<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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
----------- -----------
-------------
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.
<PAGE> 2
PART I
ITEM 1. BUSINESS
The Registrant was incorporated in October, 1991 as an Ohio corporation,
then subsequently moved its domicile to the State of Delaware. The Company's
business formerly consisted of the consumer electronics industry. The Company
formerly 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. Since September of 1997, the Company has not
been active. 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.
On February 2, 1999, management convened a Board Meeting and formally
decided to approve a merger of the Company with Brandmakers, Inc. Brandmakers,
Inc. is a Georgia domiciled company. Previous to the convening of this Board
Meeting, Brandmakers, Inc. commenced discussions with the creditors of the
Company and initiated, at its own expense, the preparation of an annual audit of
the Company's operations for the year 1997. Brandmakers, Inc. will also pay the
obligation of the Registrant which is owed to Delaware. Upon clearing comments
with its Preliminary Proxy, the Company will be lawfully incorporated, validly
existing and in good standing under the laws of the State of Delaware.
PROPOSED OPERATIONS
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
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. [See Brandmakers Existing Operations] This part of
the Plan is termed the Acquisition of Brandmakers. The Company will further be
used as a corporate vehicle to seek, investigate and, if the results of such
investigation warrant, effect a further business combination with a suitable
privately-held company or other business opportunity presented to it by persons
or firms that seek the perceived advantages of a publicly held corporation.
(2)
<PAGE> 3
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
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 attended an exhibit at Lake Arrowhead in
Oklahoma on Indian land and received a favorable interest in this equipment.
There appears to be a significant potential in Oklahoma and other native
American reservations across the country. At present we are adding bill
acceptors and printers as well as doing the final testing prior to placement.
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
(3)
<PAGE> 4
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 by mid-February, 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 May 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 February, 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
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 December, 1998. 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.
(4)
<PAGE> 5
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
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.
ITEM 2. PROPERTIES
None.
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
Upon filing this 10-K and all necessary 10-Q'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-K and incorporated by reference. In 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.
(5)
<PAGE> 6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
There is no established public trading market for the Registrant's
securities.
ITEM 6. SELECTED FINANCIAL DATA.
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 10K 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.
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
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.
(6)
<PAGE> 7
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 officers 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
<TABLE>
<CAPTION>
Title of Class Name / Address Amount of Shares Percent of
Beneficial Owner Beneficial Owner Class
<S> <C> <C> <C>
Common Stock Michael Taglish 650,966 5%
Robert Taglish 1,050,966 8%
</TABLE>
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 January 15, 1999.
Balance Sheet of December 31, 1997 and 1996
Statements of Operations for the Years ended December 31, 1997 & 1996
Statement of Shareholders' Equity for the years ended December 31, 1997 &
1996
Statement of Cash Flows for the years ended December 31, 1997 & 1996
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: February 12, 1999 By /s/ Nicholas J Chuma
------------------- -----------------------------
James Chuma, Acting Director
Acting Secretary
(7)
<PAGE> 8
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 capacity and on the date indicated.
Date: February 12, 1999 By: /s/ Peter Waite
----------------- ----------------------------
Peter Waite, Acting Director
Date: February 12,1999 By: /s/ Donald Miller
---------------- -----------------------------
Donald Miller, Acting Director
<PAGE> 9
===============================
SMART GAMES INTERACTIVE,
INC.
FINANCIAL STATEMENTS
&
INDEPENDENT AUDITOR'S REPORT
DECEMBER 31, 1997 & 1996
===============================
========================
HARMON & COMPANY,
CPA, INC.
========================
<PAGE> 10
============================
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 1996 ......................................................... Page 3
Statements of Operations for the years ended December 31, 1997 and 1996 ................................ Page 4
Statements of Shareholders' Equity for the years ended December 31, 1997 and 1996 ...................... Page 5
Statements of Cash Flows for the years ended December 31, 1997 and 1996 ................................ Page 6
Notes to Financial Statements ......................................................................... Page 7
</TABLE>
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<PAGE> 11
[LETTERHEAD H&C]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Smart Games Interactive, Inc.
