SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
333-6440
(Commission File Number)
Q-SEVEN SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
UTAH 87-0567618
(State or Other Jurisdiction of Incorporation (IRS Employer Identification No.)
or Organization)
MITTELSTR. 11-13 011-49-2173-392 20
40789 MONHEIM, GERMANY (Issuer's Telephone Number)
(Address of Principal Executive Offices)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
N/A N/A
Securities registered under Section 12(g) of the Exchange Act:
Title of Class
COMMON STOCK, $0.001 PAR VALUE PER SHARE
Check whether the issuer: (i) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's unaudited revenues for the fiscal year ended December 31, 1999
were approximately $1,200,000.
The aggregate market value of the issuer's common stock held by
non-affiliates of the issuer as of March 30, 2000, computed by reference to the
close price as at March 30, 2000 of $1.53125 of the issuer's common stock as
quoted on the OTC Bulletin Board service on such date, was approximately
$7,043,750.
The number of shares outstanding of the issuer's common stock as of March
30, 2000 was 12,500,000.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I
Item 1. Description of Business.
BUSINESS DEVELOPMENT
Q-Seven Systems, Inc. (formerly known as Downstream Incorporated - DSI,
"our company" or "we") was incorporated in November 1996 under the laws of the
State of Utah to engage in the business of financial consulting. In July 1997,
we completed a public offering of our common stock, in which we issued to the
public 1,034,000 shares. On May 24, 1999, our company and the shareholders of
Q-Seven Systems, Inc., a Nevada corporation ("Q-Seven Nevada"), entered into an
Agreement and Plan of Share Exchange pursuant to which our company acquired from
Messrs. Kriependorf, Kamp and Cordt, who are now our officers, directors and
principal shareholders, 100% of the issued and outstanding shares of Q-Seven
Nevada for 7,900,000 newly issued shares of our common stock. On June 10, 1999
we changed our name from Downstream Incorporated - DSI to Q-Seven Systems, Inc.
Q-Seven Nevada, which is now a wholly owned subsidiary of our company, has
been granted by Q-Seven Systems GmbH (see Item 12 - Certain Relationships and
Related Transactions) the exclusive right to sell licenses relating to the so
called Q-Seven User Management Software which is described in detail below (see
Item 1 - Business of Issuer). At the end of 1999 Q-Seven Nevada also owned all
issued and outstanding shares of common stock of X-Real Intertainment, Inc.
Ltd., a corporation organized under the laws of the Bahamas ("X-Real"), which
owns and operates six adult entertainment websites. See also Item 12 - Certain
Relationships and Related Transactions. X-Real has since received an investment
of DM 1,000,000 (equals approximately $500,000) from Infobridge International
Ltd., a company organized under the laws of the Bahamas, in exchange for which
it will issue a certain number of shares of its stock to Infobridge
International Ltd. Our management expects that the number of shares to be issued
to Infobridge International Ltd. will be equal to the number of shares that are
currently issued and outstanding. As a result, Q-Seven Nevada will soon own only
50% of X-Real's stock.
On October 29, 1999, we filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form 8-A to register our common
stock under Section 12(g) of the Securities Exchange Act of 1934.
BUSINESS OF ISSUER
Q-Seven Systems, Inc.
We sell licenses relating to a modulized software suite, the Q-Seven User
Management Software (the "User Management Software" or "our software"), that
allows Internet content providers to efficiently build, operate and manage
Internet environments, especially entertainment environments. Our software
consists of different modules which can be combined and customized to provide
Internet solutions for our customers' specific needs. The User Management
Software has been developed and is owned by Q-Seven Systems GmbH, a German
corporation, which has granted us the exclusive right to license the User
Management Software to our customers. Q-Seven Systems GmbH is not a subsidiary
of our company but is owned by Messrs. Kriependorf, Kamp and Cordt, our
officers, directors and principal shareholders. See Item 12 - Certain
Relationships and Related Transactions. The licenses that we sell with regard to
our software allow our customers to use the User Management Software in
accordance with their respective license agreements with us. Our customers pay
us a fee for the grant of such licenses and the use of our software. Our
customers usually make a downpayment on the license fee at the time we grant
them a license to our software; the remainder of the license fee is paid to us
in equal installments over a period of one to two years.
Q-Seven Systems GmbH delivers the User Management Software to our customers
and installs and configures it on our customers' servers. These services are
included in the license fee that our customers pay to us. Q-Seven Systems GmbH
is providing these services to our customers at no charge to us.
The User Management System is a modulized software suite which can be used
to distribute or sell products and services and collect payments for those
products and services through the Internet, and which offers users a system for
the backend administration of various types of e-commerce sites on the Internet.
The software currently consists of the following software modules that can be
combined and customized by Internet content providers into any kind of
commercial online entertainment or service system, including online gaming and
adult entertainment, to service and handle user administration and online
transactions:
o Q-7 User Account Management Server;
o Q-7 Billing Module; and
o Q-7 Casino Module.
