U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission file number 0-21831
INTERNATIONAL SPORTS WAGERING INC.
(Name of small business issuer in its charter)
Delaware 22-3375134
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
201 Lower Notch Road, Suite 2B, New Jersey 07424
(Address of principal executive offices) (Zip Code)
Issuer s telephone number: (973) 256-8181
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
Redeemable Warrants
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X]
The issuer s revenues for its most recent fiscal year (ended September 30,
1998) were $36,418
The aggregate market value of the voting and non-voting common equity
(consisting of Common Stock, par value $.001) held by non-affiliates computed
using the average bid and asked price as of December 18, 1998 was
approximately $7,919,995.
The number of shares of outstanding Common Stock, $.001 par value, as of
December 18,1998 was 7,819,660.
The issuer hereby incorporates by reference into Part III of this report,
its definitive proxy statement to be filed on or prior to January 28, 1999.
If the definitive proxy statement is not filed on or prior to January 28,
1999, the information called for by Part III will be filed as an amendment to
this Form 10-KSB on or prior to January 28, 1999.
Transitional Small Business Disclosure Format (check one):
YES NO x
<PAGE>
Introductory Note
International Sports Wagering Inc. is a development stage company
that has designed and developed an interactive, proprietary, PC-based
computer system that enables users to wager during the course of a
sporting event.
Certain statements in this Report on Form 10-KSB ( Report ) under the
captions "Item 1. Description of Business, " "Item 6. Management's
Discussion and Analysis" and elsewhere, constitute forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995, including, without limitation, statements regarding
potential market size, the likelihood that the Company will receive and
maintain any needed gaming licenses or other approvals for use of its
products, the ability of the Company to attract adequate numbers of
players for its SportXction(TM) sports wagering game and cash requirements.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance, or
achievements, expressed or implied, by such forward-looking statements.
Such factors include, among others, the following: single product;
limited contracts; uncertain market acceptance; development stage
company; expectation of losses; small wagering pools; capital
requirements; need for additional financing; governmental regulation;
competition and rapid technological change; uncertainties regarding
intellectual property; management for growth; dependence on key
personnel; limited marketing experience; need for additional personnel;
limited market size; seasonality of sporting events; possible exclusive
relationships between casinos and third parties; possible objections by
leagues and broadcasters; control by management; possible volatility of
market price of common stock and warrants; NASDAQ delisting; low stock
price; and other factors referred to in this Report. See "Item 1.
Description of Business-Important Factors Regarding Forward- Looking
Statements and Other Risks." When used in this Report, statements that
are not statements of current or historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"anticipates," "plans," "intends," "expects," "believes" and similar
expressions are intended to identify such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions
to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
PART I
Item 1. Description of Business.
History
International Sports Wagering Inc., a Delaware corporation (the
"Company"), is a development stage company. The Company commenced
operations in May 1995 and is the successor by merger to Systems
Enterprises, Inc., which was organized in December 1992. The Company's
SportXction(TM) sports wagering system (the "System") was conceived by the
Company's founder, Mr. Barry Mindes, who together with Mr. Bernard
Albanese, developed a simulation of the System for use in determining
whether casinos had interest in the System. Additionally, patent
applications covering the System were prepared and filed with the U.S.
Patent and Trademark Office ("PTO") and corresponding foreign patent
applications were also filed. Prior to its initial public offering,
commencing in May 1995, the Company raised approximately $1,700,000 in
equity capital and, subsequently, net proceeds of approximately $550,000
through a bridge financing. After the initial equity capital was
raised, personnel, consisting primarily of software engineers and
programmers, were recruited and hired and the Company engaged in
research and development and testing of the System. These activities
included writing software, developing required mathematical algorithms,
performing statistical modeling, selecting and configuring the hardware
needed for the System and determining the initial betting propositions
to be offered. The Company tested the System in a non-wagering
environment and then conducted its own live trial in a wagering
environment using play money. Thereafter, in mid 1996, the Company
sought approval for use of the System from the Nevada Gaming Authorities
(as hereinafter defined). On December 11, 1996, the Company consummated
its initial public offering (the "IPO") pursuant to which it sold
1,725,000 Units (including over-allotments) for gross proceeds of
$10,350,000. Each Unit consisted of one share of the Company's Common
Stock, par value $.001 per share (the "Common Stock"), and one
Redeemable Warrant (collectively, the "Warrants") to purchase one share
of Common Stock at an exercise price of $7.20 per share. The Common
Stock and Warrants now trade separately on the NASDAQ Small Cap Market
and no longer trade as a Unit.
General
The Company has designed and developed an interactive, proprietary,
PC-based computer system that enables users to wager during the course
of a sporting event, such as football, baseball and basketball. The
System accepts bets not only on the outcome of a sporting event but also
on discrete parts of the event and on specific game situations, such as
will a team get a first down, will a batter get on base, or will a
player make two foul shots. The System is unique in that it permits
betting while these game situations are in progress, such as between
downs or pitches, permitting more frequent placing and cashing of
wagers.
The interactive element of the System is a Player Betting Station
("PBS") that is a personal computer with a touch screen, operating a
"windowing" system which displays a television picture of a live
sporting event in the upper left-hand quadrant of the PC monitor. A list
of available bets together with the terms of those bets (including the
amount of the wager necessary to receive a particular payout and the
contestants upon whom the wager is being placed) and other details
relating to the event being watched and the bets previously placed are
displayed on the remainder of the monitor. By touching the screen, a
bettor can place a variety of bets within seconds on the sporting event
then being viewed. The System is capable of permitting bettors to select
from multiple sporting events being televised simultaneously, thereby
allowing the bettor to bet on numerous games while using the System.
The System's proprietary software permits fixed price betting during
the course of a sporting event by attempting to continuously balance the
betting pool on each betting proposition to within a pre-set level. In
general, a balanced pool is achieved when the money bet on one side of
a betting proposition is sufficient to pay off the winners on the other
side of that proposition, should the other side win. Wagers may be
placed simultaneously at computer terminals located at multiple inter-
linked casinos and other sports wagering facilities. The System
maintains a record of all wagers placed by each bettor and keeps an
account for each bettor, adding winnings and subtracting losses. The
Company recently announced that it had developed a version of its System
for use by players betting from home using a PC and a modem. The home
version of the System is currently being tested by the Nevada Gaming
Authorities and may not be introduced until it is approved by them.
(See "Recent Developments" and "Governmental Regulation").
On October 24, 1996, the Company completed a pre-trial of the System
(with play money) and, on November 25, 1996, the Company completed a
live trial (with real money) at the Excalibur Hotel & Casino in Las
Vegas, Nevada. Completion of the trial was one of the conditions for
obtaining approval by the Nevada State Gaming Control Board (the "Nevada
Board") for the use of the System. On January 6, 1997, the System was
approved by the Nevada Board for use in individual casinos. After
additional modifications to the System, the Company submitted the System
to the Nevada Board for approval for use in wide area operations. On
August 21, 1997, the Nevada Gaming Commission (the "Nevada Commission")
approved the System for use in wide area operations. (The Nevada Board
and Nevada Commission are collectively referred to herein as the "Nevada
Gaming Authorities.") Wide area operations permit wagering during the
course of sporting events through PBSs located at multiple inter-linked
casinos and gaming establishments, simultaneously, with betting pools on
each betting proposition consolidated at a central hub (the "Hub"). In
June 1997, the Company made arrangements to have Yarlow, Inc.
("Yarlow"), an operator of sports pools in Nevada, act as the Hub
Operator, at least until such time as the Company received a license
from the Nevada Gaming Authorities to operate the Hub. The Hub links,
via telecommunications lines, the Company's PBSs located in individual
casinos or other gaming establishments. On August 21, 1997, the Nevada
Commission granted to Yarlow a gaming license as an operator of an
inter-casino linked system ("OILS License"). An OILS License is a form
of gaming license that permits the license holder to receive a share of
revenue for linking games or devices electronically among various
licensed casinos. Yarlow was required to obtain an OILS License in
order to be permitted to operate the System at the Hub. Live operation
of the System commenced on September 21, 1997. On January 13, 1998, the
Company announced that Yarlow had suspended operation of Tom's Sunset
Casino, including operation of the SportXction(TM) System, as a result of
financial difficulties unrelated to the System. When operation of the
System was temporarily suspended in January, the System was in operation
at eight inter-linked casinos and gaming establishments in Nevada, with
simultaneous wagering conducted through approximately 220 PBSs installed
at those eight establishments. (See "Management's Discussion and
Analysis").
During the fiscal year ended September 30, 1997, the Company also
commenced the application process needed to obtain an OILS License
which, among other things, permits the Company to operate the Hub and
enables the Company to provide the System to sports wagering
establishments in consideration for either a portion of the revenue
received by the establishment or on a transaction fee basis. As a
consequence of the suspension of operation of the System due to Yarlow's
financial problems, the Company asked the Nevada Gaming Authorities to
expedite the processing of its OILS License application. On April 23,
1998, the Nevada Commission granted the Company an OILS License and
registered it as a publicly-traded corporation. The Nevada Commission
further granted an exemption from the requirements of its Regulation
16.100(1), which would have otherwise prohibited the Company, as a
publicly-traded corporation, from holding a Nevada OILS License. The
Company's OILS License is limited to expire at midnight on the date of
the November 1999 meeting of the Nevada Commission (unless renewed) and
has a number of conditions, all of which were agreed to by the Company,
relating to the Company's operations and the System's method of
operation and accounting. (See "Governmental Regulation").
The Company re-commenced operations on May 11, 1998, on a limited
basis in two wagering establishments with the Company performing the
duties of Hub Operator. By September 30, 1998, the System was in
operation in a total of four locations with approximately 135 PBSs.
Since the System has been in operation, wagers have been accepted on
professional basketball, baseball, and college and professional football
games. During the hiatus in operations, between late January 1998 and
late May 1998, the Company enhanced the SportXction(TM) System with
several new features, including an improved parlay of sequential bets
and free practice bets. By September 30, 1998, the Company had further
enhanced the SportXction(TM) System with several new features including a
one-sided, long shot betting proposition which offers to the bettors
larger payoffs for relatively small wager amounts. Despite these new
features and enhancements, the number of players wagering through the
System in casinos and the revenue generated by PBSs located in casinos
has been disappointing. Although the Company intends to continue to
market the System to other casinos within Nevada, no assurance can be
given that sufficient player use can be generated to make it profitable.
(See "Marketing and Sales Strategy").
Recent Developments
On September 23, 1998, the Company announced that it had developed
a version of its SportXction(TM) sports wagering system that could be used
for betting from home utilizing a PC and modem by bettors who have
established and funded accounts at gaming establishments. This modified
version of the System is designed for use for legal sports wagering by
a bettor from home within the State of Nevada. This System was designed
to run on a third-party secure Intranet that assures that players are
placing their wagers from within Nevada. On October 26, 1998, Alliance
Gaming Corp. ("Alliance") announced that it had developed the Remote
Access Verification Environment (RAVE)(TM)(1.) technology which provides the
geographic call origination verification of its PC users and is designed
to comply with recently adopted Nevada legislation regarding on-line
gaming. In October 1998, the Company's revised version of its System
in combination with the RAVE(TM) technology was submitted for approval to
the Nevada Board. They are currently being tested and may not be
introduced for service until such approval is obtained. (See
"Governmental Regulation"). The Company believes that this System, when
fully implemented, will be the first system which will allow account
wagering by bettors from home PCS in Nevada. No assurance can be given,
however, that the System will be approved by the Nevada Board or, if
approved, will generate sufficient player interest to become profitable.
(See "Governmental Regulation").
On November 2, 1998, the Nevada Commission adopted amendments to
several of its regulations, including Regulation 22 "Race Books and
Sports Pools." This revised regulation disallows the acceptance of
wagers by race and sports books made by means of telephone or other
communications' systems, unless they "... can demonstrate to the
chairman's satisfaction that the wagering communications originate from
within the State of Nevada." This new regulation is effective on March
1, 1999. It may have the effect of preventing race and sports books,
which currently accept telephone wagers, from taking such wagers after
March 1, 1999 unless they are able to fulfill the requirements of
Regulation 22. (See"Governmental Regulation").
On December 14, 1998, the Company and Alliance signed an agreement
pursuant to which the Company received an exclusive license to use the
RAVE(TM) technology in connection with legal on-line or telephone betting
1. RAVE(TM) is a trademark of Alliance Gaming Corp.
on races or sports events in conjunction with licensed race and sports
books in the State of Nevada. The Company is currently expanding the
capabilities of the System to allow other types of wagers, in addition
to the play-by-play SportXction(TM) wagers, including traditional pre-game
side and totals wagering, parlays, teasers, futures, and other exotic
wagers. Future enhancements could include the ability to allow pari-
mutuel wagers on races. The Company believes that these expanded
capabilities, in conjunction with the RAVE(TM) technology, will provide an
acceptable method for taking telephone wagers. The Company intends to
market this modified System for use for legal sports wagering from home
in the State of Nevada. The agreement to license the RAVE(TM) technology
is conditioned upon approval by the Nevada Gaming Authorities and
remains in effect for a period of seven years after final approval by
the Nevada Gaming Authorities is obtained. No assurance can be given
that the license will be approved or that the RAVE(TM) technology or the
modified version of the System will be approved by the Nevada Gaming
Authorities.
On December 23, 1998, the Company announced that it was launching
sports contests on the Internet. It expects to have approximately 20
contests through the end of the current professional football season.
The contests are open to anyone over 18 years of age and are void where
prohibited by law. Single game and grand prize winners will be awarded
cash prizes. The Company intends to derive revenue from advertising,
merchandising, data-mining and other sources in conjunction with its
contests on the Internet.
Industry Overview
In Nevada, sports wagering currently takes place at large modern
casinos and at dedicated sports wagering facilities ("sports books").
Some casinos manage their own sports book and some contract with sports
book operators to operate a sports book in the casino. Casinos currently
conducting sports wagering typically have a room in which large
projection screens and television monitors display various sporting
events while manual or electronic displays show the wagering odds.
Wagers are placed and cashed at clerk-operated betting terminals located
in the room. Although the majority of wagers on sports are paid for in
cash, a significant amount of wagering is made against pre-funded
accounts. If a pre-funded account has been established in a sports
book, patrons may make wagers against that account via the telephone.
Recently adopted regulations in Nevada require that effective March 1,
1999, in order for race and sports books in Nevada to be permitted to
accept wagers by telephone against pre-funded accounts, the race or
sports book must be able to verify that the telephone call originated
within the State of Nevada. (See "Recent Developments" and
"Governmental Regulation").
Wagers placed at sports books are principally placed on the outcome
of a game or event. Wagers also may be accepted on segments of a game,
such as points scored in a half; however, the wager is accepted only
before the segment begins. Since most sporting events take several hours
to complete, bettors can place bets and cash winning bets to use on
subsequent wagers, only a few times each day, thereby limiting the
number of wagers bettors may be inclined to make each day. As a result,
sports wagering facilities are frequently under-utilized for wagering,
as opposed to being locations for merely viewing multiple sporting
events.
In sports wagering, the gaming establishment, or "house," generally
seeks to maintain a "balanced book." A balanced book is achieved when
the money bet on one side of a betting proposition is sufficient to pay
off the winners on the other side of that proposition, should the other
side win. To accomplish this, the house gives either a handicap (the
point spread or margin by which the favorite must win) or odds (a
greater than equal payout on winning to the underdog or a lesser one to
the favorite) on the outcome of the event, or a combination of both. The
house's goal in general is to have the funds paid to the winners equal
the amount received from the losers, less the commissions that the house
charges for brokering the transactions and the use of its facilities.
Sports bettors want to know the odds or point spread (the "line") of
the wager at the time the bet is placed. While the odds may change as
the house attempts to balance its book, the terms for a previously
placed bet remain the same. Thus, bettors who place several bets on the
same team or contestant over a period of time could have different odds
or point spreads on each wager depending upon when the bet was placed.
The sports book's profit depends upon the reliability of the odds and
its adjustment of the odds when necessary. On occasion, the house's
initial handicap or odds will not result in a balanced book because the
players do not agree with the house's assessment of the outcome of the
event. The house will attempt to attract bets on one side of the
proposition by changing or moving the line up or down to induce betting
patterns in order to balance the book. If this is not possible, the
house may also refuse to accept wagers on one of the contestants or
limit the maximum amount of money that will be accepted on a line to
attempt to avoid the risk of taking an unacceptable number of bets on
one side of a betting proposition. When the limit is reached, the line
is moved. Currently, sports wagering establishments do not change odds
or handicaps frequently in order to balance pools. The odds or handicaps
are changed usually only after the book gets substantially out of
balance, if at all. Sports books currently are rarely perfectly
balanced. To the extent that the book is not balanced, the sports book
takes risk on the outcome of the game or event.
Marketing and Sales Strategy
Sports wagering is currently legal only in the State of Nevada, and
in several foreign countries, including England, Austria, Australia,
Mexico, South Africa and Canada. Sports wagering in Nevada's gaming
establishments increased from approximately $294 million in 1980 to $2.4
billion in 1997. In 1997, there were approximately 135 licensed gaming
establishments in Nevada that offered sports wagering.
Licensed gaming establishments in Nevada include casinos of varying
sizes, which offer a variety of gaming activities in addition to sports
wagering, as well as gaming establishments which offer primarily
wagering on sports and horse races. In some instances, the sports
wagering activities of casinos or other gaming establishments are
operated by licensed sports book operators, some of whom may also own
sports wagering establishments. Most casinos and sports book operators
are potential customers for the System, although sports book operators
may also be competitors. (See "Competition").
The Company has marketed, and continues to market, the System to
gaming establishments in Nevada with its own personnel. The System is
currently operating in four casinos and gaming establishments in Las
Vegas, Nevada that are inter-linked with the Hub via telecommunications
lines, with approximately 135 PBSs. Under its current arrangements with
gaming establishments at which the System is operating, each gaming
establishment receives as fees, a fixed percentage of the wagers placed
at PBSs located at that gaming establishment. The Company currently
operates the Hub and it receives as compensation for providing,
servicing, maintaining and operating the System all revenues generated
by the System, less the fees paid to the participating gaming
establishments. As the operator of the System the Company has assumed
all pool imbalance risks associated with being the house.
The Company has pursued an aggressive marketing and advertising
campaign in order to introduce the System to the gaming public in
Nevada. It has retained the services of a market research firm
specializing in gaming, with the goal of increasing public awareness of
the SportXction(TM) sports wagering system and game and increasing the
number of players of the game. The Company has developed and will
continue to develop new features and enhancements to the System to
attract additional players and increase wagering through the System.
The Company has developed a version of its SportXction(TM) sports
wagering system that is capable of being used for betting from home
against pre-funded accounts, utilizing a PC and modem. This modified
version of the System was designed to run on a third-party secure
Intranet that assures that the wagers are being placed from within
Nevada. The System is currently being tested by the Nevada Board, and
may not be introduced for service until such approval is obtained. The
Company intends to market this System for use for legal sports wagering
from home in the State of Nevada. (See "Recent Developments").
The Company intends to emphasize marketing the modified the version
of its SportXction(TM) sports wagering system in combination with the RAVE(TM)
technology for use by players from home PCS, assuming that it receives
approval of the Nevada Gaming Authorities. The Company believes that
the convenience of betting from home will increase participation when
compared to the participation from the casino environment. In addition,
the Company believes that gaming regulation changes adopted on November
2, 1998 by the Nevada Commission (see "Governmental Regulation"),
coupled with the license agreement signed with Alliance providing
exclusive rights to the RAVE(TM) technology in the State of Nevada, will
put the Company in strong position to aggressively pursue telephone
wagering from home. This marketplace includes not only the SportXction(TM)
game from home, but traditional pre-game sports wagering and pari-mutuel
race wagering.
