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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-SB/A-1
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(B)
OR 12(G) OF THE SECURITIES ACT OF 1934
ONLINE INTERNATIONAL CORPORATION
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(Exact name of Small Business Issuers in Its Charter)
NEVADA 11-3360057
- -------------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
150 Laser Court, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip code)
(516)-231-7575
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(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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n/a n/a
Securities registered under Section 12(g) of the Exchange Act:
Common Equity, Par Value $.001
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(Title of Class)
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TABLE OF CONTENTS
Item 1. Description of business . . . . . . . . . . . . . . . . . . . . . . .3
Item 2. Management's discussion and analysis or plan of operations. . . . . .7
Item 3. Description of property . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Security ownership of certain beneficial owners and management. . . 10
Item 5. Directors, executive officers, promoters and control persons
Compliance with Section 16(a) of the Exchange Act.. . . . . . 10
Item 6. Executive compensation. . . . . . . . . . . . . . . . . . . . . . . 12
Item 7. Certain relationships and related transactions. . . . . . . . . . . 13
Item 8. Legal proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 9. Market for common equity and related stockholder matters. . . . . . 14
Item 10. Recent sales of unregistered securities . . . . . . . . . . . . . . 15
Item 11. Description of securities . . . . . . . . . . . . . . . . . . . . . 16
Item 12. Indemnification of directors and officers . . . . . . . . . . . . . 18
Item 13. Financial statements. . . . . . . . . . . . . . . . . . . . . . . . 18
Item 14. Changes in and disagreements with accountants on accounting and
financial disclosure. . . . . . . . . . . . . . . . . . . . . . . . 18
Item 15. Financial statements and exhibits . . . . . . . . . . . . . . . . . 18
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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ITEM 1. DESCRIPTION OF BUSINESS.
Online International Corporation (the "Registrant") was incorporated on May
7, 1996, under and by virtue of the laws of the State of Nevada, with the intent
of acquiring an operating company engaged in the manufacture and supply of
selection slips and ticket rolls for both the gaming and lottery industries.
During the period May 7, 1996 through January 31, 1997, the Registrant had no
substantive operations. The Registrant completed a private placement during this
period in which $1,237,000 in capital was raised in addition to the original
capital of $125,000. At year end, prior to the transaction described below, the
only asset of the Registrant was cash in the amount of $1,320,000.
Prior to January 31, 1997 the Registrant was owned by all the listed
shareholders other than Gaming Lottery Corporation ("Gaming"). At that time the
only assets of the Registrant was the cash on hand from the private placement
transaction. As such the value of the Registrant was its cash on hand plus some
other value given that it was negotiating an acquisition of PAI and had
assembled a management team.
The deal between the Registrant and Gaming was dealt with at arm's length,
firstly by taking back shares rather than cash Gaming received a higher price,
secondly PAI through the Registrant moves forward with better capitalization and
thirdly, Gaming benefits from the Registrant's other activities.
On January 31, 1997, the Registrant issued 250 shares of Series A
convertible preferred stock ("Gaming") in exchange for 100% of the issued and
outstanding shares of Printing Associates, Inc. ("PAI"), said shares being then
owned by Gaming. A change in control of PAI to the Registrant shareholders did
not occur as a result of this transaction due to the rights retained by Gaming
through their ownership of the preferred shares. These rights included the
conversion of the preferred stock into common stock, veto of certain Board of
Directors decisions such as management appointments and their compensation,
fixed asset acquisitions and other rights. This effectively transfers many of
the Registrant's Directors responsibilities to Gaming, the preferred
shareholder. However, unless the Registrant is in breach of the terms and
conditions of the Preferred Shares, Gaming will be limited to a maximum
conversion resulting in 20% of the then issued and outstanding common shares.
Prior to January 31, 1997, PAI was a wholly owned subsidiary of Gaming.
There was no historical relationship between the Registrant and Gaming. The
registrant emerged as a buyer of PAI from Gaming and negotiated an arm's length
deal. The purchase price of US$25,000,000 was satisfied by the issuance of 250
Series A Preferred Shares of the Registrant. The price was established by way
of negotiations between the Registrant with Mr. Russell as President, and Gaming
with
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Mr. Weltman, Executive Vice President, acting on their behalf. Please see
Exhibit #2 of this registration statement.
This transaction is being accounted for as a recapitalization of PAI's
equity in accordance with the consensus of the Emerging Issues Task Force No.
88-16. The application of the consensus under 88-16 requires that the historic
basis of PAI's assets and liabilities be used, since there was no change in
control to the Registrant's shareholders. As a result, PAI is recording the
issuance of common stock for the $1,320,000 of net monetary assets of the
Registrant at January 31, 1997. The common stock formerly owned by Gaming is
recorded as if it were converted to preferred stock.
The historical financial statements presented are those of PAI. The
rights, preferences, privileges and restrictions of the preferred shares are
fully described in Item 11 of this document entitled "Description of
Securities." The principle offices and production facilities of the Registrant
are located in Hauppauge, New York. The Registrant has also issued a number of
its common shares via a Private Placement to raise capital for its operating
requirements.
PAI was established on December 6, 1983. PAI is a leading manufacturer of
printed products or "instruments" (i.e. selection slips and ticket rolls) for
the gaming and lottery industry. Selection slip must be accurate within .005 of
an inch tolerance in order for the lottery terminal to correctly read the data
(customer selected numbers), transmit the data to a centralized data base, and,
in turn, output a receipt (lottery ticket) to the purchaser. The product is
considered an "instrument" due to the features that must be read by an
electronic device in order for the receipt (ticket) to be generated.
PAI is a pioneer in diverse printing capabilities-mixing offset,
flexographic and letter-press printing technologies in a single process. This
makes our tickets virtually impossible to duplicate. Features vital to product
security are incorporated into PAI's manufacturing process, in addition they
have the capability of individually identifying each ticket with a unique serial
number. PAI has the technology to track these serial numbers, which is a
component of the overall validation process performed by a state lottery.
PAI's success over the last 14 years has been its state-of-the-art
manufacturing capabilities. The lottery industry experiences unpredictable,
increasing lottery jackpots, which result in an increased consumer demand. PAI
has a competitive edge in that it has the capability to satisfy spontaneous
increases in product demand with minimal lead times.
PAI has a reputation of producing a superior quality, secure product with
timely delivery. PAI manufactures in excess of 2.5 billion lottery tickets, 4
billion
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parimutuel (on and off track betting) tickets and 200 million selection slips
annually. The lottery and parimutuel products industry is controlled by a
limited number of contractors. These contractors, in turn, subcontract to PAI
to manufacture ticket rolls and selection slips.
The lottery industry is regulated by the individual States in which they
exist. The State, usually through a bidding process, will award a contract to a
qualified Vendor to manage and/or operate the lottery for a specified period of
time, usually 3 to 5 years. There are currently two (2) principal corporations
(contractors/vendors) which operate or manage lotteries. These contractors in
turn, subcontract the printing of ticket rolls and selection slips.
The parimutuel industry is regulated by State regulatory authorities.
However, the individual race track owners are able to operate their tracks in
any manner as long as they follow the State regulations. Typically, the race
tracks contract a vendor to provide the technical expertise required to comply
with the State regulations. There are two (2) primary corporations which
service the parimutuel industry. These corporations subcontract the printing of
ticket stock.
The Registrant expects to be dependent upon these four (4) corporations
(two for lottery and two for parimutuel) for a majority of its sales.
There are limited printers available to the lottery and parimutuel
industries because of the strict security requirements and the large capital
investment necessary to compete within these industries. The Company's
competitive position places it in the top 5% of the industry.
The Registrant markets its products primarily through public bidding, word
of mouth and reputation within the industries it serves. Superior customer
service and product is the major marketing tool.
Products are distributed as necessary under the direction of the
Registrant's customers.
The Registrant has a consulting agreement with the previous President of
Printing Associates, Inc., Mr. Ruegg Quibell. His annual fees is $52,000
expiring in September 1997. Services include advice and consultation in all
areas of the lottery and parimutuel industry as necessary and availability for
historical corporate information as needed.
Each product has its own unique specifications which are documented and
adhered to throughout the entire manufacturing process. The manufacturing
process is broken down into the following steps:
Pre-press: Involves processing customer approved art work into
negatives and press plates.
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Press: Includes the set up of the press to meet all product
specifications and the actual printing of the product.
Rewind/Slitting: Involves converting large printed paper mill rolls from
the press area into the appropriate size for the customer.
This is achieved by simultaneously slitting the paper and
rewinding it onto a roll core.
Packing: Involves packaging the finished product according to the
customers' specifications for shipping and distribution.
A "Quality Control" staff oversees and verifies that the product is within
the proper specifications throughout the manufacturing process.
Primarily, the Registrant purchases its major manufacturing material
(paper) for the lottery products from two vendors in order to obtain favorable
pricing. However, the paper used is considered a commodity item and could
easily be obtained from other suppliers with similar terms.
The paper used for the parimutuel ticket stock is purchased from a single
supplier. This is done at the request of the Company's customer. Should this
supplier be unable to supply the Company with paper products, the customer would
need to select another paper supplier to use for its ticket stock.
The executive management of the Registrant consists of Mr. James Russell,
President and Chief Executive Officer.
The executive management team of PAI consists of James White, President and
Chief Executive Officer; Victoria S. Danseglio, Vice President of Finance and
James Emminger, General Manager. Present plant staff is comprised of 49
employees. The tasks are varied but highly technical in each area. Special
emphasis is placed on quality assurance. PAI maintains a state-of-the-art
Pre-press Department, staffed by technicians who work to insure that the product
presented to manufacturing is perfect.
The Registrant owns 100% of Printing Associates, Inc. (PAI). PAI is the
owner of 100% of Printing Associates of Florida which is currently inactive.
The Registrant further owns 49% of PAP Security Printing which is a printer of
lottery tickets and other security printing products.
Printing Associates of Florida, Inc. is a Florida corporation that is a
wholly owned subsidiary of the Registrant. This subsidiary was established to
undertake the same business activities as the Registrant, but it has been
dormant for two (2) years.
Litigation involving the ownership of Win-Tex was settled effective as of
September 9, 1997 wherein the Registrant sold all of its stock ownership of
Win-Tex to the other majority shareholder of Win-Tex for certain cash payments
and a percentage of the gross sales of Win-Tex. The terms of the sale are as
follows:
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A. A cash payment of ninety thousand dollars US (US$90,000) which
was received on September 16, 1997.
B. Three and one-half percent (3.5%) of the gross sales of Win-Tex
generated from the Texas Lottery for a period of five (5) years beginning
October 1, 1997. The percentage payment applies to a maximum annual gross sales
of three million five hundred thousand US (US$3,500,000).
C. An additional cash payment of sixty seven thousand five hundred
US (US$67,500) is due and payable on January 31, 1998.
3. PAP Security Printing, Inc. ("PAP Security") is a Pennsylvania
corporation of which the Registrant held a forty-nine percent (49%) stock
ownership. Effective as of July 1, 1997, the Registrant sold all of its stock
ownership of PAP Security pursuant to the following terms and conditions:
A. A cash payment of US$213,817 was received on or about July 5,
1997.
B. Four percent (4%) of the gross sales of PAP Security for the
period of July 1, 1997 through November 29, 1997.
4. Printing Associates, Inc. ("PAI") is a New York corporation and is a
wholly owned subsidiary of the Registrant. The organizational structure, a
description of its operations and financial size are set forth in Item 1 and
Item 5, Financial Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
The Company currently has corporate purchase agreements with two lottery
vendors and the two parimutuel vendors. These agreements are in place for both
parties to have the assurance that the Company will have continuing orders and
the customer will receive its products as needed. The agreements contain
cancellation clauses upon thirty (30) days written notice for both parties. The
customers dictate their product requirements through purchase orders, which
cover periods of one month to one year. Standard sale terms are Net 30 days
from date of shipment. The Company is confident that the agreements it has will
continue to be renewed indefinitely.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant's cash position at January 31, 1997 was $1,593,696, an
increase of $1,518,527 from the January 31, 1996. The increase was primarily
attributable to $1,300,000 received in the private Placement of 2,486,950 shares
of common stock of the Registrant.
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Accounts receivable at January 31, 1997 was $1,085,253. The lottery and
parimutuel products industry is controlled by a limited number of contractors.
During the year ended January 31, 1997, approximately seventy-one percent (71%)
of the PAI's sales were to two contractors. In addition, approximately
sixty-seven percent (67%) of the accounts receivable balance at January 31, 1997
is due from these contractors. PAI has not experienced any collection
difficulties.
Working capital at January 31, 1997 was $2,086,034, an increase of
$3,199,697 from the working capital of ($1,113,663) at January 31, 1996. This
increase is primarily attributable to the private placement of $1,300,000 and
the conversion of debt to equity of $1,400,000. Proceeds from the sale of
excess manufacturing equipment were $236,000. The remaining increases in
working capital are attributable to the income of the current year.
Additionally, these increases are offset by an approximately $100,000 decrease
in working capital as a result of not consolidating a sixty percent (60%) owned
subsidiary corporation, as described below.
The Registrant has no material capital commitments at this time. Future
required capital will be raised either through private investors or through the
sale of common shares.
RESULTS OF OPERATIONS
YEAR ENDED JANUARY 31, 1995 TO JANUARY 31, 1996
During fiscal year ending January 31, 1996, the gross profit percentage was
thirteen percent (13%) which is consistent with the results for the period ended
January 31, 1995. Selling, General and Administrative costs in 1996 were eleven
percent (11%) of sales, which is consistent with the period ending January 31,
1995. In 1996, included in net income before taxes and minority interest of
$372,000, is a gain on sale of equipment of $90,000. No further analysis of the
changes in the income statement between January 31, 1995 and January 31, 1996 is
being provided because there was a change in ownership during fiscal year 1995
resulting in a four month (4) fiscal period ended January 31, 1995.
