-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BTEBoHflDhHhY6c8z/Ate533EL4eCCTrL1rYGR1x8t74N88khV3tankjhnWHLQ0J qgb0h4tFZtX25RyK9nWfhw== 0000799197-97-000002.txt : 19970401 0000799197-97-000002.hdr.sgml : 19970401 ACCESSION NUMBER: 0000799197-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERACTIVE GAMING & COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000799197 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 232838676 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-07764-C FILM NUMBER: 97570239 BUSINESS ADDRESS: STREET 1: 595 SKIPPACK PIKE STREET 2: SUITE 100 CITY: BLUE BELL STATE: PA ZIP: 19422 BUSINESS PHONE: 2155408185 MAIL ADDRESS: STREET 1: 595 SKIPPACK PIKE STREET 2: STE 100 CITY: BLUE BELL STATE: PA ZIP: 19422 FORMER COMPANY: FORMER CONFORMED NAME: SPORTS INTERNATIONAL LTD DATE OF NAME CHANGE: 19941102 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 Commission file Number 33-7764-C INTERACTIVE GAMING & COMMUNICATIONS CORP. (Exact name of registrant as specified in its charter.) Delaware 23-2838676 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 595 Skippack Pike, Suite 300, Blue Bell, PA 19422 (Address of principal executive offices (Zip Code) Registrant's telephone number, including area code: (215) 540-8185 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 March 14, 1997, there were 13,672,040 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 $7,449,182 computed at the closing price for the Registrant's common stock on the NASD Bulletin Board on March 14, 1997. TABLE OF CONTENTS Page Part I 1. Business 1 2. Properties 4 3. Legal Proceedings 5 4. Submission of Matters to a Vote of Securities Holders 5 Part II 5. Market Price for Registrants Common Equity and Related Stockholder Matters 6 6. Selected Financial Data 8 7.Management's Discussion and Analysis of Financial Condition and Results of Operations 11 8. Financial Statements and Supplementary Data 13 9, Changes in and Disagreement with Accountants on Accounting and Financial Disclosure 34 Part III 10. Directors and Executive Officers of the Registrant 34 11. Executive Compensation 37 12. Security Ownership of Certain Beneficial Owners and Management 38 13. Certain Relationships and Related Transactions 39 Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 40 Exhibit 27, Financial Data Schedule (For electronic Filing Purposes Only) 41 Signatures 42 PART I ITEM I. 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 The acquisition of all of the capital stock of Sports International, Ltd. (Antigua) was completed on October 20, 1994 by the issuance of 4,500,000 common shares (post split) and an aggregate of $4,000,000 of the Company's Convertible Notes (the "Notes") to shareholders of Sports International, Ltd. (Antigua). The Notes were scheduled to mature on December 31, 1996, together with interest at the prevailing prime rate, accrued quarterly, and were convertible into common stock at the rate of one share for each $1.00 of outstanding principal amount and accrued interest. All the shares issued to the Sports International, Ltd. (Antigua) stockholders and the shares issuable upon conversion of the Notes, together with accrued interest, are "restricted" shares, as such term is used in Rule 144, promulgated under the Securities Act of 1933, as amended. These Notes were converted into 4,000,000 shares of common stock effective December 31, 1994 and the interest thereon was waived in connection with the conversion. 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 "SBET". The Company is comprised of three subsidiaries and two divisions. The Gaming and Licensing Division includes Sports International, Ltd. (Grenada) ("Sports"), formerly Sports International, Ltd. (Antigua), and Global Gaming Corp. (Grenada) ("Global"). The Advertising/Software Division includes Intersphere Communications, Ltd. (Grenada) ("Intersphere"). A fourth subsidiary was formed in January 1997, Global Casinos, Ltd. (Grenada) ("Casinos"), and will be a member of the Gaming and Licensing Division in 1997. 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. Sports operates the world's first international Internet sports book. Sports betting enthusiasts, once they have established an account, can place a wager on just about any sporting event over the phone or the Internet via a personal computer. Wagers are accepted on all major sporting events in the U.S. and Europe. Sports operates its business under a gaming license issued and authorized by the government of Grenada. Sports is the principle source of revenue for the Company, generally accounting for 95% and 100% of the Company's net revenues for the years ended December 31, 1996 and 1995, respectively. Global is the exclusive principal international gaming license holder in the country of Grenada, West Indies. Through this exclusive licensing agreement with the government of Grenada, Global has the right to operate and issue sub licenses to qualified gaming companies for operating international casinos or sports books via the Internet or other telecommunications. Revenues are derived from annual licensing fees and a percentage of the sub licensees' net revenues. Intersphere is a software development, marketing and communications company specializing in the Internet market. Intersphere developed the WiseGuy Sports Wagering (Wise Guy) system, the first sports wagering system that allows casino sports books to take a wager from a customer over the Internet. The WiseGuy system was in development for over a year and is now in use by Sports. Intersphere's revenues are derived from Web Page Development and Design, traditional advertising, licensing of the Wise Guy system and the development of other related software products. The Company's newest subsidiary, Casinos, operates the world's first Internet Casino and Sports book. Casinos, in conjunction with its joint venture partner, has developed proprietary casino gaming and sports wagering software for use by customers over the Internet. 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. Currently, the Company operates primarily in the sports book segment and secondarily in horse racing. In 1997, the Company will also operate in the casino segment via the Internet. Marketing The Company's Gaming and Licensing Division primarily advertises its services during peak periods of sporting events (September through April) in gambling related magazines and newspapers, and will continue this method of advertising in the future. Recently, the Company commenced advertising its wagering services on the Internet. Initial responses have been good and the Company plans to continue the advertising on a year round basis. Government Regulation The business of the Company's Gaming and Licensing Division is conducted through its wholly owned subsidiaries which are legally organized in Grenada and licensed by the Grenadan government to conduct its business. The subsidiaries' business activities emanating from outside Grenada (customers' wagers and licensing) may become materially affected by regulations, laws or statues that may be promulgated by the various foreign, federal, state and/or local governments or their respective agencies in the future or the enforcement of such laws or regulations. In this regard, Item 3, Legal Proceedings, is hereby incorporated by reference and there are no assurances that the outcome of these proceedings will materially effect the manner in which the subsidiaries conduct its business in the future. The Company's legal position, after extensive advice of counsel, is that its gaming and gambling operations, conducted in Grenada, are not subject to regulation by the United States or its constituent states or commonwealths therein. Future Developments In March 1997, the Company launched its live Internet Casino via its Casino subsidiary. The first entertainment offered to its customers was a slot machine tournament. The Company plans to introduce more live games in the second quarter of 1997. The Company also has plans to eventually develop an interactive gaming system for the Internet World Wide Web. Employees As of March 21, 1997, the