<PAGE> 1
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, 1998
COMMISSION FILE NUMBER 0 - 23672
SMART GAMES INTERACTIVE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1692323
(state or other jurisdiction of (I.R.S. Employer
incorporation of organization) identification No.)
1633 17TH STREET
CUYAHOGA FALLS, OHIO 44223
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA
CODE: (330) 929 3682
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT COMMON STOCK, PAR
VALUE $.001 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports).
Yes No. X
------- --------
-------
<PAGE> 2
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No X
--- ---
The number of shares outstanding of the Registrant's common stock is
12,648,244. The Registrant is an inactive company. Accordingly, no estimate can
be made of the market value.
DOCUMENTS INCORPORATED BY REFERENCE
Preliminary Proxy Statement for its 1999 Annual Meeting of Shareholders,
which the Issuer intends to convene upon approval of this proxy. This is
incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
The Registrant was incorporated in October, 1991 as an Ohio corporation.
At its last Annual Meeting on August 21, 1996, approval was given by the
shareholders to move its domicile to Delaware. Technically, the shareholders
approved of a merger whereby the Ohio corporation, Sports Sciences, Inc., was
merged into a newly formed Delaware corporation called Smart Games Interactive,
Inc. Sports Sciences, Inc. was the constituent corporation and Smart Games
Interactive was the surviving corporation. This transaction was consummated in
late 1996. There have been no further changes to the registrant's corporate
structure since that time.
The Company's business formerly consisted of the consumer electronics
industry. The Company created, designed, developed and assembled interactive
electronic game simulators that incorporated Company owned hardware and software
technology. These products were marketed under the trade names Pro Swing, TeeV
Golf, PC Golf, Batter Up and PC Batter Up. These game simulators enable the
player to use skills similar to those the player would use if he or she were to
play golf on a golf course or baseball on a baseball field. The Company designed
its game simulators to be instructive, entertaining and capable of use by people
of all ages.
Since September of 1997, the Company has not been active. Although
dormant, the Company has not filed for bankruptcy protection nor has it been
placed into receivership. The Company has not been dissolved. Before going
dormant, the Company's largest creditor, Miles Rubber, did obtain a Judgment
against all of the Company's assets from the Court of Common Pleas in Summit
County, Ohio. At year end 1998, Miles Rubber had not pursued any further
enforcement of its Judgment lien.
<PAGE> 3
The Judgment held by Miles Rubber is sufficiently sweeping as to
constitute a material reclassification of the Company's assets not in the
ordinary course of business, as this term is employed in S-B Regulation 101
(a)(3).
The Company has conducted no business since September of 1997.
Accordingly, it has not produced any products or services, nor has it worked
upon any new product, and it has not distributed any other company's product for
the previous fifteen months. Given these circumstances, the Company can make no
comment about the competitive business conditions of its industry during this
time, since it has not been a participant; it has no customers; and it has no
sources for raw materials and other supplies.
In 1998, management neglected to file franchise taxes with the State of
Delaware on March 1, 1998. Similarly, the management of the registrant neglected
to file with the SEC either the regular reports that are are required of all
companies that have securities registered under the Exchange Act or a
certification on Form 15 terminating its registration under the Exchange Act. As
a result, the Company remained a Registrant under the Exchange Act but was
seriously delinquent in its SEC reporting obligations. According to the last
published quotation for the Company's Common Stock, the published bid is 0.006
and the ask is 0.009. There has been no trading activity for the past year.
John D. Lipps, the Company's former Chairman and Chief Executive
Officer, received a patent for the Pro Swing in November, 1990, before the
Company was formed. This patent was assigned to the Company in December, 1991.
Mr. Lipps executed an agreement whereby he was obligated to assign to the
Company any rights he may receive during his employment for any new products or
inventions related to the Company's business. Subsequently, Mr. Lipps secured
additional patents, including a patent entitled "Sensing Spatial Movement." All
of these patents were assigned to the Company. Under the terms of the
assignment, the assignment obligation ended upon the termination of Mr. Lipps
employment. Subsequently, Mr. Lipps submitted a notice of resignation to the
Board and this notice of resignation was accepted. At the same time, Mr. Lipps
employment agreement was terminated and Mr. Lipps took back all rights relating
to his patents. As a consequence, the Company no longer holds any of the rights
to any of the patents that were previously assigned and / or developed by the
Company.
The Company has no full time employees and no part time employees.
Since April of 1998, when a meeting was convened with Brandmakers, the Company
has been reconciled to a merger with Brandmakers. All expenses relating to this
merger, including the compiling of new audits and updating its record with the
Commission, has been borne by Brandmakers. The Company does need to get its
reporting requirement current with the Commission before any active trading can
commence.
From April of 1998 to the end of the year, Brandmakers carried on
discussions and sought settlements from the creditors of the Company. On the
whole, the
<PAGE> 4
Company's creditors were very accommodating. Brandmakers sought to buy each
creditor's outstanding balance for approximately 30% of its face value, through
a promissory note and a Release. Copies of the standard promissory note and
release are attached as Exhibits 1 and 2. In a few cases, creditors held out for
more than the 30% offered and in some rare instances, creditors sought almost
all of the balance owed to them. Although some exceptions had to be made, on
balance, Brandmakers has been successful in securing releases from its creditors
at approximately 35% of the debts face value.
One creditor, Miles Rubber, had to be separated from the pack and given
extra attention. Miles Rubber held a Judgment which covered substantially all of
the Company's assets. At year end, a definitive deal had still not been struck
between Miles Rubber and Brandmakers, although it had been made clear by both
Miles Rubber and Brandmakers that a deal would be forthcoming, as there were no
serious issues separating the parties. Miles Rubber fully expects to sell its
Judgment to Brandmakers.
