FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
DOT COM ENTERTAINMENT GROUP, INC.
(Name of Small Business Issuer in its Charter)
Florida E.I.N. 58-2466312
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
150 Randall St.
Oakville, Ontario, Canada L6J 1P3
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (716)853-1964
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of each class to be so registered
Class A Voting Common Stock
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. [X]
The issuer's revenues for the Fiscal Year ended December 31, 1999 were $579,186.
The aggregate market value of the voting stock (which consists solely of shares
of Common Stock) held by non-affiliates of the issuer as of March 23, 2000
computed by reference to the close price as at March 23, 2000 of $2.31 of the
registrant's Common Stock as quoted on the OTC Bulletin Board service on such
date, was approximately $15,013,845.
As at March 1, 2000, there were 10,500,000 shares of the issuer's common stock
outstanding.
Transitional Small Business Disclosure Format (check one)
Yes No X
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<PAGE>
PART 1
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Statements contained in this Annual Report on Form 10-KSB that are not
historical facts are forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are subject to risks and uncertainties, which could cause actual
results to differ materially from estimated results. Certain of such risks and
uncertainties are detailed in filings with the Securities and Exchange
Commission and the Company's in Item 1. "BUSINESS" and Item 6 "MANAGEMENT'S
DISCUSSION AND DESCRIPTION OR PLAN OF OPERATION" below.
ITEM 1. DESCRIPTION OF BUSINESS
A. BUSINESS DEVELOPMENT.
DOT COM ENTERTAINMENT GROUP INC.:
dot com Entertainment Group, Inc. (the "Company" or "dot com"), formerly
operating under the name of Affiliated Adjusters, Inc. (hereinafter
"Affiliated") was incorporated on December 11, 1981 in the State of Florida. On
January 27, 1999 Affiliated acquired 100% of the shares of the Precyse
Corporation of Toronto, Canada (hereinafter "Precyse"). Prior to its acquisition
of Precyse, Affiliated conducted no business and had only nominal assets and
liabilities. On February 2, 1999, Affiliated changed its name to dot com
Entertainment Group, Inc.
dot com is an Internet software development Company specializing in the creation
and support of Internet entertainment products and related services. The intent
of the Company is to identify and commercialize leading edge Internet
entertainment technologies and license these technologies to licensees
throughout the world.
B. BUSINESS OF ISSUER:
ORGANIZATIONAL STRUCTURE
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DOT COM ENTERTAINMENT CORPORATE ORGANIZATIONAL CHART
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dot com Entertainment Group, Inc.
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/ \
dot com Antigua Inc. Precyse Corporation
\
dot com Management Inc.
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The key milestones in the development and evolution of the Company are:
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DOT COM DEVELOPMENT MILESTONES
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1997* Precyse Corporation develops the CyberBingo software system, which
is a java-based Internet based Bingo game.
* Precyse Corporation develops Delphi version of the CyberBingo software
system.
* Precyse Corporation enters into license agreement with The CyberBingo
Corporation of St. John's, Antigua to license its Internet Bingo
technology.
1998* Precyse Corporation assists The CyberBingo Corporation to launch
CyberBingo on the Internet as a pay-as-you-play Internet Bingo game.
1999* dot com Entertainment Group, Inc. is formed through the acquisition of
Precyse Corporation by Affiliated and a name change.
* dot com registers its common stock with the Securities and Exchange
Commission (SEC) and becomes a reporting Company under the Securities
Exchange Act of 1934.
* dot com Antigua Inc. created to license turnkey Internet Bingo and
gaming systems to independent operators in exchange for license fees
and/or participation in the licensees' revenues.
* A private placement completed with 19 individual investors, for gross
proceeds of $249,420.
2000* dot com lists its common stock on the Frankfurt Stock Exchange OTC
Market
* dot com enters into license agreements with Azul Electrico S.A. and
Intercontinental Cyber Ventures Limited.
* dot com commences private placement offering of up to $1,250,000.
OVERVIEW
dot com develops and licenses Internet gaming software, and provides related
support and maintenance and management consulting services. The Company's
innovative gaming systems have been designed to: (i) offer customers a
user-friendly interface and superior interactive experience; (ii) provide
licensees with financially attractive returns, easy site maintenance and limited
administration; and (iii) protect customers and licensees through proprietary
fully integrated technology and business processes.
dot com's plan is to increase the number of Internet gaming licensees who use
its software technology while also increasing the number of Internet games
available to each license. Throughout FY1999, dot com focused its software
development on the creation and improvement of Internet-based Bingo technology.
The Company focused on Bingo because management concluded that Internet Bingo
players would be comprised of a different demographic when compared to the
demographics of Internet casino games. The Company determined that being a first
mover in the development of technology for the emerging Internet Bingo community
would later facilitate immediate demand within that community for other dot com
Internet games. As a result of its focus in this micro-market of Internet gaming
called "low denomination Internet games", the Company has now been asked to
build other complementary Internet gaming software products which will be
licensed to its existing and new licensees.
dot com's gaming software is licensed through its wholly-owned Antigua-based
licensing subsidiary, dot com Antigua Ltd. ("Antiguaco") to a growing list of
licensees. Antiguaco licenses and provides to each licensee a fully-installed
gaming system, which is developed in accordance with licensee requirements. In
exchange for its technology and support, dot com receives a percentage of the
licensee's revenues, in addition to a fixed license fee which is generally paid
prior to the commencement of the license term.
PRODUCTS AND SERVICES
dot com develops and provides its software products, support, maintenance and
management consulting services to independent licensees. As such, the Company is
not an operator of an Internet casino.
To its licensees, dot com provides:
* Assistance in the assessment and selection of an acceptable forum
and/or location for the licensee's Internet business
* Concept development and design of virtual business "themes"
* Complete graphical user interface with visual and sound effects
to create a total gaming experience
* Software that provides real-time Internet play
* Assistance in the connection of licensee's electronic commerce
facility to dot com's management reporting systems
* Retention and analysis of all player data, including win/loss,
game preferences and the ability to monitor player activities
* Administration and complete 24 hour, 7 days a week customer
support services
* Continuing customization of websites
* Development of custom management and marketing systems and
processes
* Customization and system integration
* Market consulting
DOT COM BINGO
dot com's first Internet Bingo system, CyberBingo(TM) is one of the world's
first Internet Bingo games written in the "java" programming language.
CyberBingo(TM) was created to capitalize on the growing demand for
Internet-based online gaming by offering players a pleasurable, interactive,
electronic version of the classic Bingo Hall-style game. CyberBingo(TM) has been
played on the Internet since January 1997.
DOT COM TECHNOLOGY
dot com's current Windows-based downloadable Bingo game provides licensees and
their players with instant access to Internet Bingo featuring a full multi-media
interface including chat and dynamic graphics. All Windows-based games require a
download or installation on a player's computer, allowing them to play dot com
Bingo on a Windows operating system. dot com presently offers its Windows-based
Bingo technology, with several other Windows-based games projected to be
released in FY2000.
dot com's current Java Bingo game utilizes the Java programming language to
provide easily accessible Bingo to the Company's licensees. The cross-platform
nature of Java makes it possible to play dot com Bingo on all major operating
systems, online, with virtually no downloading required. dot com presently
offers Bingo as its only java game with several additional Java games projected
to be released in FY2000.
In FY2000 dot com plans to introduce other technologies, including Flash games
and other java games, which will provide licensees with a variety of games in a
variety of technologies.
DOT COM'S INITIAL LICENSEE
The CyberBingo Corporation of St. John's Antigua (hereinafter "TCC" was the
first Company to license dot com's Internet Bingo technology. CyberBingo(TM) is
presently accessed and played by entering TCC's website at www.cyberbingo.net.
There is no affiliation between dot com and TCC.
The information technology hardware system which operates CyberBingo(TM) is
located in the secure premises of TCC in St. John's Antigua. The CyberBingo(TM)
hardware system consists of 5 Microsoft NT based Pentium class computers which
participate together on a local area network to form the back end of the
CyberBingo(TM) 3-tier architecture. The servers provide Database, Web Server and
Application Server functionality in addition to various e-commerce related
automation services. The hardware system is supported by a state-of-the-art tape
backup system, which provides for safe keeping of all software and data systems.
