SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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 (IRS Employer
Incorporation or Organization) Identification No.)
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
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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 Amendment No. 1 to Form
10-KSB or any further amendments to Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended December 31, 1999 were
$1,296,154.
The aggregate market value of the issuer's common stock held by
non-affiliates of the issuer as of May 11, 2000, computed by reference to the
close price as at May 11, 2000 of $1.0625 of the issuer's common stock as quoted
on the OTC Bulletin Board service on such date, was approximately $4,887,500.
The number of shares outstanding of the issuer's common stock as of May 1,
2000 was 12,500,000.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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PART I
Item 1. Description of Business.
BUSINESS DEVELOPMENT
Q-Seven Systems, Inc., formerly known as Downstream Incorporated - DSI
(collectively with the subsidiaries specified in Exhibit 21.1, unless otherwise
noted or required by the context, "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 a commitment
from Infobridge International Ltd., a company organized under the laws of the
Bahamas ("Infobridge"), to invest in X-Real DM 1,000,000 (the "Infobridge
Investment"), which amount equals approximately $456,000 on the basis of the
Federal Reserve Bank of New York May 17, 2000 noon buying rate of $1 = Euro
0.8921 and the fixed exchange rate of Euro 1 = DM 1.95583. X-Real has agreed to
issue a certain number of its shares to Infobridge in exchange for the
Infobridge Investment. At this time, no written agreement regarding the
Infobridge Investment exists between X-Real and Infobridge. In March 2000,
X-Real received the first tranche of the Infobridge Investment in an amount of
DM 500,000, which amount equals approximately $228,000 on the basis of the
Federal Reserve Bank of New York May 17, 2000 noon buying rate of $1 = Euro
0.8921 and the fixed exchange rate of Euro 1 = DM 1.95583. The remainder of the
Infobridge Investment is to be paid to X-Real upon our management's request. Our
management expects that the number of shares to be issued to Infobridge will be
approximately equal to the number of shares that are currently issued and
outstanding; Q-Seven Nevada intends to retain an equity interest in X-Real
slightly exceeding 50% in order to allow us to continue to consolidate X-Real's
results in our financial statements. As a result, Q-Seven Nevada will soon in
all likelihood own only slightly more than 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.
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BUSINESS OF ISSUER
User Management Software
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. 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
provides these services to our customers at no charge to us other than the
portion of our fee that we must pay to them for our own license.
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, which can be
combined and customized by Internet content providers into any kind of
commercial online entertainment, shopping 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 website 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.
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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 customers' 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 card and
electronic on-line debit-entry 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 licensing requirements or other restrictions on, or even ban, the
operation, or the utilization of the services, 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. The casino
software module 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 software module.
If criminal or civil proceedings were initiated against us or the licensees of
our casino software module 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 the invocation of other prohibitions against us or the licensees of our
casino software module. 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.
On May 10, 2000, the House Banking Committee Chairman James A. Leach
(R-Iowa) and the committee's ranking Democrat, Rep. John J. LaFalce (N.Y.),
introduced legislation (H.R. 4419) that would prohibit the use of credit cards,
checks, or electronic fund transfers in internet gambling. The bill, intended to
complement the Internet Gambling Prohibition Act (H.R. 3125), which the House
Judiciary Committee approved in April, would extend a current ban on gambling
over telephone lines to the Internet. If these bills were enacted, it could
affect our customers' interest in our gaming module software and could have a
material adverse effect on our business, revenues, operating results and
financial condition.
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 casinos co-hosted on their own servers in
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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 setup fee and a royalty fee based on a 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 setup fee and are then charged a royalty fee based on a
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 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, since its
inception in 1999, spent on the research and development of our software
approximately DM 1,500,000, which amount equals approximately $684,000 on the
basis of the Federal Reserve Bank of New York May 17, 2000 noon buying rate of
$1 = Euro 0.8921 and the fixed exchange rate of Euro 1 = DM 1.95583.
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."
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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 7.59% 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. The Consulting Agreement with Mr. Ellsworth has been
terminated. See also Item 12 - Certain Relationships and Related Transactions.
Internet Adult Entertainment
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 significant
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. 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 with 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.