There is no affiliation between any members of management, any
directors and any officers of the Company and Brandmakers. Brandmakers was a
former client of the Company and bought parts for golf games. This is how the
two parties came to know one another.
ITEM 2. PROPERTIES
The Company has leased two commercial storage units for the past year to
house its inventory and miscellaneous supplies. There is a lien held by Miles
Rubber against all of the merchandise stored in these two units. The lease for
these storage units has been kept current. Negotiations are proceeding between
Brandmakers and Miles Rubber for control over these storage units and it is
anticipated that Brandmakers will assume control of these commercial storage
units sometime in early 1999.
ITEM 3. LEGAL PROCEEDINGS
None. The Company does have outstanding judgments for overdue taxes owed
to Summit County and a Judgment held by Miles Rubber and Packaging on
substantially all of the Company's assets. Brandmakers is aware of these
liabilities and settlements have been negotiated, subject to and conditioned
upon approval of the Brandmakers Plan by the stockholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
While the Registrant has no active management or ongoing operations and has
not engaged in any business activities since September of 1997, Brandmakers,
Inc. believes that it may be able to recover some value for the stockholders
through the adoption and implementation of a Merger whereby Brandmakers, Inc.
will be acquired by the Company and the Company will assume control over the
<PAGE> 5
properties and business operations of Brandmakers, Inc. At the same time,
management of Brandmakers, Inc. will replace the former management and the
principals of Brandmakers, Inc. will become the new Directors of the Company.
If the Plan of Brandmakers is approved by the Stockholders, the Company's
debt will be completely restructured and assumed by Brandmakers and the Company
itself will be fully reactivated by merging all the existing operations of
Brandmakers into the Company. This merger will totally change the complexion of
the Company. To understand the impact of this decision, a summary of the
operations of Brandmakers follows.
Brandmakers, Inc. operates its corporate headquarters at 1325 Suite C,
Capital Circle N.W., Lawrenceville, Georgia 30043. Its telephone number is (770)
338 1958 and its telecopier phone number is (770) 338 9331. Brandmakers' email
address is [email protected]. Presently, Brandmakers' products consist of
the following.
Mailstart was founded in 1997 and acquired by Brandmakers in June of 1998.
Mailstart is similar to Hotmail Corporation, the firm recently acquired by
Microsoft. Like Hotmail Corporation, Mailstart integrates the core functionality
of text-based email messages with the multimedia and global access capabilities
of the World Wide Web to enable a customer to gain access to the Internet from
any place in the world to all current email boxes from any Internet enabled
computer. Mailstart serves as a virtual gateway to your POP3 email accounts,
providing the ability to remotely check, send, reply, forward or delete any
email message you may have waiting for you at your own local server. Mailstart
allows other sites to utilize and customize its POP3 email access solution
through two different programs known as Form Control and Template Program. These
programs are ideal for sites needing a low cost universal email access solution
for their users. Participation in the Form Control Program is free and requires
minimal effort by the participant.
Mailstart is introducing a new product called Mailstart Plus. Mailstart
Plus will offer additional features such as multiple email address support, zero
wait technology, folders, trashcan, message, status tracking, MIME Encoded
attachment handling, signature file, address book, multiple resolution support
and content sensitive help system.
Internet Browsers The usage of the Internet is growing rapidly and public
browsers will increase in popularity. There are 75 million E-mail addresses and
the numbers are increasing daily. Five prototypes for browsers are in the field.
Brandmakers is deciding upon the software to use on a permanent basis.
Discussions are also being held with an internet service provider.
Virtual Reality Golf Brandmakers produces a large, computerized golf game
with a 34 inch monitor screen and mat. The player uses a golf club and thanks to
<PAGE> 6
images projected on the television's screen, hits a fictional ball and plays a
round of golf on any one of fifteen world renown golf courses diplayed on the
monitor with excellent graphics. The patented club with a wand activates the
ball on the screen when passing over the patented sensor pad. The software is
sufficiently sophisticated to ascertain the difference between driving, pitching
or putting. The golf game has been a major contributor to sales for Brandmakers
over the past two years. The potential market includes sales to affluent
individuals for home use, corporate recreation centers and vending distributors.
Skill Machines Brandmakers has some skill machines that have been placed
in locations on a redemption basis. None of these are on location at this time.
Laser Cue Brandmakers is in the process of assembling ten production
prototypes for this cue that will be advertised and highlighted in a video as a
training cue. This project is several months behind schedule, after having
rejected three prototypes made by the "experts". Brandmakers finally decided on
the material to be used for the shaft as well as the appropriate construction to
make the cue strong and professional in appearance. The ten prototype cues will
be used for production quotes and marketing, including the making of a two
minute video. Brandmakers has numerous marketing ideas for Laser Cue and will be
discussing a possible infomercial. Brandmakers is counting on the cue to provide
a substantial income over the next few years. Our timing is to have the 10
production prototypes completed by the end of November, 1998, and production
pricing and tooling costs as well as an order placed for 5,000 cues later in
1999. Realistically, production for the initial order will take 60 to 90 days.
Mario Nintendo Arcade Game This is a dual laser gun game, which will have
significant appeal to the young with movement of Mario, a Dragon, Dolphins and
other targets. This product is ideal for pizza places such as Chuck E Cheese,
for arcades and for Carnivals. It has worldwide appeal and the prototype should
be ready by November 1999. Brandmakers has a marketing plan and anticipates
substantial orders.
Dual Vend Prepaid Phone Card Machines Brandmakers two column machines are
priced at the very low end of the market. Our dispensing mechanisms were
acquired inexpensively and allow us to maintain this pricing, although design
improvements in the cabinet and circuit board will lead to a small price
increase. We will advertise these machines in 1999.