Because this system accesses the Internet through a local Internet service
provider in St. John's, Antigua, temporary service interruptions occur
periodically, particularly in times when the island has a communication service
breakdown. Similarly, service interruptions can occur when the island
experiences power outages, which can not be supported by back-up generating
systems, in place at TCC's premises.
LICENSEES
Antiguaco licenses dot com's integrated technology systems to a growing list of
licensees. dot com and its affiliates earn one-time license fees for providing
an installed fully-integrated operation. The licensee's site is generally
operational within 30 - 120 days of signing a license agreement. dot com
receives a continuing percentage of the licensee's revenues, and derives revenue
from continuing maintenance, support and consulting services. The licensee must
obtain a gaming license from the jurisdiction where domiciled and dot com may,
if requested, modify the new licensee's site to more reflect its intended market
segment.
Licensees generally establish their marketing efforts from within their target
market. The initial term of the licensing agreement varies from one to five
years, renewable on terms to be agreed to by the parties. dot com provides
continuous support for fees and/or a percentage of sales, depending on the
licensee's requirements. Should any licensee become delinquent in payment to dot
com, the Company has full legal and technological ability to remotely "shut
down" the licensee's website(s).
At year end 1999, dot com had one licensee in The CyberBingo Corporation of St.
John's Antigua; with three (3) other license arrangements consummated in FY2000
by March 24, 2000 and other license agreements are in the negotiation stage.
It is anticipated that the majority of dot com's future revenue and earnings
growth will come from license fees, support and maintenance fees, business
development and consulting fees, and an ongoing participation in licensees'
revenue streams. dot com receives a percentage interest in licensee revenue
streams which are generally based on gross sales which range from 5%-50%,
depending on the demand placed on dot com's resources. The Company's primary
cost of generating continuing license income is software development and
marketing costs.
DOT COM ANTIGUA LTD.
Antiguaco is based in St. John's, Antigua, and is in the business of licensing
customized, fully integrated Internet gaming systems to independent parties
wanting to seize upon the online gaming opportunity. Antiguaco provides a
complete range of services that the operator needs in order to launch an online
gaming website including customized software, web site development and
management, custom database systems to manage customer accounts, 24-hour
technical support for the licensee and its customers, and integration services
into licensee e-commerce systems. Antiguaco provides these services in exchange
for fees and participation in the licensees' revenues, providing it with the
opportunity to spread its gaming development and operating costs among multiple
operators and broaden its penetration of the market.
GROWTH STRATEGY
The development of telecommunications, the emergence of new technology and the
international nature of the Internet have created opportunities to develop new,
efficient and secure ways to deliver entertainment to customers. As one of the
first companies to employ these new technologies on the Internet, dot com
intends to capitalize on its technological lead in Bingo and its expertise in
the analysis of player data and information to become a world leader in online
gaming systems and related management consulting services.
dot com's key strategic objectives are to: (i) to position itself as a leading
provider of Internet gaming technologies; (ii) expand geographically to other
attractive markets; and (iii) selectively pursue opportunities in other market
segments using its Internet and marketing technologies.
dot com intends to implement its business strategy by: (i) maintaining and
enhancing its technological lead; (ii) seeking key strategic alliances and;
(iii) developing dot com into a global brand name.
The following summarizes dot com's strategic focus and operating strategy:
dot com has focused its growth strategy on the development of its Bingo
technology, which creates web-based "communities" or meeting rooms for licensee
players. Because Bingo is not an odds-based game and is often regarded to be a
more socially acceptable form of wagering when compared to odds-based wagering,
licensees build core groups of repeat players who become loyal to their site
because of dot com's Bingo, chat, and various value-added programs. dot com
assists licensees to conceptualize new programs which are developed by dot com
into Internet technology and then sold to the licensee in the form of support
and maintenance. These programs include "bonus" or "comp" strategies where
players benefit from increased play or player referral programs. These
enhancements to the system require changes to the technology which is delivered
by dot com.
As the licensee continues to offer fresh content to its players and player
activity grows, the result is increased royalty, support and maintenance income
for dot com. While the licensee realizes additional Bingo player activity in the
community, other dot com games which are consistent with the low-denomination
nature of Bingo will be introduced to the licensee. This will enable the
licensee to leverage its Bingo player-base, using the technology and integrity
of the licensee's business. dot com intends to provide its existing and future
licensees with new Windows-based and java games in order to become a leading
technology provider to the online gaming industry.
dot com intends to capitalize on its technological lead in Bingo and its early
market entry to capture a significant share of the Internet Bingo market. The
Company believes it is well positioned to achieve this goal since it possesses
the competitive advantage of being one of the first companies to license
proprietary Bingo systems.
dot com has focused on designing a gaming experience using state-of-the-art
technology. Additionally, licensees may benefit from enhanced revenue generation
through innovative marketing systems and technical innovation which are designed
and delivered by dot com throughout the license term.
dot com has achieved a technological lead through the development of its
proprietary software and networked architecture. Furthermore, dot com has made a
strong commitment to continue research and development activities to enhance its
products and software and to develop new applications for potential markets.
SALES AND MARKETING STRATEGY
dot com's sales and marketing initiatives are developed in its Oakville, Ontario
premises. The Company has embraced the importance of marketing and maintaining a
customer-driven organization and is recruiting a full marketing department to
assist in achieving its sales goals. The Company has also entered into strategic
partnerships with individuals and organizations who can add value
internationally in sales, marketing and technology development.
dot com's marketing strategy is built on the development of real-world and
online advertising campaigns. Leveraging existing real world and online
promotion through related organizations is intended to generate and capitalize
on momentum and build customer and licensee player relationships and loyalty.
The Company intends to generate this awareness through several media strategies,
including traditional, online and direct response media.
Traditional media including consumer magazines, industry specific programs,
commercial advertising, television and radio coverage and related offerings,
will be developed with the assistance of specialists in marketing and promotion,
whom the Company will retain on a contract basis on tender. With the assistance
of our advisers, dot com plans to use page dominant advertising for its products
and participating licensees, sustaining weight and frequency in selected
publications thereafter. In addition, the Company will continue to work with its
licensees to provide information on product incentives, such as free games or
large prizes. The data-based nature of the business provides the technology
capable of truly carrying on a one-to-one relationship with every single user,
providing the added value features that are relevant to that particular internet
entertainment customer.
The Company will continue to negotiate banners and links on widely used search
engines, both domestically and internationally and on sites which offer
strategic advantage to the target audience. This will not only drive awareness
and traffic to licensee sites, but, to the extent exclusivity can be achieved,
it will pre-empt competitors from this vital medium. dot com intends to develop
associations with other comparable online websites, such as those maintained by
clubs, organizations and other international groups. Many of these groups have
established an on line presence to promote and provide access to their
membership and prospects.
The Company will continue to use the direct response medium to inform prospects
about the features and benefits of dot com's products and those offered by its
licensees. Targeted direct response typically takes the form of personally
addressed direct mail. dot com plans to also develop relationships with top
web-sites where advertising listings or links to dot com or its licensee sites
will be arranged. An advertising presence or the right to place inserts, or
"piggy-back", in direct mailing to target groups will also be used.
COMPETITIVE ENVIRONMENT
dot com experiences competition from five market segments:
1) Traditional gaming companies;
2) Internet gaming companies;
3) Electronic gaming companies;
4) Web service providers; and
5) Other entertainment/media companies
There are currently several competitors for the licensing of Internet gaming
software including Microgaming, Atlantic International Entertainment, Ltd.,
Chartwell Technology, Inc., Cryptologic, Inc., Boss Media AB and a number of
private and public companies. There are relatively few companies who have
focused on the on line Internet Bingo market, creating an advantage for dot com
in this market niche.
RESEARCH AND PRODUCT DEVELOPMENT
Present allocations to research and development comprised 46% of total revenues.
For the FY2000, the Company plans to spend approximately 20% of revenues on
development of new software products and services.