Company had 32 full-time employees: 3 software engineers; 3 graphic designers; 14 computer operators engaged in accepting and processing wagers; 6 marketing personnel; 1 HTML writer; and 5 employees engaged in service support. The Company also utilizes full-time and part-time consultants on an as-needed basis. None of the company's employees is 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. During 1996, the Company implemented a medical insurance plan for its officers and employees. Competition Many segments of the gaming industry are characterized by intense competition, with a large number of companies and syndicates offering the same wagering or seeking to develop sports wagering. All of these entities in most instances have vastly greater resources than the Company. The Company believes that with telephone betting, a certain trust must be established between the bettor and the Company, and the personnel who accept, process and manage the bet. Funds must be deposited by the bettor in advance and/or left on deposit, which funds are not readily available to the bettor in case of an emergency or change of plans. ITEM 2. PROPERTIES To conduct the business of its Gaming and Licensing Division, its subsidiaries presently lease and occupy approximately 5,500 square feet in St. George's, Grenada for its office and living quarters for non-Grenadan employees. The leases are for a maximum of three years and, in some cases, on a month-to-month basis. The leases expire on various dates through August 1997. The leases provide for current annualized rent of approximately $70,000. Commencing January 1, 1996, the Company entered into a three year lease for its corporate headquarters and the Advertising/Software Division in Blue Bell, Pennsylvania. The lease provides for current annualized rent of approximately $72,000. ITEM 3. LEGAL PROCEEDINGS On February 18, 1997, a search warrant ( the "Warrant") was issued, filed in the United States District Court for the Eastern District of Pennsylvania, authorizing the Federal Bureau of Investigation to search the premises of the Company's executive offices and the offices of Intersphere in Blue Bell, Pennsylvania including any and all computer hardware, software, peripheral devices and computer-related documentation on any of such premises. The Warrant lists a variety of items to be obtained based on the assumption that there was a violation of federal laws and that an illegal gambling business was being conducted from its premises in Pennsylvania. Based on the advice of counsel with significant criminal law, trial and appellate experience and comprehensive understanding of the jurisdictional scope of gaming laws, both domestic and international, management does not believe the gaming operations of its subsidiaries violate either the laws of the United States or the Commonwealth of Pennsylvania, since no gaming or gambling operations are conducted there. Management's belief is based principally on its understanding, as interpreted by its counsel, that the operations of the Gaming and Licensing Division are legally authorized in Grenada and, as such, are beyond the scope and outside the jurisdiction of the U.S. criminal laws relating to gaming activities. The Company, through counsel, while co-operating fully with the officials of the United States, intends to move to quash the Warrant and subsequent subpoena in the United States District Court on the grounds that jurisdiction is lacking. Although the Company intends to defend vigorously any action that may ultimately be brought by the United States in connection with the Warrant and subpoena, no assurance can be given that management's beliefs as to the criminality of its subsidiaries' operations, or its basis for such beliefs, are correct and that the Company will prevail. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS There were no matters submitted to a vote of securities holders during year ended December 31, 1996. PART II ITEM 5. MARKET PRICE FOR REGISTRANT'S 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 for the Company's Common Stock, as reported on the Bulletin Board, since trading resumed. 1996 1995 1994 High Low High Low High Low First Quarter 1 3/16 5/8 5 1/4 3/4 N/A N/A Second Quarter 3 3/16 5/8 3 3/4 N/A N/A Third Quarter 2 5/8 1 1/2 2 7/8 N/A N/A Fourth Quarter 2 7/8 2 1/8 3/4 3 1/2 2 On March 14, 1997, the last reported sales price for the Common Stock was $1.4375. On March 14, 1997, the Company had approximately 500 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 25,000,000 shares, $.001 par value ("Common Stock"), of which 13,672,040 shares are issued and outstanding as at March 14, 1997. Approximately 11,789,849 shares of Common Stock issued in connection with the reverse merger acquisition, conversion of Notes, and for certain services and the gaming license are "restricted" shares, as such term is used in Rule 144 of the Securities Act of 1993, 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 November 4, 1996, the Company acquired all the outstanding common stock of Intersphere for 1,000,000 restricted shares of previously unissued common stock of the Company. Intersphere developed an exclusive proprietary product known as the WiseGuy Sports Wagering System. Intersphere's revenue is derived from software licensing fees related to its proprietary product, as well as from advertising, marketing and web page design services primarily to Internet based accounts. On November 4, 1996, the Company also acquired all the outstanding common stock of Global for 1,100,000 restricted shares of previously unissued common stock of the Company. Global owns the exclusive principal master license to conduct gambling operations from the Country of Grenada. The exclusive gambling license is for two six-year terms and allows Global to sell up to four sub-licenses to qualified applicants. 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. At December 31, 1996, no preferred stock of the Company had been issued. ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented on the following table for, and as of the end of, each of the years or periods ended for the four year period ended December 31, 1996, are derived from the financial statements of the Company. For the period to June 30, 1993, the Company was inactive as Entertainment Tonight Video Express Ltd. The financial statement for the period ended December 31, 1993 is unaudited. The financial statements for the year ended December 31, 1994, have been audited by Daniel L. Lieberman, independent Certified Public Accountant. The financial statements for the years ended December 31, 1996 and 1995 have been audited by Parente, Randolph, Orlando, Carey & Associates. The 1995, 1994, and 1993 Selected Financial Data includes solely the operations of Sports International, Ltd. (Antigua). The 1996 Selected Financial Data includes the consolidated reporting of all the Company's subsidiaries included by reference herein. The selected financial data should be read in conjunction with the accompanying consolidated financial statements of the Company and the notes thereto and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." Enter- tainment Tonight Video Express Ltd. July 1, 1987 to June 30, 1996 1995 1994 1993 1993 (2) (3) (Unaudited) (Unaudited) Income Statement Data: Gross handle $58,482,731 $47,817,172 $48,182,264 $31,261,745 $ - Less customer win 55,730,479 45,237,227 45,478,223 30,888,933 - Net win 2,752,252 2,579,945 2,704,041 372,812 - Other revenues 146,243 47,341 28,963 - - Net win and other revenues 2,898,495 2,627,286 2,733,004 372,812 - Expenses 3,594,415 2,417,588 2,433,536 921,401 - Net (loss) income $ (695,920) $ 209,698 $ 299,468 $ (548,589) $ - (Loss) earnings per common share $(0.06) $0.02 $0.03 $(0.05) $ - Weighted average common shares outstanding 11,512,656 10,404,110 10,379,066 10,379,066 6,715,913 (1) Enter- tainment Tonight Video Express Ltd. July 1, 1987 to June 30, 1996 1995 1994 1993 1993 (2) (3) (Unaudited) (Unaudited) Balance Sheet Data: Working capital (deficit) $(1,348,972) $ (352,100) $(146,848) $(228,953) $ - Total assets $ 4,008,364 $ 1,931,886 $ 804,038 $ 317,198 $ - Deficit $ (738,188) $ (42,268) $(251,966) $(551,434) $(894,208) (2) Stockholders' equity (deficit) $1,909,301 $ 303,926 $ 51,713 $(249,755) $ - (1) Before one (1) for four (4) reverse split. (2) Entertainment Tonight Video Express Ltd. ceased all operations in the beginning of fiscal year 1988. The Company elected to eliminate, after June 30, 1993, capital in excess of par value totalling $894,208 against accumulated deficit totalling $894,208 for the periods ended through June 30, 1994. (3) See Note 14 to the consolidated financial statements of Item 8 of this Form 10-K for 1996 acquisitions. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations 1996 versus 1995 Gross handle and other revenues increased by $10,665,559, or 22.5%, from $47,817,172 in 1995 to $58,482,731 in 1996. Net win and other revenues increased by $271,209, or 10.3%, from $2,627,286 in 1995 to $2,898,495 in 1996. The Company's domestic presence in the U.S. together with its move to Grenada from Antigua and other related costs that flowed through to the Consolidated Statement of Operations attributed to the increase of expenses by $1,176,827, or 48.7%, from $2,417,588 in 1995 to $3,594,415 in 1996. The dramatic increase in such expenses as Legal and Professional, Salaries and Telephone were directly related to the acquisitions of our subsidiaries and the increased personnel that go along with these acquired businesses. 1995 versus 1994 Customer wagers totalled $47,817,172 in 1995 as compared to $48,182,264 in 1994. Net win and other revenues decreased by $105,718 in 1995 or 4% from $2,733,004 in 1994 to $2,627,286 in 1995. The resulting decrease in revenues was attributable to the interruption in business suffered by the Company and others during Hurricane Luis in September 1995. In order to provide for such a natural catastrophe in the future, the Company had established a second location in the Caribbean that was used to back-up all wagering emanating over the telephone. Despite incurring costs to repair the damage incurred by Hurricane Luis and establishing a second site, the Company was successful in reducing its expenses by $15,948 in 1995 from $2,433,536 in 1994 to $2,417,588 in 1995. In addition, both the President and Vice President of the Company voluntarily reduced and forgave approximately $74,000 of their salaries in 1995. Liquidity and Capital Resources The Company continued its growth trend of doubling its asset base from $804,038 in 1994 to $1,931,886 in 1995 to $4,008,364 in 1996. The Company's growth was achieved through the subsidiary acquisitions described above. There are no significant plans or demands for any further capital expenditures within the next year. The anticipated revenues from Global, Casinos and Intersphere together with the cost reduction measures described in the Prospective Outlook discussion which follows will remedy the working capital deficit of $1,348,972 in 1996 as compared to $352,100 in 1995 and $146,848 in 1994. If our outlook for greater revenues and reduced expenditures does not meet our 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 to develop new proprietary products. 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. Government Regulation - Effect on Financing The Company's business is legally constituted and organized in Grenada, West Indies, and a license fee is paid to the Grenadan government to conduct its business in the Gaming and Licensing Division. The Company's business activities emanating from the United States (customers' wagers) may be materially affected by regulations and actions that may now be in place or will be promulgated in the future by the various local, state, and/or federal government regulators. The uncertainty of how the U.S. and other world governments will look upon gambling on the Internet may deter major financial and/or investment companies from participating in any capital venture with the Company. In this regard, on February 19, 1997, the Company was served with a warrant to produce all records involving gambling activities emanating from the U.S. The Company has co-operated with the U.S. Attorney's office in Philadelphia in providing such records. However, the Company has initiated legal action on its own behalf to defend its position on Internet and off shore wagering. 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. The Company estimates that its investments in 1996 will significantly increase its revenues and earnings. The investment in Global will enable its subsidiary to sell four gaming sub licenses annually for two six year periods. Management estimates that these revenues together with royalties at 1% of licensees' net win will be approximately $500,000 per year. In addition, Global has been granted by the Government of Grenada an exclusive duty free concession which will enable it to purchase equipment for sale to its licensees. Management estimates that the Company will earn an additional $25,000 per licensee as a result of this duty free concession. The investment in Intersphere should provide an additional $100,000 per year in licensing and royalty revenues. Prior to 1996, Intersphere devoted approximately 90% of its time on the development of the proprietary WiseGuy system. Management estimates that in the future, this product should consume only 25% of Intersphere's available productive resources. Accordingly, Intersphere will sell more of its time and design services to unrelated businesses thereby increasing its revenues by about $250,000 per year. Management also anticipates that the Company's revenues from Casinos and its Internet activity will produce an additional $500,000 of annual net win after splitting revenues with its joint venture partner. A major expense to the business is the cost of international telephone and wire services. Last year Sports incurred in excess of $520,000 for such services. The Company has committed to an investment of $85,000 for a commercial telephone switch and fixed cost leased lines which management estimates will generate savings in excess of $300,000 per year into the future. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements and Supplementary Data Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 14 CONSOLIDATED FINANCIAL STATEMENTS: Balance Sheet 15 Statement of Operations 16 Statement of Stockholders' Equity 17 Statement of Cash Flows 18 - 19 Notes to Financial Statements 20 - 31 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE 32 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 33 Financial Statement schedules not included in this Form 10-K have been omitted because they are not applicable or are the required information is shown in the financial statements or notes thereto. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Interactive Gaming & Communications Corp. Blue Bell, Pennsylvania: We have audited the accompanying consolidated balance sheets of Interactive Gaming & Communications Corp. at December 31, 1996 and 1995, and the related consolidated statements of operations, 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. The consolidated financial statements of Sports International, Ltd. as of December 31, 1994, were audited by another auditor, who has ceased operations, and whose report dated April 4, 1995 expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted 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. In our opinion, the 1996 and 1995 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Interactive Gaming & Communications Corp. at December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES Plymouth Meeting, Pennsylvania March 17, 1997 INTERACTIVE GAMING & COMMUNICATIONS CORP. (FORMERLY, SPORTS INTERNATIONAL, LTD.) CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995 AND 1996
1996 1995 ASSETS CURRENT ASSETS: Cash and cash equivalents 208,020 667,766 Restricted cash 200,000 200,000 Accounts receivable, net of allowance for doubtful accounts of $ 61,802 in 1996 and $348,794 in 1995 274,108 348,794 Loan receivable 56,994 49,000 Other 10,969 10,300 Total current assets 750,091 1,275,860 PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS, Net 401,436 205,391 LOAN RECEIVABLE, INTERSPHERE - 138,788 INTANGIBLE ASSETS: Systems development costs 1,652,149 233,641 Gaming and software sub- licenses 1,150,804 - Gaming licenses, net of amortization of $20,000 in 1996 25,000 60,000 Total intangible assets 2,827,953 293,641 OTHER ASSETS 28,884 18,206 Total 4,008,364 $1,931,886