Our management believes that the restricted areas of X-Real's 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 the
potential new member to enter his/her ID card number from his/her official
German ID card. This 26 digit 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
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 or was issued to a person who
is too young 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
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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 the invocation of other prohibitions 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 also leases the content of its webpages. Cyberotic
Media A.G. 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, this fee was
approximately $295,000. Cyberotic Media A.G. provides these services and X-Real
pays a fee for these services solely on the basis of oral agreements between
Cyberotic Media A.G. and X-Real. Until the end of 1999, support services to
X-Real were also provided by Alice Jay Productions Inc. X-Real paid
approximately $78,000 to Alice Jay Productions Inc. in 1999 for such services.
See also Item 12 - Certain Relationships and Related Transactions.
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.
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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. Effective April 25, 2000, the OTC
Bulletin Board changed our trading symbol from QSSY to QSSYE to indicate that we
were not in compliance with NASD Rule 6530(a)(2) and that our common stock would
be ineligible for further quotation on, and subject to removal from, the OTC
Bulletin Board should we not, within thirty calendar days, file with the
Commission all reports required to be filed by Section 13 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Our management believes
that the filing with the Commission of this Amendment to our Annual Report on
Form 10-KSB and of an Amendment to our Report on Form 10-QSB for the quarter
ended March 31, 2000 will cause our company to be current again in its periodic
filings with the Commission. Accordingly, our management expects that the OTC
Bulletin Board will shortly reverse the change of our trading symbol. 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
---- ---
1998
----
Quarter Ended
March 31, 1998 ---* ---*
June 30, 1998 ---* ---*
September 30, 1998 $0.375** $0.15625**
December 31, 1998 $0.4375** $0.125
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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
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* 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 year's report
were based on information that was provided by certain market makers
and the National Quotation Bureau. This year's information was
provided by the OTC Bulletin Board. Our management believes that the
information set forth in the table above is accurate.
*** 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.
OVERVIEW
For accounting purposes, our acquisition (the "Q-Seven Nevada Acquisition")
in May 1999 of Q-Seven Systems, Inc., a Nevada corporation ("Q-Seven Nevada"),
is considered a reverse merger, i.e., an acquisition of our company by Q-Seven
Nevada and its wholly owned direct subsidiary X-Real Intertainment, Inc. Ltd..
At the time of the Q-Seven Nevada Acquisition, our company was essentially
inactive and had no operations and minimal assets. The exchange of 7,900,000
shares of our common
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stock for all shares of common stock of Q-Seven Nevada had the effect that the
former shareholders of Q-Seven Nevada obtained control of our company.
Accordingly, Q-Seven Nevada and its wholly owned direct subsidiary X-Real became
the continuing entities for accounting purposes and the Q-Seven Nevada
Acquisition was accounted for as a recapitalization of Q-Seven Nevada and its
wholly owned subsidiary X-Real with no adjustments to the basis of Q-Seven
Nevada's and X-Real's assets and liabilities that were acquired and assumed,
respectively. For legal purposes, our company is the surviving entity of the Q-
Seven Nevada Acquisition.
Due to the accounting treatment of the Q-Seven Nevada Acquisition as a
reverse merger, all results which relate to the fiscal year ended December 31,
1998 and appear in our audited 1999 financial statements or in the following
Management's Discussion and Analysis solely reflect the results of Q-Seven
Nevada and its wholly owned subsidiary X-Real. Any results that relate to the
operations of our company prior to the Q-Seven Nevada Acquisition were
eliminated. The reader should keep this in mind when comparing our 1999 audited
financial statements to financial statements of our company relating to periods
prior to the Q-Seven Nevada Acquisition.
As a result of the Q-Seven Nevada Acquisition, our business has changed
considerably. Currently, we only engage in two lines of business, i.e., the sale
of licenses to the User Management Software and Internet adult entertainment
through X-Real Intertainment, Inc. Ltd.
CONSOLIDATED RESULTS OF OPERATIONS
Revenues
The following table and discussion highlights the revenues that we
generated in our fiscal years ended December 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
December 31, 1999 December 31, 1998
<S> <C> <C> <C> <C>
Revenues from the sale of licenses to the User $200,487 15.47% $0 0%
Management Software
Revenues from X-Real's adult entertainment $1,095,667 84.53% $340,293 100%
websites
Total revenues $1,296,154 100% $340,293 100%
</TABLE>
We generate revenues from two lines of business, i.e., the sale of licenses
to the User Management Software and the provision of Internet adult
entertainment, through X-Real. Our total revenues rose from $340,293 for the
fiscal year ended December 31, 1998 to $1,296,154 for the fiscal year ended
December 31, 1999. In the fiscal year ended December 31, 1999, revenues from
X-Real's adult entertainment websites were $1,095,667 or approximately 84.53% of
our total revenues for that year, whereas revenues from the sale of licenses to
our software, which commenced in September 1999, were $200,487 or 15.47% of our
total revenues. Our management expects that during our fiscal year ending
December 31, 2000, the amount and the importance of revenues generated from the
sale of licenses to our software will increase because we expect to sell more
licenses to our software in the 2000 fiscal year as compared to the 1999 fiscal
year. In addition, our management expects that revenues generated by X-Real
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which can be reflected in our financial statements are likely to decrease
substantially in the 2000 fiscal year due to the fact that in all likelihood
after the completion of the Infobridge Investment we will own only slightly more
than 50% of X-Real's stock. See also Item 1 - Description of Business - Business
Development.