NUMBER OF EMPLOYEES
At the end of FY1999, the Company had 5 employees, 3 of which were full-time. At
March 24, 2000, the Company has 13 employees, 12 of which are full time. The
Company is in the process of hiring additional full-time technical, marketing,
administrative and operational support staff.
PATENTS TRADEMARKS
The Company, through its subsidiary Precyse, has applied to register its
CyberBingoTM trademark in the United States and Canada.
The Company has received the first Office Action from the United States
Department of Commerce Patent and Trademark Office (Serial Number 75/737372)
which found that no similar registered or pending mark would bar registration
under the Trademark Act section 2(d), 15 U.S.C. Section 1052(d). The Company is
proceeding to address minor changes to the description of the "wares", is
preparing an amended drawing of the design and will be agreeing to a disclaimer.
The Company has also received confirmation that the application is in process
from Canadian Intellectual Property Office, Trademarks (File Number 882381).
On December 13, 1999, the Company conducted a search of the trademark "WHERE THE
WORLD PLAYS BINGO" and has been advised by its solicitors that the trademark is
available for registration in Canada. The Company has instructed its solicitors
to prepare and file an application for the trademark in Canada and the United
States.
GOVERNMENT REGULATION
Regulatory Environment
The Company and its licensees are subject to applicable laws in the jurisdiction
in which they operate. While some jurisdictions have introduced regulation to
attempt to restrict or prohibit Internet gaming, other jurisdictions, such as
several Caribbean countries and Australia, have taken the position that Internet
gaming is legal and/or have adopted or are in the process of reviewing
legislation to regulate Internet gaming in such jurisdictions. As companies and
consumers involved in Internet gaming are located around the globe, including
the end-users of the Company's licensees, there is uncertainty regarding which
government has jurisdiction or authority to regulate or legislate with respect
to various aspects of the industry. Furthermore, it may be difficult to identify
or differentiate gaming-related transactions from other Internet activities and
link those transmissions to specific users, in turn making enforcement of
legislation aimed at restricting Internet gaming activities difficult. The
uncertainty surrounding the regulation of Internet gaming could have a material
adverse effect on the Company's business, revenues, operating results and
financial condition.
Legislation designed to restrict or prohibit Internet gaming may be adopted in
the future in the United States or other jurisdictions. After previous similar
proposals failed to pass in 1998, on March 23, 1999, Senator Jon Kyl of the
United States Senate introduced a revised proposal intended to prohibit and
criminalize Internet gambling. Further, existing and proposed legislation,
including United States and federal statutes, can be construed or have been
amended to specifically prohibit or restrict gaming through the use of the
Internet and there is a risk governmental authorities may view the Company's
licensees or the Company as having violated such statutes. Some Internet casino
operators have been the subject of criminal complaints in the states of New
York, Missouri and Minnesota. See, for example, Minnesota v. Granite Gate
Resorts, Inc., 568 N.W.2nd 715 (1997); Missouri V. Interactive Gaming &
Communications Corp., No. CV 97-7808 (Mo.Cit.Ct. 6\16\97) and New York V. World
Interactive Gaming Corporation (filed 07/13/98), among others.
There is a risk that criminal and civil proceedings could be initiated in such
jurisdictions against the Company's licensees or the Company and such
proceedings could involve substantial litigation expense, penalties, fines,
diversion of the attention of key executives, injunctions or other prohibitions
being invoked against the Company's licensees or the Company. Such proceedings
could have a material adverse effect on the Company's business, revenues,
operating results and financial condition.
In addition, as electronic commerce further develops, it may generally be the
subject of government regulation. As well, current laws, which pre-date or are
incompatible with Internet electronic commerce may be enforced in a manner that
restricts the electronic commerce market. Any such developments could have a
material adverse effect on the Company's business, revenues, operating results
and financial condition.
ITEM 2. DESCRIPTION OF PROPERTY
At December 31, 1999, the Company maintained its executive office at 345
Lakeshore Blvd. W. in Oakville, Ontario where it leased premises consisting of
approximately 840 square feet. Effective on March 1, 2000, the Company moved its
executive offices to 150 Randall Street, Suite 203 in Oakville, Ontario. This
premise is shared with its wholly-owned subsidiary, The Precyse Corporation. The
premises is leased pursuant to a lease agreement valid for five (5) years,
ending in April, 2005, with a five (5) year renewal option. The total lease
obligation is approximately $23,000 per annum, increasing to approximately
$27,000 in year five.
The Company's interim United States offices are located at 300 Delaware Ave.,
Buffalo, NY 14203. The Company has use of this space through a lease
arrangement, which lease is for one (1) year ending in December, 2000. This is a
shared office facility with the total lease obligation of approximately
USD$5,000.
There are currently no proposed programs for the renovation, improvement or
development of the properties currently leased by the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders 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
The Company's common stock is reported by the NASD Over-The-Counter Bulletin
Board under the symbol "DCEG" and on the Third Market Segment of the Frankfurt
Stock Exchange under the symbol "DOZ".
The following table sets forth the range of high and low bid quotations for the
Company's common stock for each of the periods indicated as reported by the NASD
Over-The-Counter Bulletin Board. Bid quotations reflect inter-dealer prices,
without retail markup, markdown or commission and may not necessarily represent
actual transactions.
Quarter Ended High Low
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March 31, 1999(1) $5.25 $3.75
June 30, 1999 $5.375 $3.75
September 30, 1999 $3.25 $1.00
December 31, 1999 $2.125 $0.50
(1) This was not a full quarter as the Company was called for trading in
February of 1999.
On January 27, 1999, the date when Affiliated acquired 100% of the shares of
Precyse, the Company issued 9,420,000 shares of common stock at a price of
$0.001 per share for total proceeds of $9,420 to 19 investors, 13 of whom were
accredited investors, in an offering exempt from registration under the
Securities Act of 1933 pursuant to Rule 504. No broker was engaged in such
offering. On February 2, 1999, the Company issued 80,000 shares of common stock
at a price of $3.00 per share for total proceeds of $240,000 to one accredited
investor in an offering exempt from registration under the Securities Act of
1933 pursuant to Rule 504. No broker was engaged in such offering.
As at December 31, 1999, the Company has granted options to 13 employees,
officers, directors and consultants to purchase up to 1,520,000 shares, all at
an exercise price of $3.00 per share. Such options were granted pursuant to an
exemption from registration under the Securities Act of 1933 pursuant to Rule
701.
Subsequent to the year-end the Company announced that it was raising up to
$1,250,000 through a private equity financing to investors outside of the United
States. A maximum of 500,000 units will be sold at a price of $2.50 per unit
with each unit consisting of one common share and one non-transferable warrant.
The warrant will entitle the holder to purchase one common share in the Company
at a price of $4.00 per share for a term of two years from the closing of the
offering. At March 24, 2000, 200,000 units had been sold for gross proceeds of
$500,000 less associated costs of $40,000. The offer and sale of the Units is
exempt from Regulation S of the Securities Act of 1933.
SECURITY HOLDERS
The approximate number of record holders of shares of the common stock of the
Company outstanding as of December 31, 1999 was 32.
DIVIDENDS
No dividends have been declared or paid on the Company's common stock.
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
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GENERAL
dot com is an Internet software development Company, specializing in the
creation and support of Internet entertainment products and related services.
The Company derives its revenues from several sources, including its assessment
of license fees and royalties from the use of its software. Additionally, dot
com provides licensees with technical support, maintenance, software upgrades,
information and systems consulting services, and marketing and promotional
initiatives and services geared toward generating goodwill and brand awareness.
dot com is not an Internet gaming Company, in that it does not directly or
indirectly accept wagers used to play games of chance on the Internet. Rather,
it develops and licenses the use of its commercial software products and
trademarks, such as its CyberBingo(TM) software system, to independent third
parties located in jurisdictions that permit Internet gaming as a legitimate
business enterprise.
The Company operated without revenue until May 1998. Since that time, dot com
has experienced continual revenue growth through the assessment of royalties and
support and maintenance. To the end of December 1999 the Company has had one
licensee, TCC, located in St. John's, Antigua.