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ 400,000 $ 200,000 Customers' credit balances 1,114,698 877,624 Customers' security deposits 146,051 156,500 Accounts payable and accrued expenses 438,314 393,836 Total current liabilities 2,099,063 1,627,960 STOCKHOLDERS' EQUITY: Common stock, $0.001 par value, 25,000,000 shares authorized, 13,672,040 issued and 10,942,566 shares issued and outstanding in 1996 and 1995 respectively 11,572 10,942 Additional paid-in capital 2,633,817 335,252 Deficit (738,188) (42,268) Total stockholders' equity 1,909,301 303,926 Total 4,008,364 $1,931,886 See Accompanying Notes to Financial Statements
INTERACTIVE GAMING & COMMUNICATIONS CORP. (FORMERLY, SPORTS INTERNATIONAL, LTD.) CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994 ___________________________________ GROSS HANDLE $58,482,731 $47,817,172 $48,182,264 LESS CUSTOMER WIN 55,730,479 45,237,227 45,478,223 NET WIN 2,752,252 2,579,945 2,704,041 OTHER REVENUES: Licensing fees, net $ 70,000 - - Membership fees 11,675 25,160 24,175 Other 64,568 22,181 4,788 Total other revenues 2,898,495 2,627,286 2,733,004 EXPENSES: Salaries 875,285 468,372 668,469 Telephone 520,311 378,497 479,647 Legal and professional 414,905 277,096 283,588 Advertising 353,431 276,027 154,138 Provision for doubtful accounts 286,992 246,649 84,104 Rent 238,799 172,917 178,403 Officer's Salaries 193,267 188,450 272,720 Office 190,382 77,074 62,011 Travel and related expenses 157,885 178,974 146,129 Depreciation 88,882 49,338 21,504 Amortization 80,000 - - Auto 31,828 25,111 - Relocation expense 29,707 - - Insurance 28,590 - - Interest 22,839 - - Bank Charges 22,035 13,640 15,738 Repairs and maintenance 21,598 24,655 3,003 Services and other fees 19,593 9,398 34,776 Other 18,086 31,390 29,306 Total expenses 3,594,415 2,417,588 2,433,536 Net income (loss) $(695,920) $206,698 $299,468 Net income (loss) per common share $ (0.06) $ 0.02 $ 0.03 Weighted average common shares outstanding 11,512,656 10,404,110 10,379,066 See Accompanying Notes to Financial Statements
INTERACTIVE GAMING & COMMUNICATIONS CORP. (FORMERLY, SPORTS INTERNATIONAL, LTD.) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FROM INCEPTION THROUGH DECEMBER 31, 1996
COMMON STOCK ADDITIONAL STOCK- SHARES PAID-IN HOLDERS' OUTSTANDING AMOUNT CAPITAL DEFICIT EQUITY BALANCES, JANUARY 1, 1994 PRIOR TO REORGANIZATION 6,715,913 $ 6,715 $ 889,172 $(895,887) $ - Reverse stock split 4 for 1 (5,036,847) (5,036) 5,036 - Elimination of paid-in capital - - (894,208) 894,208 - BALANCES, BEFORE REVERSE MERGER ACQUISITION AND REORGANIZATION 1,679,066 1,679 - (1,679) - Common stock issued to Sports International, Ltd. (Antigua) stockholders to effect the reverse merger acquisition and reorganization (including the net loss of $549,755 through December 31, 1993) 4,500,000 4,500 295,500 (549,755) (249,755) Common stock issued for services 200,000 20 1,800 - 2,000 Common stock issued for Convertible Note 4,000,000 4,000 (4,000) - - Net income for 1994 - - - 299,468 299,468 BALANCES, DECEMBER 31, 1994 10,379,066 10,379 293,300 (251,966) 51,713 Common stock issued for services and gaming license 563,500 563 41,952 - 42,515 Net income for 1995 - - - 209,698 209,698 BALANCES, DECEMBER 31, 1995 10,942,566 10,942 335,252 (42,268) 303,926 Common stock issued in private offering 375,000 375 749,626 - 750,001 Warrants issued in private offering - - 1,000 - 1,000 Common stock issued for services 254,474 255 508,692 - 508,947 Common stock issued for acquisitions 2,100,000 2,100 1,039,247 - 1,041,347 Net loss for 1996 - - - (695,920) (695,920) BALANCES, DECEMBER 31, 1996 13,672,040 $13,672 $2,633,817 $(738,188) 1,909,301 See Notes to Consolidated Financial Statements
INTERACTIVE GAMING & COMMUNICATIONS CORP. (FORMERLY, SPORTS INTERNATIONAL, LTD.) CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ________ _________ __________ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (695,920) $ 209,698 $ 299,468 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 168,882 49,338 21,504 Abandonment of leasehold improvements 8,297 - - Common stock issued for employee bonuses and consulting fees - 7,515 2,000 (Increase) decrease in assets: Accounts receivable 74,686 (237,410) (84,103) Other assets (11,347) (11,456) (10,150) Increase (decrease) in liabilities: Customers' credit balances 237,074 370,900 97,787 Customers' security deposits (10,449) 156,500 - Accounts payable and accrued expenses 68,816 222,329 121,495 Net cash (used in) provided by operating activities (159,961) 767,414 448,001 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and leasehold improvements (293,224) (73,218 (149,713) Purchase of systems development costs (933,899) (233,641) - Purchase of software sub-license (109,457) - - Purchase of gaming licenses (45,000) (25,000) - Increase in note and loans receivable (7,994) (144,488) (8,300) Intersphere loan assumed 138,788 - - Increase in restricted cash - (200,000) - Net cash used in investing activities (1,250,786) (676,347) (158,013) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 751,001 - - Proceeds from notes payable 200,000 200,000 - Repayment of notes payable - (16,000) (11,000) Shareholder' loans payable - (58,094) (22,910) Net cash provided by (used in) financing activities 951,001 125,906 (33,910) (DECREASE) INCREASE IN CASH (459,746) 216,973 256,078 CASH, BEGINNING 667,766 450,793 194,715 CASH, ENDING $ 208,020 $ 667,76 $ 450,793 (Continued)
INTERACTIVE GAMING & COMMUNICATIONS CORP. (FORMERLY, SPORTS INTERNATIONAL, LTD.) CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 __________ __________ __________ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Common stock issued for services (Note 12) $ 508,947 $ - $ - Common stock issued for acquisitions (Note 14) $ 1,041,342 $ - $ - Common stock issued for gaming license $ - $ 35,000 $ - Common stock issued for employee bonuses and consulting fees $ - 7,515 $ 2,000 Common stock issued to Sports International, Ltd. (Antigua) stockholders to effect the reverse merger acquisition and reorganization $ - $ - $ 87,231 Common stock issued for Convertible Note $ - $ - $ 4,000 SUPPLEMENTAL CASH FLOW INFORMATION, Interest paid $ 22,839 $ - $ - See Notes to Consolidated Financial Statements (Concluded)
INTERACTIVE GAMING & COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BACKGROUND AND NATURE OF OPERATIONS 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. and its business from the stockholders of Sports International, Ltd. 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 for four shares of the common stock of the Company; (2) the acquisition of Sports International, Ltd. by the exchange of Stock and Notes; (3) the election of former officers and directors of Sports International, Ltd. 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 The acquisition of all of the capital stock of Sports International, Ltd. was completed on October 20, 1994 by the issuance of 4,500,000 common shares (post split) and an aggregate of $4,000,000 of the Company's Convertible Notes (the "Notes") to shareholders of Sports International, Ltd. The excess of cost over the fair value of net assets acquired, related to the $4,000,000 Notes, was recorded as an adjustment to common stock and additional paid-in capital upon the conversion of the Notes to common stock effective in 1994 to reflect the substance of the transaction. Notes to Financial Statements (Continued) The Notes were scheduled to mature on December 31, 1996, together with interest at the prevailing prime rate, accrued quarterly, and were convertible into common stock at the rate of one share for each $1.00 of outstanding principal amount and accrued interest. All the shares issued to the Sports International, Ltd. stockholders and the shares issuable upon conversion of the Notes, together with accrued interest, are "restricted" shares, as such term is used in Rule 144, promulgated under the Securities Act of 1933, as amended. These Notes were converted into 4,000,000 shares of common stock effective December 31, 1994 and the interest thereon was waived in connection with the conversion. 