Paper is the major raw material used in production. PAI has provisions
within its customer contracts which protect it during periods of increasing
paper prices. Typically, after paper prices increase more than $2.00 per CWI
(hundred weight), the selling price increases at a similar rate so as not to
affect the gross margin of the product. During fiscal year ending January 31,
1996, PAI exercised such escalation provisions, allowing consistent gross profit
percentages between January 31, 1995 and January 31, 1996.
During fiscal year 1996, all sales contracts are continuing with the
exception of the Florida lottery, which expired in November 1995 and was not
renewed. The contract to produce Florida lottery tickets accounted for a
revenue of $900,000 during fiscal 1996.
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YEAR ENDED JANUARY 31, 1996 TO JANUARY 31, 1997
As stated previously, the results of operations for January 31, 1996
include the consolidated numbers of the Registrant's sixty percent (60%) owned
subsidiary, and are not consolidated at January 31, 1997.
Sales decreased by $5.4 million in 1997. Approximately $3.5 million in
reduced sales is attributable to not consolidating a sixty percent (60%) owned
subsidiary. Approximately $900,000 of decreased sales is attributable to the
non renewal of the contract to produce Florida lottery tickets. The decrease in
revenues from the remaining business for 1997 was approximately $1,000,000.
This is primarily attributable to changes in product specifications whereby the
ticket yield per unit was increased resulting in reduced sales.
The gross profit percentage decreased a total of two percent (2%) in 1997
to eleven percent (11%) from thirteen percent (13%) in 1996. However, if the
1996 results of the sixty percent (60%) owned subsidiary and the Florida
contract are removed, the gross profit percentage of the Registrants's remaining
business was eight percent (8%) for 1996. In 1997, this previously defined
remaining business had a gross profit of eleven percent (11%), a three percent
(3%) increase when compared to 1996.
In 1997, included in the net income before tax and minority interest of
$368,000, is a gain on sale of equipment of $104,000. During fiscal year 1997,
all sales contracts are continuing.
For the period February 1, 1996 through August 7, 1996 and for the year
ended January 31, 1996, PAI filed a consolidated Federal tax return with PAI's
former parent. The Federal tax expense for the year ended January 31, 1997
differs from that which would be obtained by applying the thirty-four percent
(34%) corporate tax rate to the income before income taxes. During the period
of February 1, 1996 through August 7, 1996, the former parent had substantial
losses that were utilized by PAI to offset the tax liability it otherwise would
have incurred. There was no requirement to compensate the former parent for
this benefit.
The Registrant plans to diversify its operations into the gaming, lottery
management, and distribution management sectors. Distribution management is the
term used to encompass the movement of lottery products, supplies and
promotional material to POINT-OF-SALE locations. This will be accomplished
through the acquisition of existing businesses through the issuance of shares of
the Registrant. The Registrant plans to develop a full service lottery
portfolio encompassing printing, online technology, communication and
subscription services.
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ITEM 3. DESCRIPTION OF PROPERTY.
PAI, a wholly owned subsidiary of the Registrant, leases its 21,000 square
foot principle plant which is located at 150 Laser Court, Hauppauge, New York.
This lease is effective through December 2000. The facilities maintain a high
level of security and have been inspected and approved by all of PAI's
customers.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Amount and
Title of Name and Address of Nature of Percent of
Class Beneficial Owner Beneficial Owner Class
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Preferred Gaming Lottery Corporation (1) 234 100.0%
Common Norla Rutledge 1,250,000 45.4%
Common Marie Kuitko 200,000 7.3%
Common Leon Bensimon 200,000 7.3%
Common Prastol Inc. 240,000 8.7%
Common Samuel S. Edery 190,000 6.9%
Common Gaming Lottery Corporation 266,672 9.7%
Footnote (1) The preferred shares are immediately convertible into a maximum of
20% of the issued and outstanding common shares of the Registrant. Gaming
Lottery has chosen to exercise its conversion rights and on July 10, 1997
converted a total of 16 Series A Preferred shares into 266,672 common shares.
However, unless the Registrant is in breach of the terms and conditions of the
Preferred Shares, Gaming will be limited to a maximum conversion resulting in
20% of the then issued and outstanding common shares.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
NAME AGE POSITION / OFFICE TERM SERVED
- ---- --- ----------------- ---- SINCE
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James D. Russell 42 Director, President 1 yr 5/96
S. James White 52 Director 1 yr 1/97
George T. Koutris 56 Director 1 yr 1/97
Ian Nielsen-Jones 46 Director 1 yr 1/97
MR. JAMES RUSSELL
Mr. Russell brings over 20 years of combined experience in finance,
marketing, strategic planning and corporate management to the Registrant. Mr.
Russell has held positions as a Vice President for a marketing research firm, as
a Director of a lottery and as a Senior Manager for a telecommunications
company. He was
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graduated with honors from Queens University in Kingston, Ontario, Canada. He
is committed to expanding market share, reducing costs and improving business
quality. His vision is for the Registrant to become the recognized worldwide
leader for the production of online consumables for both the gaming and
hospitality industries. Mr. Russell was the Director of Finance &
Administration with Ontario Lottery Corporation from 1989 to 1995, an Executive
Vice President & C.O.O. with Rutledge and Associates from 1995 to 1996 and the
President, Chairman and CEO of the Registrant from 1996 to present.
MR. S. JAMES WHITE
Mr. White brings over 30 years of combined experience in law enforcement,
marketing, sales and corporate management to the Registrant. He is currently
President and Chief Executive Officer of Printing Associates Incorporated. Mr.
White has also held elected positions with the NYC Transit Police Patrolman's
Benevolent Association. He holds a degree from Empire State College. Mr. White
has been employed by Printing Associates, Inc. from 1985 to present holding the
following titles and responsibilities: 1985 to 1990 - Sales Representative; 1990
to 1996 -Vice President of Sales; 1996 to present - President.
MR. GEORGE T. KOUTRIS
Mr. Koutris comes to the Registrant with over 25 years of combined
experience in finance, marketing, sales, planning, and corporate management. He
has held international executive positions with RJR MacDonald (Canada) - 1989 -
1990, Vice President - Sales & Distribution for Ontario Lottery Corp. from 1990
to 1996, and a Director of the Registrant from 1996 to present. Mr. Koutris
received his post secondary college degree from Capalano College located in
Vancouver, British Columbia. He is committed to expanding the lottery
management and distribution management components of the business.
MR. IAN NIELSEN-JONES
Mr. Nielsen-Jones has combined experience in marketing, planning,
regulatory management, and corporate management exceeding 24 years. He has held
international executive positions in the lottery, recreation, communications,
and public sectors. He has held the position of President with CUE Network
Corporation from 1995 to present, President of The Rank Organization Plc from
1993 to 1995, and President of Ontario Lottery Corp. from 1989 to 1993. Mr.
Neilsen-Jones was also Director of the Bureau of Competition Policy for the
Canadian federal government. He graduated from Loyola College (Montreal,
Canada) with an honors degree and from McMaster University (Hamilton) with a
Masters degree. He is committed to expanding the lottery management component
of the business.
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VICTORIA S. DANSEGLIO - Vice President of Finance of PAI. Ms. Danseglio
brings 10 years of experience in finance and accounting to PAI and has held
positions with both private and public accounting concerns. Previously Ms.
Danseglio was a senior accountant with Deloitte & Touche. She graduated with
distinction from Ohio Northern University with dual majors in accounting and
marketing.
None of the above listed Officers and/or Directors have been involved with
any businesses which have had any bankruptcy petitions filed by or against them
nor have they been convicted in a criminal proceeding or been subject to a
pending criminal proceeding nor been subject to any order, judgment, or decree
which would permanently or temporarily enjoin, bar, suspend or otherwise limit
their involvement in any type of business, securities or banking activities, nor
been found to have violated any Federal or State securities or commodities law.
Gaming Lottery Corporation ("Gaming") is a British Virgin Islands
corporation which is a publicly traded company with 777 shareholders of record
as of January 1, 1997. It is listed on the NASDAQ National Market with a
trading symbol of "GLCCF". It is also listed on the Toronto Stock Exchange with
a trading symbol of "GLH". The directors and officers of Gaming are as follows:
Jack Banks, Chairman of the Board, President and CEO
Amram Assayag, Director
Larry Weltman, Director, Executive Vice President and CFO
Colin O'Neal, Director
Paul Webster, Secretary
Prastol, Inc. ("Prastol") is a private Israeli investment company whose
address is c/o Bank Leumi, 19 King David Street, Jerusalem, Israel, 94101. The
principal shareholder and officer is Yair Grayevsky.
ITEM 6. EXECUTIVE COMPENSATION.
(a) SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------------
Annual Compensation Awards Payouts
- -----------------------------------------------------------------------------------------------------------------------
Restricted LTIP All Other
Names and Other Annual Stock Options Payouts Compen-
Principle Position Year Salary Bonus Compensation Award(s)($) /SAR ($) s ($) sation ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James Russell, Pres./ 1996 100,000 n/a $14,400 n/a n/a n/a n/a
Online
James White 1996 130,000 n/a $13,200 n/a n/a n/a n/a
Sales Mgr. PAI
</TABLE>
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(b) Options/Stock Appreciation Rights - There are no stock options or
stock appreciation rights currently effective.
(c) Aggregated Option/SAR Exercises Fiscal Year End Option/SAR - There are
no SAR's.
(d) Long Term Incentive Plan ("LTIP") Awards - There are no long term
incentive plans in place.
(e) Compensation of Directors - There is no compensation for directors
other than expenses directly associated with Director Meetings.
(f) Employment Contracts - See Exhibits 10.1 and 10.2.
Mr. S. James White is under contract with PAI at the annual rate of
$130,000. His contract calls for normal benefits of insurance, vacation, sick
leave, etc. His contract expires in October 2001 and includes a three (3) year
non compete clause upon any separation of employment.
Ms. Victoria S. Danseglio is under contract with PAI at the annual rate of
$70,000. Her contract calls for normal benefits of insurance, vacation, sick
leave, etc. Her contract expires in September, 1999 and includes a three (3)
year non compete clause upon any separation of employment.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There were no transactions during the last two years, or proposed
transaction, to which the small business issuer was or is to be a party, in
which any director, executive officer, nominee for directorship, security-holder
or immediate family member had a direct or indirect material interest as defined
by Rule 404 of Regulation S-B.
The acquisition of Printing Associates, Inc. ("PAP") by the Registrant is
described generally in Item 1 and more specifically in Exhibit 2. All of the
issued and outstanding shares of PAP were exchanged for 250 Series A Preferred
shares of the Registrant, the terms and conditions of which are set forth in the
attached Exhibit "A" to Exhibit 2.
The principals of Gaming which was the owner of all of the issued and
outstanding shares of PAP are identified in Item 5 above. With the exception of
Amram Assayag. who owned 20,000 shares of the then issued and outstanding
2,486,950 shares of the Registrant, none of the Gaming principals prior to the
acquisition held any ownership interest in the Registrant nor were they
directors or officers of the Registrant.
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ITEM 8. LEGAL PROCEEDINGS.
On January 21, 1997, PAI's Original Petition and Request for Declaratory
Judgment was filed against Gilberto S. Ocanas, ("Ocanas") as Cause No. 97-00718
in the 201st Judicial District Court of Travis County, Texas. In that action,
PAI has alleged that, among other things, that Ocanas breached his obligations
under a stock option to purchase certain shares of the common stock of Win-Tex
International, Inc.
The litigation between PAI and Win-Tex was settled effective September 9,
1997. See Item 1, pages 6 and 7 for a complete description of the litigation
settlement. As a result of this settlement the control referred to in Note 14
of the Financial Statements is no longer a question as ownership of Win-Tex has
reverted to Win-Tex, the Registrant has no control interest in Win-Tex, and
Win-Tex is no longer a "subsidiary of the Registrant".
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION. There is currently no market for the common or
preferred shares of the Registrant's stock. It is anticipated that a market
will exist upon the completion of this filing and due to the nature of the
issuer's business and the anticipated increase in the volume of the products of
the Registrant. The target is to file a Disclosure Statement pursuant to SEC
Rule 15c2-11 for listing on the NASD OTC Electronic Bulletin Board. Once
trading commences an application for listing on the NASDAQ Small Cap Market will
be submitted.
(b) POSSIBLE CLASSIFICATION OF REGISTRANT'S SECURITIES AS A "PENNY STOCK".
By virtue of Rule 3a51-1 of the Securities Act of 1934, (the Act), if the
Registrant's common stock has a price of less than $5.00 per share it will be
considered a "penny stock." The perquisites required of broker-dealers engaging
in transactions involving "penny stocks" have discouraged, or even barred, may
brokerage firms from soliciting orders for certain low priced stocks.
However, regardless of the price of the Registrant's stock, in the event
the Registrant has net tangible assets in excess of $2,000,000 and if the
Registrant has been in continuous operation for a least three (3) years, or
$5,000,000, if the Registrant has been in continuous operation for less than
three (3) years, Rule 3a51-1(g) of the Act will preclude the Registrant's common
stock for being classified as a "penny stock."
(c) There are no common equity shares subject to outstanding options or
warrants, or securities convertible into common equity that are subject to
outstanding options or warrants to purchase. The shares of the Series A
Preferred have a conversion clause in which each share of Preferred may be
redeemed for 16,667 shares of common equity stock. The details of this
conversion is detailed in Item 11, "Description of Securities."
Page 14
<PAGE>
The are no Rule 144 shares that could be sold or that the issuer has agreed
to register for sale under the Securities Act.
There are no shares that are being registered or proposed to be publicly
offered.
(d) There are currently 19 shareholders of record holding common shares
and 1 shareholder of record holding preferred shares.
(e) DIVIDENDS. The Registrant has paid no dividends in its common stock
for the past year.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant entered into an agreement effective January 31, 1997,
wherein the Registrant issued 250 shares of its Series A Preferred stock with a
liquidating preference of $25,000,000 US in exchange for 100% of the issued and
outstanding shares of PAI. The details of the Series A Preferred stock are
addressed in Item 11 below entitled "Description of Securities."
On August 6, 1996, the Registrant sold 1,250,000 common shares of its
common stock to Norla Rutledge at a price of $.10 per share for a total of
$125,000.