Postcard Machines Brandmakers may be the only firm manufacturing postcard
vending machines. Postage is added so the cards are ready to mail, which is
quite a convenience. At this time we have placed several machines in Orlando,
Florida and are in the process of locating more and relocating others. We have
<PAGE> 7
not yet proven the potential but our field experience is informing Brandmakers
of where to locate this equipment and where not to locate this equipment. We
believe there will be a good market but it is too early to draw any conclusions.
Computer Disk Dispenser Brandmakers currently has two machines at Colleges
dispensing computer disks and copycards (cards to insert in copying machines to
make copies). Brandmakers can also add a column to dispense prepaid phone cards
or dispense the phone cards instead of copy cards. Two other colleges have these
machines which dispense computer disks only from two columns. Research indicates
computer labs in colleges and universities will be our primary market and sales
will commence in 1999. Colleges advise us that no one makes a dispenser of
computer disks and that is the primary reason we are entering that market.
Hospitality Innovators This firm was founded in 1994 and acquired by
Brandmakers in May of 1998. This company distributes an On Premise Communication
system for various industries, but most notably for restaurants. The core
product of this firm is the Coaster Call, a Guest Paging System from Long Range
Systems. Such high profile restaurant chains as Applebee's, Ruby Tuesday,
Bennigan's, Long Horn Steakhouse and Outback have recently adopted the Coaster
Call as a system for organizing its patrons that are waiting for tables. When a
guest arrives at one of these restaurants, they are handed a coaster. They are
told that when this coaster lights up and vibrates, their table is ready and
they should return to the Hostess Stand. The guest may take this coaster and
wander through an adjoining mall or even leave the building, without fear of
losing their place in the queue for fear of not hearing their names when they
are called by the Hostess. The Coaster Call has become a popular mechanism for
relieving stress among waiting restaurant patrons. It has also eliminated the
crowding that occurs in a restaurants entry way. Finally, because the line is no
longer visually apparent to a person entering the restaurant, the prospect of
waiting for a table is more agreeable.
Hospitality has been the number one sales organization for this system
since the product was introduced three years ago, selling over 90% of all
systems worldwide. Since its inception in 1988, the On Premise paging industry
has realized sales growth of over $50 million per year. In addition to its
"Coaster Call", Hospitality Innovators has other paging systems in use with
companies such as Motorola, Long Range Systems, SIGnologies and Visiplex.
Hospitality has sold systems to numerous churches, dental offices and doctors
offices.
Hospitality Innovators has its headquarters in Lawrenceville, Georgia.
Substantial growth is projected to come from the silent paging portion of this
business this year, as well as from restaurants over the past two years. As of
the end of October, 1998 the company had over 300 current customers.
Washburn Illustration and Design This firm is seminal to the strategic
<PAGE> 8
brand recognition philosophy of Brandmakers. Although web related, this division
of brandmakers will also have carry over responsibililties in the areas of point
of purchase and packaging design. Long standing clients of this firm include
Coca Cola, McDonald's and Burger King.
Upon filing this 10-KSB and all necessary 10-QSB's, clearing comments for
its proposed Proxy Statement and resuming its status as a corporation in good
standing with the State of Delaware, the Company will mail to all security
holders of record a Proxy Statement, a preliminary copy of which is attached to
this Form 10-KSB and incorporated by reference. In further response to this
question, the reader is respectfully referred to this Proxy Statement, which
sets forth all matters to be submitted to a vote of the security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
There is no established public trading market for the Registrant's
securities. The Company's trading symbol is SSCI. The prinicipal market for the
Issuer's common equity is the Over the Counter / Bulletin Board exchange
operated by NASD. A review of the Yahoo data base of financial information
indicates that there are no historical charts available and the records which
can be retrived were last updated on November 13, 1997. In lieu of providing the
Issuer's high and low for each quarter in the last two years, it is submitted
that the price has fluctuated between 4 cents and 8 cents during this period
with very little selling and buying activity.
In a proxy statement issued just before the Annual Meeting in 1996, it
was reported that Mr. Lipps 100,000 shares of stock issuable to him upon the
exercise of immediately exercisable Common Stock purchase warrants. The Roulston
Investment Trust Limited had 30,000 shares of common stock which are issuable
upon the immediate exercisable Common Stock purchase warrants. There is also
317,500 shares issuable to certain directors and executive officers upon the
exercise of stock options exercisable within 60 days of the August, 1996 proxy
statement, which was also granted under the Stock Option Plan. Under the terms
of the option agreements, all options expired in March, 1998. It is not known
how many of warrants are still outstanding or what validity still attaches to
them. However, the proposed reverse split of 43 to 1 will substantially nullify
the warrants that are still outstanding as well as any stock issued pursuant to
Rule 144 before the Company went dormant. There are 230 stock holders of record.
Finally, there are no restrictions imposed by the Company's charter
which limit its ability to pay dividends, aside from the general provision which
stipulates that dividends may only be paid out of surplus cash earned when a
profit has been declared.
ITEM 6. SELECTED FINANCIAL DATA.
<PAGE> 9
In response to this question, the reader is respectfully referred to the
attached Financial Statements, all of which are hereby incorporated by
reference.
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The Company has no operations and no income. This condition has persisted
since September of 1997. This 10KSB is for the purpose of providing financial
information in regard to the previous 15 months while the Company has been
inactive. Brandmakers, with management's approval, has retained the firm of
Harmon & Company, CPA, Inc. to reconstruct financial statements to bring the
Registrant back into full compliance with its reporting responsibilities under
the Exchange Act. It is the intention of the acting management to seek
stockholder approval for a merger and acquisition of Brandmakers, Inc. If
approved, Brandmakers, Inc. will cause the Company to once again become an
operating public company.