Our software is designed to allow Internet service providers to administer
their sites and manage the users of their sites; it also provides a secure
online payment system. The User Management Software provides frequent, and
management believes, accurate feedback to the administrator of a website
regarding the customers of such websites and their activities. Our software can
quickly be integrated into existing Internet environments and allows Internet
service providers to keep up with the rapid pace of technological change in the
Internet. The User Management Software is designed for the use with standard
webbrowsers by non-computer professionals; our management believes that our
software is so easy to use that even non-computer professionals can administer a
system that utilizes our software.
The user account management server is the central module of every Internet
environment that uses our software. It manages not only the accounts of each
user who uses our customers' websites but also each user's account balances and
other information. Each user can transfer money to his/her individual account
and can then spend this money on our customer's websites.
The billing module is the interface between the user account management
server and any online payment software that our customers might use. Currently
it supports only the different payment mechanisms, e.g., credit and debit card
payments, that EuroDebit Systems, Inc. offers. See also Item 12 Certain
Relationships and Related Transactions.
The casino module allows online casino operators to create and manage
online casinos and offers a variety of online games. Numerous jurisdictions
impose license requirements or other restrictions on, or even ban, the operation
of online casinos in their territory. Our company does not operate online
casinos, but only provides the software that enables our customers to operate
online casinos in accordance with applicable law. The casino module software
that we license to our customers as well as the other parts of our software are
installed and operated on our clients' servers and not on any servers or systems
that belong to us or Q-Seven Systems GmbH. Consequently, our management believes
that our company is not directly affected by laws and regulations prohibiting or
restricting Internet gaming and the operation of online casinos. However, there
is a high degree of uncertainty regarding the scope and the potential addressees
of Internet gaming regulations, and regulators could take the position that our
business falls within the scope of such regulation and initiate enforcement
actions against us. In addition, Internet gaming regulation could change in the
future and the laws could be tightened, which could affect our ability to
license our casino module software. If criminal or civil proceedings were
initiated against us or the licensees of our casino module software in
jurisdictions that prohibit or restrict Internet gaming, such proceedings could
involve substantial litigation expenses, penalties, fines, diversion of the
attention of our key executives, injunctions or other prohibitions being invoked
against us or the licensees of our casino module software. Such proceedings,
their results and the uncertainty surrounding the regulation of Internet gaming
in general could have a material adverse effect on our business, revenues,
operating results and financial condition. Our management believes that the sale
of licenses to our software, including the casino module, is in accordance with
currently applicable U.S. Federal and State laws.
Our management believes that our main competitors in the area of online
gaming software are Starnet Communications International Inc., a Delaware
corporation ("Starnet"), Boss Media AB, a Swedish company ("Boss Media"),
Microgaming, a South African company ("Microgaming"), and Cryptologic, Inc., a
Canadian company ("Cryptologic").
Starnet's products are the most common online gaming software products at
the moment. They offer the largest number of different games. Our management
believes that Starnet's products differ from our products in the following ways:
Starnet only licenses co-hosted casinos on their own servers in Antigua, which
requires the licensee to obtain an Antigua gaming license. In addition, our
management believes that Starnet's licensees must share up to 40% of their net
gaming revenues with Starnet. In contrast, our software runs on our customers'
own servers and our customers only pay us a fixed license fee, but do not have
to pay us a percentage of their gaming revenues. Our management believes that
this could make our software more attractive to potential customers.
Boss Media was one of the first companies to offer online gaming software
that featured multi-player games. Our management believes that Boss Media's
gaming software also can be used only on Boss Media's own servers in Antigua. In
addition, our management believes that Boss Media's customers are required to
pay a high setup fee and a royalty fee based on a certain percentage of the net
gaming revenues generated by Boss Media's customers.
Microgaming was also among the first companies that offered an online
casino software solution. Our management believes that Microgaming's customers
are required to pay a certain setup fee and are then charged a royalty fee based
on a certain percentage of the net gaming revenues generated by Microgaming's
customers. Microgaming is one of the companies with the highest number of
licensees in the online casino software market.
Cryptologic offers a software solution for online casinos. Our management
believes that Cryptologic charges its customers a high setup fee and a royalty
fee of up to 50% of the net gaming revenues generated by the customer.
At this time, we have only licensed our software to five customers, i.e.,
Global Net Gamble Ltd., Bahamas, Futura Internet Services Ltd., Bahamas, World
Network Ltd., Bahamas, Setec Astronomy Ltd., Bahamas, and Advanced Media Group
S.A., Dominican Republic.
New modules for our software are currently being developed and tested by
Q-Seven Systems GmbH. Our management believes that some of the new modules will
be completed and available for licensing to our customers in the near future. We
have not spent any amounts on research or the development of our software. All
research and development activities with respect to our software are conducted
by Q-Seven Systems GmbH, which also bears all costs and expenses in connection
with such research and development activities. See Item 12 - Certain
Relationships and Related Transactions. Q-Seven Systems GmbH spent approximately
DM 1,500,000 (equals approximately $750,000) since its inception in 1999 on the
research and development of our software.
Currently, neither we nor Q-Seven Systems GmbH owns any patents or other
intellectual property rights regarding the User Management Software. Our
Management believes that Q-Seven Systems GmbH will apply for the registration of
such intellectual property rights in the near future. Our name "Q-Seven Systems"
and the Q-7 logo are currently not protected in the United States by any
trademarks. Q-Seven Systems GmbH has filed a trademark application in Germany
concerning the name "Q-Seven Systems" and the Q-7 logo. We own the rights to the
Internet domain names "q-sevensystems.com" and "q-sevensystems.net." Q-Seven
Systems GmbH owns the rights to the Internet domain name "q-sevensystems.de."