On January 31, 1997, the Registrant completed the sale of 1,236,950 shares
of its common unregistered stock at a price of $1.00 per share for a total of
$1,236,950. The Registrant acted as its own underwriter and there were no
commissions paid.
On July 10, 1997 Gaming Lottery Corporation exercised their conversion
rights on 16 Series A Preferred stock and those shares were converted into
266,673 shares of the Registrants common shares.
With respect to the issuance of the common shares of the Registrant as
described in this Item 10, the issuance of the initial 1,250,000 common shares
to Norla Rutledge on August 6, 1996 was made in reliance upon the exemption for
private offerings contained in Section 4(2) of the Securities Act of 1933.
Norla Rutledge is the spouse of the president of the Registrant. Similarly, the
issuance on January 31, 1997 of 1,236,950 common shares to eighteen (18) new
shareholders was also made in reliance upon the same private placement
exemption.
In each instance, each of the share purchasers had access to sufficient
information regarding the Registrant so as to make an informed investment
decision. More specifically, each purchaser signed a written subscription
agreement with respect to their financial status and investment sophistication
wherein they warranted and represented, among other things, the following:
Page 15
<PAGE>
1. That he had the ability to bear the economic risks of investing in the
shares of the Registrant.
2. That he had sufficient knowledge in financial, business, or investment
matters to evaluate the merits and risks of the investment.
3. That he had a certain net worth sufficient to meet the suitability
standards of the Registrant.
4. That the Registrant has made available to him, his counsel and his
advisors, the opportunity to ask questions and that he has been given access to
any information, documents, financial statements, books and records relative to
the Registrant and an investment in the shares of the Registrant.
TITLE SHARE AMOUNT NAME
----- ------------ ----
Common 1,250,000 Norla Rutledge
Common 20,000 Amram Assayag
Common 50,000 Lynn Barrett
Common 10,000 Bat Sheva Cohen
Common 10,000 Moses Cohen
Common 50,000 Robert Davis
Common 10,000 Robert Jolly
Common 10,000 Jimmy Kadoch
Common 7,500 Jacob Kadoch
Common 23,300 Lily Kadoch
Common 34,150 Mike Shriqui
Common 17,000 Debbie Tate
Common 50,000 Roy Whiston
Common 100,000 RNB & Co.
Common 15,000 Andrew Hrynak
Common 200,000 Marie Kuitko
Common 200,000 Leon Bensimon
Common 240,000 Prastol Inc.
Common 190,000 Samuel S. Edery
Common 266,672 Gaming Lottery Corp.
TITLE SHARE AMOUNT NAME
----- ------------ ----
Series A Preferred 234 Gaming Lottery Corp
ITEM 11. DESCRIPTION OF SECURITIES.
(a) COMMON STOCK. At July 10, 1997, the Registrant had 2,753,622 shares
of the common stock outstanding.
Page 16
<PAGE>
Registrant's Articles of Incorporation, filed May 7, 1996, authorized the
issuance of up to 100,000,000 of Registrant's common equity shares with a par
value of $0.001. Holders of shares of the common stock are entitled to one vote
for each share on all matters to be voted on by the stockholders. Holders of
common stock have no cumulative voting rights. Holders of shares of common
stock are entitled to share ratably in dividends, if any, as may be declared
from time to time by the Board of Directors in its discretion, from funds
legally available therefor.
In the event of a liquidation, dissolution or winding up of the Registrant,
the holders of shares of common stock are entitled to share pro rata all assets
remaining after payments in full of all liabilities. Holders of common stock
have no preemptive rights to purchase the Registrant's common stock. All of the
outstanding shares of common stock are fully paid and non-assessable.
(b) PREFERRED STOCK. At July 10, 1997 there were 234 shares of the
Registrant's Series A Preferred stock outstanding. The Series A Preferred stock
(the "Shares") shall pay a fixed, preferential non-cumulative cash dividend rate
of five percent (5%) (of the liquidating preference of $25,000,000) payable
semi-annually to commence 30 months from the date issued; the Shares carry a
preferential right to participate in any distribution or liquidation or
dissolution of the corporation; the Shares shall not have the right to vote in
the same manner and on the same corporate matters as the holders of common stock
except as specifically set forth in Paragraph 11 of the Share Certificate; the
right to convert the Shares into shares of common stock at a conversion rate of
one (1) preferred share for 16,667 common shares with the conversion date
commencing thirty (30) days for the date of issue of the Shares; the Holder of
these Shares shall only be permitted to convert that amount of its Shares which
would result after such conversion with the Holder then owning a maximum of
twenty percent (20%) of the then issued and outstanding common shares of the
corporation. The holder of these Shares shall have the absolute right to
transfer or assign all or any portion thereof of the Shares. The transferee or
assignee of the Shares shall have all of the rights, preferences and privileges
of the Shares and shall be subject to the same restrictions of said Shares.
Paragraph 3 of the Series A Preferred Shares certificate does not provide
for any voting rights to the Holder of the Preferred shares unless and until
there is a breach of the condition or obligations set forth in paragraph 10 of
the certificate.
Upon any such breach the Holder of the Preferred Shares is granted the same
voting rights as the Holder of the common shares of the Registrant. Still
further, upon any such breach the Holder of the Preferred shares will not be
limited to the 20% maximum conversion as set forth in paragraph 8.
Article 4th of the Amended Articles of Incorporation of the Registrant set
forth in Exhibit 3.2 hereto permits the Board of Directors to issue one (1) or
more series of Preferred Stock in such amounts and under such conditions as the
Board may decide, in that the Registrant has no plans to issue Preferred stock
in the
Page 17
<PAGE>
foreseeable future. Accordingly has not addressed or plan to address the
specific terms and conditions of any such further series of Preferred stock.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation and Bylaws of the Registrant provide for
indemnification of the Registrant's officers and directors for liabilities
arising due to certain acts performed on behalf of the Registrant that are not a
result of any act or omission on any such director or officer; provided,
however, that the foregoing provision shall not eliminate or limit the liability
of a director or officer (i) for acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law, or (ii) the payment of
dividends in violation of Section 78.300 of the Nevada Revised Statues.
Although the state statues allow for indemnification of officers and directors,
the Federal Securities and Exchange rules prohibit indemnification of officers
and directors of publicly held companies.
ITEM 13. FINANCIAL STATEMENTS.
(a) ANNUAL FINANCIAL STATEMENTS
See Item 15(a)(1)
(b) INTERIM FINANCIAL STATEMENTS
See Item 15(a)(2)
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
The accountant has not resigned, declined to stand for re-election nor were
they dismissed. The principal accountant's report on the financial statements
for the past two years contains no adverse opinion or disclaimer of opinion, nor
were they modified as to uncertainty, audit scope, or accounting principles.
There have been no disagreements with any former accountants on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS. The following financial statements are
included herein:
(1) Online International Corporation
Audited Financial Statement for
Year Ended January 31, 1997.
(2) Online International Corporation & Subsidiaries
Unaudited Consolidated Financial Statement for
Period Ended July 31, 1997.
Page 18
<PAGE>
(b) EXHIBITS. The following exhibits required by Item 601 of
Regulation S-B are included herein:
EXHIBIT NO. DOCUMENT DESCRIPTION
2. Stock Purchase Agreement Between
Online International Corporation and
Gaming Lottery
3. Articles of Incorporation and Bylaws
3.1 Articles of Incorporation - Online
3.2 Certificate of Amendment of Articles of
Incorporation - Online
3.3 Bylaws - Online
3.4 Certificate of Incorporation - Printing
Associates of New York, Inc.
3.5 Certificate of Merger - Printing
Associates of New York, Inc.
3.6 Bylaws - Printing Associates, Inc.
4. Series A Preferred Share Certificate-Online
10. Material Contracts
10.1 Employment Contract - Stanley J. White
10.2 Employment Contract - Victoria S. Danseglio
11. Computation of Earnings Per Common Share
27. Financial Data Schedule
99. Additional Exhibits
99.1 Stock Purchase Agreement between
Gilberto S. Ocanas and
Printing Associates, Inc.
99.2 Shareholders Agreement between
Win-Tex International, Inc. and
Gabriel Dasilva, etal
Page 19
<PAGE>
SIGNATURES
In accordance with Section 12 the Securities and Exchange Act of 1934 the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
ONLINE INTERNATIONAL CORPORATION
DATED:Sep. 25, 1997 BY: /s/James D. Russell
------------ -------------------------------------
JAMES D. RUSSELL
President
Page 20
<PAGE>
EXHIBIT (a)(1)
--------------
ONLINE INTERNATIONAL CORPORATION
AUDITED FINANCIAL STATEMENT FOR YEAR
ENDED JANUARY 31, 1997
<PAGE>
ONLINE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS WITH
INDEPENDENT AUDITORS' REPORT
JANUARY 31, 1997
<PAGE>
CONTENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET 2
STATEMENT OF INCOME 3
STATEMENT OF STOCKHOLDERS' EQUITY 4
STATEMENT OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Online International Corporation
We have audited the accompanying consolidated balance sheet of Online
International Corporation and Subsidiaries, as of January 31, 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years ended January 31, 1997 and 1996. 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 audit.
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 consolidated financial position of Online
International Corporation and Subsidiaries as of January 31, 1997, and the
consolidated results of their operations and cash flows for the years ended
January 31, 1997 and 1996, in conformity with generally accepted accounting
principles.
/s/ PANETH, HABER & ZIMMERMAN LLP
New York, NY
February 12, 1997, (except for notes 14 and 15, as to
which the dates are March 3, 1997 and June 28, 1997, respectively)
<PAGE>
ONLINE INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JANUARY 31, 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,593,696
Accounts receivable, less allowance for doubtful
accounts of $-0- 1,085,253
Inventories 778,731
Note receivable 38,750
Prepaid expenses and other current assets 55,092
Due from unconsolidated subsidiary 63,517
Deferred income taxes 1,067
-----------
Total Current Assets 3,616,106
-----------
PROPERTY AND EQUIPMENT, at cost, less
accumulated depreciation and amortization 963,314
-----------
OTHER ASSETS
Investment in unconsolidated subsidiaries 443,124
Deferred income taxes 14,400
Deposits 41,897
-----------
Total Other Assets 499,421
-----------
$ 5,078,841
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 22,686
Current portion of obligations under capital leases 95,520
Accounts payable 1,360,789
Accrued expenses and other current liabilities 51,077
-----------
Total Current Liabilities 1,530,072
OBLIGATIONS UNDER CAPITAL LEASES, less current portion 196,190
DEFERRED INCOME TAXES 69,108
-----------
Total Liabilities 1,795,370
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
5% preferred stock, no par value; 250 shares authorized;
issued and outstanding ($25,000,000 liquidation preference) $ 1,693,223
Common stock, $.001 par value; 100,000,000 shares authorized,
2,486,950 shares issued and outstanding 2,487
Additional paid-in-capital 1,331,522
Retained earnings 256,239
-----------
Total Stockholders' Equity 3,283,471
-----------
$ 5,078,841
-----------
-----------
</TABLE>
See notes to consolidated financial statements.
- 2 -
<PAGE>
ONLINE INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended
January 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
NET SALES $10,420,341 $15,863,610
COST OF GOODS SOLD 9,263,348 13,849,780
----------- -----------
GROSS PROFIT 1,156,993 2,013,830
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 856,302 1,820,403
----------- -----------
INCOME FROM OPERATIONS 300,691 193,427
OTHER INCOME (EXPENSE)
Miscellaneous income 4,279 5,449
Gain on sale of assets 103,803 90,330
Income from unconsolidated subsidiary 16,404 194,844
Interest expense (57,157) (112,332)
----------- -----------
Total Other Income 67,329 178,291
----------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST IN INCOME OF SUBSIDIARY 368,020 371,718
INCOME TAXES 72,353 164,728
----------- -----------
INCOME BEFORE MINORITY INTEREST IN INCOME
OF SUBSIDIARY 295,667 206,990
MINORITY INTEREST IN INCOME OF SUBSIDIARY - (31,420)
----------- -----------
NET INCOME $ 295,667 $ 175,570
----------- -----------
----------- -----------
EARNINGS PER SHARE $ .07 $ .04
----------- -----------
----------- -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING $ 4,137,115 $ 4,125,083
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE>
ONLINE INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------------- ------------------------ Additional
Number of Par Number of Paid-in Retained
Snares Value Shares Value Capital Earnings Total
--------- ------ --------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1995 100 $ 193,750 - $ - $ 125,545 $ (214,998) $ 104,297
Cancellation of shares due to
recapitalization (100) (193,750) - - (125,545) - (319,295)
Issuance of shares due to
recapitalization - - 247.5 319,295 - - 319,295
---------- ---------- ---------- ---------- ----------- ---------- -----------
Restated balance at
January 31, 1995 - - 247.5 319,295 - (214,998) 104,297
Net Income for Year ended
January 31, 1996 - - - - - 175,570 175,570
---------- ---------- ---------- ---------- ----------- ---------- -----------
Balance at January 31, 1996 - - 247.5 319,295 - (39,428) 279,867
Contribution to capital of
loan payable to former parent - - 2.5 1,373,928 - - 1,373,928
Issuance of $.001 par value
common stock 2,486,950 2,487 - - 1,331,522 - 1,334,009
Net Income for year ended
January 31, 1997 - - - - - 295,667 295,667
---------- ---------- ---------- ---------- ----------- ---------- -----------
Total Stockholders Equity at
January 31, 1997 2,486,950 $ 2,487 250 $ 1,693,223 $ 1,331,522 $ 256,239 $ 3,283,471
---------- ---------- ---------- ----------- ----------- ---------- -----------
---------- ---------- ---------- ----------- ----------- ---------- -----------
</TABLE>
See notes to consolidated financial statements.