The Company has no plan of operation for the next twelve months. The
Company has made the decision to pursue a merger and, if approved by the
stockholders, existing management will step down and Brandmakers will assume
full control.
For the periods covered by the attached financial statements, the
Company has no cash reserves at all. Even the audits have been financed by
Brandmakers. The Company has no plans for raising any additional funds in the
next twelve months. Accordingly, the Company is not planning any purchases of
any kind relating to any plants or any equipment. Regarding employees, the
Company has no employees and, if the merger with Brandmakers is not approved,
this will not change.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
For the information called for by this Item, see the Financial Statements
attached.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Mr. James Chuma, age 39, has assumed the duties of acting Secretary and
Messrs. Chuma, Peter Waite and Donald Miller constitute the present Board. These
<PAGE> 10
gentlemen are performing a caretaker operation while Brandmakers, Inc. conducts
its due diligence and prepares the necessary documentation for the convening of
the 1999 Annual Meeting. If approved by the stockholders, Messrs. Chuma, Waite
and Miller will be replaced by the principals of Brandmakers, Inc., namely Geoff
Williams, age 54, Robert J. Palmquist, age 67, and Joy Williams, age 41.
The only agreement and understanding existing between Brandmakers and the
Company is the Merger Agreement. If the Merger Agreement is ratified by the
shareholders, a Stock Acquisition Agreement will be signed. Copies of these two
agreements are attached as Exhibits 3 and 4. There are no other agreements of
any kind or nature existing between the Company and Brandmakers.
ITEM 11. EXECUTIVE COMPENSATION.
Neither the officers or directors receive compensation from the Registrant
for services performed.
Employment Contracts
Mr. Lipps, the former Chief Executive Officer, entered into an employment
contract with the Company on January 1, 1993 for a term of seven years. The term
is automatically renewable from year to year thereafter unless either party
terminates the contract with written notice ninety (90) days prior to the end of
the seventh year or any subsequent year. The agreement provides for a base
monthly salary of $10,000 which can only be increased with Board approval. This
employment agreement was terminated and, hence, payments from October 1, 1997
through December 31, 1999 were never made. Mr. Lipps has agreed to a
covenant-not-to-compete for two years subsequent to his termination or
resignation from the Company, unless such termination is in breach of the
agreement.
Messrs. Chuma, the former chief financial officer, has an employment
contract with the Company commencing January 1, 1993 for a term of two years and
which are automatically renewable from year to year thereafter unless either
party terminates the contract with written notice ninety (90) days prior to the
end of the second year or any subsequent year. In 1997 the employment contract
was terminated and, hence, payments from June 1, 1997 through December 31, 1997
were never made. The contract provided for a base monthly salary of $6,250
Messrs Chuma which can only be increased with Board approval. This former
officer has agreed to a covenant-bot-to-compete for two years subsequent to
termination or resignation, unless such termination is in breach of the
agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
<PAGE> 11
Title of Class Name / Address Amount of Shares Percent
of
Beneficial Owner Beneficial Owner Class
Common Stock Michael Taglich 1,050,966 8%
Robert Taglich 1,050,966 8%
Management holds an insignificant amount of stock in the Registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No officer, director or family member of an officer or director is
indebted to the Registrant.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS.
The following documents are hereby filed with this report.
Independent Auditor's Report dated July 20, 1999.
Balance Sheet of December 31, 1998 and 1997
Statements of Operations for the Years ended December 31, 1998 & 1997
Statement of Shareholders' Equity for the years ended December 31, 1998 &
1997
Statement of Cash Flows for the years ended December 31, 1998 & 1997
2. Preliminary Proxy Statement, filed concurrently with this 10KSB
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Smart Games Interactive, Inc.
Date: July 20, 1999 By /s/ Nicholas J Chuma
------------------- -----------------------------
James Chuma, Acting Director
Acting Secretary
<PAGE> 12
-----------------------------
Smart Games Interactive,
Inc.
Financial Statements
&
Independent Auditor's Report
December 31, 1997 & 1998
-----------------------------
-----------------------------
Harmon & Company, CPA,
Inc.
-----------------------------
<PAGE> 13
-----------------------------
SMART GAMES INTERACTIVE, INC.
-----------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report ................................................................ Page 2
Financial Statements
Balance Sheets as of December 31, 1997 and 1998 ........................................... Page 3
Statements of Operations for the years ended December 31, 1997 and 1998 ................... Page 4
Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1997 and 1998 Page 5
Statements of Cash Flows for the years ended December 31, 1997 and 1998 ................... Page 6
Notes to Financial Statements ............................................................. Page 7
</TABLE>
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Independent Auditors' Report
To the Board of Directors
Smart Games Interactive, Inc.
We have audited the accompanying balance sheets of Smart Games
Interactive, Inc. as of December 31, 1997 and 1998 and the related statements of
operations, shareholders' equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1997 and 1998 financial statements referred to
above present fairly, in all material respects, the financial position of Smart
Games Interactive, Inc. as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As more fully described in Note B,
the Company has incurred losses since its start-up and is not currently
generating sufficient cash flows from operations. This situation raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans are set forth in Notes A, B and L. The financial statements
include all necessary adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
/s/ Harmon & Company, CPA, Inc.
- -------------------------------
Harmon & Company, CPA, Inc.
Dublin, Ohio
July 20, 1999.
-2-
<PAGE> 15
SMART GAMES INTERACTIVE, INC.