At this time, neither we nor Q-Seven Nevada has any employees; however, we
entered into a Consulting Agreement, dated May 27, 1999, with Mr. Barry A.
Ellsworth, our former president, treasurer and director, who currently owns
approximately 8% of our common stock. Pursuant to the Consulting Agreement Mr.
Ellsworth was to provide certain consulting services to our company for a
monthly fee of $2,500. See also Item 12 - Certain Relationships and Related
Transactions.
X-Real Intertainment, Inc. Ltd.
Our indirect subsidiary, X-Real Intertainment, Inc. Ltd., owns and operates
six adult entertainment websites, which are exclusively directed to viewers in
Germany. Four of these websites operate on a subscription basis.
The competition in the area of adult entertainment websites is steadily
increasing. X- Real's sites were some of the first to enter this market, and our
management believes that some of X-Real's websites have achieved a significant
market brand recognition in Germany. Although the number of competitors in this
area is increasing, our management believes that X-Real will be able to maintain
and perhaps extend its market position in Germany.
German regulators impose strict regulations on the content of adult
entertainment websites that are published on the Internet. An organization with
the name Jugendschutz.net has been formed in Germany which tries to ensure that
minors will not be able to gain access to adult content of webpages. X-Real
cooperates with Jugendschutz.net as well as the German regulators to maintain a
process for its wegpages that ensures that only adults are able to gain access
to the restricted areas of those webpages. Our management believes that the
content of X-Real's websites complies with German law and that the areas of
X-Real's webpages which are accessible for every viewer comply with German law
and are suitable for every viewer.
X-Real's websites are exclusively directed to viewers in Germany and our
management believes that the restricted areas of these websites can only be
accessed by German citizens since every viewer who wishes to visit the
restricted areas of X-Real's websites needs to enter certain personal
information from his/her official German ID card. The process (the "Verification
Process") that X-Real uses to ensure that only German adults can gain access to
the restricted areas of its websites has been developed and is provided to
X-Real by Cyberotic Media A.G., which manages the operation of X-Real's websites
for a fee. See also Item 12 - Certain Relationships and Related Transactions.
The Verification Process has been developed with the help of the German
authorities that issue the official German ID cards. The Verification Process
requires every person who would like to gain access to the restricted areas of
X-Real's websites to first register with X-Real as a member and pay a certain
membership fee to X-Real. One step in the registration process requires that the
potential new member enter his/her ID card number from his/her official German
ID card. This 26 digit alphanumeric number is based on a certain logical format
and includes various coded information, including the holder's date of birth.
The ID card number also contains certain verification digits that are based on a
certain mathematical algorithm. The Verification Process allows Cyberotic to
decode the date of birth from the ID number and check, based on the verification
digits, the plausibility of the ID card number that was provided. A potential
new member who enters an ID card number that is not plausible will automatically
be rejected by X-Real as a new member.
Numerous jurisdictions prohibit and restrict the operation of adult
entertainment websites. As users of the Internet are located around the globe,
there is uncertainty regarding which government has jurisdiction to regulate
various aspects of the Internet industry. Regulators could take the position
that X-Real's websites fall within the scope of regulations regarding adult
entertainment websites imposed by their jurisdiction and initiate enforcement
actions against X-Real. In addition, the regulations in Germany regarding adult
entertainment websites could change in the future and laws could be tightened,
which could affect X-Real's ability to offer its services to the German market.
If criminal or civil proceedings were initiated against X-Real in jurisdictions
that prohibit or restrict the operation of adult entertainment websites, such
proceedings could involve substantial litigation expenses, penalties, fines,
diversion of the attention of our key executives, injunctions or other
prohibitions being invoked against us. Such changes, proceedings and their
results, and the uncertainty surrounding the regulation of the operation of
Internet adult entertainment websites in general could have a material adverse
affect on X-Real's and our business, revenues, operating results and financial
condition. Our management believes that the operation of X-Real's adult
entertainment websites is in accordance with currently applicable U.S. Federal
and State laws.
Neither we nor X-Real own any intellectual property rights regarding the
name "X-Real." X-Real owns the domain names of the six websites that it owns and
operates.
X-Real, since its inception, has not conducted any research or development
activities regarding its business and, consequently, has not spend any funds on
such activities.
X-Real does not have any employees. It utilizes the services of Cyberotic
Media A.G., from which it leases the content of its webpages. Cyberotic Media
A.G. also manages the operation of X-Real's websites, provides the Verification
Process that limits the access to X-Real's websites, updates the websites,
collects, through EuroDebit Systems GmbH, the payments of X-Real's customers and
provides maintenance services with respect to X-Real's servers. X-Real pays a
fee to Cyberotic Media A.G. for such services. In 1999 X-Real paid approximately
$295,000 to Cyberotic Media A.G. for such services. Cyberotic Media A.G.
provides these services and X-Real pays a fee for these services solely based on
oral agreements between Cyberotic Media A.G. and X-Real. See also Item 12 -
Certain Relationships and Related Transactions.