The year ended 1998 comparative income statements and cash flow statements
contained in this report have been prepared presenting only the operations of
The Precyse Corporation, which was acquired by dot com in January, 1999.
Precyse's operations are presented since the acquisition of Precyse by dot com
has been accounted for showing Precyse as the accounting acquirer since
substantially all of the previous owners of Precyse now comprise most of the
directors and officers of Dot Com, and they have effective operating control of
the combined Company, and per SAB 2:A:2 of SEC guidelines.
The following tables set forth selected information from the statements of
operations for the years ended December 31, 1999 and 1998 and the balance sheets
as at December 31, 1999 and 1998.
SELECTED STATEMENT OF OPERATIONS INFORMATION
Year Ended
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At December 31,
1999 1998
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Revenues $579,186 $121,535
Operating expenses 1,386,986 101,589
Net income (loss) (484,800) 16,546
Selected Balance Sheet Information
At December 31,
1999 1998
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Current assets $382,638 $ 15,686
Current liabilities 231,217 5,885
Shareholders' equity 474,421 9,801
Revenues increased to $579,186 for the year ended December 31, 1999 from
$121,535 for the year ended December 31, 1998. The growth in revenues results
from higher royalties and support and maintenance charges. Further contributing
to the increase in revenue is that the fiscal 1998 results only represent eight
months of revenue since revenue-generating activities only began in May of 1998.
The royalty revenue increased to $368,443 in 1999 from $121,535 in 1998
reflecting the increased activity of the Company's licensee in Antigua. Support
and maintenance revenue was $210,000 for the year ended December 31, 1999
resulting from significant upgrades being made to the CyberBingo(TM) software
and providing ongoing maintenance to the Antiguan licensee, including the
development and delivery of marketing and promotional programs. In 1998 there
was no support and maintenance revenue.
Although the Company had one licensee at December 31, 1999, it has entered into
a number of agreements that will diversify the Company's concentration of
revenue beginning in fiscal year 2000. The new licensees will also provide
licensing revenue in addition to royalties and support and maintenance revenue.
The Company earned $743 of advertising revenue during fiscal 1999 compared to
nil in 1998. The Company plans to increase its advertising revenue for fiscal
2000 and the future.
Operating expenses increased to $1,386,986 for the year ended December 31, 1999
from $101,589 for the year ended 1998. The increased operating expenses reflect
the significantly higher level of activity at the Company. During fiscal 1998,
the Company had limited operations, resulting in significantly lower expense
levels. Marketing expenses were $183,971 for fiscal 1999 compared to nil for
fiscal 1998. In 1999 the Company hired a marketing manager, and incurred
expenses in promoting the Company and its products where, in 1998, there were no
marketing initiatives undertaken. Development expenses grew to $269,044 in 1999
from $73,856 in 1998. The primary reason for the increase in development
expenses came from the hiring of software developers and consultants to improve
the Company's products and services. General and administrative expenses
increased to $232,971 for the year ended December 31, 1999 from $27,733 for the
similar period in the prior year. The increase resulted partially from the
Company becoming a public corporation in February 1999 and the incurrence of
associated professional and regulatory expenses, which were not incurred in
fiscal 1998. The Company also began to remunerate some of its senior management
in the second half of the year, leased office space and incurred the related
expenses associated with the higher level of activity of the Company which were
expenses not incurred during 1998. There was $701,000 of stock option
compensation expense in fiscal 1999 related to 760,000 non-qualified options
issued to consultants. These options were recorded as compensation expense in
accordance with the provisions of SFAS No. 123, utilizing the Black-Scholes
option-pricing model. There was no stock option compensation in fiscal 1998.
The Company incurred a net loss of $484,800 for the year ended December 31, 1999
compared to a profit of $16,546 in 1998 as a result of expenses increasing more
than revenues as the Company invested in further developing its products and
services. As the Company increases the number of its licensees and introduces
new products it is anticipated that the growth of the revenues will outpace that
of the expenses in the future. There was a $323,000 deferred tax benefit
recorded for fiscal 1999 due to the loss the Company incurred. In 1998, tax
expense was $3,400 on $19,946 of pre-tax profit.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999 the Company had cash of $51,707 as compared with $3,419 at
December 31, 1998.
At December 31, 1999 the Company had working capital of approximately $150,000
as compared with approximately $10,000 at December 31, 1998. The increase
reflects primarily the net increase in receivables balances over accounts
payable, both of which are higher than at December 1998 due to the heightened
level of activity of the Company.
At December 31, 1999, total assets increased to $705,638 from $15,686 at
December 31, 1998. The increase is due primarily to higher accounts receivable
of $254,471 and other receivables of $76,460 at December, 1999 compared to
$12,267 and nil respectively at December, 1998. The increase in accounts
receivable represents the heightened level of activity of the Company's
licensee, resulting from higher royalty and support revenues. The balance in
other receivables represents payments made by dot com on behalf of its licensee
and other amounts for which Dot Com will be repaid. Also contributing to the
increase in assets is the deferred tax asset of $323,000 resulting from the
available net operating loss carryforwards and timing differences relating to
the deductibility of consulting expenses recorded upon the issuance of
non-qualified stock options.
Total liabilities increased to $231,217 at December 31, 1999 from $5,885 at
December 31, 1998. This increase is due to the heightened level of business
activity of dot com in the current year compared to that leading to the year-end
December 1998.
In February 1999 dot com raised an aggregate of $249,420 in capital through the
sale of shares pursuant to a private placement made in accordance with Rule 504
under the Securities Act. These funds allowed the Company to increase its
marketing and development efforts. The consolidated income statements and
statements of cash flows for the year ended December 31, 1999 reflect the
results of these higher expenditures. Although there has been a significant use
of cash during the year ended December 31, 1999 resulting from an increase in
working capital and expenses associated therewith, management believes that
through continued revenue improvements, the collection of accounts receivable in
the ordinary course of business and by continuing to match expenses with cash
resources, the Company has sufficient cash-flow to meet its ongoing obligations.
Most of the Company's marketing expenditures during fiscal 1999 were made on a
discretionary basis, with no ongoing commitments, based on the cash resources
available. These marketing efforts and other discretionary expenditures will be
reduced, if necessary, to reflect the cash resources on hand from time to time.
The Company will also pursue other financing activities such as further equity
offerings and obtaining a line of credit to support its continued investment in
activities to generate increased revenues.
There are presently no material commitments for capital expenditures. Due to the
nature of its business, the Company does not require significant outlays for
capital expenditures and, as a result, is not planning for any material capital
expenditures for the foreseeable future, unless and until additional financing
is realized.
IMPACT OF INFLATION
The Company believes that inflation has not had a material effect on its
business.
RISKS AND UNCERTAINTIES
The Company has identified that there is uncertainty in North America relating
to the lawfulness of Internet gaming. As such, notwithstanding the fact that the
CyberBingo (TM) game system is licensed by TCC, which operates from Antigua,
where such business is lawful if licensed, governments elsewhere, including the
federal, state or any local governments in the United States may take the
position that Cyber Bingo(TM) is being played unlawfully in their jurisdiction.
Accordingly, the Company may face criminal prosecution in any number of
jurisdictions, either for operating an illegal gaming operation, or as aiding
and abetting others, such as its licensees, in operating an illegal gaming
operation. The Company has not devoted any of its limited resources to
investigating the legal climate in which it operates. Many of the issues facing
the Company are the same as those facing all other e-commerce providers, as
current laws are not clear as to who, if anyone, has jurisdiction over
Internet-based commerce. A number of proposals have been presented in the United
States congress to expressly ban Internet gaming, although none of these
proposals have yet been enacted. Although the Company intends to do business
worldwide, any enforceable ban on Internet gaming in the United States would
have a material adverse effect on the Company's business and both its short-term
and long-term liquidity and its revenues from operations.
YEAR 2000 RISKS
In FY1999, the potential existed and dot com was exposed to a risk that certain
of its systems or those of licensees would fail or suffer impairment as a result
of the Year 2000 issue (hereinafter "Y2K"). Y2K relates to the rollover date of
programming defaulting to 01/01/1900 rather than 01/01/2000 (the "Rollover
Date"). Although there was no impact on the Company or its licensees on the
Rollover Date and management believes that all hardware is Y2K compliant, there
may still be a risk that the Company's reliance on certain hardware systems,
software and related services could result in a complete system failure to its
software and/or hardware systems and/or any related information technology
system including communication systems.