- 4 -
<PAGE>
ONLINE INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
Januarv 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 295,667 $ 175,570
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debts - 28,000
Gain on disposal of property and equipment (103,803) (90,330)
Depreciation and amortization 281,931 411,785
Minority interest in income of subsidiary - 31,420
Equity in loss from unconsolidated subsidiary 22,390 14,399
Deferred taxes 47,999 53,342
Change in:
Accounts receivable 363,090 (498,877)
Inventory 114,428 (20,842)
Prepaid expenses and other current assets 27,736 (41,600)
Due from unconsolidated subsidiary 67,343 204,628
Intangible asset--pension - 84,098
Accounts payable (715,442) (132,089)
Accrued expenses and other current liabilities (11,205) (153,157)
Accrued pension obligation - (53,683)
Deposits 4,144 (2,471)
------------ ------------
Net Cash Provided by Operating Activities 394,278 10,193
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of equipment note - 75,000
Collection of notes receivable 34,905 30,294
Acquisitions of property of equipment (90,786) (320,916)
Proceeds from sale of property and equipment 236,250 217,000
Proceeds from sale of securities - 5,055
Investment is unconsolidated subsidiary (56,826) -
------------ ------------
Net Cash Provided by Investing Activities 123,543 6,433
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from (payments) to affiliate (65,999) 362,891
Payment of long-term debt (22,685) (22,684)
Payments of obligations under capital leases (235,219) (377,775)
Proceeds from issuance of common stock 1,319,609 -
------------ ------------
Net Cash Provided by (Used in) Financing Activities 995,706 (37,568)
------------ ------------
NET INCREASE (DECREASE) IN CASH 1,513,527 (20,942)
CASH
Beginning of year 80,169 101,111
------------ ------------
End of year $ 1,593,696 $ 80,169
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ - $ 85,000
------------ ------------
------------ ------------
Interest 57,157 38,021
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
- 5 -
<PAGE>
ONLINE INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECAPITALIZATION
On January 31, 1997, Online International, Inc. (Online) issued 250
shares of Series A convertible preferred stock in exchange for all issued
and outstanding shares of Printing Associates, Inc. (PAI). A change in
control of PAI to Online shareholders did not occur as a result of this
transaction, due to the rights retained by the former common shareholder
through its ownership of the preferred stock.
This transaction is being accounted for as a recapitalization (similar
to a reverse acquisition) of the Company's equity in accordance with the
consensus of the Emerging Issues Task Force No. 88-16. The application of
the consensus under 88-16 requires that the historic basis of PAI's assets
and liabilities be used, since there was no change in control to Online's
shareholders. As a result, PAI is recording the issuance of Common stock
for the $1,320,000 of net monetary assets of Online at January 31, 1997.
The common stock owned by the former shareholder is recorded as if it was
converted to preferred stock.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Online
International Corporation, its wholly-owned subsidiaries, Printing
Associates, Inc. and Printing Associates of Florida, Inc. for the years
ended January 31, 1997 and 1996, and its 60%--owned subsidiary, Wintex
International, Inc. (Wintex), for the year ended January 31, 1996,
collectively referred to as "The Company". As explained in Notes 8 and 14,
with respect to its investment in Wintex, the Company is currently unable
to exercise its management rights due to a dispute and litigation with a
shareholder and officer of Wintex. Accordingly, the Company has stated its
investment in Wintex at cost for the year ended January 31, 1997. All
material intercompany transactions and balances have been eliminated in
consolidation.
DESCRIPTION OF BUSINESS AND REVENUE RECOGNITION
The Company's operations consist of the design and manufacture of
lottery tickets and play slips for automated on-line contractors and
parimutuels (on track and off track betting).
Sales are recorded on the date of shipment of the merchandise.
UNCONSOLIDATED SUBSIDIARIES
The Company owns 49% of PAP Security Printing, Inc. (PAP) which is
located in Pennsylvania and 60% Wintex International, Inc. which is located
in Texas. Both companies print lottery tickets which they sell to either
automated lottery contractors or directly to individual states. The
financial statements include the operations of PAP Security Printing, Inc.
for its year ended November 30, 1996 and the ten months ended November 30,
1995.
As explained in Notes 8 and 14, the operations of Wintex for the year
ended January 31, 1997 are not included in the financial statements and the
investment is recorded at cost.
- 6 -
<PAGE>
ONLINE INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
The Company's investment in unconsolidated subsidiaries at January 31,
1997 consists of:
Investment in PAP $ 189,670
Investment in Wintex 253,454
---------
$ 443,124
---------
---------
The Company's investment in PAP is recorded under the equity method of
accounting, wherein the investment account is adjusted for the Company's
share of net income or loss of PAP.
A summary of PAP Security Printing, Inc.'s activity at November 30,
1996 is as follows:
Condensed Balance Sheet
Current assets $ 966,277
Property and equipment, net 403,331
Other assets 3,357
-----------
Total Assets $ 1,372,965
-----------
-----------
Current liabilities $ 860,297
Long-term debt 103,985
Obligations under capital leases
Deferred income tax 21,600
-----------
Total Liabilities 985,882
Stockholders' equity 387,083
-----------
$ 1,372,965
-----------
-----------
Condensed Statement of Operations is as follows:
Year Ended Ten Months Ended
November 30, November 30,
------------- ----------------
1996 1995
---- ----
Sales $ 4,927,593 $ 3,234,946
Cost of goods sold 3,512,654 2,577,774
----------- -----------
Gross profit 1,414,939 657,172
General and administrative 1,336,403 702,686
----------- -----------
Operating income (loss) 78,536 (45,514)
Other income (expenses) 30,677 (2,494)
----------- -----------
Income (loss) before income tax benefit 109,213 (48,008)
Income tax (expense) benefit (157,555) 18,622
----------- -----------
Net (loss) $ (48,342) $ (29,386)
----------- -----------
----------- -----------
- 7 -
<PAGE>
ONLINE INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Included in income from unconsolidated subsidiary is commissions
earned by the Company of $38,794 and $209,243 in 1997 and 1996. Of this
amount, $47,543 was earned during December 1995 and January 1996.
As explained in Notes 8 and 14, the investment in Wintex, is recorded
at cost in the 1997 financial statements.
INVENTORIES
Inventories are stated at the lower of cost or market with cost
determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed by both the straight-line and
declining balance methods over the estimated useful lives of the assets
indicated in Note 5. Leasehold improvements are amortized on a
straight-line basis over the life of the lease.
Maintenance and repairs are charged to income as incurred. Renewals
and replacements of a routine nature are charged to income, while those
which significantly improve or extend the life of existing property are
capitalized.
Upon sale or retirement of property and equipment, the cost and
related accumulated depreciation are eliminated from the respective
accounts and the related gain or loss is included in current income.
PENSION PLAN
The Company had a noncontributory defined benefit employee retirement
plan covering all eligible employees. The Company had been making annual
contributions to the plan equal to the amounts determined by the plan's
actuary. Effective July 8, 1995, the plan was terminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
2. MAJOR CUSTOMERS
The lottery and pari-mutuel products industry is controlled by a limited
number of contractors. The Company's sales to its three significant contractors
were approximately 41%, 30% and 10% and 44%, 27% and 7% of total revenues for
the years ended January 31, 1997 and 1996. In addition, approximately 83% of the
accounts receivable balance at January 31, 1997 is due from these contractors.
- 8 -
<PAGE>
ONLINE INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 1997
3. CASH
Included in cash are funds on deposit at a bank in New York totaling
$452,565 (including outstanding checks of $85,664 against such funds) and in an
attorney's escrow account in California totaling $1,236,888 at January 31, 1997.
Of these funds, $291,500 is insured by the FDIC.
The funds held in the escrow account were released and received by the
Company on February 2, 1997.
4. INVENTORIES
Inventories at January 31, 1997 consist of the following:
Raw materials $ 576,912
Work-in-process 88,743
Finished goods 113,076
---------
$ 778,731
---------
---------
5. PROPERTY AND EQUIPMENT
Property and equipment at January 31, 1997 consists of the following:
Estimated Useful
Life In Years
----------------
Machinery and equipment $ 2,259,497 7
Furniture and office equipment 235,512 5-7
Leasehold improvements 199,767 7-13
-----------
2,694,776
Less: Accumulated depreciation and
amortization 1,731,462
-----------
$ 963,314
-----------
-----------
6. RELATED PARTIES
For the year ended January 31, 1997 consulting fees, amounting to
$207,656 were paid to a company whose sole shareholder is a holder of 50%
of the outstanding common stock of the Company. During the year, PAI's
former parent corporation contributed its remaining loan of $1,373,928 to
the Company's capital in exchange for 2.5 shares of preferred stock.
For the year ended January 31, 1996, management fees amounting to
$240,000 are payable to the former parent. Consulting fees amounting to
$160,000 were paid to a corporation wholly-owned by the minority
shareholder of the Company's 60% owned subsidiary. There were no management
fees incurred during the year ended January 31, 1997.
- 9 -
<PAGE>
ONLINE INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 1997
7. PREFERRED STOCK
The 5% non-cumulative preferred stock is convertible into 16,667
shares of common stock for each share of preferred. Dividends, when
declared, are payable semi-annually and commence July 31, 1999. Upon
conversion, the holder of these shares is limited to retaining a maximum of
twenty percent of the then issued and outstanding common stock. The
preferred shareholders are entitled to a liquidation preference, upon which
the 5% non-cumulative preferred dividend is calculated, of $100,000 per
preferred share.
8. NON-CASH INVESTING AND FINANCING TRANSACTIONS
Capital lease obligation were incurred for the acquisition of
equipment in the amount of $107,275 in 1997 and $353,768 in 1996.
Deposits for the acquisition of property and equipment were
reclassified to equipment during 1996 in the amount of $63,792.
During 1996, a dividend was declared by an unconsolidated subsidiary
in the amount of $9,800.
The amount of $1,373,928, Due to former parent was converted to 2.5
shares of preferred stock during 1997.
A note receivable of $38,750 was received on the sale of equipment
during 1997.
A deferred tax asset of $14,400 was contributed to the Company during
1997 as part of the business combination.
As further described in Note 14, the Company's investment in Wintex is
stated at cost in 1997, while the subsidiary was consolidated in the 1996
financial statements.
Assets and liabilities appearing on the January 31, 1996 Consolidated
Balance Sheet that were reclassified as investment in Wintex consisted of
$56,826 of cash and the following noncash assets and liabilities:
Accounts receivable $ 394,501
Inventories 299,394
Prepaid expenses and other current assets 86,847
Property and equipment 590,725
Deposits 10,153
Due from unconsolidated subsidiary (73,517)
Accounts payable (281,701)
Advances from affiliates (386,891)
Accrued expenses (9,977)
Obligations under capital leases (263,937)
Minority interest in equity of subsidiary (168,969)
---------
Noncash increase to investment in unconsolidated
subsidiary $ 196,628
---------
---------
- 10 -
<PAGE>
ONLINE INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 1997
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards NO. 107, DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS ("SFAS 107") requires entities to
disclose the fair values of financial instruments except when it is not
practicable to do so. Under SFAS 107, it is not practicable to make this
disclosure when the costs of formulating the estimated values exceed the
benefit when considering how meaningful the information would be to
financial statement users.
The amounts included on the balance sheet for the Company's financial
instruments requiring disclosure of fair value at January 31, 1997 are as
follows:
ASSETS:
Cash $ 274,087 (A)
Note receivable 38,750 (A)
Due from unconsolidated subsidiary 63,517 (B)
Investment in unconsolidated subsidiaries 443,124 (B)
LIABILITIES:
Long-term debt 22,686 (A)
None of the above are derivative financial instruments and none are
held for trading purposes.
(A) The fair value approximates carrying amount.
(B) Because of the expenses necessary in conducting an appraisal of the
investments in PAP Security Printing, Inc. and Wintex International,
Inc. as well as management's inability to obtain current verifiable
information from Wintex International, Inc., management believes that
it is not practicable to estimate the fair values of the investments.
Information about PAP Security Printing, Inc. can be found at Note 1.
Wintex International, Inc. information is not available.
(C) Because of the related party nature of these advances, it is not
practicable to estimate their fair values.
10. PENSION PLAN
The Company had a qualified noncontributory pension plan covering
substantially all of its employees. The plan was terminated as of July 8,
1995. At such time all accrued benefits to plan participants had been fully
funded. All the plan assets were distributed to the participants during the
year ended January 31, 1997.
11. LEASES
The Company is the lessee of certain equipment under operating and
capital leases as well as lessee of office and warehouse space in New York.
- 11 -
<PAGE>
ONLINE INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 1997
11. LEASES (Continued)
At January 31, 1997, the future minimum lease payments for all leases
are as follows:
Obligations
Operating under
Leases Capital Leases
----------- ----------------
1998 $ 198,000 $ 122,520
1999 198,000 109,790
2000 181,500 75,775
2001 - 28,153
2002 - 9,384
Remaining years - -
--------- ---------
$ 577,500 345,622
---------
---------
Less amount representing interest 53,912
---------
Present value of minimum lease
payments 291,710
Less current portion 95,520
---------
Long-term portion $ 196,190
---------
---------
Rent expense for the year ended January 31, 1997 and 1996 amounted to
$231,106 and $409,485.
Equipment held under capitalized leases at January 31, 1997 consists
of the following:
Machinery and equipment $ 666,247
Less: Accumulated amortization 219,044
---------
$ 447,203
---------
---------
12. INCOME TAXES
The provision for income taxes consists of the following components:
January 31,
---------------
1997 1996
---- ----
Current
Federal $ 10,897 $ 102,022
State 13,457 9,364
--------- ---------
24,354 111,386
--------- ---------
Deferred
Federal $ 31,159 $ (10,058)
State 16,840 63,400
--------- ---------
47,999 53,342
--------- ---------
$ 72,353 $ 164,728
--------- ---------
--------- ---------
- 12 -
<PAGE>
ONLINE INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 1997
12. INCOME TAXES (Continued)
Deferred income taxes at January 31, 1997 consists of the following:
Gross deferred tax assets $ 15,467
--------
--------
Gross deferred tax liabilities $ 69,108
--------
--------
The deferred tax asset balances are primarily a New York State in
vestment tax credit. The deferred tax liability balances are primarily the
result of temporary differences between the investments in PAP Security
Printing, Inc. and Wintex International, Inc. for financial statement
purposes and their tax bases. No income or loss from the unconsolidated
subsidiaries is recorded for tax purposes.
