration, issued a warrant to purchase 4,000,000 shares of the Company's restricted common stock at the stock's par value of $ .001 per share. The warrant expires December 31, 2004. In May, 1999, Gamblenet, whose principal asset was the warrant to purchase 4,000,000 shares of the Company's restricted common stock, was sold to an unrelated third party in exchange for $2,628,000, comprised of $ 128,000 in cash and a promissory note payable to the Company in the amount of $ 2,500,000. The note, which bears interest at 6% per annum, matures in May, 2004 with principal payments of $ 500,000 due annually prior thereto. The Company received an aggregate of $ 458,678 in 1999 in connection with this transaction and was accounted for as additional paid in capital. The amount of the promissory note outstanding at December 31, 1999 was $2,169,322 and is shown on the balance sheet as a reduction in stockholders' equity In 2000, the maker of the note defaulted under the terms of the note and the Company's management deemed the balance of the obligation to be uncollectible. Accordingly, the unpaid balance of $ 2,169,322 was written off as uncollectible and additional paid in capital was reduced. In May 2001, certain holders of the warrant exercised their rights to acquire 2,630,051 shares of the Company's restricted common stock underlying the warrant. F-17 INTERACTIVE GAMING & COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE J-LOSSES PER COMMON SHARE The following table presents the computation of basic and diluted loss per share: 2000 1999 Net loss available for common shareholders $ 687,255 $ ( 327,863) Basic and fully diluted loss per share $ (.03) $ (0.02) Weighted average common shares outstanding 23,097,400 18,696,615 Net loss per share is based upon the weighted average number of shares of common stock outstanding. NOTE K-RESCISSION OF BUSINESS COMBINATION In June, 1999, the Company issued 7,500,000 shares of its restricted common stock in exchange for a subscripti on receivable valued at $ 1,875,000 for the purpose of acquiring a controlling interest in certain assets formerly owned by Century Industries, Inc . ("Century"). In December, 1999, the Company authorized a series of 1,000,000 shares of the Company's preferred stock as convertible preferred stock ("Series A Voting Convertible Preferred Stock"). After five years, each share of the Preferred Stock is convertible into 15 shares of the Company's Common Stock. In addition, the holders of the preferred stock may not convert their shares to the Company's common stock unless the Company earns $.25 per share on a fully diluted basis for the year ended prior to the conversion; the market value of the Company's common shares has averaged $5.00 per share for 30 days prior to the conversion; and the shares will remain intact as a class, and shall remain restricted as a control block , salable pursuant to SEC rule 144 In the event of liquidation, dissolution, or winding up of the Company, the holders of the Preferred Stock have a liquidation preference of $1.00 per share . In December 1999, the Company entered into a Share and Lock Up Agreement whereby, if consummated, the Company agreed to exchange its common and convertible preferred stock for assets formerly held by Century. The purpose of the Agreement was to allow the Company and the entity controlling the assets formerly held by Century to combine their respective financial statements. In 2000, the Company authorized its stock transfer agent to issue 1,000,000 shares of its convertible preferred stock in connection with the proposed transaction. The business combination was not consummated and the certificate representing the 1,000,000 shares of the Company's convertible preferred stock was returned to the Company and cancelled in April, 2001. Since the Company did not consummate the transaction and the shares were not delivered by the escrow agent the accompanying financial statements reflect the convertible preferred shares as never being issued. In addition, the 7,500,000 shares of restricted common stock previously issued in connection with this Agreement were returned to the Company in May, 2001 and the subscription receivable of $1,875,000 was cancelled. F-18 INTERACTIVE GAMING & COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE L- SUBSEQUENT EVENT In January 2001, the Company entered into a non-binding Letter of Intent to license certain Company software and sell the Company's wholly owned subsidiary, Play for Fun, Inc. The proposed terms of the license agreement are as follows: ? $ 200,000, payable at closing ? $1,800,000 in the form of a promissory note, bearing interest at the prime lending rate plus 2% per annum ? The term of the $ 1,800,000 note shall be for 36 months, with monthly payments of interest accruing and commencing 60 days after closing. The unpaid principal, together with unpaid interest shall be due and payable in full at the due date of the Loan. The proposed terms of the sale of Play for Fun, Inc. are as follows: ? At closing, the Company shall receive a 9.9% equity interest in the Purchaser's company ? The Company shall receive 50% of all profits earned by Play For Fun, Inc. for a period of 3 years from the date of closing. Profits are defined as earnings before interest expense, taxes, depreciation and amortization. F-19