Although the Company relies on systems developed using current technology and on
systems designed to be Y2K compliant, we may have to replace, upgrade or
re-engineer or program certain systems to ensure that all technology will be Y2K
compliant when operating together. Management does not anticipate having to
incur any major operating or capital expenditures that would have a material
impact on our financial condition. While management believes that the Company's
hardware and software systems are and will continue to operate after the
Rollover Date, there can be no assurance that all systems will function
adequately.
ITEM 7. FINANCIAL STATEMENTS
Information with respect to this item is contained in the financial statements
appearing at Item 13 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In March 2000, Rosenswig Carere McRae, LLP of Toronto, Ontario, the independent
Chartered Accountants previously engaged as the principal accountant to audit
the 1998 and prior financial statements of Precyse Corporation (the accounting
predecessor to the Company), resigned. As noted earlier in ITEM 6, the year
ended 1998 comparative income statements and cash flow statements contained in
this report have been prepared presenting only the operations of Precyse
Corporation. The resignation resulted from the Company becoming a U.S. public
company and the conclusion that the Company would be better served through the
engagement of a U.S. Certified Public Accounting firm. The Company elected to
utilize the services of Freed Maxick Sachs & Murphy, PC of Buffalo, New York.
The audit report of Rosenswig Carere McRae, LLP on the financial statements of
the Company as of December 31, 1998 did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to audit scope or
accounting principles. The decision to change accountants was approved by the
Board of Directors of the Company. There have been no disagreements with the
former accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of the former accountant, would have caused it
to make reference to the subject matter of the disagreements in connection with
its report. The Company has provided a copy of this disclosure to its former
accountants, and the Company requested that the former accountants furnish them
with letters addressed to the Securities and Exchange Commission stating whether
they agree with the statements made by the registrant, and, if not, stating the
respects in which they do not agree. A copy of the former accountant's responses
indicating agreement is included as an Exhibit to this report.
PART III.
- ---------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and Executive Officers of the Company are as follows:
Name Age Position Period Served
- ---- --- -------- -------------
Ken Lusk 50 Director 02/1999 to Present
and Chairman
Scott White 37 Director 02/1999 to Present
President & CEO
George White 66 Director 02/1999 to Present
Perry Malone 37 Director 02/1999 to Present
And VP Technology
Ted Colivas 39 VP Operations
Andre Kern 37 Controller
Glenn Scott 33 Director of
Business Development
Howard Rubinoff 42 Secretary
and General Counsel
John Reilly 40 Director 02/1999 to Present
Kenneth R. Lusk, Director and Chairman: Mr. Lusk is a Professional Chartered
Accountant in the Province of Ontario and possesses a bachelor of commerce
degree from Queens University in Kingston. Since 1991, Mr. Lusk has worked as a
Management Consultant with major North American real estate developers and major
Federal Crown corporations including the Canadian Broadcasting Corporation and
Canada Post. Prior to his self-employment, from 1981 to 1991, Mr. Lusk served as
an Executive Vice President with Bramalea Limited, where his responsibilities
included overseeing the property development activities in both the United
States and Canada, and a variety of financial, treasury management and corporate
planning functions.
Scott White, Director, President and CEO: Mr. White is a lawyer, called to the
bar in the Province of Ontario in 1989. He is a graduate from the University of
Toronto with a bachelor of arts degree and the University of Windsor with a
bachelor of laws degree. Mr. White has provided legal services to his clients
several areas of law, including corporate/commercial, administrative and
business acquisitions. He has acquired business management experience as the
managing partner of Bush, Frankel & White, Barristers & Solicitors and as a
Company director with Vista International Petroleums Ltd. (1993-1996) and as a
corporate secretary with Nova Continental Development Corporation (1994-1997).
George S. White, Director: Mr. White has acquired more than 30 years of
experience as a senior officer, director and management consultant with Fortune
500 companies. From 1974 to 1994, Mr. White occupied several senior management
positions including Vice President and General Manager with United Westburne
Inc., which is North America's largest distributor of electronic, electrical and
plumbing supplies. In addition to his experience with Fortune 500 companies,
over the past 30 years, Mr. White has provided consulting advice on mergers,
acquisitions, marketing and public relations for a variety of public small-cap
companies in Canada and the United States. He presently serves as a director of
Holmer Gold Mines Ltd., which is a Company listed for trading on the Toronto
Stock Exchange.
Perry Malone, Director and Vice President Technology: Mr. Malone graduated from
Ryerson University in Toronto with a bachelor degree in Engineering in 1985. He
has acquired extensive experience as a computer systems architect and engineer,
providing consulting services to some of Canada's leading corporations. From
February 1988 to January 1999, through his wholly-owned consulting Company
Pericom Systems Corporation, Mr. Malone provided IT consulting services as a
Senior Systems Analyst to Canadian Pacific Limited, Bell Canada, IBM Canada and
Toronto Dominion Securities. Mr. Malone has served as the Company's Vice
President of Technology since February 1999, in which position he is still
incumbent.
Ted Colivas, Vice President Operations: Mr. Colivas graduated from the
University of Toronto in 1987 with a bachelor of science degree in Physics. He
has acquired extensive experience as a computer systems specialist in a wide
variety of enterprise wide IT/IS operations and management. Mr. Colivas has
served as a Senior Business Applications Consultant with Ericsson Communications
Canada (May 1997-January 1999) and a Computer Operations Manager and Systems
Performance Engineer with Canadian Pacific Limited (August 1990- October 1996).
Mr. Colivas has served as the Company's Vice President of Operations since
February 1999, in which position he is still incumbent.
Andre Kern, Controller: Mr. Kern is a Professional Chartered Accountant in the
Province of Ontario and graduated from the University of Toronto in 1985. Mr.
Kern was appointed to the position of Controller in January 1999. Since 1996,
Mr. Kern has served as Corporate Controller for Devtek Corporation, a Canadian
public Company, listed on the Toronto Stock Exchange. At Devtek and other public
companies that Mr. Kern has worked for he has provided expertise in finance and
treasury, public Company affairs, acquisitions and disposals, and business
operations.
Glenn Scott, Director of Business Development: Mr. Scott is a graduate of
Ryerson University in Toronto with a bachelor of commerce degree in 1992. Since
1992, Mr. Scott has worked extensively in the area of sales and marketing with
experience on both the agency and client sides of the business. Mr. Scott has
served as a Brands Manager with MacLaren Lintas in Toronto, Canada and Versus
Technologies, where he was instrumental in the marketing of the E*trade Canada
brand in on and offline media. Mr. Scott has also served as a Brands Manager
with Gee Jeffery & Partners in Toronto. Mr. Scott brings business development
skills to dot com along with a comprehensive understanding in the development of
various business/marketing strategies for long term growth.
Howard Rubinoff, Secretary: Mr. Rubinoff graduated with a bachelor degree in
arts from York University and a bachelor of laws degree from the University of
Windsor. He also attended the Detroit College of Law for one semester and took
courses at the University of Detroit. Mr. Rubinoff practices primarily in the
area of corporate/commercial law with emphasis on mergers and acquisitions and
financing. In the last few years, he has been involved in a number of major
restructurings of public companies.
John F. Reilly, Director: Since 1998, Mr. Reilly has served as the Managing
Director for State Street Brokerage Services (Canada) Inc. State Street is one
of the world's largest financial institutions specializing in custody, trust,
investment management and brokerage. Prior to joining State Street, in 1992 Mr.
Reilly became the CEO of Versus Brokerage Services, President of Versus
Brokerage Services (US), and Managing Director CEO of Versus Technologies. He
was primarily responsible for bringing E*Trade, the Internet securities dealer,
to Canada and launching it under Versus Brokerage Services. Prior to co-founding
Versus, Mr. Reilly was Vice President Electronic Trading at RBC Dominion
Securities. Mr. Reilly obtained a Bachelor of Business Administration, Finance
from Wilfred Laurier in 1981 and has taken numerous industry-related courses and
qualifications including the Partners, Officer and Directors Exam.