For the period February 1, 1996 through August 7, 1996 and for the
year ended January 31, 1996 Printing Associates, Inc. and Printing
Associates of Florida, Inc. filed a consolidated Federal tax return with
the Company's former parent. The Federal tax expense for the year ended
January 31, 1997 differs from that which would be obtained by applying the
34% corporate tax rate to the income before income taxes primarily because
of the period February 1, 1996 through August 7, 1996, the former parent
had substantial losses that were utilized by the Company to offset the tax
liability it otherwise would have incurred. There was no requirement to
compensate the former parent for this benefit.
The reconciliation between the actual and expected Federal tax is as
follows:
Year Ended
Januarv 31,
-------------------------
1997 1996
---- ----
Income tax provision at 34% $ 125,127 $ 126,384
State and local income taxes net of
Federal income tax effect 20,300 48,024
Benefit of former parent company losses (72,075) -
Change in estimate of prior year Federal
income tax 1,894 (13,108)
Effect of nondeductible expenses 2,860 6,925
Effect of dividend exclusion (5,753) (3,497)
-------- --------
Actual income tax provision $ 72,353 $ 164,728
-------- --------
-------- --------
13. COMMITMENTS
The Company has entered into employment contracts with the president
and other key employees which expire at various dates ranging from
September 22, 1997 through October 22, 2001. The Company has also entered
into a consulting agreement expiring on September 22, 1997. Future minimum
payments relating to these agreements are as follows:
1998 $ 251,333
1999 190,000
2000 190,000
2001 170,000
2002 97,500
--------
$ 898,833
--------
--------
- 13 -
<PAGE>
ONLINE INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 1997
14. CONTINGENCIES
The Company has instituted an action against a shareholder/officer of
its 60% owned subsidiary, Wintex. The Company maintains that the
shareholder/officer has breached his obligations under a stock option
agreement dated July 29, 1994, for 11% of the outstanding common stock of
Wintex. The shareholder/officer has taken control of the subsidiary and has
not allowed the Company to exercise its management rights. The Company has
initiated legal proceedings to regain control of the subsidiary. At January
31, 1997, the investment is recorded at cost since the Company is unable to
exercise control.
The shareholder/officer has counterclaimed, stating that under the
shareholder agreement, Printing Associates, Inc. is obligated to purchase
his holdings in Wintex for approximately $2 million.
If Printing Associates prevails in the legal proceedings, it will
directly own 60% of Wintex and regain management control without any outlay
of additional cash. If the shareholder/officer prevails, Printing
Associates would be required to purchase his shares and would then own 99%
of Wintex for an additional cash outlay of $2 million. Presently,
management is unable to determine if $2 million is a fair value for the
shares, Accordingly, any potential loss for the difference between fair
value and the purchase price of the additional shares cannot be estimated
at this time.
Management does not believe that the shareholder/officer's claim has
merit, however, due to the uncertainties inherent in litigation, it is at
least reasonably possible that the Company will not prevail.
15. SUBSEQUENT EVENT
On June 28, 1997, the Company sold its 49% interest in PAP Security
Printing, Inc. for $70,000 and a 4% royalty on PAP's gross receipts from
the sale of lottery products for the period December 1, 1996 through
November 30, 1997.
- 14 -
<PAGE>
EXHIBIT NO. (a)(2)
ONLINE INTERNATIONAL CORPORATION
UNAUDITED FINANCIAL STATEMENT FOR YEAR
ENDED JULY 31, 1997
<PAGE>
ONLINE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JULY 31, 1997
UNAUDITED
ASSETS
- -------------------------------------------------
Cash $ 1,488,671
Accounts receivable, less allowance
for doubtful accounts of $0 1,126,971
Inventory 319,491
Prepaid assets 74,432
Note Receivable- equipment 23,750
Due from affiliates 63,516
Other current asset 68,998
-----------
TOTAL CURRENT ASSETS 3,165,829
-----------
PROPERTY, at cost, less accumulated
depreciation 905,727
-----------
OTHER ASSETS
Deferred taxes 15,467
Investment in subsidiaries 253,454
Deposits 38,147
-----------
TOTAL OTHER ASSETS 307,068
-----------
TOTAL ASSETS $ 4,378,624
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------
Current maturities of long-term debt $ 11,395
Current portion of obligations under capital leases 87,789
Accounts payable 544,337
Accrued expenses 168,720
-----------
TOTAL CURRENT LIABILITIES 812,240
-----------
Obligations under capital leases, less
current portion 151,097
-----------
TOTAL LIABILITIES 963,337
-----------
STOCKHOLDERS' EQUITY
5% preferred stock, no par value; 234 shares 1,577,943
authorized, issued and outstanding
Common stock, $.001 par value; 100,000,000 shares 2,754
authorized, 2,753,622 shares issued and
outstanding
Additional paid-in capital 1,446,535
Retained earnings (deficit) 388,055
-----------
TOTAL STOCKHOLDERS' EQUITY 3,415,287
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,378,624
-----------
-----------
<PAGE>
ONLINE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
3 MONTHS ENDED 3 MONTHS ENDED
JULY 31,1997 JULY 31, 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 92,815 $ 129,777
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Gain on sale of subsidiary (82,648) -
Gain on sale of equipment - (110,394)
Depreciation and amortization 69,227 75,920
CHANGE IN:
Accounts Receivable 25,513 461,902
Inventory 212,425 83,922
Prepaid expenses and other current
assets 22,119 7,158
Accounts Receivable-sale of subsidiary (68,500) -
Accounts Receivable-sale of equipment - (93,750)
Accounts payable (74,556) (566,036)
Accrued expenses and other current
liabilities 23,079 (13,101)
Deposits - (1,885)
---------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 219,474 (26,487)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of notes receivable 5,000 9,000
Acquisitions of property and equipment (51,182) (135,441)
Proceeds from sale of equipment - 275,000
Investment in unconsolidated subsidiary 272,318 -
---------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 226,136 148,559
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt (5,621) (5,671)
Payments (to) from affiliate-net - (37,857)
Payments of obligations under capital leases (25,516) -
---------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (31,137) (43,528)
---------- ---------
NET INCREASE (DECREASE) IN CASH 414,473 78,544
CASH
Beginning of period 1,074,198 11,470
---------- ---------
End of period $1,488,671 $ 90,014
---------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 7,401 $ 16,898
---------- ---------
---------- ---------
Taxes $ 27,500 -
---------- ---------
---------- ---------
<PAGE>
ONLINE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
6 MONTHS ENDED 6 MONTHS ENDED
JULY 31, 1997 JULY 31, 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 131,818 $ 296,172
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Gain on sale of subsidiary (82,648) -
Gain on sale of equipment (110,394)
Depreciation and amortization 138,455 151,369
CHANGE IN:
Accounts Receivable (41,718) 519,335
Inventory 459,240 116,509
Prepaid expenses and other current
assets (19,838) 4,800
Accounts Receivable-sale of subsidiary (68,500) -
Accounts Receivable-sale of equipment - (93,750)
Accounts payable (816,452) (862,869)
Accrued expenses and other current
liabilities 48,534 (28,599)
Deposits 3,750 (1,885)
---------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (247,359) (9,312)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of notes receivable 15,000 15,000
Acquisitions of property and equipment (80,869) (136,967)
Proceeds from sale of equipment - 275,000
Investment in unconsolidated subsidiary 272,318 -
---------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 206,449 153,033
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt (11,291) (11,342)
Payments (to) from affiliate-net - (36,000)
Payments of obligations under capital leases (52,824) (29,708)
---------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (64,115) (77,050)
---------- ---------
NET INCREASE (DECREASE) IN CASH (105,025) 66,671
CASH
Beginning of period 1,593,696 23,343
---------- ---------
End of period $1,488,671 $ 90,014
---------- ---------
---------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIO
Cash paid for:
Interest $ 15,674 $ 38,738
---------- ---------
---------- ---------
Taxes - -
---------- ---------
---------- ---------
<PAGE>
ONLINE INTERNATIONAL CORPORATION
CONSOLIDATED INCOME STATEMENT
UNAUDITED
<TABLE>
<CAPTION>
3 MO. ENDED 3 MO. ENDED 6 MO. ENDED 6 MO. ENDED
7/31/97 7/31/96 7/31/97 7/31/96
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES - NET $ 2,890,621 $ 2,661,825 $ 5,418,145 $ 5,610,252
COST OF GOODS SOLD 2,393,445 2,473,203 4,550,955 5,071,896
----------- ----------- ----------- -----------
GROSS PROFIT 497,176 188,622 867,190 538,356
SELLING, GENERAL & ADMINISTRATIVE 412,479 202,339 710,993 413,836
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 84,697 (13,717) 156,197 124,520
OTHER INCOME (EXPENSE) 75,329 143,494 71,075 171,652
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 160,026 129,777 227,272 296,172
INCOME TAX EXPENSE 67,211 - 95,454
----------- ----------- ----------- -----------
NET INCOME $ 92,815 $ 129,777 $ 131,818 $ 296,172
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
EARNINGS PER SHARE $ 0.01 $ 0.03 $ 0.02 $ 0.07
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING 6,653,700 4,125,083 6,653,700 4,125,083
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS:
The accompanying unaudited financial statements have been prepared in accordance
with instructions to Form 10-QSB and therefore, do not include all information
and footnotes necessary for a complete presentation of financial position,
results of operations, cash flows and stockholders' equity in conformity with
generally accepted accounting principles. Except as disclosed herein, there has
been no material change in the information disclosed in the notes to the
financial statement included in the Company's annual report in the Form 10-SB
for the year ended January 31, 1997. In the opinion of Management, all
adjustments considered necessary for a fair presentation of the results of
operations and financial position have been included and all such adjustments
are of a normal recurring nature. Operating results for the six months ended
July 31, 1997 are not necessarily indicative of the results that can be expected
for the year ending January 31, 1998.
NON-CASH FINANCING TRANSACTION
On July 10, 1997, 16 Series A Preferred Shares were converted into 266,672
common shares.
SALE OF UNCONSOLIDATED SUBSIDIARV
Effective July 1, 1997, the Company sold all of its stock ownership in a 49%
owned subsidiary for approximately $272,000 recognizing a gain of approximately
$82,000.
SUBSEQUENT EVENT
Litigation involving the ownership of WinTex (a 60% owned subsidiary) was
settled effective as of September 9, 1997 wherein the Company sold all of its
stock ownership of WinTex to the other majority shareholder of WinTex for
certain cash payments and a percentage of the gross sales of WinTex for a period
of five (5) years beginning October 1, 1997.
The consolidated financial statements for the periods ended July 31, 1996 have
been restated to exclude the results of the former 60% owned subsidiary.
INVENTORIES: Inventories at July 31, 1997 consist of the following:
Raw Materials: $219,516
Work-in-process: 38,224
Finished goods: 61.751
-------
$319,491
--------
<PAGE>
JULY 31, 1997
MANAGEMENT'S DISCUSSIONS AND ANALYSES OR PLAN OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at July 31, 1997 was $1,488,671 an increase of
$414,473 from April 30, 1997. This increase is attributable to the current
year's income and the sale of a 49% owned subsidiary in July 1997 (see
discussion of sale below).
Accounts receivable at July 31, 1997 was $1,150,721. The lottery and
parimutuel products industry is controlled by a limited number of contractors.
During the six months ended July 31,1997, approximately 70% of the Company's
sales were to two contractors. In addition, approximately 60% of the accounts
receivable balance at July 31, 1997 are due from these contractors. The Company
has not experienced any collection difficulties.
Working capital at July 31, 1997 was $2,353,590, an increase of $267,556
from the working capital of $2,086,034 at January 31, 1997 and an increase of
$249,431 from the working capital of $2,104,159 at April 30, 1997. This increase
in working capital is attributable to the current year's income, offset by a
reduction of current liabilities, primarily accounts payable.
The ratio of current assets to current liabilities is 3.9 to 1 at July 31,
1997 compared to .75 to 1 at July 31, 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1996 TO THREE MONTHS ENDED JULY 31, 1997
Sales increased $ 228,000 in the three months ended July 31, 1997 compared
to the three months ended July 31, 1996. This increase is primarily attributable
to increased orders during the beginning of the second quarter of the year after
slightly lagging orders during the first quarter (see comment on year to date
sales under SIX MONTHS ENDED JULY 31, 1996 TO SIX MONTHS ENDED JULY 31, 1997).
The gross profit percentage increased 10% in the quarter ended July 31,
1997 to 17% from 7% in the quarter ended July 31, 1996. This is attributable to
the ability of the company to take advantage of prompt payment discounts on its
paper purchases in 1997 and continued improvements in the manufacturing process
which has reduced the overall waste generation.
During the quarter ended July 31, 1997, all contracts are continuing.
<PAGE>
Income from operations for the quarter ended July 31,1997 was $85,000 an
increase of $97,000 over the quarter ended July 31, 1996 where there was a
($14,000) loss from operations. The primary reason for this increase is higher
profit margins. Selling, general and administrative costs increased $210,000 in
the quarter ended July 31, 1997 as compared to the quarter ended July 31, 1996.
This is directly attributable to the marketing and administrative expenses
incurred by Online International Corporation in its efforts to obtain lottery
management contracts.
For the three months ended July 31, 1996 income taxes were not provided for
because the former parent had substantial losses that were utilized by the
Company to offset the tax liability it otherwise would have incurred.
During the quarter ended July 31, 1997, the Company sold its share of a 49%
owned unconsolidated subsidiary for approximately $272,000 recognizing a gain of
approximately $82,000 (see footnotes to the financial statements).
SIX MONTHS ENDED JULY 31, 1996 TO SIX MONTHS ENDED JULY 31, 1997
Year to date sales at July 31, 1997 are $192,000 lower than the year to
date sales for the six months ended July 31, 1996. This slight decrease is
primarily attributable to lower paper costs (thus a lower selling price) in the
six months ended July 31, 1997 compared to the period ended July 31, 1996.