Forward-Looking Statements. Our company has made certain forward-looking
statements in this report. They use such words as "may," "will," "expect,"
"believe," "plan" and other similar terminology. These statements reflect our
management's current expectations and involve a number of risks and
uncertainties. Actual results could differ materially due to the success of
operating initiatives, advertising and promotional efforts, continuing Year 2000
compliance efforts, as well as changes in global and local business and economic
conditions; currency exchange and interest rates; labor and other operating
costs; political or economic instability in local markets; competition; consumer
preferences, spending patterns and demographic trends; legislation and
government regulation; and accounting policies and practices.
Item 2. Description of Property.
We do not own any real property. Since August 1999, our world headquarters
has been located in a recently completed office building in Monheim, Germany,
and consists of approximately 430 square meters of office space. We share this
space with Q-Seven Systems GmbH, which rents it from Mediacenter
Betriebsgesellschaft mbH. The office space is provided to us by Q-Seven GmbH at
no charge. See also Item 12 - Certain Relationships and Related Transactions. We
do currently not intend to rent our own office space. The lack of any own
facilities for our operations may work to our detriment in the future. Our
wholly owned subsidiary Q-Seven Systems, Inc., a Nevada corporation, as well as
our indirect subsidiary X-Real Intertainment, Inc. Ltd. share our office space
in Monheim, Germany.
Item 3. Legal Proceedings.
There are no actions, suits, proceedings or governmental investigations
pending, or to the knowledge of our management, threatened against our company
or any of our subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the holders of our common
stock through the solicitation of proxies or otherwise during the fourth quarter
of the fiscal year covered by this report.
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
MARKET INFORMATION
Prior to June 15, 1999, our common stock was traded on the Over-The-Counter
Bulletin Board under the trading symbol DWNS. Since that date, our common stock
has traded under the trading symbol QSSY. Our common stock is also traded on the
over-the-counter market of the Frankfurt Stock Exchange under the trading symbol
QSV. From August 1999 through January 2000, our common stock was also traded on
the over-the-counter market of the Berlin Stock Exchange.
The following table sets forth high and low bid prices of the shares of our
common stock for the periods indicated. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions. The quotations set forth below were provided by the
Over-The-Counter Bulletin Board.
Bid Prices
High Low
Quarter Ended 1998
March 31, 1998 ---* ---*
June 30, 1998 ---* ---*
September 30, 1998 $0.375** $0.15625**
December 31, 1998 $0.4375** $0.125
1999
March 31, 1999 $1.375 $0.25
June 30, 1999 $2.625*** $0.5***
$5.25*** $1.5***
September 30, 1999 $5.78125 $1.78125
December 31, 1999 $2.875 $1.125
--------
* High and low bid prices are not available for our common stock for the
first and second quarter of 1998 according to the OTC Bulletin Board. The
prices that were reported in our 1998 Annual Report on Form 10-KSB were
provided by certain market makers and the National Quotation Bureau.
** These prices differ from the prices that were provided in our 1998
Annual Report on Form 10-KSB. The prices used in last years' report were
based on information that was provided by certain market makers and the
National Quotation Bureau. This years' information was provided by the OTC
Bulletin Board. Our management believes that the information set forth in
the table above is the accurate information.
*** The OTC Bulletin Board provided us with two sets of bid prices for this
period due to the fact that our trading symbol was changed in the second
quarter of 1999. The first set of bid prices reflects the low and high bid
prices of our common stock for the time during the second quarter of 1999
when it was traded under the symbol DWNS; the second set of bid prices
reflects the low and high bid prices of our common stock for the time
during the second quarter of 1999 when it was traded under the symbol QSSY.
HOLDERS
As of April 5, 2000, there were approximately 28 holders of record of our
common stock. Some of these holders were institutions that probably were holding
our stock on behalf of various beneficial owners.
DIVIDENDS
We have never paid cash dividends on our common stock and do not anticipate
paying dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis or Plan of Operation.
[TO BE COMPLETED BY AMENDMENT UPON COMPLETION OF OUR AUDITED FINANCIAL
STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.]
Item 7. Financial Statements.
[TO BE COMPLETED BY AMENDMENT UPON COMPLETION OF OUR AUDITED FINANCIAL
STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.]
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
There were no changes in, or disagreements with accountants on accounting
and financial disclosure for our two most recent fiscal years.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
DIRECTORS AND EXECUTIVE OFFICERS
As of March 30, 2000, the following directors and executive officers of our
company hold the offices indicated until their successors are chosen and
qualified after the next annual meeting of shareholders:
Name Age Title(s)
Philipp S. Kriependorf 26 President, Chief Executive Officer and
Director since May 1999
Philip Kamp 26 Vice President, Treasurer and Director since
May 1999
Olaf D. Cordt 28 Secretary and Director since May 1999
The following is certain additional information concerning each of the
executive officers and directors of our company.
PHILIPP SEBASTIAN KRIEPENDORF serves as President, Chief Executive Officer and
Director of our company. He also serves as a Managing Director of Q-Seven
Systems GmbH and as Director of EuroDebit Systems, Inc., a company that has
developed an electronic on-line debit-entry payment and clearing system. Mr.