We have audited the accompanying balance sheets of Smart Games
Interactive, Inc. (known as Sports Sciences, Inc. prior to merger with and into
Smart Games Interactive, Inc. on October 11, 1996 (see Note A)) as of December
31, 1997 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. The
financial statements of Smart Games Interactive, Inc. as of December 31, 1996,
were audited by other auditors whose report dated March 24, 1997 expressed an
unqualified opinion and included an explanatory paragraph on going concern
matters. (see Notes A and B)
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 1996 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 1996, 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 N. 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.
Harmon & Company, CPA, INC.
- --------------------------------------------------------------
HARMON & COMPANY, CPA, INC.
October 20, 1998 except as to the information
presented in Notes A, B and N for which the date is
January 15, 1999.
Phone 614-792-9833 Members of the AICPA...SEC Practice Section
Fax 614-792-9834 Ohio Society of Certified Public Accountants
-2-
<PAGE> 12
SMART GAMES INTERACTIVE, INC.
BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
Assets
<S> <C> <C>
Current Assets
- --------------
Cash $ 2,578 $ 482,340
Accounts Receivable, less allowances of $32,284 and
$44,000, respectively 1,925 28,980
Inventories
Raw Materials -0- 301,289
Work-In-Process -0- 166,180
Finished Goods 21,300 91,374
----------- -----------
Total Inventories 21,300 558,843
----------- -----------
Prepaid Expenses and Other Current Assets 1,000 171,886
----------- -----------
Total Current Assets 26,803 1,242,049
----------- -----------
Property, Plant & Equipment, less Accumulated Depreciation and Amortization
- ---------------------------------------------------------------------------
Machinery & Equipment 10,462 325,471
Computer & Communication Equipment 50,446 84,983
Furniture & Fixtures 29,170 31,095
Leasehold Improvements -0- 3,283
Capital Leases -0- 37,860
----------- -----------
90,078 482,692
Less Accumulated Depreciation and Amortization (80,456) (317,631)
----------- -----------
Total Property, Plant & Equipment 9,622 165,061
----------- -----------
Other Assets
- ------------
Trade Credits, net of valuation reserves of $798,000 in 1996 -0- 42,000
Other Assets, net -0- 84,085
----------- -----------
Total Other Asset -0- 126,085
----------- -----------
Total Assets $ 36,425 $ 1,533,195
----------- -----------
Liabilities and Shareholder's Equity (Deficit)
Current Liabilities
Current portion of Capital Lease Obligations $-0- $ 5,841
Note Payable 14,000 -0-
Accounts Payable 577,252 591,235
Accrued Compensation and Related Liabilities 15,000 4,328
Other Accrued Expenses 46,328 207,700
----------- -----------
Total Current Liabilities 652,580 809,104
----------- -----------
Long-term Liabilities
- ---------------------
Capital Lease Obligations. net of current portion -0- 28,797
----------- -----------
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) (5,570,179)
----------- -----------
Total Shareholders' Equity (Deficit) (616,155) 695,294
----------- -----------
Total Liabilities & Shareholders' Equity (Deficit) $ 36,425 $ 1,533,195
----------- -----------
</TABLE>
See accompanying notes to financial statements
<PAGE> 13
SMART GAMES INTERACTIVE, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net Sales $ 159,133 $ 663,406
Cost of Goods Sold 143,754 537,921
------------ ------------
Gross Margin 15,379 125,485
------------ ------------
Selling, General and Administrative Costs 769,809 791,532
Research and Development Costs 1,433 133,216
Non - recurring Charges 783,620 697,303
------------ ------------
1,554,862 1,622,051
------------ ------------
Loss from Operations (1,539,483) (1,496,566)
Other Expenses 12,970 25,243
------------ ------------
Loss before Extraordinary Items (1,552,453) (1,521,809)
Extraordinary Items 241,004 201,150
------------ ------------
Net Loss ($ 1,311,449) ($ 1,320,659)
------------ ------------
Net Loss per common share before extraordinary item ($ 0.12) ($ 0.23)
------------ ------------
Net Loss per common share ($ 0.10) ($ 0.20)
------------ ------------
Shares used in calculation of net loss per share 12,648,244 6,692,154
------------ ------------
</TABLE>
See accompanying notes to financial statements
-4-
<PAGE> 14
SMART GAMES INTERACTIVE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Total
------------ Paid in Accumulated Shareholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1995 5,176,379 $1,035 $4,803,192 ($4,249,520) $554,707
Issuance of common stock for cancellation
of indebtedness 538,532 108 385,998 386,106
Issuance of common stock for cash
pursuant to private placements 6,933,333 1,387 1,298,613 1,300,000
Expenditures for private placement (224,860) (224,860)
Net Loss (1,320,659) (1,320,659)
--------------------------------------------------------------------------------------------------------------