X-Real's Adult Entertainment Websites
X-Real generates revenues by charging a fee to viewers who access any of
its six adult entertainment websites. Four of X-Real's websites operate on a
subscription basis. Subscribers to these sites pay X-Real a monthly membership
fee. X-Real's two other websites operate on both a subscription and
non-subscription basis. Certain areas of those websites are accessible to
subscribing members only; other areas are accessible also to non-members, who
pay a fee based on the amount of time they spend viewing the site. Our revenues
generated through X-Real increased from $340,293 for the fiscal year ended
December 31, 1998 to $1,095,667 for the fiscal year ended December 31, 1999.
This increase was primarily attributable to the addition, in spring 1999, of two
new websites to X-Real's adult entertainment business and increased
subscriptions for X-Real's websites as a result of an affiliate program with
webmasters which advertise X-Real's websites for a percentage of the additional
revenues generated by X-Real from new subscriptions that result from such
advertisements.
Sale of Licenses to the User Management Software
Since September 1999, we have generated revenues from the sale of licenses
to our software. In 1999, we generated $200,487 from the sale of licenses to our
software. In the fourth quarter of 1999, we concentrated on selling licenses to
the newly developed casino module of the User Management Software, while Q-Seven
Systems GmbH concentrated on research and development with regard to the User
Management Software. See also Item 1 - Description of Business - Business of
Issuer; and Item 12 - Certain Relationships and Related Transactions. In October
1999, we attended Interactive 2000 in Miami, Florida, an audiotext and Internet
business show, as well as Exponet in Duesseldorf, Germany, one of Germany's
largest Internet and network tradeshows. In January 2000, we attended the
International Casino Exhibition ICE 2000 in London. Contacts made by our
management during these tradeshows led to discussions and negotiations with
potential new customers of our software. In October 1999, we entered into a
license agreement with Setec Astronomy Ltd., a Bahamian company, which will
utilize our software to operate the Seaside Online Casino. In November 1999, we
sold a license to our software and its casino module to World Network Ltd., a
Bahamian company, which plans to operate an online casino with our software. Our
management expects that most of our revenues in the 2000 fiscal year will be
generated from the sale of licenses to our software.
COSTS AND EXPENSES
The following table and discussion highlights our costs and expenses for
our fiscal years ended December 31, 1999 and December 31, 1998:
12
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
December 31, 1999 December 31, 1998
<S> <C> <C> <C> <C>
Total revenues $1,296,154 $340,293
Costs and expenses:
Cost of sales $554,249 42.70% $77,008 28.56%
Selling, general and administrative $743,533 57.29% $192,633 71.44%
Depreciation and amortization $90 0.01% $0 0%
Total costs and expenses $1,297,872 100% $269,641 100%
</TABLE>
Cost of Sales
Cost of sales for our fiscal year ended December 31, 1999 includes
primarily costs associated with the management, operation and maintenance of
X-Real's adult entertainment websites, computer and network equipment costs in
connection with X-Real's servers and royalties paid to Q-Seven Systems GmbH for
our right to license the User Management software.
Our cost of sales during the fiscal year ended December 31, 1998 was
$77,008, as compared to $554,249 for the fiscal year ended December 31, 1999.