Kriependorf also serves as a management consultant for Mediacenter
Betriebsgesellschaft mbH and has prior experience as a project manager for
T.N.P./Q-5 Internet Marketing GmbH. Mr. Kriependorf is the chairman of Cyberotic
Media A.G.'s supervisory board. Mr. Kriependorf has studied economics at the
University of Cologne in Germany. See also Item 12 - Certain Relationships and
Related Transactions.
PHILIP KAMP serves as Vice President, Treasurer and Director of our company. He
also serves as Chief Financial Officer of EuroDebit Systems, Inc. and as
Managing Director of EuroDebit Systems GmbH, a 90% owned subsidiary of EuroDebit
Systems, Inc., of which X-Real, our indirect Bahamian subsidiary, is currently
the main customer. Mr. Kamp also serves as a management consultant for
Mediacenter Betriebsgesellschaft mbH. Mr. Kamp has previously worked for D.M.
Griffith, Inc. Consulting. In 1997, Mr. Kamp founded T.N.P./Q-5 Internet
Marketing GmbH and, in 1999, Cyberotic Media AG. Mr. Kamp has a bachelors degree
in economics, specializing in international business administration, from the
University of Utrecht in the Netherlands. See also Item 12 - Certain
Relationships and Related Transactions.
OLAF DOMINIK CORDT serves as Secretary and Director of our company. He also
serves as a consultant for Q-Seven Systems GmbH and as a Director of EuroDebit
Systems, Inc. He also works as a consultant for Mediacenter Betriebsgesellschaft
mbH. Mr. Cordt has Internet-related experience through his work at T.N.P./Q-5
Internet Marketing GmbH, of which he is currently the Managing Director. Mr.
Cordt has studied computer sciences at the University of Dortmund in Germany.
See also Item 12 - Certain Relationships and Related Transactions.
SIGNIFICANT EMPLOYEES
Our company has currently no employees. We utilize at no charge certain
employees of Q-Seven Systems GmbH, none of which we would consider a significant
employee.
FAMILY RELATIONSHIPS
Our management is not aware of any family relationships among our
directors, executive officers or other persons nominated or chosen by us to
become officers or executive officers of our company.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Our management is not aware of any material legal proceedings involving any
of our directors, director nominees, promoters or control persons, including
bankruptcy petitions filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or
within two years prior to that time; criminal convictions or pending criminal
proceedings (excluding traffic violations and other minor offenses); any order,
judgment or decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting the involvement in any type of business,
securities or banking activities; any order, judgment or decree of a competent
jurisdiction (in a civil action), the Commission or the Commodity Futures
Trading Commission to have violated a federal or state securities or commodities
law, which judgment has not been reversed, suspended or vacated.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than ten percent of a registered class
of our common stock, to file with the Commission reports of ownership and
changes in ownership. Officers, directors and persons who own more than ten
percent of our common stock are required to furnish us with copies of all forms
they file pursuant to Section 16(a) of the Exchange Act.
Based solely on our review of the copies of such forms received by us, or
written representations from certain reporting persons, our management believes
that, during the fiscal year ended December 31, 1999, all filing requirements
applicable to our officers, directors and more than percent beneficial owners
were complied with.
Item 10. Executive Compensation.
The following table summarizes the total compensation of (A) our current
President, Chief Executive Officer and Director, Mr. Kriependorf, (B) our former
President, Treasurer and Director (until May 24, 1999), Mr. Ellsworth, and (C)
our other most highly compensated executive officers (collectively, the "Named
Executive Officers"). At this time, none of our executive officers receives from
us a salary or other compensation for their services. Mr. Kriependorf did not
receive any compensation from us in 1999. He received, however, payments from
our affiliate Mediacenter Betriebsgesellschaft mbH, which are reflected in the
compensation table below. See also Item 12 - Certain Relationships and Related
Transactions.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards Payouts
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Principal Position Year Salary Bonus Compensation Award(s) Optional SARs Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Philipp S. Kriependorf 1999 approximately 0 0 0 0 0 0
President, Chief Executive $50,000***
Officer and Director*
Barry A. Ellsworth 1999 $6,000 0 $5,000**** 0 0 0 0
Director, President and 1998 $22,000 $19,300 0 0 0 0 0
Treasurer** 1997 $12,000 $2,535 0 0 0 0 0
</TABLE>
- --------------
* Since May 24, 1999.
** Until May 24, 1999.
*** The amount of DM 100,000 (equals approximately $50,000) was paid in 1999 to
Mr. Kriependorf by Mediacenter Betriebsgesellschaft mbH. This amount
includes the monetary benefits relating to the use of a car provided to Mr.
Kriependorf. Approximately 90% of this compensation was paid for his
services as managing director of Q-Seven Systems GmbH. The remaining 10%
was paid to Mr. Kriependorf for services that he provided in 1999 to other
Internet related companies owned by Messrs. Kriependorf, Kamp and Cordt.
See also Item 12 - Certain Relationships and Related Transactions.
****This amount was paid to Mr. Ellsworth pursuant to a Consulting Agreement
with us dated May 27, 1999. See Item 12 - Certain Relationships and Related
Transactions.
We have not granted to the Named Executive Officers during the fiscal year
ended December 31, 1999 any options or SARs or any long-term incentive plan
awards.