Quantities sold remain substantially consistent during the two six month
periods.
The gross profit percentage for the six months ended July 31, 1997 was 16%
as compared to a gross profit percentage of 10%, an increase of 6%. As discussed
previously, this increase is attributable to the Company's ability to maximize
paper purchase discounts and minimize waste in the manufacturing process.
At July 31, 1997 inventories were $459,240 lower than at January 31, 1997.
This decrease is a result of the Company's ability to reduce its raw paper on
hand because of certain arrangements with its paper vendors to warehouse paper
for the Company.
For the six months ended July 31, 1996 income taxes were not provided for
because the former parent had substantial losses that were utilized by the
Company to offset the tax liability it otherwise would have incurred.
<PAGE>
EXHIBIT NO. 11
COMPUTATION OF EARNINGS PER COMMON SHARE
<PAGE>
EXHIBIT 11
ONLINE INTERNATIONAL CORP.
COMPUTATION OF EARNINGS PER COMMON SHARE
Year Ended January 31,
-------------------------
1997 1996
------ ------
Earnings
Net income applicable to common stock $ 295,667 $ 175,570
---------- ----------
---------- ----------
Shares
Weighted average number of common shares
outstanding 6,795
Additional shares assuming conversion of
preferred A shares 4,130,320 4,125,083
---------- ----------
Weighted average number of common and
common stock equivalents $4,137,115 $4,125,083
---------- ----------
---------- ----------
Earnings Per Share $ .07 $ .04
---------- ----------
---------- ----------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> JAN-31-1996
<PERIOD-END> JAN-31-1997
<CASH> 1,593,696
<SECURITIES> 0
<RECEIVABLES> 1,085,253
<ALLOWANCES> 0
<INVENTORY> 778,731
<CURRENT-ASSETS> 3,616,106
<PP&E> 2,694,776
<DEPRECIATION> 1,731,462
<TOTAL-ASSETS> 5,078,841
<CURRENT-LIABILITIES> 1,530,072
<BONDS> 0
0
1,693,223
<COMMON> 2,487
<OTHER-SE> 1,587,761
<TOTAL-LIABILITY-AND-EQUITY> 5,078,841
<SALES> 10,420,341
<TOTAL-REVENUES> 10,544,827
<CGS> 9,263,348
<TOTAL-COSTS> 10,119,650
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,157
<INCOME-PRETAX> 368,020
<INCOME-TAX> 72,353
<INCOME-CONTINUING> 295,667
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 295,667
<EPS-PRIMARY> .07
<EPS-DILUTED> 0
</TABLE>
<PAGE>
99.1
STOCK PURCHASE AGREEMENT BETWEEN
GILBERTO S. OCANAS AND PRINTING ASSOCIATES, INC.
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement is made as of the 29th day of July 1994
between GILBERTO S. OCANAS ("Ocanas"), a resident of Texas and PRINTING
ASSOCIATES, INCORPORATED ("PAI"), a New York Corporation, with reference to the
following facts:
A. PAI has recently acquired the stock of certain minority shareholders in
WinTex, Inc. ("WinTex") a Texas corporation providing lottery ticket stock and
machine readable bet slips for use in the Texas Lottery and by virtue of such
acquisition now owns 60% of WinTex.
B. WinTex is a certified minority owned and operated company under Texas law and
wishes to maintain that certification to assure preferential status in
procurements by and on behalf of the Texas Lottery.
C. Ocanas and his wife are qualified minorities under Texas law and each
currently own 20% of WinTex.
D. Ocanas is actively engaged in the management of WinTex.
E. The parties hereto agree that the best interests of WinTex and its
shareholders will be served if Ocanas and his wife become majority owners of
Wintex and continue to control its management.
NOW, THEREFORE in consideration of the mutual promises and covenants contained
herein, and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties have agreed as follows:
1. PAI hereby sells to Ocanas 11% of the issued and outstanding voting
stock of WinTex for Thirty-Six Thousand ($36,000) whereby Ocanas will own 31% of
Wintex and in conjunction with his wife 51% with unrestricted voting rights
thereon.
2. Ocanas hereby delivers to PAI his promissory note in the amount of
Thirty-Six Thousand ($36,000) to PAI payable 30 days after written demand by PAI
and bearing interest from the date of such demand until paid at the rate of
prime plus 2%.
3. Ocanas agrees that he will continue his employment with WinTex during
the term of said promissory note and will not sell his stock in Wintex
without first offering such stock to PAI upon the same terms as any bona fide
third party offer for such shares.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
above set forth.
GILBERTO S. OCANAS PRINTING ASSOCIATES, INCORPORATED
/s/ Gilberto S. Ocanas /s/ [ILLEGIBLE]
- ----------------------------------- ---------------------------------------
<PAGE>
99.2
SHAREHOLDERS AGREEMENT BETWEEN
WIN-TEX INTERNATIONAL, INC. AND
GABRIEL DASILVA, ET AL
<PAGE>
SHAREHOLDERS AGREEMENT
THIS SHAREHOLDERS AGREEMENT is made and entered into this 17th day of
April, 1992, by and between WIN-TEX INTERNATIONAL, INC., a corporation
organized and existing in accordance with the laws of the State of Texas
(hereinafter also referred to as "Corporation"), GABRIEL DASILVA (hereinafter
also referred to as "daSilva"), AVATUS H. STONE (hereinafter also referred to
as "Stone"), GILBERTO S. OCANAS (hereinafter also referred to as "Ocanas"),
ANA MARGARITA GUZMAN (hereinafter also referred to as "Guzman"), RUEGG
QUIBELL (hereinafter also referred to as "Quibell") and PASQUALE J. BAGNATO
(hereinafter also referred to as "Bagnato").
W I T N E S S E T H:
WHEREAS, the Corporation desires to sell and each of the individual
parties hereto desire to purchase, shares of common stock of the Corporation
subject to the terms and conditions of this agreement;
WHEREAS, the parties hereto intend for the ownership of the shares of the
Corporation to be as follows:
Gilberto S. Ocanas 20 shares
Ana Margarita Guzman 20 shares
Gabriel daSilva 20 shares
Avatus H. Stone 20 shares
Ruegg Quibell 10 shares
Pasquale J. Bagnato 10 shares
----
Total 100 shares
WHEREAS, the parties hereto, being all of the shareholders of the
Corporation, believe that it is in their mutual interest
<PAGE>
to make provisions for the future disposition of the shares of common stock of
the Corporation owned by them, to the end that continuity of harmonious
management is assured, and a fair process is established by which said shares of
common stock may be transferred, conveyed, assigned or sold;
NOW, THEREFORE, in consideration of the mutual premises and covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties, intending to be
legally bound, hereby agree as follows:
1. DEFINITIONS: For the purposes of this Shareholders Agreement, the
following definitions shall apply to the interpretation and construction of the
words and phrases contained herein unless otherwise clearly required by the
context:
a. "Agreement" means this Shareholders Agreement.
b. "Corporation" means WIN-TEX INTERNATIONAL, INC.
c. "Assignment or other Transfer" includes but is not limited to, a
sale, exchange, gift, hypothecation, collateral assignment, subjecting the
ownership interest to a security interest, attachment, judgment creditor
execution, bankruptcy, or other similar occurrence sanctioned by law without the
prior written consent of the other Shareholder(s) and the Corporation.
d. "Shareholder" or "Shareholders" means GILBERTO S. OCANAS,ANA
MARGARITA GUZMAN, GABRIEL DASILVA, AVATUS H. STONE,
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<PAGE>
RUEGG QUIBELL, and PASQUALE J. BAGNATO, and their heirs, executors,
administrators, or other legal representatives, and any other person or entity
that may hereafter acquire stock of the Corporation by or from any of them. e.
e. "Stock" means all of the interest of any Shareholder in any and
all of the issued and outstanding common stock of the Corporation which is
now owned, or hereafter acquired, directly or indirectly, by him or her.
2. PURCHASE OF STOCK:
a. Prior to the execution of this Agreement, Gilberto S. Ocanas
has subscribed for, and been issued, 20 shares, Ana Margarita Guzman has
subscribed for, and been issued, 20 shares, Gabriel daSilva has subscribed
for, and been issued, 20 shares, and Avatus H. Stone has subscribed for, and
been issued, 20 shares, in the amount of One Thousand Two Hundred Fifty and
00/100 Dollars ($1,250.00) per share. The Corporation shall issue ten (10)
shares each to Quibell and Bagnato, for a total of twenty (20) additional
shares, for the consideration set forth herein. Ocanas, Guzman, daSilva and
Stone shall each pay the sum of $25,000.00 for their subscriptions on the
following schedule:
Later of April 15, 1992 or
execution of Agreement $ 5,000.00
May 1, 1992 5,000.00
June 1, 1992 10,000.00
July 1, 1992 5.000.00
-----------
Total $ 25.000 00
-----------
b. Quibell and Bagnato shall pay to the Corporation
the sum of Two Hundred Thousand Dollars ($200,000.00) in total,
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<PAGE>
being $100,000.00 each, for their stock, and, in addition, shall loan the
Corporation an additional $200,000.00 in total, being $100,000.00 each, subject
to the terms and conditions below. Payments of the stock and loan shall be made
on the following schedule:
Later of April 15, 1992 or
execution of Agreement $ 80,000.00
May 1, 1992 80,000.00
June 1, 1992 160,000.00
July 1, 1992 80.000.00
-----------
Total $400.000.00
-----------
c. The terms and conditions of the $200,000.00 loan from Bagnato
and Quibell to the Corporation shall be as follows: interest shall accrue at
an annual rate equal to the prime interest rate as reported in the Wall
Street Journal, Money Rates, as of the last day of each month, plus two
percent (2%), from the date that all subscribed capital has been paid to the
Corporation until the date of payment, compounded monthly. The net profit of
the Corporation shall be used (i) to pay accrued interest to Quibell and
Bagnato, and (ii) to repay the loan to Quibell and Bagnato until the entire
$200,000.00 has been repaid. Payments will be made equally to Quibell and
Bagnato.
d. In further consideration for their shares, daSilva, Stone,
Quibell, and Bagnato agree to cause Wintech International Corporation, a
Virginia corporation, to guaranty the lease obligation of the Corporation to
Crow-Global Partners, Ltd., which lease shall be for an initial term not to
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<PAGE>
exceed ten (10) years, at an initial base rent not to exceed $7,782.40 per month
(plus expense pass-throughs).
e. The issued and outstanding Stock of the Corporation shall be
owned as follows:
Ocanas 20 SHARES
Guzman 20 shares
daSilva 20 shares
Stone 20 shares
Quibell 10 shares
Bagnato 10 shares
f. Share certificates for the foregoing shares shall be issued
promptly after execution of this Agreement.
3. BINDING OBLIGATIONS: This Agreement shall bind the parties hereto and
all persons to whom Stock is, or may be issued, transferred, sold or otherwise
conveyed, including, but not limited to, any transferee or assignee that owns or
holds any Stock of the Corporation as the result of any transfer or assignment
by operation of law or as a result of any assignment or transfer as the result
of any judicial or legal judgment, decree, resolution or determination; and, it
shall be conditional to the issuance, transfer, sale or other conveyance of the
Stock of the Corporation that the person or entity to whom Stock is issued,
transferred, sold or otherwise conveyed, shall become a signatory and party to
this Agreement prior to said issuance, transfer, sale or other conveyance.
4. RESTRICTION ON THE ASSIGNMENT OR OTHER TRANSFER: No Shareholder
shall assign or transfer his or her interest in the
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<PAGE>
Stock of the Corporation except upon the terms and conditions hereinafter set
forth.
5. SALE OR TRANSFER:
a. TRANSFER FOR VALUE: If any Shareholder desires to sell, convey,
assign, transfer, hypothecate, pledge, or otherwise dispose of any or all of his
or her shares in the Corporation for value, he or she shall first give the
Corporation and each of the other Shareholders of the Corporation written notice
of his or her intention to make such disposition. No such notice shall be given
until Shareholder shall have first obtained a BONA FIDE written offer in good
faith to purchase his or her shares. A copy of the offer setting forth the terms
and conditions of the proposed purchase, with the names and addresses of the
purchaser or purchasers shall be attached to the written notice. Upon receipt of
the notice, the Corporation shall take steps necessary to have the Board of
Directors consider the offer within thirty (30) days. If the Board of Directors
decides to purchase the shares, it shall match the BONA FIDE written offer and
acquire the shares of Shareholder in accordance with the terms and conditions of
the offer. If the Board of Directors decides not to purchase the shares, then,
if the selling Shareholder is daSilva or Stone, the other of them, and if the
selling Shareholder is Quibell or Bagnato, the other of them shall then have the
option to purchase said shares, which
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<PAGE>
option must be exercised within fifteen (15) days from the decision of the Board
of Directors, but in no event more than forty-five (45) days from receipt of
notice by the Corporation. In the event that the other Shareholder as described
in the preceding sentence does not exercise his or her secondary right of first
refusal, then the remaining Shareholders desiring to exercise their option to
purchase may also exercise the option of the non-electing Shareholder, on a pro
rata basis based upon Stock issued and outstanding owned by the electing
Shareholders. In the event that the Corporation does not elect to purchase the
shares within thirty (30) days from the giving of the notice, or any of the
other Shareholders do not elect to purchase their pro rata portion of the shares
within thirty (30) days of the Corporation's decision, then Shareholder shall be
free to make the disposition of said shares strictly in accordance with the BONA
FIDE written offer; provided, however, that such disposition shall be made
within ninety (90) days after the other Shareholders decline to execute on their
secondary right of first refusal, and in strict accordance with the terms and
conditions of such BONA FIDE offer and shall be subject to paragraph 24 hereof.
In the event that the shares of Shareholder are not disposed of in accordance
with the BONA FIDE offer within the ninety (90) day period, the provisions of
this Paragraph 5 shall again be applicable and must be complied with.
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<PAGE>
b. TRANSFER BY GIFT. In view of the importance of each Shareholder's
involvement in the business of the Corporation, no Shareholder shall make any
gift or gratuitous transfer of his or her Stock for five (5) years after the
date of this Agreement.