In addition to emphasizing wagering from home, in December 1998, the
Company began to conduct sports contests over the Internet. The Company
intends to eventually derive revenue from advertising, merchandising,
data-mining, user fees and corporate sponsorships in conjunction with
its contests.
The Company is also marketing the System in foreign countries in
which sports wagering is legal and may explore alternative applications
of its proprietary technology, including adaptation of the System for
use in non-wagering activities such as interactive games in bars, and
games and activities conducted over the Internet, cable television and
other communications media.
The SportXction(TM) Sports Wagering System
Overview of the System
The SportXction(TM) sports wagering system permits continuous fixed
price betting during the course of a sporting event by continuously
attempting to balance the betting pool on each betting proposition to
within a pre-set level. It allows bettors to view a live sporting event,
wager throughout that event as it is underway and cash winning bets. The
period during which wagers may be placed is thereby extended.
The System accepts bets on the outcome of the sporting event, on
discrete parts of the event, and on specific game situations, such as
will a team get a first down, will a batter get on base, or will a
player make two foul shots. The System also permits betting while these
game situations are in progress, such as between downs, pitches or foul
shots. Wagers may also be cashed-out before the outcome of the event is
determined, at the then current value (the initial price modified by any
change in odds). Betting is therefore nearly continuous, somewhat
analogous to the situation which exists at a craps table, with each play
being potentially a "new game."
Operation of the System
The System operator begins by setting up a number of pools or
wagering propositions (for example, the winner of a game or the team
leading at the end of a particular period of play, over or under scoring
on the game or period, and wagers on specific events or games
situations). Prior to commencement of the sporting event, the System
operator sets the odds or handicap (point spread) on certain betting
propositions, with greater odds given to the less capable contestant.
Once the sporting event begins, the System sets the initial odds on
other betting propositions. The System changes the odds automatically as
bets are made in order to induce a betting pattern which would lead to
a balanced pool. The bettor may therefore make multiple wagers on the
same betting proposition as the odds change. As wagering continues, one
side of a betting proposition may become underfunded, that is, players
have bet less money on one side of a particular betting proposition (the
underfunded side) than players have bet on the opposite side of such
betting proposition (the overfunded side). If this occurs, and if the
overfunded side of the betting proposition wins, the house would have to
pay out more money to the winning bettors on the overfunded side than
the house would have received from the bettors on the underfunded side.
To limit the house's exposure, the System is designed to automatically
adjust the odds to induce bettors to wager on the underfunded side of
the betting proposition, thereby attempting to balance the pool to
within a pre-set level. Since the System is designed for a fixed payout,
the changing odds are reflected in the amount that the bettor must bet
to receive the fixed amount (including return of his wager). For
example, the odds of Team A winning a game may be set initially so that,
in order to receive a $20 payout (including the return of his wager),
the bettor must bet $12. If, during the game, Team A is ahead by 10
points, the System would automatically change the odds so that in order
to receive $20, the bettor might, at that point in the game, be required
to bet $16. If a pool can no longer be kept to within a pre-set level of
balance, it may be closed and another pool opened with a handicap or
odds designed to lead to balance. This would happen dynamically during
the entire event. There could be many different betting propositions
available during the course of a sporting event; however, prior to
establishing a new betting proposition, the house must believe that
there will be sufficient player interest so that a balanced pool could
be maintained.
The System permits, and the sports wagering operator is likely to
have, both long- and short-term propositions on a sporting event. Long-
term propositions may be based upon the outcome of an entire game or
discrete segments of a game. Wagering continues on the long-term
propositions even as game conditions change, causing the odds on the
outcome to change during the course of the event. Examples of typical
short-term propositions are, in football, will the offensive team make
a first down on a specific possession; and in basketball, which team
will be the next to score 10 points. Betting is almost continuous until
the specific event occurs or the specific game situation is completed.
Since short-term pools open and close rapidly, sometimes in several
minutes or less, there are new propositions constantly available during
the entire contest.
The System works on a "bet against deposited funds" basis. When
a bettor desires to begin wagering at a sports book, he deposits a sum
of money (above a minimum set by the sports book) with a cashier at the
gaming establishment and receives an account number and a personal
identification ("PIN") number. The bettor places wagers using his funds
on deposit. The System automatically adds the bettor's winnings and
subtracts losses from his account. When the player wishes to commence
play, he signs on to a Player Betting Station using his account number
and PIN number. The PBS will show credits equal to his deposit. As
wagers are placed, the credit balance in the PBS is reduced by the
amounts wagered. When the bettor wins, the monitor on the PBS shows that
the bettor has won and his credit balance in the PBS is automatically
increased by his winnings.
A player may also suspend wagering on a PBS. To do so, he touches the
appropriate button on the PBS and operation of the PBS is suspended for
a limited period of time. Upon the player's return, he reactivates his
PBS by entering his PIN number. All bets which are open or undecided
continue to be paid off as they are decided.
Bettors may, in many circumstances, cash-out their wagers before the
winner is determined or the betting proposition is complete. Cashed-out
wagers are paid at their then current value. The System determines the
then current value by placing a hedging bet on the other contestant at
the odds in effect when the bet is being cashed. The player cashing-out
a bet early would therefore not win as much as he might win if his team
is ultimately victorious; nor would that player lose as much as he might
if his team ultimately lost.
The System is a continuous action pool-balancing system. As such, it
reacts by changing the odds on open or undecided betting propositions to
reflect current bettor sentiment as expressed by their bets. This can
result in rapid changes in odds, particularly if game conditions change
abruptly as in the case of a sudden score, injury, or player ejection.
Odds can even change while the bettor is in the process of entering a
wager into the System. As betting is continuous, bets may be entered
while game conditions are changing. At times, bets will be delayed until
a play is completed and the results of the play are entered by those
controlling the System to prevent past posting. Consequently, all bet
entries are treated as "requests" to make a bet at the odds which were
displayed when the bet entry process started. If the amount that must be
wagered to win a fixed payout has changed after the request is made and
before the bet is accepted, the player will be shown the new amount,
asked to reconfirm his bet request and be given a short period of time
to respond. If the bet is not reconfirmed within this time period, the
bet is automatically cancelled. It is even possible that the amount may
change again before the bettor's decision on the new price is made, in
which event the process will be repeated. The player will either
reconfirm his request at the new price, if he finds it acceptable, or
the bet will automatically be cancelled. If the player finds an
acceptable price, and the System accepts the bet, the price on the bet
stays fixed regardless of future changes in odds on that bet, the game
or betting patterns.
As game conditions change, for example, the score changes or the time
clock advances, the odds will usually change as a result of the betting
pattern. This may result in existing pools closing if they can no longer
be held to a desired level of balance. Such pools may then be replaced
with new pools covering the same proposition. This is generally done
automatically, although the house can override the System with manual
pool opening and closing capability.
For ease of player use, the System shows odds by displaying fixed
payouts with corresponding bet sizes which must be placed to receive the
fixed payout. The sum of the bet sizes on each side of a proposition
will equal the fixed payout plus the house commission. For example, in
a fixed payout of $20 with a hypothetical house commission of $2, if the
amount that a bettor had to wager on the favorite was $16 in order to
receive $20, the amount that the bettor would have to wager on the
underdog to receive $20 would be $6.
It is not necessary that the book be perfectly balanced, but only
that the imbalances be less than some percentage of the pool or dollar
amount set by the house. Under these circumstances, the house can
generally ensure that its exposure is no more than a fixed percentage or
dollar amount, which is an acceptable portion of the profit from its
commissions. The System generally is able to automatically prevent the
house exposure from exceeding a specified maximum amount by changing the
betting terms in the pool to induce bettors to wager on the side which
is underfunded, thereby attempting to induce a balancing of the pool.
In extreme cases, the house or the System may automatically stop
accepting bets on the underfunded side when the exposure limit is
reached while continuing to accept bets on the other side. Under these
circumstances, the pool will presumably tend to return to balance after
which the house can resume taking bets on the contestant or proposition
for which betting was suspended.
The System is computerized, with complete, time-stamped records,
providing regulatory authorities as well as gaming establishments with
the ability to audit, analyze and control a game.
Since May 11, 1998, when the Company restarted operation of the
System, and has been operating the System at the Hub, the Company has
assumed all pool imbalance risks associated with being the house.
System Components
The proprietary software and state-of-the-art, commonly available
hardware, is configured in an arrangement designed specifically for the
System. The innovative software continuously attempts to balance
wagering pools to within pre-set levels, thereby permitting wagers to be
made continuously during the course of a sporting event while generally
assuring the gaming establishment of a pre-determined minimum
commission. The software permits the operator to make available a wide
variety of betting propositions to players. By using statistical data
and modeling within the System, the System automatically sets and
adjusts odds on the betting propositions.
The major elements of the System include the Transaction Processor,
Pool Processor, plus numerous input and control computer terminals,
including the Player Betting Station, Game Controller Terminal, Game
Supervisor Terminal, Manager Terminal, Administrative Terminal, and
Cashier Terminal, all of which are controlled by proprietary software.
There are also a variety of printers for printing receipts and reports.
The System processes secure messages exchanged between the various
elements in real time and employs sophisticated mathematical algorithms
in their functioning. These are used with event statistics and
statistical modeling. The television display is independent of the
System, being merely a standard television signal which is picked up by
the gaming establishment and shown for the convenience of the bettor.
The System can operate without a television signal. A player could, for
example, view any television or display while betting, or even bet
without viewing the game, such as before the game begins. The System
uses redundant hardware and re-start and recovery software to maximize
System up-time upon component failure.
All terminals are connected to the central processing unit via a
client/server network. The Hub server is a computer that maintains all
pools, calculates odds, opens and closes all wagering on all pools,
controls all input and output devices (such as betting terminals,
printers and management terminals) produces all management and
regulatory reports and is the repository of all current and historical
data on the wagering system. The proprietary software permits
continuous, rapid recalculation of odds, based upon changing betting
patterns and an evaluation of bets that have been placed.
The Player Betting Station, or PBS, employs a personal computer with
a touch screen, through which bettors are able to enter bets into the
System. Utilizing a windowing system, the PBS shows a television picture
of a live sporting event in the upper left quadrant of the monitor.
Shown in the lower left quadrant of the monitor is status information
appropriate to the sporting event being displayed, such as the score,
inning or which team has ball possession, and a player's financial
summary. On the right half of the display all of the betting
propositions which are available are shown vertically. Wagers are
entered by touching sequentially the payout size button on the terminal
screen (initially to select a given payout amount, and subsequently if
the bettor changes the payout amount desired), the appropriate bet
button and the bet confirmation button. Also on the screen are a series
of housekeeping buttons for use in signing on, signing off, and tuning
to the desired sporting event. An alternative display screen shows a
list of the bettor's won, lost and open bets, his deposits, and his
available betting balance. Shown on another selectable screen are the
current value of bets previously placed. This screen may be used to
immediately cash-out previously placed bets while the event on which the
ager has been placed is still in process.
Data relating to all substantive events during the course of a
sporting event that affect the betting odds are entered into the System
through the Game Controller Terminal by the game controller for each
event. These events include points or runs scored, period, inning, outs,
downs, team having possession of the ball, and the like, depending upon
the sport. The System sends this information to the pool processor to
open and close betting propositions, declare unofficial winners and set
opening lines, among other things. Because the game controller is
entering data during a live sporting event, bets are delayed briefly to
enable the game controller to enter the data.
The Game Supervisor Terminal is utilized by the game supervisor(s)
of each sporting event to manage the wagering on that sporting event.
The Game Supervisor Terminal is used to open betting lines, enter data
to attempt to maintain the desired level of house commission as pool
balances change, close or suspend one or both sides of a betting
proposition, and declare official pool winners. This terminal is also
utilized by the game supervisor to oversee the accuracy of the
information input by the game controller.
The Manager Terminal is used by the manager to oversee the entire
operation of the System at one time. This terminal allows the manager to
monitor the overall house commission for each event, to view any event
on which wagers are being taken and to observe in parallel the inputs by
the operators and the operation of virtually any terminal in the System.
The Administrative Terminal is the main management terminal in the
System. It is used to authorize personnel to operate the System, keep
the chart of future events upon which wagers will be accepted, together
with when betting can commence and when the game (day, date and time)
actually begins. It also keeps the pools to be allowed in an event and
the sizes of the bets which will be accepted in each pool in each event.
It is through this terminal that most reports are accessed. Reports
produced by this terminal are used by the casino or sports book operator
and regulatory authorities.
The Cashier Terminal can access the status of every player account
which is open. When a player wishes to receive cash, he goes to the
cashier and gives his account number and enters his PIN number on a
keypad. The Cashier Terminal verifies that the PIN number is correct,
as well as certain other information for security purposes.
Intellectual Property
The Company regards the System, including the software contained
therein, as proprietary.
The Company filed two U.S. patent applications for its proprietary
wagering methods and its related computer processing system. Both
patent applications have been issued as U.S. patents. Corresponding
applications have been or will be filed in certain foreign countries.
It is the Company's policy that all employees and outside consultants
involved in research or development activities sign proprietary
information, non-disclosure and patent assignment agreements. This may
not afford adequate protection for the Company's know-how and
proprietary products. Other parties may develop products similar to the
System or otherwise attempt to duplicate the System in ways which
circumvent the Company's technology and existing or future patents.
The Company has not received any claim that it is infringing any
patent or other proprietary right and is not currently aware of any
claim that it is infringing any intellectual property rights of others.
However, there can be no assurance that third parties may not assert
infringement claims against the Company, which claims the Company would
be required to defend at considerable expense or enter into arrangements
requiring the Company to pay royalties or other damages, any of which
could materially and adversely affect the Company's business. See
"Uncertainties Regarding Intellectual Property."
The Company has applied for Federal trademark registration with the
PTO and for State of Nevada servicemark registration for the name
SportXction(TM). State of Nevada servicemark registration was issued,
however, Federal trademark registration has not yet been issued. In
August 1998 the Company received a "Notice of Allowance under Section
10b3(b)(2) from the PTO" which requires that the Company file prior to
January 28, 1999 a Statement of Use. There can be no assurance that
the Company will obtain registered Federal trademark protection for the
name SportXction(TM). If the Company fails to obtain such protection, the
Company may be required to select a new name for the System and incur
additional marketing and other expenses to promote its name. (See
"Recent Developments").
Governmental Regulation
The ownership and operation of casino gaming facilities in Nevada,
including sports pools, the operation of an inter-casino linked
system, the manufacture, sale and distribution of gaming devices for use
or play in Nevada or for distribution outside of Nevada, and the
manufacture, sale and distribution of associated equipment for use or
play in Nevada is subject to The Nevada Gaming Control Act and the
regulations promulgated thereunder (collectively, the "Nevada Act") and
various local ordinances and regulations. Such activities are subject
to the licensing and regulatory control of the Nevada Commission, the
Nevada Board, and various local, city and county regulatory agencies.
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are
concerned with, among other things: (i) the prevention of unsavory or
unsuitable persons from having a direct or indirect involvement with
gaming, or manufacturing or distribution of gaming devices at any time
or in any capacity; (ii) the strict regulation of all persons,
locations, practices, associations and activities related to the
operation of licensed gaming establishments and the manufacture or
distribution of gaming devices and equipment; (iii) the establishment
and maintenance of responsible accounting practices and procedures; (iv)
the maintenance of effective controls over the financial practices of
licensees, including the establishment of minimum procedures for
internal fiscal affairs and the safeguarding of assets and revenues,
providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (v) the prevention of
cheating and fraudulent practices; and (vi) providing a source of state
and local revenues through taxation and licensing fees. Change in such
laws, regulations and procedures could have a material adverse effect
on the Company's operations.
Within the United States, sports wagering is currently legal only in
Nevada. Pursuant to the Professional and Amateur Sports Protection Act,
28 U.S.C. Section 3701, et. seq. (hereinafter referred to as the
"Sports Act"), which was effective January 1, 1993, the proliferation
of legalized sports books was significantly curtailed. Although the
Sports Act generally prohibits sports wagering in every jurisdiction in
the United States, including those jurisdictions subject to the Indian
Gaming Regulatory Act (25 U.S.C. Section 2701 et. seq.), the Sports Act
permits such wagering in those jurisdictions that authorized sports
wagering prior to the effective date of the Act. 28 U.S.C. Section
3704. Thus, sports books and wagering are permitted to continue to
operate in Nevada. Moreover, the Interstate Wire Act, 18 U.S.C. Section
1084, also prohibits those in the business of betting and wagering from
utilizing a wire communication facility for the transmission in
interstate or foreign commerce of any bets, wagers or information
assisting in the placing of such bets and wagers on any sporting event
or contest unless such betting or wagering activity is specifically
authorized in each jurisdiction involved.
Under Federal law, a licensed race book or sports pool in Nevada may
not accept bets received by use of wire communications facilities,
including telephones and computers, unless such bets originated in a
jurisdiction wherein such betting or wagering is legal. Under 1997
Nevada legislation, persons are prohibited from accepting or placing
wagers through any "medium of communication." The term "medium of
communication" is broadly defined and includes, without limitation,
mail, telephone, television, telegraph, facsimile, cable, wire, the
Internet or any other similar medium." The network through which the
System operates qualifies as a "medium of communication." However, this
statute specifically exempts wagers accepted or received by persons or
establishments licensed to engage in wagering under Nevada law, provided
such wagers are accepted or received within Nevada and otherwise comply
with all other applicable gaming laws and regulations. This statute
does not, therefore, prevent the System from being operated in its
present form.
Additionally, race book and sports pool wagers may be accepted only
in person or by way of a transmission initiated within the State of
Nevada. NGC Regulation 22.140(1). A recent amendment to this
regulation permits such transmissions to be made not only by telephone,
but also by other forms of wagering communication systems, including
those based on wire, cable, radio, microwave, lights, optics, or
computer data networks, but excluding the Internet. Approval to accept
wagers by such communications systems must be received from the Nevada
Board Chairman. Beginning on March 1, 1999, and thereafter, race books
and sports pools will be required to obtain written permission from the
Nevada Board Chairman, on an annual basis, to continue using its
communications technology. In addition, effective March 1, 1999, a race
book or sports pool will only be allowed to accept wagering
communications, other than in person, if it can demonstrate to the
satisfaction of the Nevada Board Chairman that its wagering
communications originate from within the State of Nevada.
On July 1, 1995, the State of Nevada amended Chapter 464 of the
Nevada Revised Statutes to allow persons licensed to accept, pursuant
to regulations to be adopted by the Nevada Commission, wagers from
other jurisdictions in which pari-mutuel wagering is legal. However, no
new regulations have been promulgated and the regulations of the Nevada
Commission currently prohibit any licensed race books and sports pools
in the State of Nevada from accepting any wagers from interstate
locations. In order for persons licensed to accept off-track pari-mutuel
wagers to be able to take advantage of the business opportunity
provided by the new law, and for the Company to benefit therefrom, the
Nevada Commission must further amend its regulatory restrictions. There
can be no assurances that the Nevada Commission will amend or remove
such regulatory restrictions or that any such amendment would not be
burdensome to the Company.