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 "SBET". The Company is comprised of three subsidiaries and two divisions. The Gaming and Licensing Division includes Sports International, Ltd. (Grenada) ("Sports") and Global Gaming Corp. (Grenada) ("Global"). The Advertising/Software Division includes Intersphere Communications, Ltd. (Grenada) ("Intersphere"). A fourth subsidiary was formed in January 1997, Global Casinos, Ltd. (Grenada) ("Casinos"), and will be a member of the Gaming and Licensing Division in 1997. 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. Sports operates the world's first international Internet sports book. Sports betting enthusiasts, once they have established an account, can place a wager on just about any sporting event over the phone or the Internet via a personal computer. Wagers are accepted on all major sporting events in the U.S. and Europe. Sports operates its business under a gaming license issued and authorized by the government of Grenada. Sports is the principle source of revenue for the Company, generally accounting for 95% and 100% of the Company's net revenues for the years ended December 31, 1996 and 1995, respectively. Global is the exclusive principal international gaming license holder in the country of Grenada, West Indies. Through this exclusive licensing agreement with the government of Grenada, Global has the right to operate and issue sub licenses to qualified gaming companies for operating international casinos or sports books via the Internet or other telecommunications. Revenues are derived from annual licensing fees and a percentage of the sub licensees' net revenues. Notes to Financial Statements (Continued) Intersphere is a software development, marketing and communications company specializing in the Internet market. Intersphere developed the WiseGuy Sports Wagering (Wise Guy) system, the first sports wagering system that allows casino sports books to take a wager from a customer over the Internet. The WiseGuy system was in development for over a year and is now in use by Sports. Intersphere's revenues are derived from Web Page Development and Design, traditional advertising, licensing of the Wise Guy system and the development of other related software products. The Company's newest subsidiary, Casinos, operates the world's first Internet Casino and Sports book. Casinos, in conjunction with its joint venture partner, has developed proprietary casino gaming and sports wagering software for use by customers over the Internet 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Sports, Global and Intersphere. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Restricted Cash Restricted cash represents a thirty-day certificate-of-deposit held by a financial institution as collateral for a note payable which bears interest at an average rate of 5%. Accounts Receivable The Company extends credit to "Platinum Members" for whom the Company holds a security deposit as collateral for the credit extended. Management believes that the security deposit and the allowance for doubtful accounts are sufficient to cover any potential losses on collection of such accounts. Notes to Financial Statements (Continued) Financial Instruments The carrying amounts of cash, restricted cash, accounts receivable, note and loans receivable, notes payable and accounts payable approximate fair value at December 31, 1996 and 1995. Equipment and Leasehold Improvements Equipment and leasehold improvements are recorded at cost. Depreciation and amortization are provided for on the straight-line method over the estimated useful lives of the assets. Systems Development Costs The Company capitalizes the cost of developing certain software products it plans to market in accordance with Statement of Financial Accounting Standard No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" (Note 8). Gaming and Software Sub-licenses Through its subsidiaries Global and Intersphere, the Company has obtained the exclusive right to sub-license gaming operations and sports wagering software interactively. The Company has valued those sub-licensing agreements at their fair value as determined by the present value of anticipated future cash flows. Gaming Licenses Gaming licenses primarily relate to the Company's Granadian operations. Annually, the Company pays a fee to the Granadian government which it amortizes over the one year term. Common Stock The Company has from time to time issued restricted common stock, unregistered with the Securities and Exchange Commission. The Company's restricted shares are only limited as to the holders ability to resell the stock into the public trading markets. At December 31, 1996 and 1995, 11,789,849 shares and 9,263,000 shares of the total issued and outstanding shares of 13,672,040 and 10,942,566, respectively, were restricted as described above. Notes to Financial Statements (Continued) Common Stock Transactions The Company adopted the recognition provisions of Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" in 1995. Advertising Costs Costs incurred for advertising are expensed as incurred. Income Taxes The Company derives its revenue from its wholly owned subsidiaries, Sports International, Ltd., Intersphere and Global, all of which are incorporated in Grenada. The government of Grenada does not presently impose income taxes on the Company. Accordingly, no provision for income taxes has been reflected in the financial statements. (Loss) Earnings Per Common Share (Loss) earnings per common share for 1996 and 1995 is based on the weighed average number of shares of common stock outstanding during those years. Earnings per share for 1994 is based on the number of shares of common stock outstanding as of December 31, 1994, which reflects the number of shares of common stock exchanged in the reverse merger including the number of shares issued in exchange for the Convertible Note as of December 31, 1994. Reclassifications Certain balances and amounts in the 1995 and 1994 financial statements have been reclassified to conform with the presentation for 1996. 3. BASIS OF PRESENTATION, REGULATION AND CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company had a working capital deficiency of $1,348,972 and $352,100 at December 31, 1996 and 1995, respectively. The majority of the Company's operations are financed by cash flows from operations including customers' credit balances and security deposits, which remain on deposit until customers request repayment. Accordingly, the ability of the Company to continue to finance its operations internally is contingent on customer repayment requests. The Company may need to seek other financing if a significant Notes to Financial Statements (Continued) amount of customers' credit balances and/or security deposits are required to be repaid in a concentrated time period. The Company's business activities, operations and net income are derived primarily from its wagering business in Grenada. The Company incurred a net loss of $695,920 in 1996 and although the business had been profitable during 1995 and 1994, there is no assurance that profits will return. Customers' credit balances and security deposits exceeded cash by $1,052,729 and $366,358 at December 31, 1996 and 1995, respectively. There is no assurance that the Company will develop the liquidity to repay customers, if required, without other financing. Sports is legally constituted in Grenada and pays a license fee to the Granadian government to conduct its business. The Company's business activities emanating from the United States (customers' wagers) may become materially affected by regulations and actions that may now be in place or will be promulgated by the various foreign, federal, state and/or local government agencies in the future. These factors, among others, indicate the Company's ability to continue in existence is dependent 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 significant revenue and cash flows from its new Global Casino operations and gaming and 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, joint venturing and sharing of development costs, or other resources. 