This increase is primarily attributable to increased costs associated with the
operation of X-Real's websites due to the addition, in spring 1999, of two new
webpages and the payment, since September 1999, of a royalty fee to Q-Seven
Systems GmbH for our right to license the User Management Software to our
customers. Approximately $373,254 or 67.34% of our total cost of sales are
attributable to the operation of X-Real's websites, whereas approximately
$180,995 or 32.66% relate to the sale of licenses to our software. We paid
approximately $295,000 to Cyberotic Media A.G. and approximately $78,000 to
Alice Jay Productions Inc. for managing, operating and maintaining X-Real's
websites. See also Item 12 - Certain Relationships and Related Transactions. We
paid $180,995 to Q-Seven Systems GmbH as royalty fee for our right to license
the User Management Software to our customers. Our management expects that the
cost of sales relating to X-Real's websites which is to be reflected in our
financial statements is likely to decrease substantially in the 2000 fiscal year
due to the fact that in all likelihood after the completion of the Infobridge
Investment we will own only slightly more than 50% of X-Real's stock. See also
Item 1 Description of Business - Business Development. The aggregate royalty fee
that we pay to Q-Seven Systems GmbH for the right to license our software will
increase in the 2000 fiscal year, if we sell more licenses to our software and
generate higher license fees, since the fee we pay to Q-Seven Systems GmbH is a
percentage of the fee we receive from our customers.
13
<PAGE>
Selling, General and Administrative
Selling, general and administrative expenses for the fiscal year ended
December 31, 1999 consisted primarily of legal and accounting expenses in
connection with the Q-Seven Nevada Acquisition, advertising costs for X-Real's
websites and compliance with periodic reporting requirements under the
securities laws.
Our selling, general and administrative expenses during the fiscal year
ended December 31, 1998 were $192,633, as compared to $743,533 for the fiscal
year ended December 31, 1999. This increase is primarily attributable to
increased legal and accounting expenses in connection with the Q-Seven Nevada
acquisition and the compliance with the periodic reporting requirements under
the securities laws as well as increased advertising costs for X-Real's
websites. Approximately $506,976 or 68.18% of the selling, general and
administrative expenses during the 1999 fiscal year are attributable to the
operation of X-Real's websites, whereas approximately $236,557 or 31.82% of such
expenses are attributable to the sale of licenses to our software.
Depreciation and Amortization
Depreciation and amortization expenses increased from $0 for the fiscal
year ended December 31, 1998 to $90 for the fiscal year ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We are currently financing our operations primarily through cash generated
from operations. Net cash provided by operating activities was $44,133 in the
fiscal year ended December 31, 1999 compared to net cash used in operating
activities of $5,754 in the fiscal year ended December 31, 1998. The increase in
net cash provided by operating activities is primarily due to an increase in net
income before taxes. Net cash provided by financing activities was $13,397 and
$758 for the fiscal years ended December 31, 1999 and December 31, 1998,
respectively. These were proceeds from additional capital contributions.
We expect to continue financing our ongoing operations primarily through
cash generated from operations. Our management anticipates that cash on hand,
cash provided by operating activities and cash available from the capital
markets will be sufficient to fund our operations for the next twelve months.
Our current assets increased by $343,356, from $102,290 at December 31,
1998 to $445,646 at December 31, 1999, while our current liabilities increased
by $378,796, from $24,522 to $403,318, over the same period. The increase in
current assets was primarily attributable to our new lines of business and an
increase in cash and accounts receivable generated by such new operations. The
increase in current liabilities was primarily due to our new lines of business
and an increase in accrued expenses and accounts payable resulting from such new
operations. Our fixed assets at December 31, 1999 consisted of office equipment
valued at $622.
YEAR 2000
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates.
14
<PAGE>
These date code fields need to distinguish 21st century dates from 20th century
dates and, as a result, many companies' software and computer systems had to be
upgraded or replaced in order to comply with such "Year 2000" requirements.
Neither we nor any of our subsidiaries have experienced any significant Year
2000 disruptions, and neither we nor our subsidiaries have incurred any material
costs in connection with Year 2000 remediation.
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 7. Financial Statements.
Our audited financial statements for the fiscal year ended December 31,
1999 are included in Item 13, Exhibit 99.1, and are incorporated herein by
reference. The company which audited our 1999 financial statements has recently
changed its name from Jones, Jensen & Company LLC to HJ & Associates LLC.
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.
15
<PAGE>
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 May 1, 2000, the following directors and executive officers of our
company held the offices indicated, to serve 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 29 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.
16
<PAGE>
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, executive officers, 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 Exchange Act, 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 initial 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 ten percent beneficial
owners were complied with.
17
<PAGE>
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
Salary Bonus Compensation Award(s) Optional SARs Payouts Compensation
Name and Principal Position Year ($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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.