As of the present time, the SportXction(TM) sports wagering game is not
deemed by the Nevada Gaming Authorities to be either a sports pool or a
pari-mutuel wagering pool. If the SportXction(TM) game was deemed to be a
sports pool or pari-mutuel wagering pool, in order for the Company to
receive a portion of the revenue obtained therefrom or to receive
compensation on a transaction fee basis from either a sports pool or a
pari-mutuel wagering pool, it might need to obtain appropriate licensing
from the Nevada Gaming Authorities. It is unclear whether the Nevada
Gaming Authorities will in the future consider the SportXction(TM) game or
System utilized in casinos or the modified System to be used in
connection with wagering from home, to be a sports pool or pari-mutuel
wagering pool and if so whether the Company would be required to obtain
any additional licensing, or the conditions that might be imposed by the
Nevada Gaming Authorities in connection with any such licensing. There
can be no assurances that the Company will be able to receive the
necessary licensing.
The Company's SportXction(TM) sports wagering system qualifies as
"associated equipment" as that term is defined in the Nevada Act.
Associated equipment is generally defined in the Nevada Act as any
equipment or mechanical, electromechanical or electronic contrivance,
component or machine used remotely or directly in connection with
gaming, any game, race book or sports pool that would not otherwise be
classified as a gaming device. A "gaming device" is generally defined
as any equipment or mechanical electromechanical or electronic
contrivance, component or machine used remotely or directly in
connection with gaming, any game, race book or sports pool which
affects the result of wagering by determining win or loss. All
associated equipment that is manufactured, sold or distributed for use
or play in Nevada must first be administratively approved by the
Chairman of the Nevada Board. The administrative approval process for
associated equipment includes an evaluation by the Nevada Board's audit
division (the "Audit Division") and, in some cases, by the Board's
electronic services laboratory, followed by a field trial.
Manufacturers and distributors of associated equipment are not
subject to the mandatory licensing requirements of the Nevada Act
imposed upon manufacturers and distributors of gaming devices, but may
be required by the Nevada Commission, upon the recommendation of the
Nevada Board, to file an application for a finding of suitability to be
a manufacturer and distributor of associated equipment. It is unknown
whether the Nevada Board and Nevada Commission will require the Company
to file an application for a finding of suitability in addition to any
present or future licenses that the Company may hold.
In order for the Company to be compensated for use of the System on
the basis of a percentage of the revenue received by a licensed gaming
establishment or on a transaction fee basis, the Company was required
to obtain an OILS License and to be registered by the Nevada Commission
as a publicly-traded corporation (a "Registered Corporation"). In
addition, because the Company qualifies as a Registered Corporation as
a result of the consummation of its initial public offering, it was
required to receive an exemption from provisions of the Nevada Act that
render a Registered Corporation ineligible to hold a gaming license. On
April 23, 1998, the Nevada Commission granted the Company an OILS
License and registered it as a Registered Corporation. The Nevada
Commission further granted an exemption from the requirements of its
Regulation 16.100(1), which would have otherwise prohibited the Company,
as a Registered Corporation, from holding a Nevada OILS License. The
Company's OILS License is limited to expire (unless renewed) at midnight
on the date of the November 1999 meeting of the Nevada Commission and
has a number of conditions, all of which were agreed to by the Company,
relating to the Company's operations and to the System's method of
operation and accounting. There can be no assurances that the Company
will have its licensing, registration or exemption renewed in November
1999. The Nevada Gaming Authorities may deny an application for any
cause which they deem reasonable. A finding of suitability is comparable
to licensing, and both require submission of detailed personal and
financial information followed by a thorough investigation. The
applicant for licensing or a finding of suitability must pay all costs
of the investigation. Determination of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
As a Registered Corporation and a gaming licensee ("Gaming Licensee")
the following regulatory requirements will apply to the Company:
As a Registered Corporation and Gaming Licensee, the Company is
required periodically to submit detailed financial and operating
reports to the Nevada Commission and to furnish any other information
which the Nevada Commission may require. Substantially all material
loans, leases, sales of securities and similar financing transactions
are required to be reported to or approved by the Nevada Commission.
The Nevada Gaming Authorities may investigate any individual who has
a material relationship to, or material involvement with, a Registered
Corporation and Gaming Licensee in order to determine whether such
individual is suitable or should be licensed as a business associate of
a Gaming Licensee. Officers, directors and certain key employees of the
Company would be required to file applications with the Nevada Gaming
Authorities and may also be required to be licensed or found suitable by
the Nevada Gaming Authorities. Officers, directors and key employees of
the Company who are actively and directly involved in gaming activities
in respect of the operation of the System may be required to be
licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause
which they deem reasonable. A finding of suitability is comparable to
licensing, and both require submission of detailed personal and
financial information followed by a thorough investigation. The
applicant for licensing or a finding of suitability must pay all the
costs of the investigation. Determination of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
Changes in licensed positions must be reported to the Nevada Gaming
Authorities and, in addition to their authority to deny an application
for a finding of suitability of licensure, the Nevada Gaming Authorities
have jurisdiction to disapprove a change in corporate position. All of
the Company's officers and directors, except for its outside directors,
have been licensed. Such licenses are limited for the same period as
the Company's OILS License. There can be no assurance that such
licenses will be renewed by the Nevada Gaming Authorities.
If the Nevada Gaming Authorities were to find an officer, director
or key employee unsuitable for licensing or unsuitable to continue
having a relationship with the Company, it would have to sever all
relationships with such person. In addition, the Nevada Commission may
require the Company to terminate the employment of any person who
refuses to file appropriate applications. Determination of suitability
or of questions pertaining to licensing are not subject to judicial
review in Nevada.
If it were determined that the Nevada Act was violated by the
Company, the registration and OILS Licenses it held could be limited,
conditioned, suspended or revoked, subject to compliance with certain
statutory and regulatory procedures. In addition, the Company and the
persons involved could be subject to substantial fines for each separate
violation of the Nevada Act at the discretion of the Nevada Commission.
Furthermore, the Nevada Commission could revoke the approval of the
System and could order the termination of existing contracts for the
System. Limitation, conditioning or suspension of the registration and
OILS Licenses held by the Company could (and revocation of any
registration and OILS Licenses would) materially adversely affect the
Company's manufacturing, distribution and gaming operations.
Any beneficial holder of the Company's voting securities, regardless
of the number or shares owned, may be required to file an application,
be investigated, and have his suitability determined as a beneficial
holder of the Company's voting securities if the Nevada Commission has
reason to believe that such ownership would otherwise be inconsistent
with the declared policies of the State of Nevada. The applicant must
pay all costs of investigation incurred by the Nevada Gaming Authorities
in conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership
of more than 5% of a Registered Corporation's voting securities to
report the acquisition to the Nevada Commission. The Nevada Act
requires that beneficial owners of more than 10% of a Registered
Corporation's voting securities apply to the Nevada Commission for a
finding of suitability within thirty days after the Chairman of the
Nevada Board mails the written notice requiring such filing. Under
certain circumstances, an "institutional investor," as defined in the
Nevada Act, which acquires more than 10%, but not more than 15%, of the
Registered Corporation's voting securities may apply to the Nevada
Commission for a waiver of such finding of suitability if such
institutional investor holds the voting securities for investment
purposes only. An institutional investor shall not be deemed to hold
voting securities for investment purposes unless the voting securities
were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of
directors of the Registered Corporation, any change in the Registered
Corporation's corporate charter, bylaws, management, policies or
operations of the Registered Corporation, or any of its gaming
affiliates, or any other action which the Nevada commission finds to be
inconsistent with holding the Registered Corporation's voting
securities for investment purposes only. Activities which are not deemed
to be inconsistent with holding voting securities for investment
purposes only include (i) voting on all matters voted on by
stockholders; (ii) making financial and other inquiries of management
of the type normally made by securities analysts of informational
purposes and not to cause a change in its management policies or
operations; and (iii) such other activities as the Nevada Commission
may determine to be consistent with such investment intent. If the
beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The
applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability
or a license within thirty days after being ordered to do so by the
Nevada Commission or the Chairman of the Nevada Board, may be found
unsuitable. The same restrictions apply to a record owner if the record
owner, after request, fails to identify the beneficial owner. Any
stockholder found unsuitable and who holds, directly or indirectly, any
beneficial ownership of the common stock beyond such period of time as
may be prescribed by the Nevada Commission may be guilty of a criminal
offense. The Company will be subject to disciplinary action if, after
it receives notice that a person is unsuitable to be a stockholder or
to have any other relationship with the Company, it (i) pays that person
any dividend or interest upon voting securities of the Company, (ii)
allows that person to exercise, directly or indirectly, any voting
right conferred through securities held by that person, (iii) pays
remuneration in any form to that person for services rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require such
unsuitable person to relinquish his voting securities including, if
necessary, the immediate purchase of said voting securities for cash at
fair market value.
The Nevada Commission may, in its discretion, require the holder of
any debt security of a Registered Corporation to file applications, be
investigated and be found suitable to own the debt security of a
Registered Corporation if the Nevada Commission has reason to believe
that his acquisition of such debt security would otherwise be
inconsistent with the declared policy of the State of Nevada. If the
Nevada Commission determines that a person is unsuitable to own such
security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including the loss of its approvals, if without the
prior approval of the Nevada Commission, it (i) pays to the unsuitable
person any dividend, interest, or any distribution whatsoever, (ii)
recognizes any voting right by such unsuitable person in connection with
such securities, (iii) pays the unsuitable person remuneration in any
form, or (iv) makes any payment to the unsuitable person by way of
principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time. If
any securities are held in trust by an agent or by a nominee, the record
holder may be required to disclose the identity of the beneficial owner
to the Nevada Gaming Authorities. A failure to make such disclosure may
be ground for finding the record holder unsuitable. The Company will
also be required to render maximum assistance in determining the
identity of the beneficial owner. The Nevada Commission has the power to
require the stock certificates of the Company to bear a legend
indicating that the securities are subject to the Nevada Act. It is
unknown whether the Commission will impose such a requirement on the
Company.
A Registered Corporation may not make a public offering of its
securities without the prior approval of the Nevada Commission if the
securities or proceeds therefrom are intended to be used to construct,
acquire or finance gaming facilities in Nevada, or to retire or extend
obligations incurred for such purposes. Such approval, if given, does
not constitute a finding, recommendation or approval by the Nevada
Commission or the Nevada Board as to the accuracy or adequacy of the
prospectus or the investment merits of the securities offered. Any
representation to the contrary is unlawful. The regulations of the
Nevada Board and Nevada Commission also provide that any entity which is
not an "affiliated company," as such term is defined in the Nevada Act,
or which is not otherwise subject to the provisions of the Nevada Act
or such regulations, such as the Company, which plans to make a public
offering of securities intending to use such securities, or the
proceeds from the sale thereof for the construction or operation of
gaming facilities in Nevada, to finance the operation of gaming
facilities in Nevada, or to retire or extend obligations incurred for
such purposes, may apply to the Nevada Commission for prior approval of
such offering. The Nevada Commission may find an applicant unsuitable
based solely on the fact that it did not submit such an application of
approval, unless upon a written request for a ruling, the Nevada Board
Chairman has ruled that it is not necessary to submit an application.
The Company filed a written request for a ruling (the "Ruling Request")
that it was not necessary to submit its IPO for prior approval. On
November 25, 1996, the Nevada Board Chairman responded to the Ruling
Request by issuing a written ruling (the "Ruling") that the Company was
not required to submit the IPO for prior approval. The Ruling did not
constitute a finding, recommendation or approval by the Nevada
Commission or the Nevada Board as to the accuracy or adequacy of the
prospectus or the investment merits of the securities offered. The
Ruling also did not constitute a finding that the Company has been or
will be found qualified to be involved with gaming activities in Nevada
for which a separate Nevada Commission approval will be required. Any
representation to the contrary is unlawful.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting
agreements, or any act or conduct by a person whereby he obtains
control, may not occur without the prior approval of the Nevada
Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and the Nevada Commission in
a variety of stringent standards prior to assuming control of such
Registered Corporation. The Nevada Commission may also require
controlling stockholders, officers, directors and other persons having
a material relationship or involvement with the entity proposing to
acquire control, to be investigated and licensed as part of the
approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate
defense tactics affecting Nevada corporate gaming licensees, and
Registered Corporations that are affiliated with those operations, may
be injurious to stable and productive corporate gaming. The Nevada
Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Nevada's
gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates;
(ii) preserve the beneficial aspects of conducting business in the
corporate form; and (iii) promote a neutral environment for the orderly
governance of corporate affairs. Approvals are, in certain
circumstances, required from the Nevada Commission before the
Registered Corporation can make exceptional repurchases of voting
securities above the current market price thereof and before a
corporate acquisition opposed by management can be consummated. The
Nevada Act also requires prior approval of a plan or recapitalization
proposed by the Registered Corporation's Board of Directors in response
to a tender offer made directly to the Registered Corporation's
stockholders for the purposes of acquiring control of the Registered
Corporation.
License fees and taxes, computed in various ways depending on the
type of gaming or activity involved, are payable to the State of Nevada
and to the counties and cities in which gaming operations are to be
conducted. Depending upon the particular fee or tax involved, these
fees and taxes are payable either monthly, quarterly or annually and are
based upon either (i) a percentage of the gross revenues received; or
(ii) the number of gaming devices operated. Annual fees are also
payable to the State of Nevada for renewal of licenses as a manufacturer
and distributor.
Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such persons
(collectively, "Licensees"), and who proposes to become involved in a
gaming venture outside of Nevada, is required to deposit with the
Nevada Board, and thereafter maintain, a revolving fund in the amount of
$10,000 to pay the expenses of investigation by the Nevada Board of
their participation in such foreign gaming. The revolving fund is
subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain
reporting requirements imposed by the Nevada Act. A Licensee is also
subject to disciplinary action by the Nevada Commission if it knowingly
violates any laws of the foreign jurisdiction pertaining to the foreign
gaming operation, fails to conduct the foreign gaming operation in
accordance with the standards of honesty and integrity required of
Nevada gaming operations, engages in activities that are harmful to the
State of Nevada or its ability to collect gaming taxes and fees, or
employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal
unsuitability.
The Company may also be required to make annual filings with the
Attorney General of the United States in connection with the operation
of the System.
In August 1996, the United States Congress passed legislation which
creates the National Gaming Commission. The National Gaming Commission
generally has the duty to conduct a comprehensive legal and factual
study of gambling in the United States and existing Federal, state and
local policies and practices with respect to the legalization or
prohibition of gambling activities, to formulate and propose changes in
such policies and practices and to recommend legislation and
administrative actions for such changes. It is not possible to predict
the future impact of these proposals on the Company and its operations.
Any such proposals could have a material adverse affect on the Company's
business.
Legislation is currently pending in the United States Congress to
prohibit certain forms of betting or wagering or engaging in the
business of gambling over the Internet. A bill which was recently passed
by the Senate, S. 474, would also prohibit betting or wagering or
engaging in the business of gambling over "interactive computer
services." The System arguably fits within the definition of an
"interactive computer service." If enacted, S. 474 may prohibit the
operation of the System in all or certain forms.
A companion bill now before the U.S. House of Representatives, H.R.
2380, would also expand the existing federal prohibition against betting
or wagering through interstate and foreign wire communication facilities
to outlaw betting or wagering through a broad spectrum of interstate and
foreign communication facilities. Also included in H.R. 2380 are
provisions placing specific duties on interactive computer service
providers to "discontinue or refuse, the leasing, furnishing or
maintaining" of communication facilities used in transmitting or
receiving gambling information, but the bill does not define the meaning
of "interactive computer service provider." Additionally, H.R. 2380
contains language limiting its application to the use of communication
facilities in interstate or foreign commerce and expressly exempts
wagers between jurisdictions in which such wagering is not illegal. The
System currently operate only within the State of Nevada.
It does not appear that H.R. 2380 will be passed by the U.S. House
of Representatives before the end of the current session. There can be
no assurance, however, that either S. 474 or H.R. 2380, or both, will
not be reintroduced in the next Congress or that one or the other bill
will not become law in its present or any other form.
Under 1997 Nevada legislation, persons are prohibited from accepting
or placing wagers through any "medium of communication." The term
"medium of communication" is broadly defined and includes, without
limitation, mail, telephone, television, telegraph, facsimile, cable,
wire, the Internet or any other similar medium." The network through
which the System operates qualifies as a "medium of communication."
However, this statute specifically exempts wagers accepted or received
by persons or establishments licensed to engage in wagering under Nevada
law, provided such wagers are accepted or received within Nevada and
otherwise comply with all other applicable gaming laws and regulations.
This statute does not, therefore, prevent the System from being operated
in its present form or from homes pursuant to the revised Regulation 22.
(See "Recent Developments").
Competition
Sports wagering competes with other forms of gambling available to
the general public both within and outside of the State of Nevada,
including, but not limited to, casino games (such as traditional slot
machines, video slot, poker and blackjack machines, roulette, card
games, keno and craps), bingo, state-sponsored lotteries, on-and-off
track betting on horses and dogs, jai alai, offshore cruise ships,
riverboats and Native American gaming operations. In addition, the
System competes with sports wagering as it currently exists in Nevada.
The Company is not aware of any system currently in operation or under
development that is similar to the System. No assurance can be given
that such a system does not exist or is not under development.
The Company believes that sports wagering facilities in casinos are
currently operated either by the casino itself or pursuant to
contractual relationships with licensed sports book operators. Such
entities which operate sports books in casinos may have exclusive
relationships with casinos which could limit the ability of casinos to
contract directly with the Company. As a result, the Company might be
required to pay substantial sums to such third parties for the
privilege of supplying the System to any such casino, which could have
a material and adverse effect on the Company's financial condition and
results of operations. (See "Possible Exclusive Relationships Between
Casinos and Third Parties").
American Wagering, Inc., through its subsidiary Leroy's Horse and
Sports Place ("Leroy's"), is a licensed bookmaker with approximately 46
sports books, the largest number of sports book locations in the State
of Nevada. Leroy's sports books are operated primarily in casinos in
major metropolitan areas in Nevada and in its own facilities. Leroy's
offers casinos a turnkey sports betting operation that allows casinos
to offer sports wagering to its patrons without bearing the risk and
overhead associated with conducting the operation themselves. In
October 1996, American Wagering, Inc. acquired the subsidiary of
Autotote Corporation which sold sports wagering equipment and terminals
to casinos and sports book operators in Nevada. The Company believes
that the subsidiary involved sold such equipment, which was largely
record keeping equipment, to virtually all of the approximately 135
casinos and sports book operators in Nevada. American Wagering, Inc.
also operates a new pari-mutuel sports wagering game, called MegaSports,
which accepts pari-mutuel wagers on the outcomes of sports contests,
events that occur within or during those contests and the outcomes of a
group of sports contests. The Company believes that these sports
wagering products only accept wagers prior to commencement of events
and, since they are in pari-mutuel format, they will not include fixed
price bets as is customary in sports wagering.
In addition, the Company may compete with suppliers of other forms
of gaming equipment and services most of whom are substantially larger
with greater technological, financial and other resources than the
Company. Among the companies currently producing gaming equipment are
International Game Technology; GTECH Corporation, the largest supplier
of equipment and systems to state sponsored lotteries; AmTote
International, Inc., a supplier of equipment, systems and devices for
pari-mutuel wagering on horses, dogs and in jai alai; Video Lottery
Technologies, Inc., which operates video lottery systems and, through
its subsidiary, United Wagering System, Inc., operates in the pari-
mutuel wagering business; WMS Industries Inc., which designs,
manufactures and sells coin-operated pinball and video games, home video
games, casino gaming devices and video lottery terminals; Alliance
Gaming Corp. which designs, manufactures and distributes electronic
slot machines, video gaming machines, video lottery terminals and
computer gaming management systems; and several smaller companies.