4. SIGNIFICANT ESTIMATES AND CONCENTRATIONS Most of the Company's unrestricted cash is held outside the United States and is not covered by FDIC insurance. The Company has provided an allowance for doubtful accounts of $61,802 and $348,794 at December 31, 1996 and 1995, respectively, based on management's analysis and estimates. As a result, it is reasonably possible that management's estimate of the carrying amount of accounts receivable will change in the near term. The Company has recognized the value of its gaming and software sub-licensing agreements based on the present value of anticipated future cash flows. Additionally, the Notes to Financial Statements (Continued) Company has capitalized software development costs and believes these costs are more than 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, 1996. 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. At December 31, 1996 and 1995, 74% and 100% of the Company's net assets were located in Grenada and Antigua, respectively. Substantially all of the Company's revenues are derived from an exclusive gaming license from the government of Grenada. The exclusive gaming license expires in 2008. 5. RELATED PARTY TRANSACTIONS The note receivable is from a Company consultant and shareholder, is unsecured, payable on demand and bears interest at the prime rate plus 1%. Also, the Company paid consulting fees of $35,331 to its Chief Financial Officer. 6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consist of the following at December 31, 1996 and 1995: 1996 1995 Furniture, fixtures and equipment $542,218 $270,777 Leasehold improvements 29,628 12,307 Total cost 571,846 283,084 Less accumulated depreciation and amortization 170,410 77,693 Net $401,436 $205,391 Notes to Financial Statements (Continued) 7. LOAN RECEIVABLE, INTERSPHERE The Company advanced funds to an Internet World Wide Web service company for the purpose of advertising, marketing, promotion, and communications in the print and electronic media. On November 4, 1996, the Company acquired the Internet World Wide Web service company (Intersphere). 8. SYSTEMS DEVELOPMENT COSTS In May 1995, the Company signed a definitive letter of intent with a major software developer to produce and market a "Virtual Casino" by offering its customers the opportunity to play classic casino games on their personal computers, such as blackjack, craps, roulette, baccarat and slot machine games, on 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 and $233,641 at December 31, 1996 and 1995, respectively. Subsequent to December 31, 1996, both projects were substantially completed and amortization will commence in 1997. 9. CUSTOMERS' CREDIT BALANCES AND SECURITY DEPOSITS The Company administers accounts for its customers by depositing funds into a single bank account and maintaining separate records for the amount each customer has on deposit. Customers open accounts by mailing checks or sending funds by wire transfer to an offshore bank account administrated by Sports. The usual wager/bet procedure requires a toll-free telephone call to Sports for the odds on various sporting events. When a bet is placed in Grenada, the amount of the wager is removed from the customer's account. Winnings are credited to the customer's account and may be collected by the customer by requesting that the funds be issued by check to their home address or wire transferred to their bank account. 10. NOTES PAYABLE On December 8, 1995, the Company issued a promissory note payable to a financial institution in the amount of $200,000. The note is collateralized by a certificate-of-deposit Notes to Financial Statements (Continued) in the amount of $200,000. The note bears interest at a fixed rate of 8% and is due on demand. On August 27, 1996, the Company issued a second promissory note payable to the same financial institution in the amount of $200,000. The note is collateralized by 1,000,000 shares of Company stock owned by the Company's President. The note payable bears interest at a variable rate of prime plus 1.5% (9.5% at December 31, 1996) and is due on demand. 11. COMMITMENTS Commencing January 1, 1996, the Company entered into a three year lease for its corporate headquarters in Blue Bell, Pennsylvania. In June 1996, the Company entered into a three-year lease agreement for its wagering operations in St. George's, Grenada. Future minimum rental payments under the leases are as follows: Year ending December 31: 1997 $139,200 1998 140,388 1999 33,732 12. COMMON STOCK TRANSACTIONS On December 13, 1995, the Company: Issued 23,500 shares of restricted common stock as an employee stock bonus to all employees, exclusive of officers and directors, and recognized $4,115 in employee bonuses (based on the fair market value of the stock received); Issued 340,000 shares of restricted common stock as a bonus to management consultants engaged by the Company, and recognized $3,400 in consulting fees (based on the fair market value of services performed); and Issued 200,000 shares of restricted common stock for $35,000 and cash of $25,000 to purchase the gaming license. The total amount capitalized of $60,000 was based on the fair market value of the gaming license. 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. Notes to Financial Statements (Continued) 13. PRIVATE OFFERING OF COMPANY STOCK 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. 14. ACQUISITIONS On November 4, 1996, the Company acquired all the outstanding common stock of Intersphere for 1,000,000 restricted shares of previously unissued common stock of the Company. Intersphere developed an exclusive proprietary product known as the WiseGuy Sports Wagering System. Intersphere's revenue is derived from software licensing fees related to its proprietary product, as well as from advertising, marketing and web page design services primarily to Internet based accounts. On November 4, 1996, the Company also acquired all the outstanding common stock of Global for 1,100,000 restricted shares of previously unissued common stock of the Company. Global owns the exclusive principal master license to conduct gambling operations from the island of Grenada. The exclusive gambling license is for two six-year terms and allows Global to sell up to four sub-licenses to qualified applicants. Both the Intersphere and Global acquisitions were recorded under the purchase method of accounting; and, accordingly, the results of operations of Intersphere and Global for the period from November 4, 1996 to December 31, 1996 are included in the accompanying consolidated financial statements. The purchase price of each acquisition was based on the fair market value of the net assets acquired as follows: Intersphere Global Current assets $ 63,056 $ 100 Equipment 60,574 - Security deposits 15,676 - Software development 166,293 - Software license 377,021 - Gaming license - 773,783 Current liabilities (415,161) - $ 267,459 $ 773,883 Notes to Financial Statements (Continued) The following unaudited proforma financial information for the Company gives effect to the Intersphere and Global acquisitions as if they had occurred on January 1, 1996. These proforma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on the date indicated, or which may result in the future. The proforma information includes revenues for Intersphere of $104,149 and net losses of $201,165 for the year ended December 31, 1996. Prior to January 1, 1996, Intersphere had no appreciable results of operations. Additionally, Global was a development stage enterprise as of the acquisition date and had no results of operations in 1996. The proforma financial information for 1996 is as follows: Net win and other revenues $3,002,644 Net loss (897,085) Weighted average common shares outstanding 13,290,464 Loss per common share (0.07) 15. STOCK OPTION PLANS In May 1995, the stockholders approved the 1995 Stock Option and Stock Award Plan (the "Plan") and the 1995 Directors Stock Option Plan (the "Director's Plan"). The purpose of the Plan is to attract and retain qualified and competent persons as officers, employees, consultants, agents, and independent contractors. The purpose of the Director's Plan is to attract and retain nonemployee directors to the Company's board. Under the Plan and the Director's Plan, the Company may grant up to 600,000 and 300,000 stock options, respectively. The terms of options granted shall be determined by the Stock Options Committee appointed by the Board of Directors. At December 31, 1995, no stock options had been awarded. On October 25, 1996, the Company issued 50,000 stock options to a departing Company officer. The options have an exercise price 33% higher than the fair market value of the Company's common stock on the date of the grant or $1.25 per share. The options remain exercisable for a three year period ending October 25, 1999. The fair value of the options at the date of grant was nominal. Accordingly, no compensation expense related to the options granted has been recognized by the Company. 16. PREFERRED STOCK In May 1995, the shareholders approved an amendment to 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, Notes to Financial Statements (Continued) relative rights and preferences of such shares. At December 31, 1996 and 1995, no preferred stock had been issued. 17. CONTINGENCY On February 18, 1997, a search warrant ( the "Warrant") was issued, filed in the United States District Court for the Eastern District of Pennsylvania, authorizing the Federal Bureau of Investigation to search the premises of the Company's executive offices and the offices of Intersphere in Blue Bell, Pennsylvania including any and all computer hardware, software, peripheral devices and computer-related documentation on any of such premises. The Warrant lists a variety of items to be obtained based on the assumption that there was a violation of federal laws and that an illegal gambling business was being conducted from its premises in Pennsylvania. Based on the advice of counsel with significant criminal law, trial and appellate experience and comprehensive understanding of the jurisdictional scope of gaming laws, both domestic and international, management does not believe the gaming operations of its subsidiaries violate either the laws of the United States or the Commonwealth of Pennsylvania, since no gaming or gambling operations are conducted there. Management's belief is based principally on its understanding, as interpreted by its counsel, that the operations of the Gaming and Licensing Division are legally authorized in Grenada and, as such, are beyond the scope and outside the jurisdiction of the U.S. criminal laws relating to gaming activities. The Company, through counsel, while co-operating fully with the officials of the United States, intends to move to quash the Warrant and subsequent subpoena in the United States District Court on the grounds that jurisdiction is lacking. Although the Company intends to defend vigorously any action that may ultimately be brought by the United States in connection with the Warrant and subpoena, no assurance can be given that management's beliefs as to the criminality of its subsidiaries' operations, or its basis for such beliefs, are correct and that the Company will prevail. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE Board of Directors Interactive Gaming & Communications Corp. Blue Bell, Pennsylvania: We have audited the basic 1996 and 1995 consolidated financial statements of Interactive Gaming & Communications Corp. as of December 31, 1996 and 1995 and for each of the years in the two year period ended December 31, 1996 and have issued our report thereon dated March 17, 1997, such consolidated financial statements and report are included elsewhere in this Form 10-K. Our audit also included the financial statement schedule of Interactive Gaming & Communications Corp. listed in Item 14. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audit. In our opinion, such financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth herein. PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES Plymouth Meeting, Pennsylvania March 17, 1997 INTERACTIVE GAMING & COMMUNICATIONS CORP. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 Balances at Provision Accounts Balances at Beginning Charged to Written- End of of Year Expense Off Year For the year ended December 31, 1996 Allowance for doubtful accounts $348,794 $286,992 $573,984 $ 61,802 For the year ended December 31, 1995: Allowance for doubtful accounts $111,384 $246,649 $ 9,239 $348,794 For the year ended December 31, 1994: Allowance for doubtful accounts $ 27,280 $ 84,104 $ - $111,384 See Notes to Consolidated Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On March 27, 1996, the Company filed Form 8-K announcing the change in independent accountants. The Company engaged Parente, Randolph, Orlando, Carey and Associates to perform an audit for the year ended December 31, 1995. This decision was approved by the Company's management. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Executive Officers and Directors The following table sets forth the name, age, and position of each executive officer and director of the Company. Name Age Position Term Expires Michael F. Simone 48 Chairman of the Board, Director, 1997 Annual Meeting President, Secretary and Chief Executive Officer Lawrence E. Hirsch, 57 Director and Vice President 1997 Annual Meeting Esquire Fred Michini, CPA 54 Chief Financial Officer 1997 Annual Meeting There were three officers and two directors who tendered their voluntary resignations citing personal reasons, namely, Rina Moscariello, Joseph A. Lashinger, Esquire and Jack Scott. All the directors were re-elected to the Board of Directors at the Annual Meeting of Shareholders on June 21, 1996. The term of office for each director is one year or until his or her successor is elected and qualified at the Company's annual meeting of shareholders. Michael F. Simone is a Company Director, and was President/Treasurer, Organizer and Owner of 50% of the outstanding shares of Sports International, Ltd. (Antigua) from inception in November 1992 until the Company acquired all of the capital stock of Sports International, Ltd. (Antigua) on October 20, 1994. From 1989 to 1992, Mr. Simone was a Vice President of Anchor Savings Bank, heading one of the bank's real estate lending divisions. He graduated from The University of Miami in 1972, and holds a BS Degree in Finance. Lawrence E. Hirsch, Esquire has been a practicing attorney since 1963 and was General Counsel to Sports International, Ltd. (Antigua) from inception in November 1992 until the Company acquired all of the capital stock of Sports International, Ltd. (Antigua) on October 20, 1994. He now serves as Special Counsel to the Company on a per diem basis. Mr. Hirsch holds a Bachelor of Law Degree from Temple University. Fred Michini, CPA received his Bachelor's Degree from LaSalle University in 1965 and Master's Degree from Temple University in 1972. He is certified in Pennsylvania and New Jersey. His experience included staff auditor for the U.S. General Accounting Office, partner at a regional Philadelphia CPA firm, and founder and partner of a second CPA firm. His financial management experience also includes Chief Financial Officer for four service related Delaware Valley companies. Board Meetings and Committees Directors who are employees of the Company receive no compensation for services as directors. The Company plans to establish an Audit Committee, a Compensation Committee and an Option Committee, each of which will consist of two directors. The Audit Committee will review with the Company's independent accountants the scope and timing of the accountants' audit services and any other services they are asked to perform, their report on the Company's financial statements following completion of their audit and the Company's policies and procedures