All directors are elected annually.
FAMILY RELATIONSHIPS.
George S. White and Scott F. White are father-son. There are no other family
relationships among the Company's directors, executive officers or other persons
nominated or chosen by the Company to become officers or executive officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
The Company is not aware of any material legal proceedings involving any
director, director nominee, promoter or control person including criminal
convictions, pending criminal matters, pending or concluded administrative or
civil proceedings limiting one's participation in the securities or banking
industries, or findings of securities or commodities law violations.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that, during the fiscal year ended December 31, 1999, all filing requirements
applicable to its officers, directors and greater than ten percent beneficial
owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table summarizes the total compensation of the Chief Executive
Officer and the other most highly compensated executive officers (collectively,
the "Named Executive Officers") of the Company earning in excess of $100,000 for
the year ended December 31, 1999, as well as the total compensation paid to each
such individual for the Company's three previous fiscal years:
Long Term Compensation
----------------------
- -------------------------------------------------------------------------
Annual Compensation Awards
- -------------------------------------------------------------------------
Securities
Underlying
Name and Options/ All Other
Principal Year Salary Stock SARs Compensation
Position ($) ($) ---------- (US$)
- -------- ---- ------ ------------
Scott White 1999 $5,000 100,000 $37,500(1)
President and
Chief Executive
Officer
1998 -0- -0- -0-
1997 -0- -0- -0-
(1) The compensation consists of a one time bonus which had not been paid as at
March 24,2000.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
(a) (b) (c) (d) (e)
% of Total
Number of Options/
Securities SARs
Underlying Granted to Exercise
Options/SARs Employees or Base
Name Granted (#) in Fiscal Year Price ($/Sh) Expiration Date
---- ----------- -------------- ------------ ---------------
Scott White 100,000 13.34 $3.00 Feb 2, 2004
For the above granted options, the options have fully vested.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
Number of
Securities
Underlying Value of
Unexercised In-the-Money
Options/SARs Options/SARs
At Fy-End(#) at FY-End($)
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized($) Unexercisable Unexercisable
---- ------------ ----------- ------------- -------------
Scott White -0- -0- 100,000/0 0/0
COMPENSATION OF DIRECTORS
A. Standard Arrangements.
The members of the Company's Board of Directors are reimbursed for actual
expenses incurred in attending Board meetings.
B. Other Arrangements.
Not applicable
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
As at December 31, 1999, there were no written contracts or agreements between
the Company and its employees. Employee salaries are set by the members of the
Board of Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information, as of December 31, 1999, with respect to
beneficial ownership of the Company's Common Stock by each person known by the
Company to be the beneficial owner of more than 5% of its outstanding Common
Stock, by each director of the Company, by each Named Executive Officer and by
all officers and directors of the Company as a group. Unless otherwise noted,
each shareholder has sole investment and voting power over the shares owned.
Name And Address Amount and Nature Percent Of Class
Beneficial Owner(1) of Ownership
Ken Lusk 1,078,000(2)(3) 9.0%
Scott White 1,012,000(2)(3) 8.4%
Perry Malone 1,012,000(2)(3) 8.4%
Ted Colivas 1,012,000(2)(3) 8.4%
Glenn Scott 100,000(4) 0.8%
Howard Rubinoff 100,000(4) 2.8%
George White 50,000(4) 0.4%
John Reilly 50,000(4) 0.4%
Andre Kern 100,000(4) 0.8%
Marie Rose Holdings Ltd. 650,000(5) 6.2%
All officers and
directors as a group
nine persons) 4,750,000 39.52%
(1) All persons have an address c/o the Company; 300 Delaware Ave., Buffalo, NY
14202 except Marie Rose Holdings Limited which maintains its address at
P.O. Box 588, St. Peter Port, Guernsey, C.I..
(2) Includes shares of common stock currently owned and any shares as to which
the holder may become the owner within 60 days, such as by the exercise of
options.
(2) Includes options granted in 1999 to purchase common stock at $3.00 per
share of 50,000 for Mr. Lusk, 100,000 for each of Messrs. Scott White, Ted
Colivas and Perry Malone.
(3) Consists solely of options granted in 1999 to purchase common stock at
$3.00 per share.
(4) Consists solely of common stock. The ultimate beneficial owner of these
securities is Michael A. Fielding.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Nothing reportable.
ITEM 13. INDEX TO EXHIBITS
(a) Financial Statements (included in Part II of this Report):
Reports of Independent Accountants
Consolidated Balance Sheet - December 31, 1999
Consolidated Statements of Income (Loss) and Retained Earnings
(Deficit) - December 31, 1999
Consolidated Statements of Shareholders' Equity (Deficiency) -
December 31, 1999
Consolidated Statements of Cash Flows - December 31, 1999
Notes to Consolidated Financial Statements - December 31, 1999
1.1 Memorandum of Agreement among Affiliated Adjusters, Inc. and the
stockholders of The Precyse Corporation dated January 27, 1999*
3.1 Articles of Incorporation, as amended*
3.2 Bylaws*
10.1 Technology License and Maintenance Agreement between The Precyse
Corporation and The CyberBingo Corporation dated December 4, 1997*
10.2 Consulting Agreement between registrant and Colivas Enterprises Ltd.
dated March 16, 1999*
10.3 Consulting Agreement between registrant and Pericom Systems Corp.,
undated*
10.4 Transaction Processing Agreement between PreCyse Corporation and First
Atlantic Commerce Ltd. dated January 29, 1999*
16.1 Letter of Rosenswig Carere McRae, LLP
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Chartered Accountants
27.1 Financial Data Schedule
* Previously filed
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the period covered
by this Report.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
dot com ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
(FORMERLY AFFILIATED ADJUSTERS, INC.)
------------------------
December 31, 1999 and 1998
with
INDEPENDENT AUDITOR'S REPORTS
<PAGE>
CONTENTS
Page
----
Independent Auditor's Reports 1 - 2
Consolidated Financial Statements:
Balance Sheets 3
Statements of Operations 4
Statements of Changes in Stockholders' Equity 5
Statements of Cash Flows 6
Notes to the Consolidated Financial Statements 7 - 11
<PAGE>
dot com ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
(FORMERLY AFFILIATED ADJUSTERS, INC.)
INDEPENDENT AUDITOR'S REPORT
To the Shareholders of
dot com Entertainment Group, Inc. and Subsidiaries
(Formerly Affiliated Adjusters, Inc.)
We have audited the consolidated balance sheet of dot com Entertainment
Group, Inc. and Subsidiaries (formerly Affiliated Adjusters, Inc.) as at
December 31, 1999 and the consolidated statements of operations, stockholders'
equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of dot com Entertainment Group,
Inc. and Subsidiaries as of and for the year ended December 31, 1998 were
audited by other auditors whose report dated August 12, 1999 expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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 audit provides a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the company as at
December 31, 1999 and the consolidated results of its operations and changes in
its cash flows for the year then ended in accordance with generally accepted
accounting principles.
FREED MAXICK SACHS & MURPHY, P.C.
Buffalo, New York
March 20, 2000
<PAGE>
AUDITOR'S REPORT
To the shareholders of
dot com Entertainment Group, Inc.
(Formerly Precyse Corporation)
We have audited the balance sheet of dot com Entertainment Group , Inc.
(formerly Precyse Corporation) as at December 31, 1998 and the statements of
income and retained earnings, and changes in financial position for the year
then ended. Precyse Corporation was the accounting acquirer of dot com
Entertainment Group, Inc. in January 1999. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 1998 and the
results of its operations and changes in its financial position for the year
then ended in accordance with generally accepted accounting principles.
s/Rosenswig Carere McRae LLP
Chartered Accountants
Toronto, Canada
August 12, 1999
2
<PAGE>
dot com ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
(FORMERLY AFFILIATED ADJUSTERS, INC.)