Personnel
The Company has thirteen full-time employees, consisting of the
Chairman of the Board, President, General Manager-Nevada Operations,
Vice President-Software Development, two software engineers and
programmers, an accountant, an audit clerk, two gaming operations
personnel and three technicians. The Company considers its relations
with its employees to be good.
The Company also utilizes individuals periodically to train gaming
establishment personnel and players or prospective players in the use of
the System. The Company also has used, and may from time to time in the
future use, outside consultants on specific assignments or projects.
The Company may seek to hire marketing and sales personnel to
develop other markets and to market the System to casinos and sports
book operators as well as additional programmers, technicians and
administrative personnel.
Research and Development
During the fiscal years ended September 30, 1997 and September 30,
1998, the Company spent approximately $992,000 and $996,000,
respectively, on research and development activities. These expenses
included primarily, programmers' salaries and benefits, consultants'
fees, patent fees, the depreciation expense associated with computer
equipment used in the development of the System, and the costs of two
trials of the System in Nevada required for approval of its use in
individual gaming establishments and for wide area operation. The
Company intends to continue to expend significant sums on such
activities.
Important Factors Regarding Forward Looking Statements and other Risks
Certain statements in this Report under the captions "Item 1.
Description of Business," "Item 6. "Management's Discussion and
Analysis" and elsewhere, constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995,
including, without limitation, statements regarding potential market
size, the likelihood that the Company will receive and maintain any
needed gaming licenses or other approvals for use of its products, the
ability of the Company to attract adequate numbers of players of its
SportXction(TM) sports wagering game and cash requirements. Such forward-
looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or
achievements of the Company, or industry results, to be materially
different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors
include, among others, those described below and those presented
elsewhere by management from time to time. When used in this Report,
statements that are not statements of current or historical fact may be
deemed to be forward-looking statements. Without limiting the
foregoing, the words "anticipates," "plans," "intends," "expects,"
"believes" and similar expressions are intended to identify such
forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements that may
be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Single Product; Limited Contracts; Uncertain Market Acceptance. The
Company s success will depend primarily on the success of a single
product, the System. The Company's System was approved by the Nevada
Commission for use in individual casinos on January 6, 1997 and for use
in wide area operation on August 21, 1997. The System began live
operation on September 21, 1997 in nine Nevada casinos. Simultaneous
wagering is conducted through PBSs located at the inter-linked casinos,
with betting pools consolidated at the Hub. The System commenced
operation for both football and baseball games and added basketball when
that season began. The Company has pursued an aggressive marketing and
advertising campaign to introduce the SportXction(TM) sports wagering
system to the gaming public in Nevada and to increase the number of
players of the game. It retained the services of a market research firm,
with the goal of increasing public awareness of this new game and
increasing the number of players of the game. The Company has added
several new features and enhancements to the System to attract players
and increase wagering. Thus far, the total number of players has been
limited and the total amount wagered through the System has been modest.
In addition, the System is currently only in operation in four casinos
and gaming establishments. The Company has developed a version of the
System that may be used for betting from home utilizing a PC and modem
over a secure Intranet within Nevada that it licensed from another
party. This revised version of the System is currently being tested by
the Nevada Board, and may not be introduced for service until such
approval is obtained. The Company believes that having this System
available, when fully implemented, for betting from home will provide a
more convenient environment for players to try the SportXction(TM) game.
There is no assurance that there will be market acceptance of betting
from home using PCS in the State of Nevada. This has never been
attempted previously in Nevada, although betting from home using PCS on
the Internet has gained a fair degree of popularity. To achieve
commercial success, the System must be accepted both by casino and
sports book operators and by gaming patrons. The Company believes that
acceptance by casino and sports book operators will ultimately depend
upon acceptance by patrons as a new and/or alternative form of sports
wagering. There can be no assurance that the System will be accepted by
its intended market. If the System does not achieve sufficient market
acceptance, the Company s business, financial condition and results of
operations would be materially and adversely affected.
Development Stage Company; Expectation of Losses. The Company is in
the development stage and has generated limited revenues from the
System. As of September 30, 1998, the Company had cumulative net losses
since inception of approximately $6.1 million and the Company expects to
continue to incur substantial losses and negative cash flow at least
through calendar 1999. There can be no assurance that the Company will
become profitable or that cash flow will become positive at any time in
the future. The likelihood of the Company s success must be considered
in light of the problems, delays, expenses and difficulties encountered
by an enterprise in the Company s stage of development, many of which
may be beyond the Company s control. These include, but are not limited
to, unanticipated problems relating to further product enhancement and
development; software design, development and enhancement; acceptance of
the System by the wagering public and casinos; testing; gaming
regulations and taxes; System assembly; the competitive and regulatory
environment in which the Company plans to operate; marketing problems;
and additional costs and expenses that may exceed current estimates.
Small Wagering Pools. The System was designed to operate most
effectively when there are large numbers of players and a substantial
number of wagers being placed through the System simultaneously. When
the number of players wagering through the System is modest, as has been
the case during the period of time that the System has been in
operation, and there are relatively small amounts wagered on each
available betting proposition, it is more difficult to attempt to create
balanced pools. Also under such circumstances, odds may change rapidly
causing participants to be required to reconfirm bets at changing odds
before a wager is accepted. These circumstances could cause player
dissatisfaction to this form of sports wagering resulting in gaming
establishments not wishing to have the System operated in their sports
books, which could have a material adverse effect on the business of the
Company and its prospects. To avoid such rapidly changing odds, the
System could be run with larger pre-set limits for the amount of
imbalance the System will tolerate before changing the odds. See
"Operation of the System." Increasing the size of these pre-set limits
increases the Company's financial exposure to the players' ability to
wager on the winning side of the betting propositions offered. This
could reduce the revenues generated by the System and could have a
material adverse effect on the business of the Company and its
prospects. Since May 11, 1998, the Company has been the operator of the
System and thereby acts as the house. The Company, therefore, has
assumed all pool imbalance risks associated with being the house.
Limited Number of Casinos. The System is currently operating in only
four gaming establishments. Each gaming establishment receives a fixed
percentage of the handle generated through the System from its
establishment. Because only a modest amount of money is currently being
wagered through the System, one or several casinos may be unwilling or
unable to continue to operate the System in their casino. Under such
circumstances the Company would be forced to cease operations in those
casinos, thereby reducing the availability of the System to potential
patrons. No assurance can be given that the Company could make
arrangements with additional gaming establishments to install the System
in a timely manner, or at all.
Capital Requirements; Need for Additional Financing. The Company
anticipates that its existing resources will be adequate to fund its
capital and operating requirements through the next 18 months based upon
the Company s current business plan. See "Management Discussion and
Analysis." The Company s capital requirements may vary materially from
those now planned due to a number of factors, including the rate at
which the Company can introduce the System, the market acceptance and
competitive position of the System, the response of competitors to the
System and the ability of the Company and its management to satisfy
applicable licensing requirements. The Company may need to raise
additional capital to fund its future operations. There can be no
assurance that additional financing will be available when needed on
terms acceptable to the Company, or at all. If additional funds are
raised by issuing equity securities, further dilution to existing
stockholders will result and future investors may be granted rights
superior to those of existing stockholders. Insufficient funds may
prevent the Company from implementing its business strategy or may
require the Company to limit its operations significantly.
Governmental Regulation. The System qualifies as associated
equipment as that term is defined in the Nevada Act. Associated
equipment is generally defined as any equipment or mechanical,
electromechanical or electronic contrivance, component or machine used
remotely or directly in connection with gaming, any game, race book or
sports pool that would not otherwise be classified as a gaming device.
All associated equipment that is manufactured, sold, transferred,
offered or distributed for use or play in Nevada must first be
administratively approved by the Chairman of the Nevada Board. The
administrative approval process for associated equipment includes an
evaluation by the Nevada Board s audit division (the Audit Division )
and, in some cases, by the Nevada Board s electronic services
laboratory, followed by a field trial.
On April 23, 1998, the Nevada Commission granted an OILS license to
the Company and registered it as a publicly-traded corporation. The
Nevada Commission further granted an exemption from the requirements of
its Regulation 16.100(1), which would have otherwise prohibited the
Company, as a publicly-traded corporation, from a holding a Nevada OILS
License. The Company's OILS License is limited to expire at midnight on
the date of the November 1999 meeting of the Nevada Commission and has
a number of conditions, which were agreed to by the Company, relating to
its method of operation and to the manner in which the System would
account for gaming transactions.
No assurance can be given that the Company's OILS License, or its
registration and exemption will be renewed in November 1999, or that its
directors and officers will be relicensed, or that no new burdensome
conditions, limitations or restrictions will be imposed upon the
Company. In addition the Nevada Commission has the discretion, at any
time, to require that the Company apply for a finding of suitability to
be a manufacturer and distributor of associated equipment. The
operation of licensed gaming in general, and the operation of race books
and sports pools in particular, is subject to strict licensing and
regulatory control by the Nevada Board, the Nevada Commission and
various local, city and county regulatory agencies. No applicant for a
registration, license, finding of suitability or approval (individually,
a "Gaming License" and collectively, "Gaming Licenses") has any right to
the Gaming License. Any Gaming License issued or granted is a revocable
privilege, and no holder acquire any vested rights therein or
thereunder. In connection with the Company's application for renewal of
its Gaming License, or any further Gaming Licenses, the Nevada
Commission will have the authority to require that any beneficial owner
of the Company's voting securities be investigated and found suitable,
although the Nevada Act does not require a finding of suitability unless
a person is the beneficial owner of more than 10% of the outstanding
voting securities. In addition, if any of the Company's officers,
directors, key employees or stockholders are denied a license or finding
of suitability, or are found unsuitable to continue having a
relationship with the Company, the Company would have to sever its
relationship with such persons. Furthermore, if the Company's Gaming
Licenses are not renewed, any existing approval for the System could be
revoked and the Nevada Commission could order the termination of any
existing contracts for the System. Moreover, the Company would be
prevented from selling or distributing the System for use or play in
Nevada after the date of expiration of the Company's Gaming License.
No person is permitted to acquire control of the Company, as the
holder of a Gaming License, without the prior approval of the Nevada
Commission upon the recommendation of the Nevada Board. The Nevada
Commission may require controlling stockholders, officers, directors and
other persons having a material relationship or involvement with the
entity proposing to acquire control, to be investigated and licensed as
part of the approval process relating to an acquisition of control. The
applicant is required to pay all costs of investigation.
In August 1996, the United States Congress passed legislation which
creates a national gaming study commission (the National Gaming
Commission ). The National Gaming Commission will generally have the
duty to conduct a comprehensive legal and factual study of gambling in
the United States and existing Federal, state and local policies and
practices with respect to the legalization or prohibition of gambling
activities, to formulate and propose changes in such policies and
practices and to recommend legislation and administrative actions for
such changes. It is not possible to predict the future impact of these
proposals on the Company and its operations. Any such proposals could
have a material adverse affect on the Company s business.
Legislation is currently pending in the United States Congress to
prohibit certain forms of betting or wagering or engaging in the
business of gambling over the Internet. A bill which was recently passed
by the Senate, S. 474, would also prohibit betting or wagering or
engaging in the business of gambling over "interactive computer
services." The System arguably fits within the definition of an
"interactive computer service." If enacted, S. 474 may prohibit the
operation of the System in all or certain forms.
A companion bill now before the U.S. House of Representatives, H.R.
2380, would also expand the existing federal prohibition against betting
or wagering through interstate and foreign wire communication facilities
to outlaw betting or wagering through a broad spectrum of interstate and
foreign communication facilities. Also included in H.R. 2380 are
provisions placing specific duties on interactive computer service
providers to "discontinue or refuse, the leasing, furnishing or
maintaining" of communication facilities used in transmitting or
receiving gambling information, but the bill does not define the meaning
of "interactive computer service provider." Additionally, H.R. 2380
contains language limiting its application to the use of communication
facilities in interstate or foreign commerce. The System currently
operates only within the State of Nevada.
It does not appear that H.R. 2380 will be passed by the U.S. House
of Representatives before the end of the current session. There can be
no assurance, however, that either S. 474 or H.R. 2380, or both, will
not be reintroduced in the next Congress or that one or the other bill
will not become law in its present form or any other form.
Under 1997 Nevada legislation, persons are prohibited from accepting
or placing wagers through any "medium of communication." The term
"medium of communication" is broadly defined and includes, without
limitation, mail, telephone, television, telegraph, facsimile, cable,
wire, the Internet or any other similar medium." The network through
which the System operates qualifies as a "medium of communication."
However, this statute specifically exempts wagers accepted or received
by persons or establishments licensed to engage in wagering under Nevada
law, provided such wagers are accepted or received within Nevada and
otherwise comply with all other applicable gaming laws and regulations.
This statute does not, therefore, prevent the System from being operated
in its present form or from home pursuant to the revised Regulation 22.
(See "Recent Developments").
As of the present time, the SportXction(TM) sports wagering game is not
deemed by the Nevada Gaming Authorities to be either a sports pool or a
pari-mutuel wagering pool. If the SportXction(TM) game was deemed to be a
sports pool or pari-mutuel wagering pool, in order for the Company to
receive a portion of the revenue obtained therefrom or to receive
compensation on a transaction fee basis from either a sports pool or a
pari-mutuel wagering pool, it might need to obtain appropriate licensing
from the Nevada Gaming Authorities. It is unclear whether the Nevada
Gaming Authorities will in the future consider the SportXction(TM) game or
System utilized in casinos or the modified System to be used in
connection with wagering from home, to be a sports pool or pari-mutuel
wagering pool and if so whether the Company would be required to obtain
any additional licensing, or the conditions that might be imposed by the
Nevada Gaming Authorities in connection with any such licensing. There
can be no assurances that the Company will be able to receive the
necessary licensing.
Competition and Rapid Technological Change. The Company s operations
compete with other forms of gambling, both within and outside of Nevada,
including, but not limited to, sports wagering as currently conducted in
Nevada, casino games (such as traditional slot machines, video slot,
poker and blackjack machines, roulette, card games, keno and craps),
bingo, state-sponsored lotteries, on-and off- track betting on horses
and dogs, jai alai, offshore cruise ships, riverboats and Native
American gaming operations. The gaming industry is also subject to
shifting consumer preferences and perceptions. A shift in consumer
acceptance or interest in gaming could adversely affect the Company.
Moreover, competition is intense and increasing among providers of
wagering and gaming equipment, both hardware and software, and the
Company believes that new competitors will emerge in the future. Many of
the Company s competitors or potential competitors may have products
that may compete directly with the System and such competitors may have
significantly greater financial, technological, manufacturing,
marketing, operating and other resources than the Company. In addition,
certain of the Company s potential competitors, including large
providers of wagering, gaming and computer equipment, may have
technological capabilities that would allow them to develop new or
alternative systems. The wagering and gaming equipment industry is
subject to rapid change and is characterized by constant technological
innovation. There can be no assurance that future technological advances
will not result in improved products or services that could adversely
affect the Company s business or that the Company will be able to
develop and introduce competitive uses for its products and to bring
such uses to market in a timely manner. Increased competition is likely
to result in price reductions, reduced operating margins and loss of
market share, any of which could materially and adversely affect the
Company s business, operating results or financial condition.
Furthermore, any success the Company might have may induce new
competitors to enter the market. There can be no assurance that the
Company will be a successful competitor in the wagering and gaming
equipment and service industry.
Uncertainties Regarding Intellectual Property. The Company regards
the System and related technology as proprietary and relies primarily on
a combination of patent, trademark, copyright and trade secret laws and
employee and third-party non-disclosure agreements to protect its
proprietary rights. The Company filed two United States patent
applications for its proprietary wagering methods and its related
computer processing system and patents with respect to each application
have issued. Corresponding applications have been or will be filed in
certain foreign countries and are pending. No assurance can be given
that any of the Company s foreign patent applications will issue as
patents, that any issued patents will provide the Company with
significant competitive advantages, or that challenges will not be
instituted against the validity or enforceability of any patent owned by
the Company or, if instituted, that such challenges will not be
successful. Defense of intellectual property rights can be difficult and
costly, and there can be no assurance that the Company will be able
effectively to protect its technology from misappropriation by
competitors. Additionally, third party infringement claims may result in
the Company being required to enter into royalty arrangements or pay
damages, any of which could materially and adversely affect the
Company s business, financial condition and results of operations. It is
the Company s policy that all employees and consultants involved in
research and development activities sign non-disclosure agreements;
however, this may not afford the Company sufficient protection for its
know-how and its proprietary information and products. Other parties may
independently develop similar or more advanced technologies or design
around aspects of the Company s technology which may be patented or
duplicate the Company s trade secrets.
As the number of software products in the industry increases and the
functionality of these products further overlaps, software developers
and publishers may increasingly become subject to infringement claims.
Although the Company has not received any claim that it is infringing
any patent or other proprietary right and is not currently aware of any
claim that it is infringing any intellectual property rights of others,
there can be no assurance that the Company will not face such claims,
with or without merit, in the future. Any such claims or litigation
could be costly and could result in a diversion of management s
attention, which could have a material adverse effect on the Company s
business, financial condition and results of operations. Any settlement
of such claims or adverse determinations in such litigation could also
have a material adverse effect on the Company s business, financial
condition and results of operations.
Management of Growth. Execution and implementation of the Company s
plan of operation will require significant growth. The Company s current
plans for growth will place a significant strain on the Company s
financial, managerial and other resources. The Company s ability to
manage its growth effectively will require it to continue to improve its
operational, financial and management information systems and to
attract, motivate and train key employees. If the Company s executives
are unable to manage growth effectively, the Company s business,
operating results and financial condition would be materially and
adversely affected.
Dependence on Key Personnel. The Company is dependent upon the
continued efforts and abilities of its executive officers and other key
personnel such as Barry Mindes, the Company s founder and Chairman of
the Board, and Bernard Albanese, a director of the Company and the
Company s President and Treasurer. The loss or unavailability of Messrs.
Mindes or Albanese for any significant period could have a material and
adverse effect on the Company s business, financial condition and
results of operations. Messrs. Mindes and Albanese have entered into
employment agreements with the Company which terminate on June 30, 1999
and June 30, 2000, respectively. No assurance can be given that those
agreements will be extended or renewed by the Company or the employees
upon expiration of their term and if not extended or renewed whether
individuals with similar backgrounds and experience could be hired to
replace them. The Company does not maintain and does not intend to
obtain key person life insurance on the life of either Messrs. Mindes or
Albanese. The Company s operations will also depend to a great extent on
the Company s ability to attract new key personnel and retain existing
key personnel in the future. Competition is intense for highly skilled
employees and there can be no assurance that the Company will be
successful in attracting and retaining such personnel, or that it can
avoid increased costs in order to do so. The Company s failure to
attract additional qualified employees or to retain the services of key
personnel could have a material adverse effect on the Company s
operating results and financial condition.
Limited Marketing Experience; Need for Additional Personnel. The
Company has very limited marketing resources and limited experience in
marketing and selling the System. The Company currently relies on its
own personnel in marketing and selling the System. Presently, only the
Chairman of the Board and the General Manager - Nevada Operations are
devoting attention to marketing and sales, and the Company will need to
hire additional personnel to market the System. There can be no
assurance that the Company will be able to establish adequate marketing
and sales capabilities. Achieving market penetration will require
significant efforts by the Company to create awareness of, and demand
for, the System. The failure by the Company to successfully develop its
marketing capabilities would have a material adverse effect on the
Company s business, financial condition and results of operations.