6. RESTRICTIVE ENDORSEMENT: The Stock of the Corporation included under
the terms of this Agreement shall bear the following legend:
These shares have not been registered under the Securities Act of
1933, as amended, or the securities laws of any State. These shares
may not be transferred except in transactions which are exempt under
the Securities Act and applicable State securities laws or pursuant to
effective registrations thereunder.
These shares are also subject to the terms of a Shareholders Agreement
dated as of 4/17, 1992, which, among other things, sets forth certain
rights, duties and obligations of the Corporation and the holder of
these shares. A copy of the Shareholders Agreement is available for
inspection at the principal office of the Corporation. This
restriction shall be the first lien upon the interest of the
Shareholders hereof. No interest in the Corporation shall be
recognized unless such transfer, in the opinion of counsel for the
Corporation, is made in accordance with the terms of said Agreement.
After endorsement, the certificates of Stock shall be returned to
Shareholder who shall, subject to the terms of
this Agreement, be entitled to exercise all rights of ownership of
such shares. All Stock of the Corporation hereafter issued to Shareholder shall
bear the same endorsement.
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<PAGE>
7. DEATH OF SHAREHOLDER:
a. Upon the death of a Shareholder, at the option of the
Corporation, which option may be exercised at any time up to one (1) year from
the date of death, the heirs, executors, administrators, representatives or
successors in interest of the Shareholder, as the case shall be, shall tender
said Stock as set forth in subparagraph b. below, and the Corporation shall
redeem said stock for the fair market value of the Shareholder's stock as of the
date of death, determined according to paragraph 8 of this Agreement.
b. As of the exercise of the option by the Corporation, the estate
shall not be deemed to be a shareholder of the Corporation, and the estate shall
hold the share certificates on behalf of the Corporation until said certificates
are redeemed by the Corporation. The fair market value of the Shareholder's
Stock shall be the fair market value of the Corporation multiplied by the
percentage of outstanding shares owned by the Shareholder.
8. DETERMINATION OF FAIR MARKET VALUE: Within thirty (30) days of the
exercise of the option, the estate and the Corporation shall attempt to jointly
agree upon the fair market value of the Shareholder's Stock. If the parties
cannot agree on the fair market value during said thirty (30) day period, the
Corporation shall then cause a qualified appraiser to appraise the Corporation
and determine the fair market value of
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<PAGE>
the Shareholder's Stock. The appraisal fee shall be divided evenly and paid by
both parties. If either the Corporation or the Shareholder, or both, are
dissatisfied with the appraisal price determined by the appraiser, that party
shall give notice of same to the other within ten (10) days of receipt of the
appraisal and shall select another qualified appraiser within an additional
twenty (20) days of receipt of the appraisal, at the expense of the party
retaining the qualified appraiser. The additional appraiser(s) shall determine
an appraisal price within ninety (90) days of his or her selection. Failure to
comply with the time periods set forth above shall cause the loss of the right
of the non-complying party to designate an additional appraiser. The final
appraisal price shall then be the average of that of the two or three
appraisers, as the case may be. The appraisers appointed under this Agreement
shall consider all opinions and relevant evidence submitted to them by the
parties, or otherwise obtained by them, and shall set forth their determination
in writing, together with their opinions and their considerations on which the
opinions are based, with a signed counterpart to be delivered to each party.
9. PAYMENT OF PURCHASE PRICE: If the purchase price of the Stock pursuant
to this paragraph 8 of this Agreement exceeds $50,000, the Corporation shall
have the right to tender to the Shareholders' estate (i) a down-payment equal to
the sum of $50,000 plus 20% of the purchase price in excess of $50,000,
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<PAGE>
but in no event more than $100,000, plus (ii) a promissory note for the balance
of the purchase price with equal quarterly installments of principal, and
interest accrued thereon, for five (5) years, with interest at the prime rate as
reported in the Wall Street Journal, money rates, as of the date of death.
10. MANAGEMENT OF CORPORATION:
a. The Shareholders agree to vote for the following persons, and no
other, as directors of the Corporation:
Gilberto S. Ocanas
Gabriel daSilva
Ana Margarita Guzman
Ruegg Quibell
Avatus Stone
In the event of the death, incapacity or resignation of Ocanas
or Guzman, then the other of them shall designate his or her replacement. In
the event of the death, incapacity, or resignation of daSilva or Stone, the
other or others of them, as the case may be, shall designate his replacement.
In the event of the death, incapacity or resignation of Quibell, then Bagnato
shall designate his replacement.
In the event of the sale of all of the Stock of any Shareholder
who is a director pursuant to this Agreement, then the purchaser thereof
shall be entitled to nominate one (1) substitute director in the place of the
Shareholder who has sold his Stock.
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<PAGE>
b. The directors shall appoint the following persons, and no others
as officers of the Corporation:
Chairman of the -- Gilberto S. Ocanas
Board and Chief
Executive Officer
President and Chief
Operating Officer -- Gabriel daSilva
Vice President -- Pasquale J. Bagnato
Secretary -- Ana Margarita Guzman
Treasurer -- Paula daSilva
c. The Chief Executive Officer shall be responsible for external
relations of the Corporation, and for making all strategic decisions for the
Corporation, subject to the approval of the Board of Directors. Ocanas shall
also serve as director of marketing of the Corporation. The President shall be
responsible for day to day management of the Corporation, and shall make all
such decisions, with consultation with the other officers as necessary.
d. Effective April 1, 1992, the Corporation shall pay the Chief
Executive Officer an initial salary of One Thousand Dollars ($1,000.00) per
week, based upon part-time effort. The parties understand and agree that Ocanas
may manage his other personal investments, and will not be required to devote
full time to the Corporation. Any increases in compensation must be approved by
the Board of Directors. In addition, the Chief Executive Officer shall be
reimbursed for
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<PAGE>
reasonable out-of-pocket expenses, subject to approval by the Board of
Directors.
e. Effective April 1, 1992, the Corporation shall pay the President
an initial salary in the amount of One Thousand Six Hundred Dollars ($1,600.00)
per week, based upon less than full time effort. The parties hereto understand
and agree that daSilva may manage his other personal investments, and will
continue his other business interests, some of which are in the same industry,
and will not be required to devote full time to the Corporation. Any increases
in compensation must be approved by the Board of Directors. In addition, the
President shall be reimbursed for reasonable out-of-pocket expenses, subject to
approval by the Board of Directors.
11. NEGATIVE COVENANTS: The Corporation and all of the parties hereto
covenant that for so long as this Agreement is in effect, the Corporation shall
not, nor shall any party cause the Corporation to, do any of the following
without the affirmative consent of a three (3) of the five (5) directors set
forth herein:
(1) ADDITIONAL STOCK. The Corporation shall not authorize any
additional stock or class of securities, issue any additional stock to any
person, or make any material change in its capital structure.
(2) LOANS. The Corporation shall not make any loans, advances, and/or
extensions of credit to, or investment in, any person.
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<PAGE>
(3) DEBT. The Corporation shall not incur any debt in an amount in
excess of $25,000.00 from any person or group of related persons or $50,000.00
in the aggregate.
(4) REDEMPTIONS. The Corporation shall not redeem, retire, purchase
or otherwise acquire any of its stock, except as expressly permitted under this
Agreement.
(5) MERGER. The Corporation will not merge or consolidate with or
acquire any other company or entity.
(6) INVESTMENTS. The Corporation will not make any investments in the
securities of any other company or entity, other than in the ordinary course of
business.
(7) BUSINESS PURPOSE. The Corporation will not make any material
changes to its business objectives, purposes and operations.
(8) GUARANTEES. The Corporation will not guarantee or in any way
become liable with respect to the obligations or liabilities of any other
person.
(9) ENCUMBRANCES. With the exception of a security interest in
connection with the routine purchase of equipment or supplies from unrelated
third parties, the Corporation will not encumber, pledge, mortgage, grant a
security interest in, assign, sell, lease or otherwise dispose of or transfer,
whether by sale, merger, consolidation, liquidation, dissolution, or otherwise,
any of its assets.
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<PAGE>
(10) ARTICLES OF INCORPORATION AND BY-LAWS. The Corporation will not
amend, revise or restate its Articles of Incorporation of its By-Laws.
(11) CAPITAL EXPENDITURES. The Corporation shall not incur or make any
capital investments or capital expenditures (including entering into any capital
leases) in excess of $50,000.00 in any one fiscal year.
(12) DEFERRED COMPENSATION PLANS. The Corporation will not adopt or
institute any deferred compensation, retirement, pension or profit sharing plan.
12. RESTRICTIVE COVENANT:
a. In view of the consideration paid by the Shareholders of the
Corporation, the parties agree that the restrictive covenant herein contained is
important to the goodwill value of the Corporation, and part of the bargained
for consideration. All of the parties hereto agree that for so long as he or she
is employed by, or serves as an officer or director of, the Corporation and for
a period of one (1) year after the later of (i) termination of his or her
employment by the Corporation for any reason, or (ii) termination of his or her
status as an officer or director, he or she shall not, anywhere within the State
of Texas, be employed by, serve as a consultant to, serve as an officer,
director, or partner of, or own an interest in (except for a passive investment
interest, where such interest is not more than 1% of the total stock or
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<PAGE>
equity in such entity) any corporation, partnership, joint venture, limited
liability company, proprietorship, engaged in the printing of lottery tickets or
engaged in providing services to a state lottery.
b. Ocanas, Guzman, daSilva, Stone, Bagnato and Quibell each
represent and warrant to the Corporation and the Shareholders that the foregoing
restriction will not unreasonably interfere with their livelihood or ability to
earn a living in his usual and customary occupation.
c. The Shareholders of the Corporation are express third-party
beneficiaries of the provisions of this Paragraph 12.
d. In the event of any legal process to enforce the provisions of
this Paragraph 12, the prevailing party shall be entitled to reimbursement of
all costs and reasonable attorneys' fees from the non-prevailing party.
13. INDEMNIFICATION:
a. The parties hereto, their successors, transferees, and assigns
mutually agree to indemnify and hold harmless the Corporation and each of the
other parties, their successors and assigns, against and in respect of any and
all damages, claims, causes of action, losses, penalties, liabilities and
expenses (including, without limitation, legal, accounting, and other expenses)
suffered or incurred by the non-responsible party or parties, or their
successors and
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<PAGE>
assigns which are arising out of or connected with their respective: (i) breach
or violation of this Agreement, or (ii) falsity, misrepresentation in, or breach
of any of the representations, warranties or covenants made in this Agreement.
b. Upon obtaining knowledge thereof, the party seeking
indemnification ("Indemnified Party") shall promptly notify the party
required to provide indemnification ("Responsible Party") in writing, of any
damages, claims, losses, liabilities or expenses which they have determined
has given or could give rise to a right of indemnification under this Section
13 ( "Notice of Claim"). The Notice of Claim shall specify the nature and
details of the claim (including the amount claimed) giving rise to such right
of indemnification. If the claim or demand set forth in the Notice of Claim
relates to a claim or demand asserted by a third party (a "Third Party
Claim"), the Responsible Party shall have the right to employ counsel of
their choice to defend any such claim or demand, and the Indemnified Party
shall have the right to cooperate in the defense of any such Third Party
Claim. Responsible Party shall notify the Indemnified Party in writing within
thirty (30) days after receipt of the Notice of Claim of their decision to
defend in good faith any Third Party Claim. So long as the Responsible Party
is defending in good faith any such Third Party Claim, the Indemnified Party
shall not settle or compromise such Third Party Claim or seek collection with
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<PAGE>
respect thereto. The Indemnified party shall make available to the Responsible
Party or their representatives all records and other materials reasonably
required by them for their use in contesting any Third Party Claim. If the
Responsible Party does not so elect to defend any such Third Party Claim, the
Indemnified Party shall have no obligation to do so. Except for a Third Party
Claim being defended in good faith, the Responsible Party shall satisfy their
indemnification obligations hereunder in cash within thirty (30) days after
receipt of the Notice of Claim.
14. DEADLOCK:
If any Shareholder shall, in their own subjective judgment, deem it
necessary to terminate their relationship with the other Shareholders as
described herein, they shall follow the following procedure:
a. OFFER TO SELL: In the event that Ocanas, or daSilva and Stone,
acting as a group or Quibell and Bagnato, acting as a group, either group
referred to as Shareholder Group, desires to sell or transfer their Stock,
except in the case of a BONA FIDE offer under paragraph 5 hereof, then that
Shareholder, or Shareholder Group, as the case may be, the Offering Shareholder
or Shareholder Group, shall offer to sell their Stock to the other Shareholder
group, the Receiving Shareholder group. The Offering Shareholder Group shall
deliver to the Receiving Shareholder Group, a notice of
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<PAGE>
intention to sell their Stock, which notice shall set forth the following:
(i) Total purchase price per share;
(ii) Terms of payment, if other than cash;
(iii) Date of closing; and
(iv) Any other terms or conditions as may be determined by the
Offering Shareholder Group. The notice of intention to sell shall be given by
certified mail, return receipt requested, to the last known address of both
members or the Receiving Shareholder Group.
b. RESPONSE TO OFFER TO SELL: Within sixty (60) days of the receipt
of the notice of intention to sell, as set forth in subparagraph a. hereof, the
Receiving Shareholder Group shall either:
(i) Accept the offer of the Offering Shareholder Group and
thereafter purchase the Stock of the Offering Shareholder Group, on a pro rata
basis, upon the terms and conditions set forth in the notice of intention to
sell; or
(ii) Agree to sell their Stock to the Offering Shareholder Group
upon the terms and conditions set forth in the notice of intention to sell,
which agreement shall be fully binding and legally enforceable against each of
the Offering Shareholder Group who shall thereafter purchase the Stock of
Receiving Shareholder Group upon the terms and conditions set forth in the
notice of intention to sell.