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1999 1998
---- -----
Current assets:
Cash .......................................... $ 51,707 $ 3,419
Accounts receivable:
Trade ........................................ 254,471 12,267
Other ........................................ 76,460 -
---------- ---------
Total current assets ........................ 382,638 15,686
Deferred tax asset ............................. 323,000 -
---------- ---------
$ 705,638 $ 15,686
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ......... $ 164,401 $ -
Accounts payable - officers ................... 63,416 -
Income taxes payable .......................... 3,400 3,400
Shareholder's loan ............................ - 2,485
--------- ----------
Total current liabilities .................... 231,217 5,885
--------- ----------
Stockholders' equity:
Common stock, $.001 par value, 50,000,000
shares authorized, 10,500,000 shares issued
and outstanding (4,000,000 - 1998) ............ 10,500 4,000
Additional paid in capital:
Common stock ................................. 238,050 (3,870)
Stock options ................................ 701,000 -
Retained earnings (accumulated deficit) ....... (475,129) 9,671
--------- ---------
474,421 9,801
--------- ---------
$ 705,638 $ 15,686
========= =========
See accompanying notes.
3
<PAGE>
dot com ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
(FORMERLY AFFILIATED ADJUSTERS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1999 1998
---- ----
Revenues ................................ $ 579,186 $ 121,535
Expenses:
Development ............................ 269,044 73,856
General and administrative ............. 232,971 27,733
Marketing .............................. 183,971 -
Stock option compensation (Note 6) ..... 701,000 -
---------- -----------
1,386,986 101,589
---------- -----------
Income (loss) before income tax
(expense) benefit ...................... (807,800) 19,946
Income tax (expense) benefit ............ 323,000 (3,400)
--------- -----------
Net income (loss) ....................... $ (484,800) $ 16,546
========= ===========
Net income (loss) per share - basic ..... $ (.049) $ .005
========= ===========
Weighted average number of common shares
outstanding - basic .................... 9,958,333 3,475,000
========= ===========
See accompanying notes.
4
<PAGE>
dot com ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
(FORMERLY AFFILIATED ADJUSTERS, INC.)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31,
<TABLE>
<CAPTION>
Paid-in Paid-in Retained
Capital Capital Earnings
Common Stock Common Stock (Accumulated
Shares Amount Stock Options Deficit) Total
------ ------ ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 ........ 3,100,000 $ 3,100 $ (2,970) $ - $ (6,875) $ (6,745)
Issuance of common stock .......... 900,000 900 (900) - - -
Net income - 1998 ................. - - - - 16,546 16,546
Balance at December 31, 1998 ...... 4,000,000 4,000 (3,870) - 9,671 9,801
Issuance of common stock for
acquisition of dot com (Note 2) .. 6,420,000 6,420 2,000 - - 8,420
Issuance of common stock .......... 80,000 80 239,920 - - 240,000
Stock options issued in exchange
for services ..................... - - - 701,000 - 701,000
Net loss - 1999 ................... - - - - (484,800) (484,800)
Balance at December 31, 1999 ...... 10,500,000 $ 10,500 $ 238,050 $ 701,000 $ (475,129) $ 474,421
</TABLE>
See accompanying notes.
5
<PAGE>
dot com ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
(FORMERLY AFFILIATED ADJUSTERS, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31,
1999 1998
---- ----
Cash flows from operating activities:
Net income (loss) ..................................... $(484,800) $ 16,546
Adjustments to reconcile net income (loss) to
net cash used in operations:
Stock option compensation ............................ 701,000 -
Deferred income tax benefit .......................... (323,000) -
Changes in non-cash working capital items:
Accounts receivable .................................. (318,664) 3,182
Accounts payable and accrued expenses ................ 164,401 -
Accounts payable - officers .......................... 63,416 -
Income taxes payable ................................. - 3,400
Deferred revenue ..................................... - (30,550)
--------- --------
Net cash used in operating activities ................. (197,647) (7,422)
Cash flows from financing activities:
Repayment of shareholder loan ....................... (2,485) (204)
Proceeds from issuance of common stock .............. 248,420 -
--------- --------
Net cash provided by (used in) financing activities.. 245,935 (204)
--------- --------
Net increase (decrease) in cash ......................... 48,288 (7,626)
Cash, beginning of year ................................. 3,419 11,045
--------- --------
Cash, end of year ....................................... $ 51,707 $ 3,419
========= =======
See accompanying notes.
6
<PAGE>
NOTE 1. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include
the accounts of dot com Entertainment Group, Inc. and Subsidiaries (formerly
Affiliated Adjusters, Inc.) (dot com) and its wholly owned subsidiaries, Precyse
Corporation (Precyse), dot com Antigua Ltd. (Antigua), dot com Management Ltd.
(collectively the Company). All significant intercompany balances and
transactions have been eliminated.
Nature of Business - The Company is a software development company,
specializing in developing and supporting internet gaming, lottery,
entertainment and related software. The software is marketed worldwide out of
the Company's Oakville, Ontario, Canada office.
US Dollars Reporting - The United States dollar is the principal currency
of the company's business and accordingly these financial statements are
expressed in United States dollars.
Estimates - The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
receipts and expenditures during the reporting period. Actual results could
differ from estimates.
Fair Value of Financial Instruments - The carrying amounts of the current
assets and liabilities reported in the balance sheets approximate fair value due
to their short term maturity.
Segment Reporting - In accordance with SFAS 131, the Company is currently
organized, managed and internally reported as one segment.
Revenue Recognition - Royalty fees are collected from licensees, who
license the Company's Internet entertainment software. Royalty revenue is
recognized as licensees provide Internet services to their customers. Support,
maintenance and advertising revenue is recognized when the service has been
provided.
Net Income (Loss) Per Common Share - In accordance with SFAS 128, dual
presentation of basic and diluted earnings per share is required on the face of
the statement of operations. Net income (loss) per share is based upon the
weighted average number of common shares outstanding during the periods
presented. Outstanding stock options have not been considered common stock
equivalents as of December 31, 1999 as their assumed exercise would be
anti-dilutive. There were no options or warrants outstanding on December 31,
1998.
Research, Developmental and Organizational Costs - Research, developmental
and organizational costs are expensed as incurred.
Advertising - The Company expenses advertising costs as incurred.
Advertising expense was $2,462 for the year ended December 31, 1999 ($0 - 1998).
7
<PAGE>
NOTE 1. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes - Income taxes are computed in accordance with Financial
Accounting Standards Board Statement No. 109, Accounting for Income Taxes.
Deferred taxes are provided on temporary differences arising from assets and
liabilities whose bases are different for financial reporting and income tax
purposes.
Concentration of Credit Risk - The Company has entered into a software
license agreement with one customer. The royalties derived from this agreement
along with maintenance and support provided to the same customer represent the
only source of revenue for the Company. The loss of this customer may have a
material adverse effect on the Company.
Accounting for Stock Based Compensation - The Company accounts for its
stock option plans under APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation expense is recognized for stock options
issued to employees as long as the exercise price is greater than or equal to
the market value of the common stock at the date of grant. In accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS No. 123) the Company discloses the summary of proforma
effects to reported net income and earnings per share for 1999 and 1998, as if
the Company had elected to recognize compensation costs based on the fair value
of the employee options at the grant date. Nonqualified stock options issued to
non-employees is recognized as compensation expense based upon the fair value of
the consideration received or the fair value of the equity instruments issued,
which ever is more reliably measurable (see Note 6).
NOTE 2. - CAPITAL TRANSACTION
In January, 1999, Affiliated Adjusters, Inc. (Affiliated) (a nonoperating
public shell) entered into a business combination with Precyse Corporation,
whereby Affiliated purchased 100% of the outstanding common stock of Precyse for
$1,000. Simultaneously, a Precyse stockholder acquired 900,000 shares of
outstanding stock of Affiliated. In addition, Affiliated issued 9,420,000 shares
of common stock at $.001 per share, of which former Precyse stockholders
acquired 3,100,000 of these shares. Subsequent to these transactions, Affiliated
changed its name to dot com Entertainment Group, Inc. (dot com).