COMPENSATION OF DIRECTORS
The members of our Board of Directors do neither receive any compensation
from us for their service as directors of our company nor are they reimbursed by
us for actual expenses incurred by them in attending our board meetings or
otherwise.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT, AND CHANGE IN CONTROL
ARRANGEMENTS
There are neither any written employment contracts between us and the Named
Executive Officers nor any compensatory plans or arrangements involving a Named
Executive Officers exceeding $100,000. Oral employment contracts exist between
each of Messrs. Kriependorf, Kamp and Cordt, our officers, directors and
principal shareholders, and Mediacenter Betriebsgesellschaft mbH, relating to
services rendered by Messrs. Kriependorf, Kamp and Cordt to Internet related
companies that are owned by them, including Q-Seven Systems GmbH. None of these
oral employment agreements provide for an annual compensation exceeding, in each
case, $100,000. See also Item 12 - Certain Relationships and Related
Transactions.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The table below sets forth information, as of April 5, 2000 (except where
otherwise indicated), with respect to the beneficial ownership of our common
stock by each person known by us to be the beneficial owner of more than 5% of
our outstanding common stock, by each of our directors, by each Named Executive
Officer and by all of our officers and directors as a group. Unless otherwise
noted, each such shareholder has the sole investment and voting power with
respect to the shares owned.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial
Ownership of Common Stock as
Title of Class Name And Address of Beneficial Owner Position of April 5, 2000 Percent of Class
- -------------- ------------------------------------ -------- ------------------------------ ----------------
<S> <C> <C> <C> <C>
Common Stock, Philipp S. Kriependorf President, Chief 2,633,334 shares 21.07%
$0.001 par c/o Q-Seven Systems, Inc., Mittelstr Executive Officer,
value per share 11-13, D-40789 Monheim, Germany and Director* Record and Beneficial
Common Stock, Philip Kamp Vice President, 2,633,333 shares 21.07%
$0.001 par c/o Q-Seven Systems, Inc., Mittelstr Treasurer, and
value per share 11-13, D-40789 Monheim, Germany Director* Record and Beneficial
Common Stock, Olaf D. Cordt Secretary and 2,633,333 shares 21.07%
$0.001 par c/o Q-Seven Systems, Inc., Mittelstr Director*
value per share 11-13, D-40789 Monheim, Germany Record and Beneficial
Common Stock, Barry A. Ellsworth President, Treasurer 1,021,500 shares*** 8.17%***
$0.001 par 6120 W. Tropicana Ave. A16-299, and Director**
value per share Las Vegas, NV 89103 Record and Beneficial
Common Stock, All directors and executive officers 7,900,000 shares 63.2%
$0.001 par of our company as a group (3 persons).
value per share Record and Beneficial
</TABLE>
----------
* Since May 24, 1999.
** Until May 24, 1999.
*** As of January 27, 2000.
Item 12. Certain Relationships and Related Transactions.
Some of the stockholders, directors and officers of our company are also
controlling shareholders, directors and officers of other Internet related
companies. In certain instances, our company engages in transactions with these
companies.
Q-Seven Systems GmbH, a German corporation founded in February 1999
("Q-Seven GmbH"), is owned by Messrs. Kriependorf, Kamp and Cordt, our
directors, officers and controlling shareholders. Mr. Kriependorf is the
managing director of Q-Seven GmbH and receives a salary for such services from
Mediacenter Betriebsgesellschaft mbH (see below). We use at no charge Q-Seven
GmbH's offices in Monheim, Germany, as well as certain of Q-Seven GmbH's office
equipment (e.g., telephone, facsimile, etc.). We also utilize free of charge to
us the services of certain of Q-Seven GmbH's employees. There are no written
agreements between us and Q-Seven GmbH regarding the use of Q-Seven GmbH's
offices, office equipment and employees. Q-Seven GmbH owns the User Management
Software that we license to our customers. We have entered into a License
Agreement with Q-Seven GmbH pursuant to which we have been granted the exclusive
and unlimited right to license the User Management Software to our customers. We
have to pay to Q-Seven GmbH a royalty fee of 90% of the revenues generated by
the sale of licenses regarding the User Management Software.
EuroDebit Systems, Inc, a Nevada corporation which has developed an
electronic on-line debit-entry payment and clearing system ("EuroDebit"), is
approximately 42% owned by Messrs. Kriependorf, Kamp and Cordt, our directors,
officers and controlling shareholders. EuroDebit Systems GmbH, a German
corporation ("EuroDebit GmbH"), is a 90% owned subsidiary of EuroDebit. X-Real,
our indirect Bahamian subsidiary, is currently, through Cyberotic Media A.G.
(see below), the main customer of EuroDebit GmbH.
Mediacenter Betriebsgesellschaft mbH, a German corporation ("Mediacenter"),
is owned by Messrs. Kriependorf, Kamp and Cordt, our directors, officers and
controlling shareholders. Q-Seven GmbH leases from Mediacenter the office space
in Monheim that we are using and certain of the office equipment that Q-Seven
GmbH and we are using. Mr. Kriependorf is an employee of Mediacenter and,
pursuant to an oral agreement between Mediacenter and Q-Seven Systems GmbH and
an oral employment agreement between Mediacenter and Mr. Kriependorf, receives
from Mediacenter a salary for his services as Managing Director of Q-Seven
Systems GmbH. See Item 10 - Executive Compensation, in Footnote "***". Messrs.