Balance Sheets
December31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
---- ----
Assets
<S> <C> <C>
Current Assets
- --------------
Cash $ 2,578 $ 0
Accounts Receivable, less allowances of $32,284
in 1997 1,925 0
Inventories:
Raw Materials 0 0
Work-In-Process 0 0
Finished Goods 21,300 0
Total Inventories 21,300 0
----------- -----------
Prepaid Expenses and Other Current Assets 1,000 0
----------- -----------
Total Current Assets 26,803 0
----------- -----------
Property, Plant & Equipment, less Accumulated
- ---------------------------------------------
Depreciation and Amortization
-----------------------------
Machinery & Equipment 10,462 0
Computer & Communication Equipment 50,446 0
Furniture & Fixtures 29,170 29,170
----------- -----------
90,078 29,170
Less Accumulated Depreciation and Amortization (80,456) (23,715)
----------- -----------
Total Property, Plant & Equipment 9,622 5,455
----------- -----------
Total Assets $ 36,425 $ 5,455
----------- -----------
Liabilities and Shareholder's Equity (Deficit)
Current Liabilities
- -------------------
Note Payable $ 14,000 $ 14,000
Accounts Payable 577,252 151,604
Accrued Compensation and Related Liabilities 15,000 0
Other Accrued Expenses 46,328 14,600
----------- -----------
Total Current Liabilities 652,580 180,204
----------- -----------
Shareholders' Equity (Deficit)
- ------------------------------
Preferred Stock, at par value ($.0002), 5,000,000 shares authorized,
-0- shares issued and outstanding 0 0
Common Stock, at par value ($.0002), 50,000,000 shares authorized, 12,648,244
shares issued and outstanding in 1997 and 1996, respectively 2,530 2,530
Paid-in Capital 6,262,943 6,262,943
Accumulated Deficit (6,881,628) (6,440,222)
----------- -----------
Total Shareholders' Equity (Deficit) (616,155) (174,749)
----------- -----------
Total Liabilities & Shareholders' Equity (Deficit) $ 36,425 $ 5,455
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements
-3-
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SMART GAMES INTERACTIVE, INC.
Statements of Operations
For the Years Ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Net Sales $ 159,133 $ 44,468
Cost of Goods Sold 143,754 21,300
------------ -----------
Gross Margin 15,379 23,168
------------ -----------
Selling, General and Administrative Costs 769,809 54,988
Research and Development Costs 1,433 0
Non-recurring Charges 783,620 0
------------ -----------
1,554,862 54,988
------------ -----------
Loss from Operations (1,539,483) (31,820)
Other Expenses 12,970 1,200
------------ -----------
Loss before Extraordinary Items (1,552,453) (33,020)
Extraordinary Items 241,004 474,426
------------ -----------
Net Income (Loss) ($1,311,449) $ 441,406
------------ -----------
Net Income (Loss) per common share before extraordinary item ($0.12) ($0.00)
Net Income (Loss) per common share ($0.10) $0.03
Shares used in calculation of net income (loss) per share 12,648,244 12,648,244
------------ -----------
</TABLE>
The accompanying notes are an integral part of the financial statements
-4-
<PAGE> 17
SMART GAMES INTERACTIVE, INC.
Statements of Shareholders' Equity (Deficit)
For the Years Ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Common Stock Total
------------ Paid in Accumulated Shareholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1996 12,648,244 2,530 6,262,943 (5,570,179) 695,294
---------- ------ ---------- ----------- ---------
Net Loss (1,311,449) (1,311,449)
----------- ---------
Balance December 31, 1997 12,648,244 2,530 6,262,943 (6,881,628) (616,155)
---------- ------ ---------- ----------- ---------
Net Loss 441,406 441,406
----------- ---------
Balance December 31, 1998 12,648,244 $2,530 $6,262,943 ($6,440,222) ($174,749)
========== ====== ========== =========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements
-5-
<PAGE> 18
SMART GAMES INTERACTIVE, INC.
Statements of Cash Flows
For the Years Ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Loss before extraordinary activities ($1,552,453) ($33,020)
Extraordinary item 241,004 474,426
----------- -----------
Net income (loss) (1,311,449) 441,406
Adjustments to reconcile net loss to net cash used
by operating activities
Depreciation and amortization 10,374 4,167
Accounts receivable allowances 11,716 0
Adjustment of valuation reserves (538,186) 0
Non - recurring charges 783,620 0
Cash provided (used) by the change in:
Accounts receivable 27,055 1,925
Inventories 537,543 21,300
Prepaid expenses and other assets 170,886 1,000
Note Payable 14,000 0
Accounts payable (13,983) (425,648)
Accrued expenses (150,700) (46,728)
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (459,124) (2,578)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Purchases of property and equipment 0 0
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Issuance of notes payable 14,000 0
Repayment of capital lease obligations (34,638) 0
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (20,638) 0
----------- -----------
NET INCREASE (DECREASE) IN CASH (479,762) (2,578)
----------- -----------
Cash and Cash equivalents, beginning of year 482,340 2,578
----------- -----------
Cash and Cash equivalents, end of year $ 2,578 $ 0
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements
-6-
<PAGE> 19
SMART GAMES INTERACTIVE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
Note A - Summary of Significant Accounting Policies
ORGANIZATION AND NATURE OF PRIOR OPERATIONS - Smart Games Interactive,
Inc. (the Company) is engaged in the consumer electronics industry. The Company
designs, develops and manufactures interactive electronic game simulations that
incorporate the Company-owned hardware and software technology. The Company's
products are sold throughout the United States and internationally.
On October 11, 1996, Sports Sciences, Inc. ("SSI"), the predecessor to
the Company, reincorporated from the State of Ohio to the State of Delaware by
means of a merger with and into the Company (the "Merger"), then a wholly-owned
subsidiary of SSI. The Company was the surviving corporation in the Merger. In
the Merger, SSI's outstanding common stock was automatically extinguished and
converted into issued and outstanding shares of the Coin pan/s common stock.