Further, there can be no assurance that the development of such
marketing capabilities will lead to sales or leases of the System. See
Business-Marketing and Sales Strategy.
Limited Market Size. Presently, the market for the System in the
United States is limited to casinos and sports book operations in the
State of Nevada. No assurance can be given that new markets will develop
or that legislation permitting sports wagering in other states within
the United States will be adopted. In addition, while sports wagering
exists outside of the United States, no assurance can be given that the
System would be accepted in such foreign markets or that compliance with
any regulatory conditions imposed by foreign jurisdictions will be
achieved.
Seasonality of Sporting Events. The Company s operations are
substantially dependent on a continuous supply of broadcast sporting
events on which bettors can wager. The Company believes that certain
sports (such as professional football) or certain sporting events (such
as the World Series in baseball and the Superbowl in football) may
generate more wagering revenue than others. A concentration in any
calendar period of sports or sporting events which induce higher
wagering, will, to the extent the Company s revenue is derived based on
wagering revenue, result in higher revenue for such periods. The Company
is aware of one company whose revenue from sports book operations has
been seasonal, with more than half of the wagers received being placed
between September and January, and with wagers on professional and
college football games historically comprising approximately 40% of the
bets placed. In addition, strikes in professional sports may result in
a significant loss of revenue and adversely affect the Company s results
of operations for the periods in which they occur.
Possible Exclusive Relationships Between Casinos and Third Parties.
The Company has focused its marketing efforts on casinos and sports book
operations in Nevada. The Company believes that sports wagering
facilities in casinos are currently operated either by the casino itself
or pursuant to contractual relationships with licensed sports book
operators. The Company is aware of one entity which owns and operates
sports book facilities in approximately 46 casinos and other gaming
establishments. Such entity or any other entity which operates sports
books in casinos may have exclusive relationships with casinos which
could limit the ability of casinos to contract directly with the
Company. As a result, the Company might be required to pay substantial
sums to such third parties for the privilege of supplying the System to
any such casino, which could have a material and adverse effect on the
Company s financial condition and results of operations.
Possible Objections by Leagues and Broadcasters. The System operates
in conjunction with live broadcasts of sporting events shown in casinos
or other gaming establishments. The broadcast of sporting events by
television stations is typically covered by agreements with players
leagues such as the National Football League or the National Basketball
Association. In addition, display by casinos within their sports betting
parlors of sporting events is typically subject to agreement with
broadcasters of sporting events. Players leagues could attempt to
enjoin use of the System in conjunction with broadcasts of such sporting
events and sue the Company for damages, whether or not such claims have
merit. In the event either leagues or sporting event broadcasters object
to wagering on sporting events in general, or use of the System in
particular, and in the event that the Company could not eliminate such
objections by modification of the System or otherwise, the Company s
financial condition and results of operations could be materially and
adversely affected.
Control by Management. As of December 17, 1998, Barry Mindes, Mindes
Family Limited Partnership, of which Mr. Mindes is general partner,
Bernard Albanese and the Marie Albanese Trust, a trust for the benefit
of Mr. Albanese s wife, together beneficially own approximately 44.5% of
the outstanding shares of Common Stock (excluding any stock options held
by Mr. Albanese which could, in the future, be exercised) . As a result
of such ownership, such stockholders are likely to have the ability to
control the election of the directors of the Company and the outcome of
issues submitted to a vote of the stockholders of the Company.
Possible Volatility of Market Price of Common Stock and Warrants. The
market price of securities of development stage companies and many
emerging companies has been highly volatile, experiencing wide
fluctuations not necessarily related to the operating performance of
such companies. Factors such as the Company s operating results,
announcements by the Company or its competitors concerning technological
innovations, new products or systems may have a significant impact on
the market price of the Company s securities.
NASDAQ Delisting; Low Stock Price. The trading of the Company s
Common Stock and Warrants on NASDAQ will be conditioned upon the Company
meeting certain asset, capital and surplus earnings and stock price
tests set forth by NASDAQ. To maintain eligibility for trading on
NASDAQ, the Company will be required to, among other things, maintain
net tangible assets of at least $2,000,000 and a minimum bid price of
$1.00 per share and adhere to certain corporate governance provisions.
If the Company fails any of the tests, the Common Stock or Warrants may
be delisted from trading on NASDAQ. The effects of delisting include the
limited release of the market prices of the Company s securities and
limited news coverage of the Company. Delisting may restrict investors
interest in the Company s securities and materially adversely affect the
trading market and prices for such securities and the Company s ability
to issue additional securities or to secure additional financing. On
March 10, 1998, the Company received notice from NASDAQ indicating that
because the Company's shares of Common Stock failed to maintain a
closing bid price of $1.00 or more for a period of 30 days, it would be
subject to delisting. The Company was given a period of 90 days in
which to regain compliance with the minimum bid price requirement.
Prior to the end of such 90-day period, the Company's shares of Common
Stock met the minimum bid price requirement and, therefore, its shares
of Common Stock were not delisted. If in the future the Company's
shares of Common Stock failed to meet the minimum bid price requirement,
it might have to consider a reverse stock split or any other means
permissible to attempt to meet the minimum bid price requirement, or its
shares could be deleted. In addition to the risk of volatile stock
prices and possible delisting, low price stocks are subject to the
additional risks of federal and state regulatory requirements and the
potential loss of effective trading markets. In particular, if the
Common Stock or Warrants were delisted from trading on NASDAQ and the
trading price of the Common Stock was less than $5.00 per share, the
Common Stock or Warrants could be subject to Rule 15g-9 under the
Exchange Act which, among other things, requires that broker/dealers
satisfy special sales practice requirements, including making
individualized written suitability determinations and receiving
purchasers written consent, prior to any transaction. If the Company s
securities were also deemed penny stocks under the Securities
Enforcement and Penny Stock Reform Act of 1990, this would require
additional disclosure in connection with trades in the Company s
securities, including the delivery of a disclosure schedule explaining
the nature and risks of the penny stock market. The Securities and
Exchange Commission regulations define a penny stock to be any
non-Nasdaq equity security that has a market price (as therein defined)
of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. Such requirements could
severely limit the liquidity of the Company s securities.
Future Sales of Restricted Securities; Registration Rights. As of
December 18, 1998 the Company had 7,819,660 shares of Common Stock
outstanding. Of these shares, 1,725,000 were registered in the Company's
IPO in December, 1996 and generally are freely tradable by persons other
than affiliates of the Company, without restriction or further
registration under the Securities Act. Of the balance, 6,024,269 shares
of Common Stock (the Restricted Shares ) outstanding, were sold by the
Company prior to its initial public offering in reliance on exemptions
from the registration requirements of the Securities Act and are
restricted securities as defined in Rule 144 promulgated under the
Securities Act and may not be sold in the absence of registration under
the Securities Act unless an exemption therefrom, including an exemption
afforded by Rule 144, is available. Under Rule 144 (and subject to the
conditions thereof), 3,477,408 of the Restricted Shares owned by Barry
Mindes, Mindes Family Limited Partnership, Bernard Albanese and the
Marie Albanese Trust and are currently eligible for sale. All of the
remaining 2,546,861 Restricted Shares are also currently eligible for
sale. Prior to the IPO, the Company s officers, directors and existing
stockholders entered into agreements ("lock-up") which prohibited them
from selling stock in the Company without the prior written consent of
Barington Capital Group, L.P., the Company's managing underwriter for
its IPO, until December 12, 1997. On August 27, 1997 Barington released
948,135 shares of the 6,024,269 shares locked up (none of which released
shares were held by directors, officers or employees of the Company).
In consideration therefor, those shareholders who had a portion of their
shares released agreed to extend the lock up on their remaining shares
until December 12, 1998. The Company s existing stockholders and the
holders of the Bridge Warrants and the options issued to the
Underwriters in the IPO are also entitled to certain rights with respect
to the registration under the Securities Act of the securities held by
them. The sale of a substantial number of shares of Common Stock or the
availability of Common Stock for sale could adversely affect the market
price of the Common Stock and Warrants prevailing from time to time.
Federal and State Registration Requirements; Possible Inability to
Exercise Warrants; Possible Redemption of Warrants. Holders of Warrants
will have the right to exercise them only if there is a current
registration statement in effect with the Securities and Exchange
Commission (the Commission ) and such shares are qualified with or
approved for sale by various state securities agencies, or if in the
opinion of counsel for the Company, there is an effective exemption from
registration. There can be no assurance that the Company will be able to
keep a registration statement covering the shares underlying the
Warrants current. If a registration statement covering such shares of
Common Stock is not kept current for any reason, or if the shares
underlying the Warrants are not registered in the state in which a
holder resides, the Warrants will not be exercisable and may be deprived
of any value. The Warrants are redeemable after the Separation Date by
the Company at a price of $.05 per Warrant if the trading price of the
Common Stock is at least $12.00 (200% of the initial Unit offering
price) for a period of 15 consecutive trading days ending within 15 days
of the date upon which the Warrants are called for redemption. If the
Company elects to redeem the Warrants, such redemption could force the
holders to exercise the Warrants and pay the exercise price at a time
when the holders might not otherwise wish to do so or at a time when the
holders might not be financially able to do so; to sell the Warrants at
their then current market price when they might otherwise wish to hold
the Warrants; or to accept the redemption price of $.05 per Warrant
which, at the time the Warrants are called for redemption, is likely to
be substantially less than the market value of the Warrants.
Absence of Dividends. The Company has not paid any dividends on its
outstanding Common Stock since its inception and does not intend to pay
any dividends to its stockholders in the foreseeable future. The Company
currently intends to reinvest earnings, if any, in the development and
expansion of its business.
Anti-Takeover Effects of Certain Provisions of Certificate of
Incorporation and Delaware Law. The Company s Certificate of
Incorporation authorizes the issuance of 2,000,000 shares of Preferred
Stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without obtaining stockholder approval,
to issue such Preferred Stock with dividend, liquidation, conversion,
voting or other rights that could adversely affect the voting power or
other rights of the holders of the Common Stock. In the event of
issuance, the Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a
change in the control of the Company. Certain provisions of Delaware law
may also discourage third party attempts to acquire control of the
Company.
Item 2. Description of Property
The Company currently leases approximately 2,350 square feet of space
in Little Falls, New Jersey under a lease expiring on June 30, 2000.
Annual lease payments for this facility, at which all development and
most administrative functions are currently conducted, during the fiscal
year ended September 30, 1998, were approximately $19,700. For the
fiscal year ending September 30, 1999 lease payments for this facility
are expected to be approximately $28,900. The Company also entered into
a three year lease ending on April 30, 2000 for approximately 2,000
square feet of space in Las Vegas, Nevada. This facility is used as the
Hub for operating the System and for sales, training, maintenance,
repairs and storage of equipment. Lease payments for this facility
during the fiscal year ended September 30, 1998 were approximately
$36,600 and are expected to be approximately $38,100 during the fiscal
year ended September 30, 1999. The Company also leases off-site
facilities in Nevada for the storage of equipment.
In May 1997 the Company purchased a condominium unit in Las Vegas,
Nevada for use by its employees while travelling to Nevada on the
business of the Company.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
quarter ended September 30, 1998.
PART II
Item 5. Market for Common Equity and Related Shareholder Matters.
Market Information
From December 11, 1996, the effective date of the Company's
Registration Statement on Form SB-2, until April 4, 1997, Units
consisting of one share of the Company's Common Stock, par value $.001
per share, and one redeemable Warrant to purchase one share of Common
Stock at an exercise price of $7.20 per share were on the NASDAQ Small
Cap Market ("NASDAQ"). Commencing on April 7, 1997, Units were no
longer traded and the Company's Common Stock and Warrants began to trade
separately.
The following tables set forth, for the periods indicated and as
reported by NASDAQ, the high and low bid prices for the Units. The
quotations reflect inter-dealer prices without retail mark-up, mark-down
or commission and may not represent actual transactions.
Quarter (or Period) High Low
December 12, 1996 to December 31, 1996 8 3/8 7
January 1, 1997 to March 31, 1997 10 1/2 7 1/8
April 1, 1997 to April 4, 1997 7 5/8 7 1/2
The following table sets forth the periods indicated and as reported
by NASDAQ, the high and low bid prices for shares of the Company's
Common Stock. The quotations reflect inter-dealer price without retail
mark-up, mark-down or commission and may not represent actual transactions.
Quarter (or Period) High Low
April 7 to June 30, 1997 7 5 3/4
July 1, 1997 to September 30, 1997 7 3/8 5 1/4
October 1, 1007 to December 31, 1997 6 1
January 1, 1998 to March 31, 1998 1 3/16 1/2
April 1, 1998 to June 30, 1998 4 1/2 27/32
July 1, 1998 to September 30, 1998 2 9/32 1
The closing bid and asked prices on December 18, 1998 were $1 25/32 and
$1 15/16, respectively.
Current Holders of Common Stock
Based upon information supplied to the Company by its transfer agent,
the number of stockholders of record of the Common Stock on December 18,
1998 was 66. The Company believes there are in excess of 900 beneficial
owners of its Common Stock whose shares are held in Street Name.
Dividends
The Company has never paid cash dividends with respect to its Common
Stock. The Company intends to retain future earnings, if any, that may
be generated from the Company s operations to help finance the
operations and expansion of the Company and accordingly does not plan,
for the foreseeable future, to pay dividends to holders of Common Stock.
Any decision as to the future payment of dividends on Common Stock will
depend on the results of operations and financial position of the
Company and such other factors as the Company s Board of Directors, in
its discretion, deems relevant.
Recent Sales of Unregistered Securities
On October 28, 1996 the Company issued 6 1/2 units in a bridge financing
(the "Bridge Units"), each Bridge Unit consisting of (i) a 10% Senior
Promissory Note (the "Bridge Notes") in the principal amount of $100,000
and (ii) warrants to purchase 30,000 shares of the Company's Common
Stock (the "Bridge Warrants"), at an exercise price equal to the lesser
of $3.60 or 60% of the initial Unit offering price in the Company's
subsequent IPO. Barington Capital Group, L.P. acted as placement agent
for the offering of Bridge Units which were made to a limited number of
accredited investors pursuant to the exemption from the registration
requirements of the Securities Act of 1933, as amended, afforded by
Section 4(2) thereof. The aggregate offering price was $650,000, of
which net proceeds received by the Company amounted to approximately
$550,000. An aggregate of 195,000 Bridge Warrants were issued in the
bridge financing. The Bridge Warrants entitle the holders thereof to
purchase, in the aggregate, up to 195,000 shares of Common Stock at an
exercise price of $3.60 per share, subject to adjustment. The Bridge
Warrants may be exercised at any time after issuance and expire on
October 28, 2001. The shares underlying the Bridge Warrants were
registered concurrently with the IPO, and are subject to a two-year
lock-up with Barington. The holders of the Bridge Warrants are entitled
to certain "piggyback" and demand registration rights.
Use of Proceeds from Initial Public Offering
On December 11, 1996, the Company's Registration Statement on Form
SB-2 (Reg. No. 333-15005) relating to its IPO was declared effective,
pursuant to which it sold 1,725,000 units (including over-allotments)
consisting of one share of Common Stock and one redeemable warrant to
purchase Common Stock at an exercise price of $7.20 per share, for gross
proceeds of $10,350,000. After underwriting discounts and commissions,
expenses paid to or for the benefit of underwriters, and other costs of
the IPO, net proceeds were approximately $8,576,000.
At or subsequent to the closing of the IPO, the Company expended
approximately $659,000 for repayment of the Bridge Notes; approximately
$1,318,000 for the purchase of computer equipment including PBSs;
approximately $296,000 for professional fees; approximately $311,000 for
directors and officers liability insurance premiums; approximately
$450,000 for marketing the System; approximately $132,000 for the
purchase of a condominium in Henderson, Nevada for use by its employees
while traveling on business in Nevada; and approximately $100,000 for a
loan to an officer, of which approximately $33,650 was outstanding as of
September 30, 1998. After other expenses, including product enhancement
and development, sales and administration, approximately $3,460,000
remained in cash and short-term, interest-bearing, investment grade
securities as of September 30, 1998.
Item 6. Management Discussion and Analysis
In June of 1997 the Company retained Yarlow, Inc. ("Yarlow") d/b/a
Tom's Sunset Casino to operate the Company's SportXction(TM) sports
wagering System until the later of June 1998 or such time as the
Company received a Nevada gaming license as an operator of an
inter-casino linked system ( "OILS license"), permitting it to operate
the System. The Company applied for an OILS license in July 1997. On
January 13, 1998, the Company announced that Yarlow had suspended
operation of Tom's Sunset Casino, including operation of the
SportXction(TM) System, as a result of financial difficulties unrelated to
the System.
Live operation of the System commenced on September 21, 1997 and by
January, 1998, when operation of the System was temporarily suspended,
as described above, the System was in operation at eight inter-linked
casinos and gaming establishments in Nevada, with simultaneous wagering
conducted through approximately 220 player-betting stations installed at
those eight establishments.
On April 23, 1998, the Nevada Gaming Authorities granted an OILS
license to the Company. The Company re-commenced operations on May 11,
1998 on a limited basis in two wagering establishments with the Company
performing the duties of Hub Operator. By September 30, 1998, the
System was in operation in a total of four locations. Wagers were
accepted on both professional basketball, baseball, and college and
professional football. During the hiatus in operations, between late
January, 1998 and late May, 1998, the Company enhanced the SportXction(TM)
System with several new features including an improved parley of
sequential bets which had initial testing last winter, and free practice
bets. By September 30, 1998, the Company again enhanced the SportXction(TM)
System with several new features including one-sided, long-shot
propositions.
For the year ended September 30, 1998 the Company had a net loss of
$2,935,002 or $0.38 loss per share on a basic and fully diluted basis
on the 7,780,722 weighted average common shares outstanding, compared
with a net loss of $2,191,321, or $0.29 loss per share on a basic and
fully diluted basis on the 7,475,996 weighted average common shares
outstanding for the year ended September 30, 1997. Revenues of $36,418
were reported for the year ended September 30, 1998, compared with
revenues of $3,580 reported for the prior year. Prior to being granted
an OILS license, the Company was restricted to charging fixed fees for
the use of the System. Subsequent to the granting of the OILS license,
the Company's revenues represent the net win (i.e. total amount wagered
less total amount paid out) of the System. The System was operated for
approximately eight months of the year ended September 30, 1998, and for
approximately 10 days of the year ended September 30, 1997.
The net win is affected by the success (or lack thereof) of the
players in making sports wagering bets. The System seeks to induce
balanced betting action. It operates most efficiently when there are a
substantial number of wagers being placed through the System
simultaneously. When the number of wagers through the System is modest,
as it has been most of the time the System has been in operation, it is
more difficult to attempt to create balanced pools. This tends to result
in lower net wins.
The increased loss for the year ended September 30, 1998 resulted
primarily from: marketing expenses which increased by $238,474 to
$450,219, primarily reflecting advertising to promote awareness of the
SportXction(TM) game; depreciation expenses, which increased by $217,126
from the prior year to $419,418, reflecting the purchase of additional
computer equipment used in the operation of the System; salary expenses,
which increased by $105,205 to $1,131,478, attributable to increased
administrative, marketing, technical support activities and a severance
payment to a former officer; a decline in interest income which
decreased by $90,201 to $221,259 due to reduced investments; a bad debt
write-off of $79,497 (consisting of a $50,000 loan and $29,497 of
accounts receivable), due to the financial difficulties of Yarlow; and
rent expense which increased by $41,434 to $55,390 due to opening an
office in Las Vegas.