Kamp and Cordt are also employees of Mediacenter and, pursuant to oral
employment agreements with Mediacenter, each received in 1999 a salary in the
amount of DM 100,000 (equals approximately $50,000) from Mediacenter for their
services to Internet related companies owned by Messrs. Kriependorf, Kamp and
Cordt, including Q-Seven GmbH.
Cyberotic Media A.G., a German corporation, which is controlled by Messrs.
Kamp and Cordt, two of our directors, officers and controlling shareholders,
resells EuroDebit GmbH's services to X-Real, our indirect Bahamian subsidiary.
Cyberotic Media A.G. also manages the operations of X-Real, leases to X-Real to
content for its X-Real websites and provides maintenance services with respect
to X-Real's servers. Cyberotic Media A.G. provides such services to X-Real and
X-Real pays a fee to Cyberotic for such services solely based on oral
agreements.
In other instances, as is the case with respect to T.N.P./Q-5 Internet
Marketing GmbH, whose managing director is Mr. Cordt, our Director and
Secretary, there are no intercompany transactions, but only commonality of
ownership and control. Because control of these companies is held by a common
group of people, under certain circumstances our company could possibly be held
liable for the debt of one of those other companies, if that company were to
become insolvent. If this were to occur, it could have a significant adverse
effect on our business and financial condition.
Mr. Barry A. Ellsworth was the President and Treasurer of our Company until
May 24, 1999 and currently owns approximately 8% of our common stock. We entered
into a Consulting Agreement with Mr. Ellsworth dated May 27, 1999, pursuant to
which Mr. Ellsworth was to provide certain consulting services to us in exchange
for a monthly fee of $2,500.
Item 13. Exhibits, List and Reports on Form 8-K.
EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation, as amended: Incorporated herein by
reference to Exhibit 3.1 to the Report on Form 10-QSB for the
quarter ended June 30, 1999.
3.2 By-laws, as amended: Incorporated herein by reference to Exhibit
3.2 to the Report on Form 10-QSB for the quarter ended September
30, 1999.
3.3 Form of Stock Certificate: Incorporated herein by reference to
Exhibit 3.3 to the Registration Statement on Form 8-A, filed on
October 29, 1999.
10.1 License Agreement between Q-Seven Systems GmbH and Q-Seven
Systems, Inc., undated: Incorporated herein by reference to
Exhibit 10.1 to the Report on Form 10-QSB for the quarter ended
June 30, 1999.
10.2 Agreement and Plan of Share Exchange, dated May 24, 1999:
Incorporated herein by reference to Exhibit III to the Report on
Form 8-K filed with the Commission on June 9, 1999.
10.3 Consulting Agreement dated May 27, 1999 between Q-Seven Systems,
Inc. and Mr. Barry A. Ellsworth.*
21.1 Subsidiaries.*
--------
* Filed herewith.
REPORTS ON FORM 8-K
On November 15, 1999, we filed with the Commission an amendment to our
report on Form 8-K of June 8, 1999, to amend and restate certain financial
statements that were filed as exhibits to such report.
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this request to be signed on its behalf by the undersigned, thereunto
duly authorized.
Q-SEVEN SYSTEMS, INC.
Date: April 14, 2000 By: /s/ Ph. Kriependorf
_________________________
Name: Philipp S. Kriependorf
Title: President, Chief Executive Officer
and Director
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and the dates indicated.
Date: April 14, 2000 /s/ Ph. Kriependorf
_________________________
Philipp S. Kriependorf
President, Chief Executive Officer
Chief Financial Officer, Chief
Accounting Officer and Director
Date: April 14, 2000 /s/ Philip Kamp
_________________________
Philip Kamp
Director
Date: April 14, 2000 /s/ Olaf D. Cordt
_______________________
Olaf D. Cordt
Director
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
3.1 Articles of Incorporation, as amended: Incorporated herein
by reference to Exhibit 3.1 to the report on Form 10-QSB for
the period ended June 30, 1999.
3.2 By-laws, as amended: Incorporated herein by reference to
Exhibit 3.2 to the report on Form 10-QSB for the period
ended September 30, 1999.
3.3 Form of Stock Certificate: Incorporated herein by reference
to Exhibit 3.3 to the Registration Statement on Form 8-A,
filed on October 29, 1999.
10.1 License Agreement between Q-Seven Systems GmbH and Q-Seven
Systems, Inc., undated: Incorporated herein by reference to
Exhibit 10.1 to the report on Form 10-QSB for the period
ended June 30, 1999.
10.2 Agreement and Plan of Share Exchange, dated May 24, 1999:
Incorporated herein by reference to Exhibit III to the
Report on Form 8-K filed with the Commission on June 9,
1999.
10.3 Consulting Agreement dated May 27, 1999 between Q-Seven
Systems, Inc. and Mr. Barry A. Ellsworth.*
21.1 Subsidiaries.*
-------
* Filed herewith.