WINDING DOWN AND TERMINATION OF OPERATIONS - Cash flow generated from
operations during 1997, and prior years, was not sufficient to maintain
operations. During 1997, the Company started planning for possible long term
debt financing and/or private placements of equity and/or debt securities. The
Company's efforts to obtain financing were not successful. To address the
Company's severe and ongoing cash flow problems, the Company significantly
reduced the level of operations during the second quarter of 1997 and
accordingly proceeded to close down all operations of the Company in the last
half of 1997. Accordingly, the Company terminated all employees, including the
president and chief executive officer, John D. Lipps. Due to this termination,
all patents assigned by Mr. Lipps to the Company reverted back to Mr. Lipps. The
Company has incurred certain non-recurring charges totaling $783,620 as a result
of reducing the inventories and certain assets to net realizable values and
returning the patents. The following is summary of non-recurring charges:
<TABLE>
<CAPTION>
1997 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Inventory valuation adjustments and writeoffs $512,767 $ 0
Property & Equipment valuation adjustments and writeoffs 155,439 0
Patents 73,414 0
Writeoff of Trade Credits 42,000 0
-------- ---
Total Non-recurring items $783,620 $ 0
======== ===
</TABLE>
In addition, and as more fully explained in Note L, the Company has
submitted to the Board of Directors a draft of an Acquisition and Merger
Agreement whereby in a reverse merger, the Company would acquire Brandmakers,
Inc., a Georgia corporation. Under the terms of the agreements Brandmakers, Inc.
would be merged into the Company.
Prior to and in anticipation of the merger, the principals of
Brandmakers, Inc. have, on the Company's behalf, continued the program whereby
it negotiated settlements of outstanding trade payable indebtedness owed by the
Company. Brandmakers has executed and/or agreed to issue notes payable and/or
cash of approximately $155,000 in order to settle indebtedness of approximately
$577,000.
CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
temporary cash investments and trade accounts receivables. The Company places
its temporary cash in vestments with financial institutions and, although at
December 31, 1996 they had invested amounts in excess of federal insurance
limits, management did not feel that the Company was exposed to any substantial
credit risk. As previously indicated, the Company significantly reduced the
level of operations during the second quarter of 1997 and accordingly proceeded
to close down all
-7-
<PAGE> 20
SMART GAMES INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
operations of the Company in the last half of 1997, All risks with respect to
accounts receivable, valuation allowances and appropriate reserves have been
considered.
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.
INVENTORIES - The Company values its inventories at the lower of cost
or market. Cost is determined utilizing the first-in, first-out (FIFO) method.
Inventories at December 31, 1997 were at minimal levels and represented
primarily slow-moving and obsolete items which were sold or liquidated in 1998.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets, ranging from five to seven years. Repairs and maintenance
costs are charged to expense as incurred.
OTHER ASSETS, NET - In prior years, other assets consisted primarily of
patents and trademarks which were stated at cost. The Company capitalized the
costs associated with obtaining patents and trademarks, primarily legal expenses
and filing fees. On an ongoing basis, the Company evaluated the carrying value
of its patents and trademarks and adjusts for any impairment in value.
Amortization was computed on a straight-line basis over the estimated useful
life of the patent or trademark, not to exceed 17 years for patents and 40 years
for trademarks. Amortization expense for the years ended December 31, 1997 and
1998 were $10, 671 and $0, respectively. As previously discussed, the Company
terminated all employees, including the president and chief executive officer,
John D. Lipps. Due to this termination, all patents assigned by Mr. Lipps to the
Company reverted back to Mr. Lipps and a $73,414 non-recurring charge was
recorded in 1997.
REVENUE RECOGNITION - The Company recognizes revenue when gobds are
shipped to customers except for inventory shipped on a consignment basis.
Revenue from consignments is recognized when the consignee sells the product to
individual consumers. Allowances are recorded for estimated product returns and
warranties. International sales, including Canada, amounted to approximately
$2,000 and $0 for the years ended December 31, 1997 and 1998, respectively.
INCOME TAXES - Income taxes are accounted for in accordance with the
provisions of Statement of Financial Accounting Standards No 109 (SFAS 109),
"Accounting for Income Taxes." Under SFAS 109, the asset and liability method is
used to account for income taxes. This method requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the financial reporting basis and tax basis of
assets and liabilities. Valuation allowances are established, if necessary, to
reduce the deferred tax asset to the amount that will more likely than not be
realized. Income tax expense is the current tax payable or refundable for the
period plus or minus the net change in the deferred tax assets and liabilities.
NET LOSS PER COMMON SHARE - Net loss per common share is computed using
the weighted average number of shares of common stock and common equivalent
shares outstanding.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
NOTE B - BASIS OF PRESENTATION; LIQUIDITY AND NON-RECURRING CHARGES
The Company's financial statements have been prepared on a going
concern basis and include certain adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible inability of the
Company to continue as a going concern.
-8-
<PAGE> 21
SMART GAMES INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
INVENTORY; NON-RECURRING CHARGES - During 1997, the Company recognized
unusual, non-recurring charges of $512,767 related to reducing inventories to
net realizable value. Such value is based on management's estimate of sales of
its 16-bit technology products in the ensuing years. The inventory balance of
the Company's remaining 16-bit technology products at December 31, 1996 was
approximately $51,000, an amount which was subsequently written off in 1997.
BARTER TRANSACTION - TRADE CREDITS; NON-RECURRING CHARGES - In prior
years, the Company entered into an agreement whereby it sold its products at
fair market value in exchange for cash and trade credits to be utilized on a
part cash (cash portion not to exceed 50%), part trade basis for media
advertising, goods and or services. The initial term of the agreement was for 36
months; however, the Company had the right to extend the agreement for an
additional 12 months. Any trade credits remaining after expiration of the
agreement were to become null and void. None of the trade credits had been
utilized by the Company.