*** Mediacenter Betriebsgesellschaft mbH paid to Mr. Kriependorf in 1999
the amount of DM 100,000, which amount equals approximately $45,000 on
the basis of the Federal Reserve Bank of New York May 17, 2000 noon
buying rate of $1 = Euro 0.8921 and the fixed exchange rate of Euro 1
= DM 1.95583. 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. This Consulting Agreement has
been terminated. 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.
18
<PAGE>
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 Officer. 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 provides for an annual compensation exceeding, in each case, $100,000
or includes any change-in-control arrangements. 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 May 1, 2000, 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
Title of Name And Address of of Common Stock as of Percent of
Class Beneficial Owner Position May 1, 2000 Class
- ----- ----------------- -------- ----------- -----
<S> <C> <C> <C> <C>
Common Philipp S. Kriependorf President, Chief 2,633,334 shares 21.07%
Stock, c/o Q-Seven Systems, Inc., Executive
$0.001 par Mittelstr. 11-13, D-40789 Officer and Record and Beneficial
value per Monheim, Germany Director*
share
Common Philip Kamp Vice President, 2,633,333 shares 21.07%
Stock, c/o Q-Seven Systems, Inc., Treasurer and
$0.001 par Mittelstr. 11-13, D-40789 Director* Record and Beneficial
value per Monheim, Germany
share
Common Olaf D. Cordt Secretary and 2,633,333 shares 21.07%
Stock, c/o Q-Seven Systems, Inc., Director*
$0.001 par Mittelstr. 11-13, D-40789 Record and Beneficial
value per Monheim, Germany
share
19
<PAGE>
Common Barry A. Ellsworth President, 948,500 shares 7.59%
Stock, 6120 W. Tropicana Ave. Treasurer and
$0.001 par A16-299, Las Vegas, NV Director** Record and Beneficial
value per 89103
share
Common All directors and executive officers of our 7,900,000 shares 63.2%
Stock, company as a group (3 persons).
$0.001 par Record and Beneficial
value per
share
</TABLE>
----------
* Since May 24, 1999.
** Until May 24, 1999.
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. No written agreements
exist 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 pay Q-Seven
GmbH a royalty fee of 90% of the fees arising upon the sale of licenses for 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
20
<PAGE>
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 from Mediacenter in 1999 a salary for their services
to Internet related companies owned by Messrs. Kriependorf, Kamp and Cordt,
including Q-Seven GmbH. This salary was DM 100,000, which amount equals
approximately $45,000 on the basis of the Federal Reserve Bank of New York May
17, 2000 noon buying rate of $1 = Euro 0.8921 and the fixed exchange rate of
Euro 1 = DM 1.95583.
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. The fee paid to Cyberotic in 1999 was approximately $295,000.
Alice Jay Productions Inc. provided support services to X-Real in 1999 and
received $78,000 for such services. Our officers, directors and controlling
shareholders Messrs. Kamp and Cordt are among the persons who control Alice Jay
Productions Inc.
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 7.59% 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. The Consulting Agreement has been
terminated effective as of August 5, 1999 pursuant to a Termination Agreement
dated April 17, 2000.
21
<PAGE>
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 on June 9, 1999.
10.3 Consulting Agreement dated May 27, 1999 between Q-Seven
Systems, Inc. and Mr. Barry A. Ellsworth: Incorporated
herein by reference to Exhibit 10.3 to the Report on Form
10-KSB for the fiscal year ended December 31, 1999.
10.4 Termination Agreement dated April 17, 2000 between Q-Seven
Systems, Inc. and Mr. Barry A. Ellsworth: Incorporated
herein by reference to Exhibit 10.4 of the Report on Form
10-QSB for the period ended March 31, 2000.
21.1 Subsidiaries: Incorporated herein by reference to Exhibit
21.1 to the Report on Form 10-KSB for the fiscal year ended
December 31, 1999.
27.1 Financial Data Schedule.*
99.1 Consolidated Audited Financial Statements (December 31, 1999
and 1998).*
--------
* Filed herewith.
22
<PAGE>
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.
23
<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Q-SEVEN SYSTEMS, INC.
Date: May 19, 2000 By: /s/ Philipp S. Kriependorf
__________________________
Name: Philipp S. Kriependorf
Title: President
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: May 19, 2000 /s/ Philipp S. Kriependorf
_________________________
Philipp S. Kriependorf
President, Chief Executive Officer
Chief Financial Officer, Chief
Accounting Officer and Director
Date: May 19, 2000 /s/ Olaf D. Cordt
_______________________
Olaf D. Cordt
Director
24
<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 on June 9, 1999.