Shortly after the Company was granted the OILS license, the Company
assumed responsibility for the players' account balances (money
deposited by players in accounts prior to commencing play on the
System) of approximately $7,000, and for cash reconciliation payment
balances owed to the casinos of approximately $5,000. These balances
were the responsibility of Yarlow in accordance with the agreements
between the Company, Yarlow, as Hub operator, and the sports wagering
establishments at which the System was in operation before it was shut
down due to Yarlow's financial difficulties. The balances were secured
by a Certificate of Deposit ("CD" ) in the amount of $50,000. The
Company has petitioned Nevada Board to reimburse the Company out of the
proceeds of that CD for the assumption of those fiscal responsibilities.
There can be no assurance that the Nevada Board will agree to such a
reimbursement, or that if there is a reimbursement, that it will be for
the entire amount requested.
The Company incurred approximately $996,000 in research and
development costs for the year ended June 30, 1998, compared with
approximately $992,000 for the comparable prior year period.
The Company continues to be in the development stage, with limited
revenues generated from the System. As of September, 1998, the Company
had cumulative net losses since inception of $6,061,022. It expects to
continue to incur substantial losses and negative cash flow at least
through fiscal year ended September 30, 1999. Contributing to this are
the fact that revenues currently being generated since the resumption of
the operation of the System in mid-May, 1998 have been insignificant and
the Company's expectation that it will continue to incur substantial
research and development expenses for further product enhancement and
development activities.
As of September 30, 1998 the Company had liquid resources totaling
$3,473,570. These include cash and cash equivalents in the amount of
$198,607, and short term investments in the amount of $3,274,963
Investments are limited to investment grade marketable securities with
maturities of less than 18 months. Based upon its current proposed plans
and assumptions relating to its operations, the Company anticipates that
existing resources will be sufficient to satisfy its contemplated cash
requirements for approximately 18 months. Capital expenditures are
expected to be limited to purchase of additional computer equipment and
leasing additional computer equipment, most of which will be required in
connection with its activities relating to legal wagering from home in
Nevada. (See "Business - Recent Developments"). Existing resources will
fund these requirements.
Utilization of the SportXction(TM) sports wagering system in casinos and
other gaming establishments has been disappointing to date. The Company
believes this is due to a variety of factors including players having to
learn a new game, lack of effective advertising means to address players
in casinos who are largely tourists and the disinclination of local
players to visit major casinos in Las Vegas and the fact that after the
System had been operational from late September 1997 to January 1998,
the System ceased operating for four months when Yarlow, the then Hub
Operator, suffered financial difficulties. In order to encourage more
potential players to wager through the System, the Company adapted the
System to permit limited time periods of free play and practice betting
during the course of a sporting event. It also introduced other new
features and enhancements to the System to attract additional players
and increase wagering. These features included a form of parlay wager
resulting in a larger potential payoff, smaller minimum wagers, and a
one-sided, long shot proposition which offers to the players larger
payoffs for relatively small wager amounts. Despite these new features
and enhancements, the revenue generated by the casino based PBSs remains
small, and is likely to remain insufficient to avoid continuing loses by
the Company for the foreseeable future.
The Company intends to focus primarily on adapting the System for
opportunities in new markets including; (i) wagering from home within
the State of Nevada, (ii) wagering in those foreign countries where it
is legal, and (iii) non-wagering applications, including games and
contests over the Internet (See "Recent Developments"). The Company also
intends to explore alternative applications of its proprietary
technology, including adaptation of the System for activities conducted
over cable television and other communications media.
Year 2000 Issue
The term "Year 2000 ('Y2K') Issue" is a general term used to describe
the various problems that may result from the improper processing of
dates and date-sensitive calculations by computers and other machinery
as the year 2000 is approached and reached. These problems generally
arise from the fact that most of the world's computer hardware and
software have historically used only two digits to identify the year in
a date, often meaning that the computer will fail to distinguish dates
in the "2000's" from the date in the "1900's." These problems may also
arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field. The Y2K
computer software compliance issues may affect the Company and most
companies in the world. The Company's SportXction(TM) sports wagering
System was designed and developed during the past several years. As
such, the Company recognized Y2K problem and has attempted to write all
of its proprietary software utilizing four digits in order to avoid a
Y2K problem. The Company also utilizes a variety of software products
in its database manufactured by Microsoft Corporation, all of which are
reported to be Y2K compliant.
The Company's technical staff of software engineers and programmers
are continuing to analyze and test the hardware and peripheral products
that it utilizes in its System to determine whether they are Y2K
compliant. The Company's staff attempts to identify any hardware or
software with potential Y2K problems; assess the magnitude of such
problems, if any; remedy any such problems that are found and test the
solutions; and plan for any contingencies.
Based upon its efforts to date, the Company does not believe that its
System requires any material modifications or replacements in order to
be Y2K compliant. The Company does not believe that the readiness of
its customers and suppliers to be Y2K compliant will have a material
impact on the Company. The Company is in the process of developing
contingency plans relating to the Y2K problems to the extent such plans
are possible. Such plans are expected to be developed by July 1, 1999.
These plans will attempt to mitigate both internal risks of the Y2K
problem with any risks that may be impacted by the Company's customers
and suppliers. The Company believes, however, that due to the
widespread nature of potential Y2K issues, the contingency planning
process is an ongoing one which may require further modifications as the
Company obtains additional information regarding any Y2K problems
affecting the Company's systems and equipment and regarding the status
of its suppliers and customers regarding their becoming Y2K compliant.
Through September 30, 1998 the Company estimates that it has spent
approximately $35,000 in its efforts to achieve Y2K compliance, all of
which has been recognized as an expense in the Company's Statement of
Operations. The Company does not expect that any additional costs to be
incurred in its efforts to achieve Y2K compliance will have a material
effect on its liquidity or financial condition. The Company intends to
fund the costs of becoming Y2K compliant from its available liquid
assets.
The failure to correct a material Y2K problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition. Due
to the general uncertainty inherent in the Y2K problem, resulting in
part from the uncertainty of the Y2K readiness of the Company's
customers and suppliers, the Company is unable to determine at this time
whether the consequences of any Y2K failures will have a material impact
on the Company's results of operations, liquidity or financial condition.
The preceding "Y2K problem" discussion contains various forward-
looking statements which represent the Company's beliefs or expectations
regarding future events. When used in the "Y2K problem" discussion, the
words "believes," "expects," "estimates" and similar expressions are
intended to identify forward-looking statements Forward-looking
statements include, without limitation, the estimated cost of becoming
Y2K compliant and the Company's belief that its Systems and equipment
will be Y2K compliant in a timely manner and that the readiness of its
customers and suppliers to be Y2K compliant will not have a material
impact on the Company. All forward-looking statements involve a number
of risks and uncertainties that could cause the actual results to differ
materially from the projected results, including problems that may arise
on the part of third parties. Factors that may cause these differences
include, but are not limited to, the availability of qualified personnel
and other information technology resources; the ability to identify and
rededicate all date sensitive lines of computer code or to replace
embedded computer chips in affected systems or equipment; and the
actions of governmental agencies or other third parties with respect to
Y2K problems. If the modifications and conversions required to make the
Company Y2K compliant are not made or are not completed on a timely
basis, the resulting problems could have a material impact on the
operations of the Company. This impact could, in turn, have a material
adverse effect on the Company's results of operations and financial
condition.
Item 7. Financial Statements
International Sports Wagering Inc.
(A Development Stage Company)
Index
Page
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS
Balance Sheets as of September 30, 1998 and 1997. F-3
Statements of Operations for the years ended
September 30, 1998 and 1997 and the period from
May 22, 1995 (date of inception) to September 30,
1998. F-4
Statements of Stockholders' Equity for the period
from May 22, 1995 (date of inception) to September
30, 1998. F-5
Statements of Cash Flows for the years ended
September 30, 1998 and 1997 and the period from
May 22, 1995 (date of inception) to September 30,
1998. F-6
Notes to Financial Statements F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
International Sports Wagering Inc.
We have audited the accompanying balance sheets of International Sports
Wagering Inc. (a development stage company) as of September 30, 1998 and 1997,
and the related statements of operations, stockholders' equity and cash flows
for the years ended September 30, 1998 and 1997 and for the period from May
22,1995 (date of inception) to September 30, 1998. 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 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 financial statements referred to above present
fairly, in all material respects, the financial position of International
Sports Wagering Inc. (a development stage company) as of September 30, 1998
and 1997, and the results of its operations and its cash flows for the years
then ended, and for the period from May 22, 1995 (date of inception) to
September 30, 1998, in conformity with generally accepted accounting
principles.
New York, New York KPMG Peat Marwick LLP
November 25, 1998
F-2
<PAGE>
International Sports Wagering Inc.
(A Development Stage Company)
Balance Sheets
September 30, 1998 and 1997
ASSETS
1998 1997
Current Assets:
Cash and cash equivalents $ 198,607 1,026,313
Accounts receivable 3,401 2,950
Investments 3,274,963 4,457,118
Current portion of notes receivable 25,000 34,615
Prepaid expenses and other current
assets 105,486 184,315
Total current assets 3,607,457 5,705,311
Investments -- 618,120
Property and equipment, net 800,070 1,055,196
Notes receivable less current portion 8,620 34,615
Other assets 13,423 6,358
Total assets $ 4,429,570 7,419,600
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Deposits payable $ 10,490 --
Accounts payable 94,629 143,197
Accrued expenses 155,910 222,345
Total current liabilities 261,029 365,542
Stockholders' Equity:
Preferred stock, par value $.001 per
share; 2,000,000 shares authorized,
none issued or outstanding -- --
Common stock, par value $.001 per
share; 20,000,000 shares authorized,
issued and outstanding; 7,819,660
in 1998 and 7,749,269 in 1997 7,820 7,749
Additional paid-in capital 10,264,243 10,214,829
Deficit accumulated during the
development stage (6,103,522) (3,168,520)
Total stockholders' equity 4,168,541 7,054,058
Total liabilities and
stockholders' equity $ 4,429,570 7,419,600
See accompanying notes to financial statements.
F-3
International Sports Wagering Inc.
(A Development Stage Company)
Statements of Operations
Years ended September 30, 1998 and 1997 and the period
from May 22,1995 (date of inception) to September 30, 1998
May 22, 1995
(date of
Year ended Year ended inception) to
September 30, September 30, September 30,
1998 1997 1998
Revenues $ 36,418 3,580 39,998
Costs and expenses:
Research and development
expense 996,104 992,224 2,779,623
General and administrative
expense 2,196,575 1,215,039 3,637,521
3,192,679 2,207,263 6,417,144
Operating loss (3,156,261) (2,203,683) (6,377,146)
Other income (expense):
Interest income 221,259 311,460 572,722
Interest expense -- (299,098) (299,098)
221,259 12,362 273,624
Net loss $(2,935,002) (2,191,321) (6,103,522)
Net loss per share $ (0.38) (0.29) (0.85)
Weighted average common
shares and equivalents
outstanding-basic and
diluted 7,780,722 7,475,996 7,161,595
See accompanying notes to financial statements.
F-4
International Sports Wagering Inc.
(A Development Stage Company)
Statement of Stockholders' Equity
For the period from May 22, 1995
(date of inception) to September 30, 1998
<TABLE>
<CAPTION>
Deficit
accumulated
Additional during the
Common stock paid-in development
Shares Amount capital stage Total
<S>
<S> <C> <C> <C> <C> <C>
Issuance of shares
of common stock
upon incorporation
(May 22, 1995) 907 $ 1 $ 2 $ -- $ 3
Issuance of common
stock upon merger 3,023,048 3,023 (2,023) -- 1,000
Issuance of common
stock 1,767,567 1,768 813,843 -- 815,611
Net loss -- -- -- (109,011) (109,011)
Balance, September 30,1995 4,791,522 4,792 811,822 (109,011) 707,603
Issuance of common
stock 60,461 60 42,440 -- 42,500
Issuance of common
stock through exercise of
warrants 1,164,729 1,165 813,021 -- 814,186
Issuance of common
stock through
exercise of options 7,557 7 5,306 -- 5,313
Issuance of options
to consultants -- -- 14,500 -- 14,500
Net loss -- -- -- (868,188) (868,188)
Balance, September 30,1996 6,024,269 6,024 1,687,089 (977,199) 715,914
Issuance of common
stock 1,725,000 1,725 8,527,740 -- 8,529,465
Net loss -- -- -- (2,191,321) (2,191,321)
Balance, September 30,1997 7,749,269 7,749 10,214,829 (3,168,520) 7,054,058
Issuance of common
stock through
exercise of options 70,391 71 49,414 -- 49,485
Net Loss -- -- -- (2,935,002) (2,935,002)
Balance, September 30,1998 7,819,660 $ 7,820 $ 10,264,243 $(6,103,522) $ 4,168,541
</TABLE>
See accompanying notes to financial statements.
F-5
International Sports Wagering Inc.
(A Development Stage Company)
Statements of Cash Flows
Years ended September 30, 1998 and 1997 and the period
from May 22, 1995 (date of inception) to September 30, 1998
<TABLE>
<CAPTION>
May 22, 1995
(date of
Year ended Year ended inception) to
September 30, September 30, September 30
1998 1997 1998
<S>
<C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,935,002) $ (2,191,321) $ (6,103,522)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 420,203 203,077 695,183
Bad debt expense 79,497 -- 79,497
Issuance of options to consultants -- -- 14,500
Changes in assets and liabilities:
Accounts receivable (79,948) (2,950) (82,898)
Prepaid expenses and other current assets 78,829 (175,430) (105,486)
Other assets (7,850) (2,885) (16,040)
Customer deposits 10,490 -- 10,490
Accounts payable (48,568) 100,815 94,629
Accrued expenses (66,435) 79,080 155,910
Net cash used in operating activities (2,548,784) (1,989,614) (5,257,737)
Cash flows from investing activities:
Purchase of investments (7,293,918) (32,175,535) (39,469,453)
Proceeds from sales of investments 9,094,193 27,100,297 36,194,490
Purchase of property and equipment (164,292) (953,022) (1,492,636)
Issuance of notes receivable -- (100,000) (100,000)
Proceeds from repayments of notes receivable 35,610 30,770 66,380
Net cash provided by (used in) investing activities 1,671,593 (6,097,490) (4,801,219)
Cash flows from financing activities:
Proceeds from issuance of common stock 49,485 8,575,871 10,257,563
Net cash provided by financing activities 49,485 8,575,871 10,257,563
Net (decrease) increase in cash and cash equivalent (827,706) 488,767 198,607
Cash and cash equivalents, beginning of period 1,026,313 537,546 --
Cash and cash equivalents, end of period $ 198,607 $ 1,026,313 $ 198,607
Supplemental disclosures:
Cash paid for interest $ -- $ 9,098 $ 9,098
</TABLE>
See accompanying notes to financial statements.
F-6
International Sports Wagering Inc.
(A Development Stage Company)
Notes To Financial Statements
September 30, 1998 and 1997
(1) Description of Business
International Sports Wagering Inc. (the Company) was incorporated in the
State of Delaware on May 22, 1995 to develop and market an interactive,
client/server based computer system for purposes of wagering on sporting
events. The Company is the successor by merger to Systems Enterprises, Inc.
(SEI), an S-corporation incorporated in the State of New Jersey on December
17, 1992, 100% owned by the Company's founding shareholder, that had nominal
operating activities during its existence. Subsequent to the merger, the
Company reimbursed the founding shareholder for certain legal fees incurred by
SEI that were specific to the Company's planned business activities.
The Company is a development stage company which has not commenced
generating significant revenue from its planned primary business activities.
Since the Company's inception, it has been primarily engaged in product
research and development, market testing its intended product, recruitment of
key personnel, and raising capital. In the fiscal year ended September 30,
1998 the Company s system was operational for approximately 8 months, however
there are no significant operating revenues and there have been no significant
product sales from inception of the Company through September 30,1998. There
can be no assurance that the Company will be able to enhance or market its
product in the future, that future revenues will be significant, that any
sales will be profitable, or that the Company will have sufficient funds
available to enhance or market its product. Further, the Company's future
operations are dependent on the success of the Company's commercialization
efforts, market acceptance, and maintaining regulatory approval of its
product.
On October 28,1996, the Company raised approximately $550,000, net of
expenses, from the sale of 6.5 units in a private placement for $100,000 per
unit, each unit consisting of a 10% senior promissory note in the principal
amount of $100,000 and warrants to purchase 30,000 shares of the Company's
common stock at an exercise price equal to the lesser of $3.60 per share or
60% of the initial public offering (the "IPO") price per share in its IPO.
The senior promissory notes were due on the consummation of the Company's IPO.
On December 17,1996, the Company closed its IPO of 1,500,000 units
("Units"), each Unit consisting of one share of common stock, par value $.001
per share ("Common Stock"), and one redeemable warrant to purchase one share
of Common Stock ("Warrant"), at a price of $7.20 per Unit. After underwriting
discounts and commissions, other expenses of the offering, and the repayment
of promissory notes issued in connection with the bridge financing consummated
on October 28, 1996, the Company received net proceeds of approximately $7.2
million. On January 22, 1997, the underwriters exercised an over-allotment
option for an additional 225,000 Units, yielding additional net proceeds to
the Company of approximately $1.2 million.
F-7
<PAGE>
International Sports Wagering Inc.
(A Development Stage Company)
Notes To Financial Statements (Continued)
September 30, 1998 and 1997
(2) Summary of Significant Accounting Policies
Cash and cash equivalents:
Cash and cash equivalents consist of funds held on deposit with banking
institutions with original maturities of less than 90 days.
Property and equipment:
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is provided over the estimated useful lives of the
respective assets, generally three to twenty five years, using the straight-
line method.
Expenditures for repairs and maintenance are charged to expense as
incurred.
Investments:
Investments at September 30, 1998 and 1997 consist of debt securities
issued by the Federal government and corporate entities. The Company accounts
for these investments pursuant to Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(FAS 115).
Under FAS 115, debt securities are classified as either held to maturity,
trading or available-for-sale. Securities that an enterprise has the positive
intent and ability to hold to maturity are classified as held to maturity.
Trading securities are bought and held principally for the purpose of selling
them in the near future. All securities not classified as either held to
maturity or trading are classified as available-for-sale. Held to maturity
securities are reported at amortized cost, while trading and available-for-
sale securities are recorded at fair value pursuant to FAS 115. For trading
securities, unrealized holding gains and losses are included in earnings. All
of the Company's debt securities are classified as available-for-sale.
The current investments include those debt securities which are
scheduled to mature within twelve months of the balance sheet date, and
include investments with maturities ranging from October of 1998 to September
of 1999.
Research and development:
All research and development, patent application and patent maintenance
costs are charged to expense as incurred.
F-8
International Sports Wagering Inc.
(A Development Stage Company)
Notes To Financial Statements (Continued)
September 30, 1998 and 1997
(2) Summary of Significant Accounting Policies (Continued)
Fair value of financial instruments:
Statement of Financial Accounting Standards No.107, "Disclosures About
Fair Value of Financial Instruments", defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties and requires disclosure of the
fair value of certain financial instruments. The Company believes that there
is no material difference between the fair value and the reported amounts of
financial instruments in the balance sheets.
Income taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Deferred income taxes are measured using the enacted tax rates and laws that
are anticipated to be in effect when the differences are expected to reverse.