It became apparent that circumstances indicated that there was
substantial uncertainty as to the Company's ability to utilize the trade credits
during the remaining term of the agreement as realization of the trade credits
is dependent on the Company generating sufficient future cash flows to meet the
cash payments required in connection with the utilization of the trade credits.
During 1997, the Company recorded a non-recurring charge of $42,000 as a result
of reducing the trade credits to their net realizable value.
PROPERTY AND EQUIPMENT VALUATION ADJUSTMENTS AND WRITE-OFFS - Property
and equipment valuation adjustments and write-offs consisted of the following
for 1997:
<TABLE>
<CAPTION>
Cost Adjustment As Adjusted
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Machinery and equipment $ 325,471 ($315,009) $ 10,462
Computer equipment 84,983 (34,537) 50,446
Furniture and fixtures 31,095 (1,925) 29,170
Leasehold improvements 3,283 (3,283) -0-
Assets held under capital leases 37,860 (37,860) -0-
--------- --------- ---------
482,692 (392,614) 90,078
Less accumulated depreciation and amortization 317,631 (237,175) 80,456
--------- --------- ---------
Property and equipment, net $ 165,061 ($155,439) $ 9,622
========= ========= =========
</TABLE>
During 1998, the equipment and computers which had been fully
depreciated and which management determined had no value were written down
to $0.
NOTE C - EXTRAORDINARY ITEMS
During the fourth quarter of 1996, the Company initiated a program
whereby it negotiated settlements of outstanding trade payable indebtedness owed
by the Company. The Company continued this program during 1997 and paid cash of
approximately $98,000 to settle indebtedness of approximately $355,000. The
Company reduced accounts payable and other accrued expenses on its balance sheet
by approximately $355,000 and recorded an extraordinary after tax gain of
approximately $241,004, net of expenses of approximately $15,996.
Prior to and in anticipation of the proposed merger, the principals of
Brandmakers, Inc. have, on the Company's behalf, continued the program whereby
it negotiated settlements of outstanding trade payable indebtedness owed by the
Company. Brandmakers has executed notes payable and/or cash of approximately
$155,000 in order to settle indebtedness of approximately $577,000.
-9-
<PAGE> 22
SMART GAMES INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
Because it is likely that these payables will be paid by Brandmakers,
Inc. (a third party), during 1999, the Company reduced its accounts payable and
other accrued expenses by approximately $476, 000 and recorded an extraordinary
after tax gain of approximately $476,000.
NOTE D - LEASES
During a portion of 1997, the Company leased its office, manufacturing
facility and certain office equipment under noncancellable operating leases. The
office and manufacturing facility lease expired in May 1997 and the Company did
not exercise its option to renew. In conjunction with expiration of the lease,
the Company recorded a writeoff of leasehold improvements of $3,283 in 1997.
NOTE E - WARRANTY AND RIGHT OF RETURN POLICIES
All of the Company's products carry a minimum 90 day manufacturer's
warranty. The warranty period begins on the date of purchase by the individual
consumer. Consumers, who purchase a product from the Company, have the right to
return the product for either merchandise, credit or refund (within 30 days of
purchase) provided the product is free of damage or abuse not consistent with
the normal use of the product: All sales were final and no additional warranty
or right of return exists for sales made in 1997 or 1998.
NOTE F - COMMITMENTS
PATENT AGREEMENT WITH COMPANY PRESIDENT - The President of the Company
had previously assigned four patents and/or patent applications to the Company
in connection with his employment. The assignment stated that, in the event the
President's employment was terminated for any reason, he was entitled to
severance payments equal to three percent of the annual gross revenues received
by the Company from the sale of its products which rely on these patents, and
are payable only for the life of the patents and patent applications. Pursuant
to the agreement, payments were not to exceed $360,000 or be less than $90,000
on an annual basis. In the event the Company did not perform in accordance with
the agreement, the patents and patent applications were to revert to the
President. This reversion took place during the third quarter of 1997.
LICENSING AGREEMENTS - The Company had licensing agreements with
certain major manufacturers of video games for the limited right to use the
manufacturers" trademarks in connection with several of the Company's products.
The agreements called for royalties equal to five percent of net sales of
products licensed under the agreements. The Company recognized royalty expense
of approximately $0 in 1997 and 1998 relating to these agreements. The Company
allowed these agreements, which cover the Company's 16- bit product line, to
expire at their respective expiration dates.
In September 1996, the Company executed a license agreement with Little
League Baseball, Incorporated ("Little League') whereby the Company can utilize
the trademarks of Little League on Smart Baseball TM. This agreement expired in
September 1997 and was not renewed. No royalty expense related to this agreement
was recorded during 1997 and 1998.
NOTE G - COMMON STOCK
On April 18, 1994, the Company completed a public offering of 800,000
units consisting of one common share and one common share purchase warrant for
proceeds of approximately $4 million ($3.4 million after expenses). The warrants
became separately transferable sixty days after the effective date of the
offering. Under the terms of the warrant agreements, the exercise price of the
warrants and the number of shares purchasable are adjusted whenever common stock
is issued at a share price below the current market
-10-
<PAGE> 23
SMART GAMES INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
value. At December 31, 1996, warrants to purchase 1,061,571 shares of the
Company's common stock exercisable at $4.71 per share were outstanding. These
warrants expired on April 7, 1997.