As a result of these transactions, the former Precyse shareholders became
38% owners of dot com and gained control of the board of directors. Accordingly,
the transaction has been accounted for in accordance with Securities and
Exchange Commission, Staff Accounting Bulletin Topic 2:A:2, whereby, Precyse is
deemed to be the accounting acquirer of dot com, followed by a recapitalization.
The remaining 6,320,000 of the above shares issued along with the 100,000
Affiliated shares previously outstanding were recorded in this recapitalization.
The assets and liabilities of dot com as of the acquisition have been recorded
at their historical cost, which approximated their fair market value. The
results of operations include those of dot com since the date of acquisition.
The results of operations had dot com and Precyse been combined as of
January 1, 1998, would not have been significantly different than the amounts
reported.
8
<PAGE>
NOTE 3. - STOCKHOLDER'S LOAN
The stockholder's loan was non-interest bearing and payable on demand. The
loan was repaid during the year ended December 31, 1999.
NOTE 4. - COMMITMENTS
A. Lease Commitments
The Company utilizes certain computer equipment and
facilities under operating leases which expire at various dates
through 2005. Rent expense under operating leases for the years
ended December 31, 1999 and 1998, was approximately $16,500 and
$15,000, respectively.
The approximate future minimum payments required under these
leases are as follows:
2000 $ 33,000
2001 37,000
2002 30,000
2003 27,000
2004 27,000
Thereafter 4,000
----------
$ 158,000
B. Consulting Contracts
The Company is obligated under various consulting agreements
with certain officers which expire in 2002. The agreements
provide for minimum aggregate annual payments of $300,000.
Consulting expense under these agreements for the year ended
December 31, 1999 amounted to $231,500 ($0 - 1998). As of
December 31, 1999, $63,416 is still owed to the officers. The
agreements also provide for the annual granting of stock options
to purchase the Company's common stock.
NOTE 5. - STOCKHOLDERS' EQUITY
In 1998, 900,000 shares of common stock were issued as consideration for
services performed.
In February 1999, the Company issued 80,000 shares of common stock at a
price of $3 per share. The total proceeds amounted to $240,000.
9
<PAGE>
NOTE 6. - STOCK OPTION PLANS
During the year ended December 31, 1999, the Board of Directors adopted a
stock option plan under which, 1,500,000 shares are available. These shares may
be granted to directors, officers, employees and consultants at the discretion
of the Board. Under the plan, the options granted will either qualify as
incentive stock options ("ISO's") in accordance with IRC Section 422 or options
which are not intended to be ISO's ("non-qualified options"). Upon grant of the
option, the Board will determine the exercise price, which shall not be less
than the fair value of the Company's common stock at the date of grant, and the
term, which shall not exceed 5 years.
During the year ended December 31, 1999, 1,500,000 options were granted
under this plan, plus an additional 20,000 options, all of which had an exercise
price of $3.00 per share. The options were granted to officers/directors
(760,000 options) and to consultants (760,000 options). All of these options
were fully vested at the grant date and expire in 2004.
Incentive Stock Options - For ISO's issued to employees, including
directors and officers, the Company has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards (SFAS) No. 123 - "Accounting for
Stock-Based Compensation," and, accordingly, does not recognize compensation
cost for stock option grants under fixed awards. If the Company had elected to
recognize compensation cost based on the fair value of the options granted at
grant date as prescribed by SFAS No. 123, net loss and loss per share for the
year ended December 31, 1999 would have increased as follows:
Net income (loss) - as reported ............ $ (484,800)
Net income (loss) - pro forma .............. $ (1,199,800)
Income (loss) per share - as reported ...... $ (.049)
Income (loss) per share - pro forma ........ $ (.120)
The weighted average fair value of the options granted in the year ended
December 31, 1999 was $.99 per share. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
based on the following weighted-average assumptions:
Expected dividend yield .............................. 0%
Expected stock price volatility ...................... 50%
Risk-free interest rate .............................. 4.8%
Expected life of options ............................. 3 years
Non-Qualified Options - The non-qualified options issued to consultants
have been recorded as compensation expense, in accordance with the provisions of
SFAS No. 123, utilizing the Black-Scholes option pricing model and the
assumptions outlined above. Total consulting expense recognized on the 760,000
options issued during 1999 amounted to $701,000.
10
<PAGE>
NOTE 7. - INCOME TAXES
The Company recognizes deferred taxes using the asset and liability method
and recognizes future tax benefits measured by enacted tax rates attributed to
deductible temporary differences and available net operating tax loss
carryforwards to the extent that realization of such benefits is more likely
than not. The deferred tax asset recognized at December 31, 1999 is the result
of available net operating loss carryforwards and timing differences relating to
the deductibility of consulting expenses recorded upon the issuance of
non-qualified stock options. At December 31, 1999, the Company had net operating
loss carryforwards of approximately $107,000, which expire through 2014. The
income tax expense as of December 31, 1998, represents a current tax expense.
NOTE 8. - FOURTH QUARTER ADJUSTMENTS
During the year ended December 31, 1999, the Company recognized an
adjustment in the fourth quarter relating to the issuance of stock options
granted to consultants for the Company in the first quarter of 1999. The options
were subsequently deemed to be non-qualified options requiring the recognition
of consulting expense equal to the fair value of the stock options granted. (see
Note 6). The adjustment was to decrease income by $421,000, net of deferred
income taxes of $280,000. In addition, the Company recorded a deferred income
tax asset/benefit in the fourth quarter of 1999 amounting to $43,000 related to
available net operating loss carryforwards. The portion of this benefit that
related to the first and second quarters of 1999 amounted to $12,000 and
$31,000, respectively.
NOTE 9. - SUBSEQUENT EVENT
Subsequent to December 31, 1999, the Company entered into an agreement to
issue up to 500,000 units of equity instruments in a private placement offering.
Each unit will generate $2.50 and will consist of one share of the Company's
common stock and one warrant to purchase a share of common stock at a price of
$4.00 per share. The warrants vest immediately and expire two years from the
date of grant. As of the date of this report 200,000 units had been sold raising
capital of $500,000.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
(Registrant) dot com Entertainment Group, Inc.
By: /s/ Scott White
---------------------------------
President and Chief Executive Officer
Date March 30, 2000
By: /s/ Andre Kern
---------------------------------
Controller and Principal Accounting Officer
Date March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By /s/ Scott White President, Chief Executive Officer and Director
------------------------
Date March 30, 2000
By /s/ Ken Lusk Chairman and Director
------------------------
Date March 30, 2000
By VP Technology and Director
------------------------
Date March _, 2000
By /s/ George White Director
------------------------
Date March 30, 2000
By /s/ John Reilly Director
------------------------
Date March 30, 2000
LETTER OF ROSENSWIG CARERE MCRAE LLP
Rosenswig Carere McRae, LLP (Letterhead)
March 10, 2000
Securities and Exchange Commission
450 West Fifth Street, N.W.
Washington, DC 20549
Gentlemen:
We have read item 8 of dot com Entertainment Group, Inc.'s form 10KSB dated
March 29, 2000 and are in agreement with the statements contained in the
paragraph therein regarding our resignation as auditors of Precyse Corporation.
/s/ Rosenswig Carere McRae, LLP
Rosenswig Carere McRae, LLP
LIST OF SUBSIDIARIES
EX-21.1
Precyse Corporation
dot com Antigua Ltd.
dot com Management Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 3,419 51,707
<SECURITIES> 0 0
<RECEIVABLES> 12,267 330,931
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 15,686 382,638
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 15,686 705,638
<CURRENT-LIABILITIES> 5,885 231,217
<BONDS> 0 0
0 0
0 0
<COMMON> 130 10,500
<OTHER-SE> 0 463,921
<TOTAL-LIABILITY-AND-EQUITY> 15,686 705,638
<SALES> 121,535 579,186
<TOTAL-REVENUES> 121,535 579,186
<CGS> 0 0
<TOTAL-COSTS> 101,589 1,386,986
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 19,946 (807,800)
<INCOME-TAX> 3,400 (323,000)
<INCOME-CONTINUING> 16,546 (484,800)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 16,546 (484,800)
<EPS-BASIC> 0.01 (0.05)
<EPS-DILUTED> 0.01 (0.05)
</TABLE>