10.3 Consulting Agreement dated May 27, 1999 between Q-Seven
Systems, Inc. and Mr. Barry A. Ellsworth: Incorporated
herein by reference to Exhibit 10.3 of the Report on Form
10-KSB for the fiscal year ended December 31, 1999.
10.4 Termination Agreement dated April 17, 2000 between Q-Seven
Systems, Inc. and Mr. Barry A. Ellsworth: Incorporated
herein by reference to Exhibit 10.4 of the Report on Form
10-QSB for the period ended March 31, 2000.
21.1 Subsidiaries: Incorporated herein by reference to Exhibit
21.1 of the Report on Form 10-KSB for the fiscal year ended
December 31, 1999.
27.1 Financial Data Schedule.*
99.1 Consolidated Audited Financial Statements (December 31, 1999
and 1998).*
-------
* Filed herewith.
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This scedule contains summary financial information extracted from Q-Seven
Systems, Inc. December 31, 1999 Audited Financial Statements and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 57534
<SECURITIES> 0
<RECEIVABLES> 388112
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1359
<DEPRECIATION> 737
<TOTAL-ASSETS> 446268
<CURRENT-LIABILITIES> 403318
<BONDS> 0
0
0
<COMMON> 12500
<OTHER-SE> 30450
<TOTAL-LIABILITY-AND-EQUITY> 446268
<SALES> 1296154
<TOTAL-REVENUES> 1300329
<CGS> 554249
<TOTAL-COSTS> 1297872
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2457
<INCOME-TAX> 35674
<INCOME-CONTINUING> (33217)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33217)
<EPS-BASIC> (0.00)
<EPS-DILUTED> 0
</TABLE>
Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
(Formerly Downstream Incorporated - DSI)
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
<PAGE>
C O N T E N T S
Independent Auditors' Report................................................. 3
Consolidated Balance Sheet................................................... 4
Consolidated Statements of Operations........................................ 5
Consolidated Statements of Stockholders' Equity.............................. 6
Consolidated Statements of Cash Flows........................................ 7
Notes to the Consolidated Financial Statements............................... 8
<PAGE>
HJ & ASSOCIATES, L.L.C.
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
American Institute of Certified Public Accountants
Utah Association of Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
Board of Directors
Q-Seven Systems, Inc. and Subsidiary
(Formerly Downstream Incorporated - DSI)
Monheim, Germany
We have audited the accompanying consolidated balance sheet of Q-Seven Systems,
Inc. and Subsidiary (formerly Downstream Incorporated - DSI) at December 31,
1999 and the related consolidated statements of operations, stockholders' equity
and cash flows for the years ended December 31, 1999 and 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Q-Seven
Systems, Inc. and Subsidiary (formerly Downstream Incorporated - DSI) as of
December 31, 1999 and the consolidated results of their operations and their
cash flows for the years ended December 31, 1999 and 1998 in conformity with
generally accepted accounting principles.
/S/ HJ & Associates, LLC
HJ & Associates, LLC
Salt Lake City, Utah
May 10, 2000
<PAGE>
Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
(Formerly Downstream Incorporated - DSI)
Consolidated Balance Sheet
ASSETS
December 31,
1999
-----------------
CURRENT ASSETS
Cash $ 57,534
Accounts receivable (Notes 1 and 3) 388,112
-----------------
Total Current Assets 445,646
-----------------
PROPERTY AND EQUIPMENT - NET (Notes 1 and 2) 622
-----------------
TOTAL ASSETS $ 446,268
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 200,571
Accrued expenses (Note 5) 167,073
Income taxes payable (Note 1) 35,674
-----------------
Total Current Liabilities 403,318
-----------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY
Preferred stock: 50,000,000 shares authorized of
$0.001 par value, -0- shares issued and outstanding -
Common stock: 100,000,000 shares authorized of $0.001
par value, 12,500,000 shares issued and outstanding 12,500
Additional paid-in capital (deficit) (8,343)
Retained earnings 38,793
-----------------
Total Stockholders' Equity 42,950
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 446,268
=================
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
(Formerly Downstream Incorporated - DSI)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
SALES $ 1,296,154 $ 340,293
COST OF SALES 554,249 77,008
------------------ -----------------
GROSS MARGIN 741,905 263,285
------------------ -----------------
OPERATING EXPENSES
Depreciation 90 -
Selling, general and administrative 743,533 192,633
------------------ -----------------
Total Operating Expenses 743,623 192,633
------------------ -----------------
OPERATING INCOME (LOSS) (1,718) 70,652
------------------ -----------------
OTHER INCOME (EXPENSES)
Interest income 4,175 1,358
------------------ -----------------
Total Other Income 4,175 1,358
------------------ -----------------
NET INCOME BEFORE INCOME TAXES 2,457 72,010
INCOME TAXES (Note 1) 35,674 -
------------------ -----------------
NET INCOME (LOSS) $ (33,217) $ 72,010
================== =================
BASIC INCOME (LOSS) PER SHARE (Note 1) $ (0.00) $ 0.01
================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