In 1994, the Company issued 71,785 common stock purchase warrants to
the underwriter of the offering. At December 31, 1996, warrants to purchase
95,256 shares of the Company's common stock exercisable at $4.71 per share and
expiring on April 8, 1999 were outstanding. Any or all of these warrants are
callable at the option of the Company at a price of $.01 per warrant if the
closing price of the Company's common stock equals or exceeds $4.71 for thirty
consecutive trading days. These warrants expired on April 8, 1999. In addition,
30,000 warrants, each providing for the purchase of one share of the Company's
common stock at an exercise price of $4 per share, were issued on October 19,
1993 and expired October 19, 1998, At completion of the public offering, the
Company converted certain debenture bonds to common stock through the issuance
of 323,979 shares of common stock.
In October 1996, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation to increase the number of authorized
shares of the Company's common stock from 10,000,000 to 50,000,000.
On October 11, 1996, Sports Sciences, Inc. ("SSI"), the predecessor to
the Company, reincorporated from the State of Ohio to the State of Delaware by
means of a merger with and into the Company ("Merger"), then a wholly-owned
subsidiary of SSI. The Company was the surviving corporation in the Merger. In
the Merger, SSI's outstanding common stock was automatically extinguished and
converted into issued and outstanding shares of the Company's common stock.
On October 30, 1996, the Company issued and sold 6,933,333 shares of
its common stock without registration under the 1933 Act in reliance on the
exemption effected under Regulation D of the Securities Act of 1933, as amended.
The securities were offered and sold in a private placement to a limited number
of accredited investors for a total offering price of $1,300,000. The placement
agent for the offering received a commission paid in the form of 520,000 shares
of common stock. In addition, representatives of the placement agent received
warrants to purchase an aggregate 693,333 shares of common stock at a purchase
price of $.20625 per share.
In 1996, the Company has authorized for the issuance of 10,000 shares
of common stock to the Company's manufacturing representative in China for the
continued warehousing of product. Additionally in 1996, the Company has
authorized the issuance of 30,000 shares of common stock as partial settlement
of trade payable indebtedness. As of June 9, 1999, none of these shares of
common stock have been issued.
On February 14, 1997, the Company filed a Registration Statement on
Form SB-2 in order to register,
(1) 538,532 shares of common stock the Company issued to certain trade
payable creditors in exchange for cancellation of trade payable
indebtedness,
(2) 6,933,333 shares of common stock the Company issued in the October
1996 private placement,
(3) 693,333 shares of common stock to be issued by the Company upon the
exercise of 693,333 warrants issued to the placement agent in the
October 1996 private placement and
(4) 10,000,000 shares of common stock to be offered by the Company from
time to time. Upon receiving the SEC comment letter, the Company
determined that it was unable to proceed with the offering and
withdrew the registration.
-11-
<PAGE> 24
SMART GAMES INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
The Company"s stock is currently traded on the over the counter
(0TC) market.
NOTE H - COMMON STOCK OPTIONS
On November 15, 1993, the Company's Board of Directors adopted the
1993 Non qualified Incentive Stock Option Plan. Under the plan, as amended by
the Company's shareholders in April 1995 and in October 1996, options may be
granted to employees to purchase up to 1,000,000 shares of the Company's common
stock at exercise prices not less than market value at the date of grant unless
otherwise authorized by the Board of Directors. The options are exercisable at
various times determined at the date of grant for a period of no more than ten
years. No options have been exercised under this plan. All options for 1997 and
1996 were issued to employees of the Company. These options expire under the
terms of the agreement six months after an employee is no longer in the employ
of the Company. All options expired March 1998 without any being exercised.
NOTE I - INCOME TAXES
Prior to October 20, 1993, the Company was treated as a Subchapter
S corporation under the Internal Revenue Code for income tax purposes.
Accordingly, substantially all of the income and expenses of the Company through
October 19, 1993 are included in the federal and state income tax returns of the
shareholders and operating losses generated through such period are not
available to the Company for carryover. Net operating losses since October 19,
1993 of approximately $7,350,000 are available for carryover and expire in
various years through 2013.
Deferred income taxes reflect the net effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities
and assets are as follows at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities, principally property and equipment,
patents and return reserves $-0- $-0-
Deferred tax assets:
Accrued expenses 3,900 -0-
Start up costs -0-
Trade credits -0- -0-
Net operating loss carryforwards 2,795,000 2,352,000
Other -0- -0-
---------- ----------
Total deferred tax assets 2,798,900 2,352,000
Valuation allowance for deferred tax assets (2,798,900) (2,352,000)
---------- ----------
Net deferred taxes $-0- $-0-
========== ==========
</TABLE>
Management has provided a valuation allowance for its net deferred
tax assets as the Company has incurred losses since inception.
-12-
<PAGE> 25
SMART GAMES INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE J - RELATED PARTY TRANSACTIONS
During 1997, in separate transactions, the Company borrowed a total
of $14,000 from two (2) former officers and directors of the Company. The notes
are for $10,000 and $4,000 respectively and bear interest at the rate of 10% per
annum.
NOTE K - CONTINGENCIES
The Company is subject to potential claims and legal actions
arising in the ordinary course of business. Management believes that it has
defenses of considerable merit and has or will seek settlements favorable to the
Company, but is not able to predict the ultimate outcome of these matters at
this time. Accordingly, resolutions unfavorable to the Company could result in
material liabilities and charges which have not been reflected in the
accompanying financial statements.
NOTE L - SUBSEQUENT EVENTS
The Company has submitted to the board of Directors, a draft of an
Acquisition and Merger Agreement whereby the Company would acquire Brandmakers,
Inc., a Georgia corporation. Under the terms of the agreements being drafted and
circulated, Brandmakers, Inc. would be merged into the Company.
Prior to and in anticipation of the merger, the principals of
Brandmakers, Inc. have, on the Company's behalf, continued the program whereby
it negotiated settlements of outstanding trade payable indebtedness owed by the
Company. Brandmakers has executed notes payable and/or cash of approximately
$155,000 in order to settle indebtedness of approximately $577,000.
-13-