with respect to internal accounting and financial controls. In addition, the Audit Committee will be asked to make annual recommendations to the Board of Directors for the appointment of independent public accountants for the ensuing year. The Compensation Committee will review and recommend to the Board of Directors the compensation and benefits of all officers and key employees of the company, and review general policy matters relating to compensation and benefits of employees of the Company. The Option Committee will determine the number, if any, and terms of any options granted by the Company, except to members of the Committee. Options to the members of the Option Committee must be granted and approved by the majority vote of the Board of Directors. Limitation of Liability As a Delaware corporation, the Company is bound by Section 145 of the General Corporation Law of Delaware which allows the indemnification of officers, directors, employees or agents of the Company against liabilities and expenses arising out of actions brought by a third party, provided that the Board of Directors determines that such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to a criminal matter, had no reasonable cause to believe his conduct was unlawful. Such law also permits indemnification against expenses in actions brought by a shareholder on behalf of a corporation or by the corporation itself if the standards of conduct required for indemnification in third party actions are met, and either (1) such person was not adjudged liable to the corporation, or (2) the Delaware Chancery Court or other court in which the action was brought determines that such person is fairly and reasonably entitled to be indemnified. The Company may make advances for expenses incurred in defending a suit upon the receipt of an undertaking by an officer, director, employee or agent to repay such amount if it is ultimately determined that such person is not entitled to be indemnified. The Company's Certificate of Incorporation provides that directors and officers of the Company are indemnified to the fullest extent permitted by law and states that no director or officer shall have any personal liability to the Company or its stockholders for any monetary damages for breach of fiduciary duty as a director except for liability resulting from (i) breach of the duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of Delaware corporation law (relating to unlawful dividends or redemptions), or (iv) for any transaction from which such director or officer derived an improper personal benefit. The indemnification is against all expenses arising from the lawsuit or action unless the director or officer is finally adjudged to be liable for gross negligence, recklessness or willful misconduct in the performance of his duty to the Company (unless the Delaware Chancery Court determines that in view of the circumstances of the case, the person is entitled to indemnity as determined by the court). Expenses are paid or reimbursed as incurred in advance of final disposition upon receipt of an unsecured contractual written undertaking that such amount must be repaid if it is determined that the person is not entitled to the indemnity. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), may be permitted to directors, officers, or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. The Company does not currently maintain any directors' and officers' liability insurance. ITEM 11. EXECUTIVE COMPENSATION Summary of Compensation Table Annual Compensation Name and Principal Position Salary Bonus Other Stock Michael F. Simone, Chairman, President, and Chief Executive Officer 1996 $ 144,230 $ - $ - 1995 105,750 - - 1994 150,000 - - 1993 24,000 - - Rina Moscariello, Director, Vice President, and Secretary 1996 53,844 - - 1995 70,700 - - 1994 100,000 - - 1993 24,000 - - Lawrence E. Hirsch, Esquire, Director and Vice President 1996 101,872 - - 1995 12,000 - - 1994 12,000 - - 1993 - - - Joseph A. Lashinger, Esquire, Director and Vice President 68,794 - (1) Jack Scott, Vice President 65,769 - - Fred Michini, CPA, Chief Financial Officer 35,331 - - (1) Terms of his employment resignation agreement provide an option to purchase 50,000 shares of the Company's stock at $1.75 per share with an exercise deadline of October 25, 1999. Employee Agreements and Benefits The Company does not have any employment contracts, retirement, pension, profit sharing, with or covering its officers, directors, consultants, and employees. During 1996, the Company established a medical insurance plan for its officers and employees. Stock Option and Stock Award Plan In May 1995, the stockholders approved the 1995 Stock Option and Stock Award Plan (the "Plan) and the 1995 Directors Stock Option Plan (the "Director's Plan"). The purpose of the Plan is to attract and retain qualified and competent persons as officers, employees, consultants, agents, and independent contractors. The purpose of the Director'' Plan is to attract and retain nonemployee directors to the Company'' board. Under the Plan and the Director's Plan, the Company may grant up to 600,000 and 300,000 stock options, respectively. The terms of the options granted shall be determined by the Stock options Committee appointed by the Board of Directors. At December 31, 1995, no stock options had been awarded under either plan. On October 25, 1996, pursuant with a Director's voluntary resignation, the Company authorized the purchase of 50,000 shares of stock at $1.75 per share with an exercise deadline of October 25, 1999. ITEM 12. 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 13,672,040 shares of issued and outstanding Common Stock of the Company as of March 14, 1997, 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 Nature of Number of Shares Percent Beneficial Owner Ownership Owned Michael F. Simone 23 Cottonwood Street Newtown, PA 18940 and 595 Skippack Pike, Suite 100 Blue Bell, PA 19422 Common Stock, 4,480,000 32.8% Direct Rina Moscariello 994 Derring Lane Bryn Mawr, PA 19110 and 595 Skippack Pike, Suite 100 Blue Bell, PA 19422 Common Stock, 4,010,000 29.3% Direct Lawrence E. Hirsch 1700 Sansom Street, Suite 501 Philadelphia, PA 19103 Common Stock, 10,000 0.0% Direct Fred Michini 2005 North Wales Road Lansdale, PA 19446 Common Stock, 1,000 0.0% Direct Caribbean Communications, Ltd. Antigua, West Indies Common Stock, 1,000,000 7.3% Direct Arthur Reynolds Antigua, West Indies Common Stock, 1,100,000 8.0% Direct All Executive Officers and Directors, as a Group (4 Persons) 8,501,000 62.1% ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There are no other material relationships or transactions which qualify for disclosure under this caption. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Financial Statement Schedules The consolidated financial statements and related schedules filed as part of this Form 10-K are included in Part II, Item 8. Reports on Form 8-K On November 14, 1996, the Company filed a Form 8-K reporting the acquisition of Intersphere and Global from Caribbean Communications, Ltd. and Arthur Reynolds in exchange for 1,000,000 and 1,100,000 shares, respectively, of the Company's restricted common stock. INTERACTIVE GAMING & COMMUNICATIONS CORP. (FORMERLY, SPORTS INTERNATIONAL, LTD.) SIGNATURES Pursuant to the requirements of section 13 or 15(d) 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 & COMMUNICATIONS CORP. Dated: March 28, 1997 By: /s/ Michael F. Simone Michael F. Simone, President and Chief Executive Officer By: /s/ Fred Michini Fred Michini, Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 28th day of March, 1997. INTERACTIVE GAMING & COMMUNICATIONS CORP. By: /s/ Michael F. Simone Michael F. Simone, Director, President, and Chief Executive Officer By: /s/ Lawrence E. Hirsch Lawrence E. Hirsch, Director and Vice President EX-27 2 ART. 5 FDS FOR YEAR END 10-K
5 12-MOS DEC-31-1996 DEC-31-1996 408020 0 335910 61802 0 750091 571846 170410 4008364 2099063 0 0 0 13672 1895629 4008364 0 2898495 0 0 3284584 286992 22839 (695920) 0 (695920) 0 0 0 (695920) (.06) (.06)
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