EXHIBIT 10.3
CONSULTING AGREEMENT
between
Q-Seven Systems, Inc.
1800 East Sahara Ave.
Las Vegas, Nevada
herein referred to as "PRINCIPAL"
and
Barry A. Ellsworth
6337 Highland Drive
Salt Lake City
Utah 84121
herein referred to as "CONTRACTOR"
Dated: May 27, 1999
General Provisions
The PRINCIPAL is a publicly traded company registered on the OCT Bulletin Board
in the U.S. It's officers and directors are residents of Germany and have never
been involved with a public company before. They are also unfamiliar with the
public stock markets and financial environment in the U.S. Therefore, they seek
support and counsel in handling their investor relations in the U.S.; in
structuring a pension and profit sharing program for themselves and their
employees; as well as other matters.
The CONTRACTOR has the necessary experience and the capability to provide said
counsel and is willing to consult with PRINCIPAL in the aforementioned matters
as well as helping to maintain open and friendly relations with the PRINCIPAL's
investors and shareholders.
In consideration of these provisions, the parties agree as follows:
(1) Contractor's duties
CONTRACTOR will make his experience and knowledge about the Public Stock Markets
in the U.S. and abroad; pension and profit sharing plans, investor relations;
etc. available to the PRINCIPAL. The CONTRACTOR will be of assistance in writing
and publishing press releases; writing and publishing stock related articles
about the PRINCIPAL and will consult in matters concerning the laws (CONTRACTOR
is not an attorney and will do this only to the best of his knowledge and
understanding) and regulatory bodies within the U.S., or will seek legal counsel
for and on behalf of the PRINCIPAL on such matters. In addition, the CONTRACTOR
will assist PRINCIPAL in establishing a branch office in the U.S. This includes,
but is not limited to, assistance in finding office
1
<PAGE>
space, hiring employees, establishing bank accounts and conducting other
activities necessary to establish a branch office.
(2) Consulting Fees
PRINCIPAL will pay to CONTRACTOR a monthly consulting fee of twenty five hundred
dollars USD ($2500.00) for said services. This amount may be increased at any
time during the terms of this Agreement. All taxes are to be paid by the
CONTRACTOR. In addition, the CONTRACTOR will be reimbursed for all expenses
directly related to his consulting activity. All expenses have to approved by
the PRINCIPAL in advance. CONTRACTOR may also be paid commissions by PRINCIPAL
for any sales made by CONTRACTOR of PRINCIPAL's products or services.
All payments to the CONTRACTOR are due at the end of each month.
(3) Contractor's limitations
The CONTRACTOR may not act on behalf of PRINCIPAL in relationships to any third
party or to employees of the PRINCIPAL unless expressly authorized by the
President or any Member of the Board of the PRINCIPAL. This especially includes,
but is not limited to, making statements to the public in the name of the
PRINCIPAL.
(4) Contractor to be seen as an Independent Contractor.
CONTRACTOR shall provide services as an independent contractor, and shall not be
defined as an employee or as an affiliate of PRINCIPAL or of any company
affiliated with PRINCIPAL.
(5) Nondisclosure
The CONTRACTOR hereby agrees not to make any plans, trade secrets or other
confidential information about the PRINCIPAL known to any third party unless the
plans, trade secrets or other confidential information has been made public
before or unless he is expressly authorized by the President or any Member of
the Board of the PRINCIPAL. During the period of this Agreement, the CONTRACTOR
will not compete with the PRINCIPAL, for his own benefit or the benefit of a
third party, in any of the PRINCIPAL's fields of business. This expressly
includes but is not limited to running online casinos and selling software, that
is capable of operating online casinos other than the PRINCIPAL's.
(6) Term of Agreement
The term of this Agreement shall be for as long as the PRINCIPAL remains in
business, beginning from the date of execution of this Agreement. PRINCIPAL may
not terminate services of
2
<PAGE>
CONTRACTOR during the term of this Agreement, unless CONTRACTOR has been found
by a court of law having competent jurisdiction to have been untruthful or
misleading to any third party concerning the business of PRINCIPAL that has
brought harm to PRINCIPAL; acting in a fraudulent manner; or grossly negligent
in his duties in any other way.
(7) Entire Agreement
This Agreement reflects the entire understanding of the parties with respect to
the subject matter of this Agreement and no supplementary agreements exists. All
additions and modifications of this Agreement have to be in written form and
require the approval of both parties.
Any invalid portion of this Agreement will not affect the validity of the entire
agreement. The parties will replace the invalid portion with a provision meeting
their original understanding.
The laws of the State of Nevada will govern this Agreement and its execution.
In witness thereof, the parties have caused this Agreement to be executed on the
date first stated above by their duly authorized representatives.
CONTRACTOR PRINCIPAL
/s/ Barry A. Ellsworth /s/ Ph. Kriependorf
- ---------------------- ----------------------
Barry A. Ellsworth Philipp Kriependorf
6337 Highland Drive frohnkamp 18
Salt Lake City, Utah 84121 Monheim,, Germany 40789
3
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
1. Q-SEVEN SYSTEMS, INC., a corporation organized under the laws of the
State of Nevada; and
2. X-REAL INTERTAINMENT, INC. LTD., a corporation organized under the laws
of the Bahamas.