19
<PAGE>
c. SALE WITHIN GROUP: Notwithstanding anything herein to the
contrary, at any time, Quibell and Bagnato may sell, assign, or transfer this
Stock between themselves without restriction; at any time, daSilva and Stone
may sell, assign, or transfer their Stock between themselves without
restriction; and Guzman and Ocanas may sell, assign, or transfer their Stock
between themselves without restriction. In the event that any Shareholder of
the Corporation desires to sell or transfer his or her Stock pursuant to this
paragraph 14 , except in the case of a BONA FIDE offer and sale under
paragraph 5 hereof, and the other member of his or her group does not wish to
act in concert, then, the Shareholder wishing to purchase or sell, in this
case this Offering Shareholder, shall deliver to the other member of his
group, the Receiving Shareholder, a notice of intention to sell his/her
Stock, which notice shall set forth the following:
(i) Total purchase price per share;
(ii) Terms of payment, if other than cash;
(iii) Date of closing; and
(iv) Any other terms or conditions as may be determined by the
Offering Shareholder.
The notice of intention to sell shall be given by certified mail, return receipt
requested, to the last known address of the Receiving Shareholder. Within sixty
(60) days of the receipt of the notice of intention to sell, as set forth above
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<PAGE>
in this subparagraph c. hereof, the Receiving Shareholder shall either:
(i) Accept the offer of the Offering Shareholder and thereafter
purchase the Stock of the Offering Shareholder, upon the terms and conditions
set forth in the notice of intention to sell; or
(ii) Agree to sell his/her Stock to the Offering Shareholder upon
the terms and conditions set forth in the notice of intention to sell, which
agreement shall be fully binding and legally enforceable against the Offering
Shareholder who shall thereafter purchase the Stock of Receiving Shareholder
upon the terms and conditions set forth in the notice of intention to sell.
d. MUTUAL RELEASE: The Receiving Shareholder Group, the Offering
Shareholder Group, and the Corporation, shall release and acquit the others of
any and all claims that they may have against the other, save and except the
obligations set forth in this Agreement with respect to the purchase and sale of
the Stock owned by the Shareholders.
e. CONDUCT OF BUSINESS: Upon the purchase and sale of the shares of
Stock of any Shareholder, the Corporation shall be entitled to utilize the
corporation name to continue to conduct the business of the Corporation upon the
premises utilized by the Corporation at the time of the purchase and sale,
except as otherwise provided by law.
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<PAGE>
15. REPRESENTATIONS OF SHAREHOLDERS: Each Shareholder, in purchasing the
Stock, understands and agrees that the Stock is not registered under the
Securities Act of 1933 ("Securities Act") or any state securities act. The Stock
is sold to Shareholders pursuant to exemptions from registration and may not be
re-sold unless the Stock is properly registered or subject to an exemption from
registration. By executing and delivering a counterpart of this Agreement, and
by accepting that part of the shares to be purchased pursuant to this Agreement,
each Shareholder hereby represents and warrants to the Corporation that:
a. He or she has had full and free access to any and all information
from the Corporation in order to evaluate the merits and risks of an investment
in the Corporation and has such knowledge and experience in financial and
business matters that he or she is capable of evaluating the merits and risks of
an investment in the Corporation and the purchase of Stock and making an
informed investment decision with respect thereto;
b. He or she understands and has evaluated the merits and risks of
an investment in the Corporation and the purchase of Stock;
c. He or she is a person who is able to bear the economic risks of
an investment in the Corporation and the purchase of Stock in that, among other
facts, he or she can afford to hold his or her Stock for an indefinite period
and can afford a complete loss of an investment in the Corporation.
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<PAGE>
d. He or she is relying solely on the legal advice of his or her own
legal advisor with respect to an investment in the Corporation and the purchase
of Stock;
e. He or she is acquiring his or her Stock solely for his or her own
account as principal and not with a view to resale or distribution;
f. In connection with his or her purchase of Stock: (i) he or she
has been fully informed as to the circumstances under which he or she is
required to take and hold his or her Stock pursuant to the requirements of the
Securities Act of 1933 (the "Act") and the applicable state securities or "Blue
Sky" law or laws; (ii) he or she has been informed by the Corporation that his
or her Stock is not registered under the Act and may not be transferred,
assigned or otherwise disposed of unless his or her Stock is subsequently
registered under the Act or an exemption from such registration is available;
and (iii) he or she understands that (A) the Corporation is under no obligation
to register his or her Stock under the Act or to comply with any applicable
exemption or exemptions under the applicable state securities or "Blue Sky" law
or laws with respect to his or her Stock and (B) the Corporation will not be
required to supply him or her with any information necessary to enable him or
her to make a casual sale of his or her Stock pursuant to Rule 144 under the Act
(assuming such Rule is applicable and is otherwise available to him or her with
respect to his or her Stock);
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<PAGE>
g. He or she is an "accredited investor" as defined in Rule 501(a)
of the Securities & Exchange Commission as being a director or executive officer
of the Corporation; and
h. He or she understands that this Agreement contains restrictions
on the transfer, assignment and disposition of his or her Stock and that, in
addition to such restrictions, he or she covenants and agrees that his or her
Stock shall not be sold, assigned, transferred or otherwise disposed of unless
(i) such sale, assignment, transfer or disposition is exempt from registration
under the Act and the applicable state securities or "Blue Sky" law or laws, or
(ii) a registration statement covering his or her Stock is effective under the
Act; and (iii) he or she acknowledges and understands that the business of the
Corporation has a high degree of risk.
16. NO FURTHER STOCK ISSUE: The Shareholders and the Corporation agree
that the Corporation shall not issue or sell any of the authorized but unissued
Stock of the Corporation without the express written consent of at least three
of the directors set forth herein. Any new Shareholder must become a party to
this Agreement as a condition precedent to issuance of shares.
17. ACCESS TO BOOKS AND RECORDS:
a. The Corporation and the Shareholders hereby agree that the
accountant and/or bookkeeper, regularly engaged by the Corporation to keep the
Corporation's books, records and
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<PAGE>
reports in respect thereto acts for the Corporation and each Shareholder, that,
subject to the requirement for confidentiality, each Shareholder and the estate
of any deceased Shareholder, shall have free and open access to the books and
records of the Corporation, and that as against the Corporation or any
Shareholder or estate of a Shareholder, said accountant may not claim
accountant-client privilege.
b. The Shareholder, or estate as the case may be ("Receiving Party")
agrees to hold said information ("Confidential Information") in strict
confidence, and not disclose it to any other person, except counsel,
accountants, or appraisers who have a need to know and will be bound by the same
obligation of confidentiality. The Receiving Party shall observe at least the
same degree of care as Receiving Party observes with respect to his or her own
proprietary information and trade secrets in the use, storage, and maintenance
of the Confidential Information during the term of this Agreement; but in no
case shall the Receiving Party use less than reasonable and necessary care to
protect said information. Receiving Party acknowledges that the Corporation,
because of the unique nature of the Confidential Information, would suffer
irreparable harm in the event that the Receiving Party breaches its obligation
under this Agreement in that monetary damages would be inadequate to compensate
the Corporation for such a breach. The parties agree that in such circumstance,
the
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<PAGE>
Corporation shall be entitled, in addition to such monetary relief as may be
applicable, to injunctive relief as may be necessary to restrain any continuing
or further breach by Receiving Party, without showing or proving any actual
damages sustained by the Corporation.
18. SHAREHOLDERS ACKNOWLEDGMENT: Shareholders acknowledge that they had
the opportunity to seek independent legal advice with regard to their rights and
obligations under the Agreement.
19. REPRESENTATIONS AND WARRANTIES: Ocanas, Guzman, daSilva and Stone
represent to Bagnato and Quibell that they have no knowledge of any lawsuits or
material claims against the Corporation as of the date of this Agreement.
20. NOTICES: All notices provided pursuant to this Agreement shall be
sent certified mail, return receipt requested, to the parties hereto at the
addresses set forth, or any such other address as a party may later designate:
Corporation: Win-Tex International, Inc.
-------------------------------
1309 Rutherford Ln
-------------------------------
Austin, TX 78753
-------------------------------
Shareholder: Gabriel daSilva
-------------------------------
10312 Custmoor Dr.
-------------------------------
So Spring, MD 20901
-------------------------------
Shareholder: Avatus H. Stone
-------------------------------
3000 Lloyds Ln.
-------------------------------
Ashton, VA 22124
-------------------------------
Shareholder: Gilberto S. Ocanas
-------------------------------
6575 Forsythia St.
-------------------------------
Springfield, VA 22150
-------------------------------
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<PAGE>
Shareholder: Ana Margarita Guzman
-------------------------------
6575 Forsythia St.
-------------------------------
Springfield, VA 22150
-------------------------------
Shareholder: Ruegg Quibell
-------------------------------
12 Pine Circle
-------------------------------
Barlyn Heights, N.J. 11577
-------------------------------
Shareholder: Pasquale J. Bagnato
-------------------------------
231 Washington Ave.
-------------------------------
Garden City, N.Y. 11530
-------------------------------
Notice shall be deemed given upon the earlier of (i) actual
receipt, or (ii) four (4) days after the date of mailing.
21. MODIFICATION; ENTIRE AGREEMENT: This constitutes the entire Agreement
between the parties. Except as contained herein, there are no representations,
warranties or agreements between the parties relating to the subject matter of
this Shareholders Agreement. No change, alteration, or modification of this
Agreement shall be valid unless the same shall be in writing and signed by all
the parties hereto.
22. APPLICABLE LAW: This Agreement shall be construed, governed and
administered in accordance with the laws of the State of Texas.
23. SEVERABILITY: If any provision of this Agreement is declared void or
invalid by any court of competent jurisdiction, such declaration shall not
invalidate any other provision hereof, which shall remain in full force and
effect as if executed with the void or invalid provision eliminated.
24. BENEFIT: This Agreement shall be binding upon the parties, their
heirs, legal representatives, successors and
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<PAGE>
assigns. Each transferee or any subsequent transferee of the Stock set forth
herein, or any interest in such shares shall, unless this Agreement expressly
provides otherwise, hold such shares or interest in the shares subject to all
applicable provisions of this Agreement and such transferee shall make no
further transfer except as provided in this Agreement. As conditions precedent
to the transfer of the shares on the books of the Corporation to the name of the
transferee; such transferee shall execute a copy of this Agreement which shall
contain an appropriate restriction on further transferability.
25. CONSTRUCTION: The language in all parts of this Agreement shall in all
cases be construed as a whole, according to its fair meaning, and not strictly
for or against either party.
26. TERM: The term of this Agreement shall be for the lesser of (i) the
existence of the Corporation or (ii) the lives of daSilva, Stone, Ocanas,
Quibell and Bagnato, plus twenty-one (21) years, unless extended by the mutual
written consent of the Shareholders.
IN WITNESS WHEREOF, the parties have set their hands and seals on the day
and date first above written.
WIN-TEX INTERNATIONAL, INC.
By: /s/ Gabriel daSilva (SEAL)
-----------------------------
Gabriel daSilva, President
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<PAGE>
ATTEST:
/s/ Ana Margarita Guzman (SEAL)
- ---------------------------------
Ana Margarita Guzman, Secretary
/s/ Gabriel daSilva
--------------------------(SEAL)
Gabriel daSilva
/s/ Avatus H. Stone
--------------------------(SEAL)
Avatus H. Stone
/s/ Gilberto S. Ocanas
--------------------------(SEAL)
Gilberto S. Ocanas
/s/ Ruegg Quibell
--------------------------(SEAL)
Ruegg Quibell
/s/ Pasquale J. Bagnato
--------------------------(SEAL)
Pasquale J. Bagnato
/s/ Ana Margarita Guzman
--------------------------(SEAL)
Ana Margarita Guzman
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<PAGE>
CONSENT IN LIEU OF A
SPECIAL MEETING OF THE SHAREHOLDERS OF
WIN-TEX INTERNATIONAL, INC.
Pursuant to Section 9.10A of the Texas Business Corporation Act, the
undersigned, being all of the shareholders of Win-Tex International, Inc., do
hereby execute this Consent in writing to the following actions taken by them.
RESOLVED: that the following persons be and they hereby are elected to
serve as directors of the corporation to serve until their successors are
elected and qualified:
Gilberto S. Ocanas
Gabriel daSilva
Ana Margarita Guzman
Avatus H. Stone
Ruegg Quibell
Effective this 17th day of April, 1992
4/17/92 /s/ Gilberto S. Ocanas
- -------------- --------------------------
Date Gilberto S. Ocanas
April 17, 1992 /s/ Ana Margarita Guzman
- -------------- --------------------------
Date Ana Margarita Guzman
4/17/92 /s/ Gabriel daSilva
- -------------- --------------------------
Date Gabriel daSilva
April 17, 1992 /s/ Avatus H. Stone
- -------------- --------------------------
Date Avatus H. Stone
4/21/92 /s/ Ruegg Quibell
- -------------- --------------------------
Date Ruegg Quibell
4/21/92 /s/ Pasquale J. Bagnato
- -------------- --------------------------
Date Pasquale J. Bagnato
<PAGE>
CONSENT IN LIEU OF A
SPECIAL MEETING OF THE DIRECTORS OF
WIN-TEX INTERNATIONAL, INC.
Pursuant to Section 9.10B of the Texas Business Corporation Act, as
amended, the undersigned, being all of the directors of Win-Tex International,
Inc., do hereby execute this Consent in writing to the following action taken by
them:
RESOLVED: that the Shareholders Agreement, dated 4-12-92, 1992, is
hereby ratified and approved, and the officers of the corporation are
authorized to do such acts as are necessary to effectuate the provisions of
the agreement.
Effective this 17th day of April, 1992
4/17/92 /s/ Gilberto S. Ocanas
- -------------- --------------------------
Date Gilberto S. Ocanas
4/17/92 /s/ Gabriel daSilva
- -------------- --------------------------
Date Gabriel daSilva
April 17, 1992 /s/ Ana Margarita Guzman
- -------------- --------------------------
Date Ana Margarita Guzman
April 17 /s/ Avatus H. Stone
- -------------- --------------------------
Date Avatus H. Stone
4/21/92 /s/ Ruegg Quibell
- -------------- --------------------------
Date Ruegg Quibell