Stock split:
On October 24, 1996, the Company effected a stock split related to its
common stock, whereby each common share outstanding was converted by a factor
of 3.0230479, thus increasing the number of common shares outstanding from a
pre-split amount of 1,992,788 at September 30, 1996 to 6,024,269. The Board
of Directors voted to increase the total number of shares of common stock
authorized at September 30, 1996 to 20,000,000 in connection with this stock
split. All share and per share information contained in the accompanying
financial statements has been retroactively adjusted to reflect the stock
split.
The preparation of 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 reporting period.
Actual results could differ from those estimates.
New accounting pronouncements:
Accounting for the Impairment of Long-Lived and Intangible Assets:
The Financial Accounting Standards Board ( FASB )issued SFAS No. 121.
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" which requires that long-lived assets, certain identifiable
intangible assets and goodwill related to those assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of this
statement during fiscal 1997, did not have any significant impact on the
Company's financial position or results of operations.
F-9
<PAGE>
International Sports Wagering Inc.
(A Development Stage Company)
Notes To Financial Statements (Continued)
September 30, 1998 and 1997
(2) Summary of Significant Accounting Policies (Continued)
Accounting for Stock Based Compensation:
The FASB issued SFAS No. 123, "Accounting for Stock-based Compensation."
This statement requires companies to make pro forma disclosures in a footnote
of net income as if the fair value based method of accounting for stock
options, as defined in the statement, had been applied. The Company adopted
this statement during fiscal 1997. (See Note 3).
Accounting for Net Income Per Share
During June 1997, The FASB released SFAS No. 128, Earnings per Share
( SFAS 128 ). SFAS 128 and the SEC Staff Accounting Bulletin NO.98,
establishes standards for computing and presenting earnings per share and is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Accordingly, effective December 31, 1997, the
accompanying net loss per share information has been calculated and presented
in accordance with the provisions of SFAS 128 and as further prescribed by the
relevant Staff Accounting Bulletins of the Securities and Exchange Commission.
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding during the applicable
reporting periods. The computation of diluted net loss per share is similar
to the computation of basic net loss per share except that the denominator is
increased to include the number of additional common shares that would have
been issued. However, the Company s computations of dilutive net loss per
share does not assume any conversion or exercise of securities as their effect
is antidilutive for all periods presented.
The weighted average shares used in the net loss per share computations
for the years ended September 30, 1998 and 1997 were 7,780,722 and 7,475,996
for the period from May 22, 1995 (date of inception) to September 30, 1998 was
7,161,595.
Common equivalent shares that could potentially dilute basic earnings
per share in the future and that were not included in the computation of
diluted loss per share because of antidilution were 2,328,456 and 2,262,367 as
of September 30, 1998 and 1997, respectively.
(3) Preferred and Common Stock
In May 1995, the Company's Chairman of the Board and principal
shareholder established the Company by purchasing shares and exchanging the
shares of SEI for additional shares of Company stock. Also in May 1995, the
Company issued shares to certain other founding shareholders.
F-10
<PAGE>
International Sports Wagering Inc.
(A Development Stage Company)
Notes To Financial Statements (Continued)
September 30, 1998 and 1997
(3) Preferred and Common Stock (Continued)
In June and July 1995, the Company sold a total of 399,997 units, each
consisting of 3.0230479 shares of common stock and one warrant to purchase
3.0230479 additional shares of common stock for an aggregate of approximately
$850,000 or approximately $.70 per unit to an investor group. Such amounts
were reduced by certain costs of issuance. Between February and April 1996
warrants to purchase an aggregate of 1,164,729 shares were exercised and
proceeds of approximately $814,000 ($.70 per share) were received by the
Company. All unexercised warrants issued in June and July 1995 expired by
their own terms.
In June 1996, the Company sold 60,461 shares to seven individuals
including employees, directors and investors resulting in proceeds of $42,500
($.70 per share) to the Company.
In May 1995, the Board of Directors adopted and the stockholders approved
the 1995 Stock Option Plan (the 1995 Plan). The 1995 Plan provides for the
grant of incentive stock options (ISOs) and nonqualified stock options
(NQSOs). The total number of shares of common stock with respect to which
options may be granted under the 1995 Plan is 649,955. ISOs may be granted to
individuals, who, at the time of grant, are employees of the Company. NQSOs
may be granted to officers, directors, agents, employees and consultants of
the Company, whether or not the individual is an employee of the Company. The
1995 Plan provides that the administrator must establish an exercise price for
ISOs that is no less than the fair market value per share of the common stock
at the date of grant. The exercise price of NQSOs shall be determined by the
Board of Directors. Options granted under the 1995 Plan may not be
exercisable for terms in excess of ten years from the date of grant, with
vesting periods varying for option grants.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-based Compensation" and applies APB Opinion 25 in
accounting for its plans in its financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
consistent with the provisions of SFAS NO. 123, the Company's net loss would
have been increased to the pro forma amounts indicated below:
1998 1997
Net (loss) - as reported $(2,935,002) (2,191,321)
Net (loss) - pro forma (3,111,696) (2,253,668)
Loss per share basic and diluted - as reported $ (.38) (.29)
Loss per share-basic and diluted - pro forma (.40) (.30)
The pro forma amounts as noted above may not be representative of the
effects on reported income/loss(es) for future years.
F-11
<PAGE>
International Sports Wagering Inc.
(A Development Stage Company)
Notes To Financial Statements (Continued)
September 30, 1998 and 1997
(3) Preferred and Common Stock (Continued)
The fair value of the stock options granted is estimated at grant date
using the Black-Scholes option pricing model with the following weighted
average assumptions: expected dividend yield 0.0%, risk free interest rate of
6.25%, expected volatility of 1.72%, and an expected life of 7 years. The
weighted average grant date fair value of options granted in 1998, 1997 and
1996 was $.72, $2.96, and $.25, respectively.
Activity related to the 1995 Plan is as follows:
Weighted
Shares Average Price
Outstanding, September 30, 1995 75,576 $0.70
Granted 574,372 $0.70
Exercised (7,557) $0.70
Outstanding, September 30, 1996 642,391 $0.70
Granted --
Exercised --
Outstanding, September 30, 1997 642,391 $0.70
Exercised (70,391) $0.70
Cancelled (105,805) $0.70
Outstanding, September 30, 1998 466,195 $0.70
Vested at September 30, 1998 317,311
Options available at September 30, 1998 105,805
In October 1996, the Board of Directors adopted and the stockholders
approved the 1996 Stock Option Plan (the 1996 Plan). The 1996 Plan is
substantially similar to the 1995 Plan, except that there are 825,000 shares
of Common Stock authorized and available for issuance pursuant to options
which may be granted thereunder. The 1996 Plan is administered by the Stock
Option Committee.
Activity related to the 1996 Plan is as follows:
Weighted
Shares Average Price
Outstanding, September 30, 1996 --
Granted 412,500 $6.06
Exercised --
Cancelled (58,000) $3.99
Outstanding September 30,1997 354,500 $6.40
Granted 446,000 $1.24
Exercised --
Cancelled (430,500) $5.77
Outstanding September 30,1998 370,000 $0.82
Vested at September 30, 1998 15,000
Options available at September 30, 1998 455,000
F-12
<PAGE>
International Sports Wagering Inc.
(A Development Stage Company)
Notes To Financial Statements (Continued)
September 30, 1998 and 1997
(3) Preferred and Common Stock (Continued)
The following table summarizes information about stock options
outstanding at September 30, 1998.
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Outstanding Price
.67 - .81 806,195 8 .70 332,311 .70
2.08 2.125 30,000 9 2.10 - -
836,195 332,311
At September 30, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $.672 - $2.125 and 8
years respectively.
The designations, rights, and preferences of the preferred stock are to
be determined by the Board of Directors at the time of issuance.
(4) Property and Equipment
Property and equipment at September 30, 1998 and 1997 consist of the
following:
1998 1997
Furniture and fixtures $ 38,397 $ 37,194
Building and improvements 136,394 146,896
Computer equipment 1,317,845 1,144,254
1,492,636 1,328,344
Less accumulated depreciation (692,566) (273,148)
$ 800,070 $1,055,196
F-13
<PAGE>
International Sports Wagering Inc.
(A Development Stage Company)
Notes To Financial Statements (Continued)
September 30, 1998 and 1997
(5) Accrued Expenses
Accrued expenses at September 30, 1998 and 1997 consist of the following:
1998 1997
Professional fees $ 30,000 $ 28,500
Payroll and related costs 105,432 68,645
Bonuses 20,083 125,000
Other 295 200
$155,810 $222,345
Payroll and related costs representing accrued salaries and vacations
earned but not yet taken in 1998, and 1997 was approximately 57,110, and
41,735, respectively.
The Company recognized $149,715 and $99,480 in expenses relating to
their attorney who is also a stockholder of the Company in 1998 and 1997,
respectively, and $276,746 since inception.
(6) Commitments
Leases:
The Company leases office facilities and equipment under operating
leases. Minimum rental commitments are as follows:
Year ending
September 30,
1999 $ 73,288
2000 77,179
Thereafter --
$150,417
Rent expense under operating leases during 1998 and 1997 was $55,390,
$30,945 respectively, and $110,538 since inception.
Employment agreements:
The Company entered into employment agreements with three of its
employees. The agreements, one of which expires in June 1999, one of which
expires in January 2000, and one of which expires June 2000 provide for an
aggregate minimum compensation of $448,333, and $232,083, in fiscal years
1999, and 2000, respectively. Compensation expense recognized under these
agreements for the years ended September 30, 1998 and 1997 and for the period
from inception to September 30, 1998 was $602,500, $384,315, and $1,111,815,
respectively.
F-14
<PAGE>
International Sports Wagering Inc.
(A Development Stage Company)
Notes To Financial Statements (Continued)
September 30, 1998 and 1997
(6) Commitments (Continued)
The agreements also provide for severance payments upon certain events,
as defined.
(7) Income Taxes
Income tax benefit for the years ended September 30, 1997 and 1996 and
the period from May 22, 1995 (date of inception) to September 30, 1997
differed from the amounts computed by applying the U.S. Federal income tax
rate of 34% to pre-tax loss as a result of the following:
Years ended Inception to
September 30, September 30,
1998 1997 1998
Computed tax benefit
at 34% $(997,901) (745,049) (2,072,477)
50% of meals and
entertainment expense 421 l,610 2,030
Expected state tax
benefit net of Federal (170,907) (129,888) (362,201)
Increase in valuation
allowance for deferred
tax assets 1,168,387 873,327 2,432,648
Income tax expense $ -- -- --
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1998 and 1997 are presented below:
Deferred tax assets:
Federal and state net
operating loss carryforward $2,234,316 $ 1,l26,747
Depreciation and amortization 155,224 70,920
Employee compensation and
Benefits 43,108 66,594
Total gross deferred tax
assets 2,432,648 1,264,261
Less valuation allowance (2,432,648) (1,264,261)
Net deferred tax assets $ -- $ --
F-15
<PAGE>
International Sports Wagering Inc.
(A Development Stage Company)
Notes To Financial Statements (Continued)
September 30, 1997 and 1996
(7) Income Taxes (Continued)
As of September 30, 1998, the Company had a net operating loss
carryforward of approximately $5,588,000 for Federal and state income tax
reporting purposes available to offset future taxable income through the year
2018 and future state taxable income through the year 2005. The Company has
provided a valuation allowance of $2,432,648 and $1,264,261 at September 30,
1998 and 1997, respectively, against its deferred tax assets since it is more
likely than not that the Company will not realize such assets due to the
Company's development stage nature of operations and the pre-tax loss since
inception.
(8) Bad Debt Write-off
In June of 1997, the Company entered into an agreement with a Nevada
casino whereby the Company granted the casino a license to function as the hub
operator(the "Hub Operator")of the Company's sports wagering system. Under the
agreement, the Company was to receive a fixed fee based on a per-terminal use
basis. In October of 1997, an affiliate of the Hub Operator executed a
promissory note to the Company for $50,000 loaned to the Hub Operator by the
Company. The note provides for principal in the amount of $5,000 and accrued
interest at the rate of 10% per annum to be paid in consecutive monthly
installments commencing in February of 1998 and continuing thereafter, with
all amounts fully due by September of 1998. The note is guaranteed by two
principals of the affiliate of the Hub Operator. The Hub Operator agreement
was to terminate in March of 1999 or sooner as specified in the agreement. In
January of 1998, the Hub Operator ceased doing business as a result of
financial difficulties unrelated to the operation of the system. For the year
ending September 30, 1998, the Company has posted a reserve of $79,497, which
represents the above loan of $50,000, and $29,497 in receivables.
(9) Line of Credit Agreement
In September of 1997, the Company entered into an agreement with a bank
which provided for a total line of credit of $3,000,000, with interest at
Libor plus 1% or the bank's alternate base rate as defined in the agreement.
Borrowings under this line of credit are at the convenience of the Company's
management and may be repaid at any time prior to the expiration of the
facility, with interest payable monthly. This line of credit is secured by
the Company's investments, and expires in June of 1999, unless otherwise
amended or extended. The amount of such borrowings are required to be secured
by the Company's investments, and are limited to specified marginal
percentages of certain investment vehicles maintained in a separate, specified
investment management account with the lending bank. The agreement currently
provides a line of credit of $2,400,000 and there were no borrowings during
the year.
F-16
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits.
(a) The following exhibits are filed herewith:
3.1 Certificate of Incorporation of the Company (1)
3.1(a) Amendment, filed October 24, 1996, to Certificate of Incorporation
of the Company (1)
3.2 By-Laws of the Company (1)
10.1(b) Employment Agreement between the Company and Barry Mindes, dated as
of July 1, 1998
10.2(a) Employment Agreement between the Company and Bernard Albanese,
dated as of July 1, 1998
10.3 Employment Agreement between the Company and Sidney Diamond, dated
as of February 3, 1997 (2)
10.3(a) Promissory Note dated February 6, 1997 issued by Sidney Diamond and
Arlene Diamond to the Company (5)
10.4 Form of Proprietary Information, Inventions and Non-Solicitation
Agreement (1)
10.5 Form of Subscription Agreement (1)
10.6 Rights Agreement among the Company and the investors listed on
Schedule A therein, dated as of June 2, 1995 (1)
10.7 Stock and Warrant Purchase Agreement among the Company and the
investors listed on Schedule A therein, dated as of June 2, 1995 (1)
10.8 Rights Agreement between the Company and Barry Mindes, dated as
of June 20, 1996 (1)
10.9 Form of Stockholders Agreement among the Company, Barry Mindes and
all stockholders of the Company (other than stockholders who are
party to the Rights Agreement referred to in 10.6 above) (1)
10.10 Lease between Eastern American Mortgage Company, Inc. and the
Company, dated June 9, 1995(1)
10.11 Form of Indemnification Agreement to be entered into between the Company
and its directors and executive officers (1)
10.12 1995 Stock Option Plan (1)
10.13 1996 Stock Option Plan (1)
10.14 Form of Incentive Stock Option Agreement (3)
10.15 Form of Non-Qualified Stock Option Agreement (4)
23.1 Consent of KPMG Peat Marwick LLP
24.1 Power of Attorney (Included on signature page hereto)
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
(1) Incorporated by reference to the exhibit with the corresponding
number contained in the Company's Registration Statement on Form
SB-2 (Reg. No. 333-15005) which was declared effective by the
Securities and Exchange Commission on December 11, 1996.
(2) Incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended March 31,
1997.
(3) Incorporated by reference to Exhibit 4.3 of the Company's
Registration Statement on Form S-8 (Reg. No. 333-41847).
(4) Incorporated by reference to Exhibit 4.4 of the Company's
Registration Statement on Form S-8 (Reg. No. 333-41847).
(5) Incorporated by reference to Exhibit 10.3(a) of the Company's
Annual Report on Form 10-KSB for the year ended September 30, 1997.
PART III
The information required by Part III is hereby incorporated by
reference from the Company's definitive proxy statement involving the
election of directors to be filed on or prior to January 28, 1999. If
the definitive proxy statement is not filed on or prior to January 28,
1999, the information called for by Part III will be filed as an
amendment to this Form 10-KSB on or prior to January 28, 1999.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERNATIONAL SPORTS WAGERING INC.
By: /s/ Barry Mindes
Barry Mindes, Chairman of the Board
(Principal Executive Officer)
December 29, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby severally constitutes and appoints Barry
Mindes and Bernard Albanese, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Report
and all documents relating thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing necessary or advisable to be
done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his
substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
In accordance with the requirements of the Exchange Act, this
Report has been signed by the following persons in the capacities
and on the dates stated.
Signature Title Date
/s/ Barry Mindes Chairman of the Board and December 29, 1998
Barry Mindes Director (Principal Executive Officer)
/s/ Bernard Albanese President, Treasurer and Director December 29, 1998
Bernard Albanese (Principal Financial and Accounting
Officer)
/s/ Fredric Kupersmith Director December 29, 1998
Fredric Kupersmith
/s/ Janet Mindes Director December 29, 1998
Janet Mindes
/s/ Harold Rapaport Director December 29, 1998
Harold Rapaport
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 198,607
<SECURITIES> 3,274,963
<RECEIVABLES> 3,401
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,607,457
<PP&E> 1,492,636
<DEPRECIATION> 692,566
<TOTAL-ASSETS> 4,429,570
<CURRENT-LIABILITIES> 261,029
<BONDS> 0
<COMMON> 7,820
0
0
<OTHER-SE> 4,160,721
<TOTAL-LIABILITY-AND-EQUITY> 4,429,570
<SALES> 36,418
<TOTAL-REVENUES> 257,677
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,113,182
<LOSS-PROVISION> 79,497
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,935,002)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,935,002)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,935,002)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
Exhibit 10.1(b)
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of July, 1998 between
International Sports Wagering Inc., a Delaware corporation (the
"Corporation"), and Barry Mindes ("Employee").
W I T N E S S E T H:
WHEREAS, the Employee is the founder of the Corporation;
WHEREAS, the Corporation is in the business of developing,
producing, marketing, licensing and servicing computerized sports
wagering systems;
WHEREAS, the Corporation desires to employ Employee as its
Chairman of the Board and Employee desires to serve the Corporation
in such capacity; and
WHEREAS, the Corporation desires to provide certain benefits to
the Employee upon termination of this Agreement, as herein
provided.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereto agree as follows:
1. EMPLOYMENT. Subject to the terms and conditions herein
contained, the Corporation hereby employs Employee as its Chairman
of the Board and Employee hereby agrees to serve the Corporation in
such capacity.
2. DUTIES.
(a) Employee agrees, during the Term (as hereinafter
defined), to devote his full business attention and best efforts to
the business of the Corporation and to perform such duties of an
executive and administrative nature as the Board of Directors of
the Corporation, acting reasonably, shall assign or direct,
consistent with his status and position as Chairman of the Board,
including, without limitation, such duties as would typically be
performed by persons holding similar positions in other companies.
(b) Employee shall conduct himself at all times in a manner
consistent with his position with the Corporation.
3. TERM
(a) The term of Employee's employment (the "Term") shall
commence as of July 1, 1998, and shall terminate on June 30, 1999,
subject to earlier termination only (i) in the event of Employee's
death; (ii) at the option of the Corporation, in the event of
disability (as hereinafter defined) for 90 consecutive working days
or an aggregate of 120 working days during any consecutive six
month period during the Term; (iii) for cause; or (iv) as provided
in Sections 5.2 and 7.
(b) For the purpose of this Agreement, "disability" shall
mean any injury or any physical or mental condition or illness
which shall render Employee unable to perform his duties in
accordance with this Agreement.