(Formerly Downstream Incorporated - DSI)
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In
-------------------------------------------- Capital Retained
Shares Amount (Deficit) Earnings
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Balance,
December 31, 1997 7,900,000 $ 7,900 $ (2,900) $ -
Capital contributions, 1998 - - 56,425 -
Net income for the year ended
December 31, 1998 - - - 72,010
----------------- ------------------ ------------------ -----------------
Balance,
December 31, 1998 7,900,000 7,900 53,525 72,010
Recapitalization 4,600,000 4,600 (75,265) -
Capital contributions, 1999 - - 13,397 -
Net loss for the year ended
December 31, 1999 - - - (33,217)
----------------- ------------------ ------------------ -----------------
Balance,
December 31, 1999 12,500,000 $ 12,500 $ (8,343) $ 38,793
================= ================== ================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
(Formerly Downstream Incorporated - DSI)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (33,217) $ 72,010
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 90 -
Changes in operating assets and liabilities:
(Increase) in accounts receivable (285,826) (102,286)
Increase in accounts payable 200,571 -
Increase in accrued expenses 126,841 24,522
Increase in income taxes payable 35,674 -
------------------ -----------------
Net Cash (Used) Provided in Operating Activities 44,133 (5,754)
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES - -
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Related party loans made - (55,667)
Proceeds from additional capital contribution 13,397 56,425
------------------ -----------------
Net Cash Provided by Financing Activities 13,397 758
------------------ -----------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 57,530 (4,996)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4 5,000
------------------ -----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 57,534 $ 4
================== =================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Payments For:
Income taxes $ - $ -
Interest $ - $ -
Non-Cash Financing Activities
Stock issued for fixed assets $ 712 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
(Formerly Downstream Incorporated - DSI)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
Q-Seven Systems, Inc., formerly known as Downstream Incorporated - DSI
("the Company"), was incorporated under the laws of the State of Utah
on November 26, 1996 to engage in the business of financial
consulting.
Q-Seven Systems, Inc. ("Q-Seven Nevada") was incorporated under the
laws of the State of Nevada on May 18, 1999 for the purpose of
acquiring marketing rights to a certain Internet user management
software program, and to acquire X-Real Intertainment, Inc. Ltd., a
corporation organized under the laws of the Bahamas on April 23, 1999
("X-Real").
X-Real acquired on May 18, 1999, from X-Real GbR, a German
partnership, all of X-Real GbR's assets, which consist of six Internet
pay sites.
On May 24, 1999, the Company, Q-Seven Nevada and the shareholders of
Q-Seven Nevada entered into an Agreement and Plan of Share Exchange
whereby the Company acquired 100% of the issued and outstanding shares
of Q-Seven Nevada for 7,900,000 shares of its common stock (the
"Q-Seven Nevada Acquisition"). The Q-Seven Nevada Acquisition has been
accounted for as a reverse merger.
On May 26, 1999, Q-Seven Nevada acquired all issued and outstanding
shares of common stock of X-Real (the "X-Real Acquisition"). The
X-Real Acquisition was accounted for as a recapitalization because the
partners of X-Real GbR became the shareholders of Q-Seven Nevada.
Prior to the X-Real Acquisition, Q-Seven Nevada had no operations,
assets or liabilities.
b. Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Q-Seven Nevada, the acquiring company, and its
wholly-owned subsidiary, X-Real. Intercompany accounts and
transactions have been eliminated in consolidation.
c. Accounting Method
The Company's financial statements are prepared using the accrual
method of accounting. The Company has elected a December 31, year end.
d. Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
(Formerly Downstream Incorporated - DSI)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
e. Accounts Receivable
Accounts receivable are shown net of the allowance for doubtful
accounts of $-0- at December 31, 1999.
f. Basic Income (Loss) Per Share
The computations of basic loss per share of common stock are based on
the weighted average number of common shares outstanding during the
period of the consolidated financial statements as follows:
For the Years Ended
December 31,
---------------------------
1999 1998
------------- ------------
Basic income (loss) per share:
Income (loss) (numerator) $ (33,217) $ 72,010
Shares (denominator) 10,685,206 7,900,000
Per share amount $ (0.00) $ 0.01
There were no common stock equivalents outstanding for the years ended
December 31, 1999 and 1998. Accordingly, only the basic income (loss)
per share has been calculated.
g. Change in Accounting Principle
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires companies to record
derivatives as assets or liabilities, measured at fair market value.
Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must
be highly effective in achieving offsetting changes in fair value or
cash flows. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The adoption of this
statement had no material impact on the Company's financial
statements.
9
<PAGE>
Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
(Formerly Downstream Incorporated - DSI)
Notes to the Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
h. Property and Equipment
Property and equipment is recorded at cost. Major additions and
improvements are capitalized. The cost and related accumulated
depreciation of equipment retired or sold are removed form the
accounts and any differences between the undepreciated amount and the
proceeds from the sale are recorded as gain or loss on sale of
equipment. Depreciation is computed using the straight-line method
over a period of five years.
i. Provision for Taxes
A provision for income taxes charged to operations from inception on
November 4, 1997 through December 31, 1999 has been established for
the amount of $35,674. This amount is based on income tax rates in
Germany and has been converted to U.S. dollars. X-Real was organized
under the laws of Bahamas, however, even though X-Real has its
statutory seat outside Germany, it is still subject to unlimited tax
liability in Germany since the Company had its effective place of
management in Germany.
j. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
k. Advertising
The Company follows the policy of charging the costs of advertising to
expense as incurred.
l. Revenue Recognition Policy
Revenue is recognized as the service is provided to and accepted by
the customer.
m. Concentrations of Risk
Since the financial statements of X-Real must be translated in U.S.
dollars, major changes in the currency exchange rate between the
foreign denominations and U.S. dollars may have a significant impact
on operations of the Company. Although the Company does not anticipate
the currency exchange rate to be significantly different over the next
12 months, no such assurances can be given.
10
<PAGE>
Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
(Formerly Downstream Incorporated - DSI)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1999:
Office equipment $ 1,359
Accumulated depreciation (737)
-----------------
Net property and equipment $ 622
=================
Depreciation expense for the years ended December 31, 1999 and 1998
was $90 and $-0-, respectively.
NOTE 3 - ACCOUNTS RECEIVABLE
X-Real conducts all of its business on the Internet, and all revenues
are collected electronically. All revenue collections and refunds are
managed by a corporation with which X-Real has a service agreement
(Note 4). Collected funds are held by the service company for
approximately 60 days before they are released to X-Real. The cost of
sales under the service agreement related to the receivables are
deducted from the amount released. These costs are classified as
accounts payable and accrued expenses as of the balance sheet date.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Service Agreement
X-Real owns several Internet pay sites, which are managed by a
corporation (the "Provider"). The Provider assumes responsibility for
the costs of operating the sites. In exchange, the Provider receives a
percentage of the gross revenues of the sites as a service fee. The
agreement can be terminated any time with a notice of 180 days.
Licensing Agreement
Q-Seven Nevada has an exclusive licensing agreement with Q-Seven
Systems GmbH, a German corporation that develops software. Under the
agreement, the Company has the unlimited right to sell licenses of the
software worldwide for perpetuity. The Company incurs a royalty fee of
90% of the licensing income.
Royalty expense was $180,995 and $-0- for the years ended December 31,
1999 and 1998, respectively.
11
<PAGE>
Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
(Formerly Downstream Incorporated - DSI)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998
NOTE 5 - ACCRUED EXPENSES
At December 31, 1999, accrued expenses consisted of the following:
December 31,
1999
--------------
Cost of sales associated with receivables (Note 3) $ 99,546
Advertising 67,527
--------------
Total Accrued Expenses $ 167,073
==============
NOTE 6 - SUBSEQUENT EVENTS
Subsequent to December 31, 1999, the Company verbally agreed to sell
50% of the shares of X-Real Intertainment Inc. Ltd. to a Bahamian
investment company for cash consideration of 1 million German marks
(approximately $500,000 U.S. dollars based on the exchange rate at the
end of March). The shares are to be issued when the entire
consideration is received. As of April 28, 2000, only 500,000 German
marks had been received by X-Real.
12