4. COMPENSATION AND BENEFITS. As compensation for all duties
to be rendered by Employee to the Corporation in all capacities,
the Corporation shall pay to Employee during the Term a minimum of
the following, payable in accordance with the standard payroll
practice of the Corporation:
4.1 The Employee shall receive a base salary of not less than
$165,000 per annum.
4.2 In addition, Employee shall be entitled to receive (a)
such salary increases, bonuses or other incentive compensation as
may be approved by the Board of Directors; (b) three weeks vacation
during each year of the Term; (c) such health insurance as the
Corporation may from time to time provide to all other executive
employees; (d) such life insurance as the Corporation may provide
to all other executive employees; (e) such other fringe benefits as
the Corporation may provide to its employees; and (f) at the
Corporation's expense, the use of a leased automobile plus all
expenses of operating such automobile, including but not limited to
insurance and maintenance costs.
4.3 Notwithstanding the provisions of Section 4.2, in lieu of
participating in the health insurance program provided by the
Corporation for the benefit of all of its employees, the Employee
may elect to participate in other health insurance (and/or
Medicare) and in such case the Corporation shall pay or reimburse
the Employee, upon presentation of invoices therefor, for (i) any
deductible or co-payments required to be paid by the Employee, (ii)
any health or hospitalization costs not reimbursed to the Employee
by such other health insurance (and/or Medicare) and (iii) the
premiums for the Employee's existing life insurance policies in
amount of $200,000; provided that the aggregate payment or
reimbursement per annum to which the Employee shall be entitled for
all of the foregoing benefits set forth in this Section 4.3 shall
be $8,400.
5. REQUIRED RELOCATION.
5.1 During the Term, the Corporation shall not require the
Employee to relocate outside of the New York City/New Jersey
metropolitan area (the "Area").
5.2 In the event that prior to the end of the Term of this
Agreement, the Corporation requires the Employee to relocate
outside the Area and the Employee elects in his discretion, not to
do so, the Employee may voluntarily leave the employ of the
Corporation and in such event the Corporation shall pay to the
Employee (i) his base salary until the end of the Term; (ii) all
benefits provided in Section 4.2, 4.3 and 8; and (iii) the
Severance Benefits provided in Section 6.
5.3 Notwithstanding the foregoing, the Employee may be
required to travel away from his home for reasonable periods of
time in fulfillment of his responsibilities for the Corporation.
6. SEVERANCE BENEFITS.
Upon expiration of the Term of this Agreement on June 30, 1999
or earlier if as a result of the death or disability of the
Employee, or as provided in Section 5.2 or as a result of a Change
of Control, other than for cause, the Corporation shall pay to the
Employee (or the Employee's estate (if the Agreement is terminated
as a result of the Employee's death), the following:
(a) The Employee's base salary, as provided in Section 4.1,
for a period of one year, payable in accordance with the standard
payroll practice of the Corporation; and
(b) For a period of one year, the benefits provided in
Section 4.2(c), (d), (e) and (f), Section 4.3 and Section 8.
7. CHANGE OF CONTROL:
7.1 In the event of a "Change of Control" (as hereafter
defined) during the Term the Employee shall be entitled, at his
option, which option shall be exercised by giving not less than 60
days' prior written notice to the Corporation, to terminate this
Agreement. Whether the Employee terminates this Agreement, or this
Agreement is terminated by the Corporation, after a Change in
Control, for any reason whatsoever other than for cause, the
Employee shall be entitled to the following:
(a) If the termination is during the Term, the Employee shall
be entitled to continued payment of his base salary and benefits as
provided in Sections 4.1, 4.2, 4.3 and 8 until June 30, 1999.
(b) The Employee shall be entitled to the Severance Benefits
provided in Section 6.
(c) "Change of Control" shall mean, if any person, or any two
or more persons acting a group, and all affiliates of such person
or persons, who prior to such time beneficially owned (as defined
in Rule 13d-3 under the Securities and Exchange Act of 1934 (the
"Exchange Act") less than 50% of the then outstanding Common Stock
of the Corporation, shall acquire additional shares of Common Stock
in one or more transactions or series of transactions, such that
following such transaction or transactions, such person or group
and affiliates beneficially own 50% or more of the Common Stock
outstanding.
8. REIMBURSEMENT OF EXPENSES. The Corporation shall reimburse
Employee for all reasonable business expenses paid or incurred by
him on behalf of the Corporation, including, but not limited to,
travel and entertainment expenses, that he shall incur during the
Term in connection with the performance of his duties hereunder;
provided that he submits, in a timely manner, receipts or other
expense records in such detail as may be required by the
Corporation.
9. NO CONFLICTING COMMITMENTS.
Employee represents and warrants that he has no commitments or
obligations of any kind whatsoever inconsistent with this Agreement
which would impair, infringe upon or limit his ability to enter
into this Agreement or to perform the services required of him
hereunder.
10. PROPRIETARY INFORMATION. Prior to the execution of this
Employment Agreement, Employee has signed a Proprietary Information
Agreement the terms of which shall continue in full force and
effect.
11. ENTIRE AGREEMENT. This Agreement embodies the entire
understanding and agreement of the parties hereto in relation to
the subject matter hereof, and no promise, condition, representa-
tion or warranty, express or implied, not herein set forth shall
bind any party hereto. None of the terms and conditions of this
Agreement may be changed, modified, waived or cancelled orally or
otherwise except in a writing signed by both the parties hereto,
specifying such change, modification, waiver or cancellation. A
waiver at any time of compliance with any of the terms and condi-
tions of this Agreement shall not be considered a modification,
cancellation or waiver of such terms and conditions of any pre-
ceding or succeeding breach thereof unless expressly so stated.
12. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective
legal representatives, successors and assigns.
13. GOVERNING LAW. This Agreement shall be governed by the
internal laws of the State of New Jersey without regard to
principles of conflicts of law.
14. NOTICES. Any notice or other communication required or
desired to be given shall be in writing and shall be sent by
registered or certified mail return receipt requested or by express
mail. Each such notice shall be deemed given at the time it is
mailed in any post office maintained by the United States to the
following respective addresses, which either party may change as to
such party upon ten (10) days' notice to the other.
To the Corporation:
International Sports Wagering Inc.
201 Lower Notch Road (Suite 2A)
Little Falls, New Jersey 07424
Attn: President
With a copy to:
Richard M. Hoffman, Esq.
Rubin Baum Levin Constant & Friedman
30 Rockefeller Plaza (29th Floor)
New York, New York 10112
To Employee:
Mr. Barry Mindes
32 Heights Road
Wayne, NJ 07470
15. EXTRAORDINARY RELIEF. Employee acknowledges and agrees
that irreparable damage will result to the Corporation in the event
of a breach of the Proprietary Information Agreement. Accordingly,
Employee agrees that the Corporation shall be entitled to enforce
its rights under said Proprietary Information Agreement, in the
event of a breach or threatened breach thereof, in the court of
equity, and shall be entitled to a decree of specific performance
or appropriate injunctive relief. Such remedies shall be
cumulative and not exclusive and shall be in addition to any other
rights or remedies available to the Corporation.
16. INVALIDITY. Any provision of this Agreement found to be
prohibited by law shall be ineffective as written without
invalidating the remainder of this Agreement and shall be deemed
amended to the fullest extent allowable by applicable law to
effectuate the purposes of said provision.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
INTERNATIONAL SPORTS WAGERING INC.
By:
President
EMPLOYEE:
___________________________________
Barry Mindes
<PAGE>
Exhibit 10.2(a)
EMPLOYMENT AGREEMENT
AGREEMENT made as of the lst day of July, 1998 between
International Sports Wagering Inc., a Delaware corporation (the
"Corporation"), and Bernard Albanese ("Employee").
W I T N E S S E T H:
WHEREAS, the Corporation is in the business of developing,
producing, marketing, licensing and servicing computerized sports
wagering systems; and
WHEREAS, the Corporation desires to employ Employee as its
President and Employee desires to serve the Corporation in such
capacity.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereto agree as follows:
1. EMPLOYMENT. Subject to the terms and conditions herein
contained, the Corporation hereby employs Employee as its President
and Employee hereby agrees to serve the Corporation in such
capacity.
2. DUTIES.
(a) Employee agrees, during the "Term" (as hereinafter
defined), to devote his full business attention and best efforts to
the business of the Corporation and to perform such duties of an
executive and administrative nature as the Chairman of the Board or
Board of Directors of the Corporation, acting reasonably, shall
assign or direct (i) consistent with his status and position as
President including, without limitation, such duties as would
typically be performed by persons holding similar positions in
other companies, and (ii) such other duties of a managerial nature
relating to operations, finance, personnel or support.
(b) Employee shall conduct himself at all times in a manner
consistent with his position with the Corporation.
3. TERM
(a) The term of Employee's employment (the "Term") shall
commence on July 1, 1998, and shall terminate on June 30, 2000,
subject to earlier termination only (i) in the event of Employee's
death; (ii) at the option of the Corporation, in the event of
Employee's "disability" (as hereinafter defined) for 90 consecutive
working days or an aggregate of 120 working days during any
consecutive six month period during the Term; (iii) for cause; or
(vi) as provided in Sections 5.2 or 7.
(b) For the purpose of this Agreement, (i) "disability"
shall mean any injury or any physical or mental condition or
illness which shall render Employee unable to perform his duties in
accordance with this Agreement, and (ii) "Severance Amount" shall
mean an amount equal to six months' base salary (computed on the
basis of the Employee's base salary on the date of termination of
the Employee's employment with the Corporation); provided that if
the Employee has reached age 55 on the date of termination of the
Employee's employment with the Corporation, the Severance Amount
shall mean an amount equal to 12 months' base salary.
4. COMPENSATION AND BENEFITS. As compensation for all duties
to be rendered by Employee to the Corporation in all capacities,
the Corporation shall pay to Employee during the Term, a minimum of
the following, payable in accordance with the standard payroll
practice of the Corporation:
4.1 The Employee shall receive a base salary of not less than
$150,000 per annum.
4.2 In addition, Employee shall be entitled to receive (a)
such salary increases, bonuses or other incentive compensation as
may be approved by the Board of Directors; (b) three weeks vacation
during each year of the Term; (c) such health insurance as the
Corporation may from time to time provide to its other executive
employees; (d) such life insurance as the Corporation may provide
to its other executive employees; and (e) such other fringe
benefits as the Corporation may provide to its employees.
5. REQUIRED RELOCATION.
5.1 During the Term, the Corporation shall not require the
Employee to relocate outside of the New York City/New Jersey
metropolitan area (the "Area").
5.2 In the event that after the Term of this Agreement, the
Employee continues to be employed by the Corporation on an at-will
basis, and the Corporation requires the Employee to relocate
outside the Area and the Employee elects in his discretion, not to
do so, the Employee may voluntarily leave the employ of the
Corporation and in such event the Corporation shall pay to the
Employee an amount equal to the Severance Amount and all benefits
set forth in Sections 4.2 and 8 during the period during which the
Severance Amount is being paid to the Employee. The Severance
Amount shall be paid to the Employee in accordance with the
standard payroll practice of the Corporation.
5.3 In the event that prior to the end of the Term of this
Agreement, the Corporation requires the Employee to relocate
outside the Area and the Employee elects in his discretion, not to
do so, the Employee may voluntarily leave the employ of the
Corporation and in such event the Corporation shall pay to the
Employee (i) his base salary until the end of the Term; (ii) the
Severance Amount; and (iii) all benefits set forth in Sections 4.2
ad 8 during the period during which the Severance Amount is being
paid.
5.4 Notwithstanding the foregoing, the Employee may be
required to travel away from his home for reasonable periods of
time in fulfillment of his responsibilities for the Corporation.
6. NON RENEWAL OF EMPLOYMENT AGREEMENT/DEATH/DISABILITY.
6.1 In the event that at the end of the Term of this
Agreement, the Agreement is not renewed and a new Agreement is not
entered into, and thereafter, the Employee's employment with the
Corporation is terminated by the Corporation other than for cause,
the Corporation shall pay to the Employee the Severance Amount in
accordance with the standard payroll practice of the Corporation
and all benefits set forth in Sections 4.2 and 8 shall be continued
during the period which the Severance Amount is being paid.
6.2 In the event this Agreement is terminated as a result of
the death or disability of the Employee during the Term or, after
the end of the Term while the Employee is still employed by the
Corporation on an at-will basis, the Employee or his estate, as
the case may be, shall be paid the Severance Amount and all
benefits set forth in Sections 4.2 and 8 shall be continued during
the period during which the Severance Amount is being paid.
7. CHANGE OF CONTROL.
7.1 In the event of a "Change of Control" (as hereafter
defined) following which the Employee's employment is terminated
(a) by the Corporation other than as a result of the death or
disability of the Employee or for cause, or (b) by the Employee for
"Good Reason" (as hereinafter defined) the Employee shall be
entitled to the following:
(a) If the termination is during the Term, the Employee shall
be entitled to continued payment of his base salary and all
benefits set forth in Sections 4.2 and 8 until the end of the Term,
but in no event less than six months of base salary and benefits;
provided that if such termination occurs after the Employee has
reached age 55, the Employee's base salary and benefits shall be
continued until the end of the Term, but in no event less than 12
months.
(b) If the termination occurs after the Term, while the
Employee is still employed by the Corporation on an at-will basis,
the Employee shall be entitled to the Severance Amount and benefit
continuation in the manner and for the period provided in Section
5.2.
(c) "Change of Control" shall mean, if any person, or any two
or more persons acting a group, and all affiliates of such person
or persons, who prior to such time beneficially owned (as defined
in Rule 13d-3 under the Securities and Exchange Act of 1934 (the
"Exchange Act") less than 50% of the then outstanding Common Stock
of the Corporation, shall acquire additional shares of Common Stock
in one or more transactions or series of transactions, such that
following such transaction or transactions, such person or group
and affiliates beneficially own 50% or more of the outstanding
Common Stock of the Corporation.
(d) "Good Reason", when used with reference to a voluntary
termination by the Employee of his employment with the Corporation,
shall mean:
i) the assignment to the Employee of any duties inconsistent
in a material way with, or the reduction of powers or functions
associated with, his positions, duties, responsibilities and
status with the Corporation, Employee's reporting
responsibilities or any removal of the Employee from or any
failure to reelect the Employee to any significant positions or
offices the Employee held immediately prior to the time of the
Change in Control, except in connection with the termination of
the Employee's employment by the Corporation for cause or for
death or disability;
ii) a reduction by the Corporation in the Employee's base
salary or benefits that existed immediately prior to the Change
in Control; or
iii) a change in the Employee's principal work location,
except for required travel on the Corporation's business to an
extent substantially consistent with the Employee's business
travel obligations immediately prior to the Change of Control;
provided, however, that no event shall constitute a Good Reason
unless the Employee notifies the Corporation that it has
committed an action or inaction specified in clauses (i) through
(iii) (a "Covered Action") and the Corporation does not cure
such Covered Action within 30 days after such notice, at which
time such Good Reason shall be deemed to have arisen.
Notwithstanding the immediately preceding sentence, no action
by the Corporation shall give rise to Good Reason if it results
from the Employee's termination for Cause, or from the
Employee's resignation for other than a Good Reason. If the
Employee has Good Reason to resign, he may in fact resign for
Good Reason by notice of termination given within 60 days after
the Good Reason arises.
8. REIMBURSEMENT OF EXPENSES. The Corporation shall reimburse
the Employee for all reasonable business expenses paid or incurred
by him on behalf of the Corporation, including, but not limited to,
travel and entertainment expenses, that he shall incur during the
Term in connection with the performance of his duties hereunder;
provided that he submits, in a timely manner, receipts or other
expense records in such detail as may be required by the
Corporation.
9. TERMINATION/STOCK OPTIONS.
In the event that Employee's employment with the Corporation
terminates for any reason whatsoever, including death or disability
of the Employee, other than (i) by the Corporation for cause, (ii)
or voluntarily by the Employee (other than as permitted herein),
all stock options theretofore granted to the Employee which have
not vested and become exercisable on the date of such termination
shall automatically vest and become exercisable and remain
exercisable in accordance with the terms of the Corporation's 1996
Stock Option Plan and the stock option agreements thereunder.
10. NO CONFLICTING COMMITMENTS.
Employee represents and warrants that he has no commitments or
obligations of any kind whatsoever inconsistent with this Agreement
which would impair, infringe upon or limit his ability to enter
into this Agreement or to perform the services required of him
hereunder.
11. PROPRIETARY INFORMATION. Prior to the execution of this
Employment Agreement, Employee signed a Proprietary Information
Agreement the terms of which shall continue in full force and
effect.
12. ENTIRE AGREEMENT. This Agreement embodies the entire
understanding and agreement of the parties hereto in relation to
the subject matter hereof, and no promise, condition, representa-
tion or warranty, express or implied, not herein set forth shall
bind any party hereto. None of the terms or conditions of this
Agreement may be changed, modified, waived or cancelled orally or
otherwise except in a writing signed by both the parties hereto,
specifying such change, modification, waiver or cancellation. A
waiver at any time of compliance with any of the terms and condi-
tions of this Agreement shall not be considered a modification,
cancellation or waiver of such terms and conditions of any pre-
ceding or succeeding breach thereof unless expressly so stated.
13. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective
legal representatives, successors and assigns.
14. GOVERNING LAW. This Agreement shall be governed by the
internal laws of the State of New Jersey without regard to
principles of conflicts of law.
15. NOTICES. Any notice or other communication required or
desired to be given shall be in writing and shall be sent by
registered or certified mail return receipt requested or by express
mail. Each such notice shall be deemed given at the time it is
mailed in any post office maintained by the United States to the
following respective addresses, which either party may change as to
such party upon ten (10) days' notice to the other.
To the Corporation:
International Sports Wagering Inc.
201 Lower Notch Road, Suite 2A
Little Falls, New Jersey 07424
Attn: Chairman of the Board
With a copy to:
Richard M. Hoffman, Esq.
Rubin Baum Levin Constant & Friedman
30 Rockefeller Plaza (29th Floor)
New York, New York 10112
To Employee:
Mr. Bernard Albanese
18 Doremus Drive
Towaco, N.J. 07082
9. EXTRAORDINARY RELIEF. Employee acknowledges and agrees that
irreparable damage will result to the Corporation in the event of
a breach of the Proprietary Information Agreement. Accordingly,
Employee agrees that the Corporation shall be entitled to enforce
its rights under said Proprietary Information Agreement, in the
event of a breach or threatened breach thereof, in the court of
equity, and shall be entitled to a decree of specific performance
or appropriate injunctive relief. Such remedies shall be
cumulative and not exclusive and shall be in addition to any other
rights or remedies available to the Corporation.
10. INVALIDITY. Any provision of this Agreement found to be
prohibited by law shall be ineffective as written without
invalidating the remainder of this Agreement and shall be deemed
amended to the fullest extent allowable by applicable law to
effectuate the purposes of said provision.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
INTERNATIONAL SPORTS WAGERING INC.
By:
Barry Mindes, Chairman of the Board
Bernard Albanese
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors and Stockholders
International Sports Wagering Inc.:
We consent to incorporation by reference in the registration statement on
Form S-8 (No. 333-41847) of International Sports Wagering Inc. of our
report dated November 25, 1998, relating to the balance sheets of
International Sports Wagering Inc. (a development stage company) as of
September 30, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the year ended September 30, 1998
and 1997, and for the period from May 22, 1995 (date of inception) to
September 30, 1998, which report appears in the 1998 annual report on Form
10-KSB of International Sports Wagering Inc.
KPMG Peat Marwick LLP
s/KPMG Peat Marwick LLP
New York, New York
December 28, 1998