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)
==============================================================================================================
</TABLE>
See accompanying notes to financial statements
-5-
<PAGE> 15
SMART GAMES INTERACTIVE, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997 and 1996
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Loss before extraordinary activities ($1,552,453) ($1,521,809)
Extraordinary item 241,004 201,150
----------- -----------
Net loss (1,311,449) (1,320,659)
Adjustments to reconcile net loss to net cash used
--------------------------------------------------
by operating activities
-----------------------
Depreciation and amortization 10,374 95,933
Accounts receivable allowances 11,716 (164,278)
Adjustment of valuation reserves (538,186) -0-
Non - recurring charges 783,620 697,303
Cash provided (used) by the change in:
Accounts receivable 27,055 436,932
Inventories 537,543 173,568
Prepaid expenses and other assets 170,886 (124,194)
Note Payable 14,000 -0-
Accounts payable (13,983) (446,339)
Accrued expenses (150,700) (98,943)
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (459,124) (750,677)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Purchases of property and equipment -0- (5,845)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Proceeds from issuance of common stock, net of expenses -0- 1,075,140
Issuance of notes payable 14,000 466,396
Repayment of notes payable -0- (466,396)
Repayment of capital lease obligations (34,638) (3,222)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (20,638) 1,071,918
----------- -----------
NET INCREASE (DECREASE) IN CASH (479,762) 315,396
----------- -----------
Cash and Cash equivalents, beginning of year 482,340 166,944
----------- -----------
Cash and Cash equivalents, end of year $ 2,578 $ 482,340
----------- -----------
</TABLE>
See accompanying notes to financial statements
-6-
<PAGE> 16
SMART GAMES INTERACTIVE, INC.
Notes to Financial Statements
December 31, 1997 and 1996
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 Company'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 long term debt financing, a private placement of
equity or debt securities 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 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Inventory valuation adjustments and writeoffs $512,767 $ 67,303
Property & Equipment valuation adjustments and writeoffs 155,439 - 0 -
Patents 73,414 - 0 -
Writeoff of Trade Credits 42,000 630,000
-------- --------
Total Non-recurring items $783,620 $697,303
======== ========
</TABLE>
In addition, and as more fully explained in Note N, 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 $147,597 in order to settle indebtedness of approximately
$597,597. (See Note N.)
-7-
<PAGE> 17
SMART GAMES INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
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 investments 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 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 - At December 31, 1996, other assets consisted
primarily of patents and trademarks which were stated at cost. The Company
capitalizes the costs associated with obtaining patents and trademarks,
primarily legal expenses and filing fees. On an ongoing basis, the Company
evaluates the carrying value of its patents and trademarks and adjusts for any
impairment in value. Amortization is 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 1996 was $10,671 and $10,671, respectively. 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 and a $73,414
non-recurring charge was recorded.
REVENUE RECOGNITION - The Company recognizes revenue when goods 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 $89,000 for the years ended December 31, 1997 and 1996, 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.
-8-
<PAGE> 18
SMART GAMES INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
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.
INVENTORY; NON-RECURRING CHARGES - During the 1997 and 1996, the
Company recognized unusual, non-recurring charges of $512,767 and $697,303,
respectively, 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 - During June
1995, the Company entered into an agreement whereby it sold $1,040,000 of its
products at fair market value to SKR Resources, Inc. in exchange for cash of
$200,000 and $840,000 of 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 shall become null and
void. As of December 31, 1996, none of the trade credits had been utilized by
the Company.
In 1996 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 and 1996, the Company recorded a non-recurring charge of $42,000 and
$630,000 respectively, 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:
<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>
-9-
<PAGE> 19
SMART GAMES INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE C - NONCASH TRANSACTIONS
In May 1996, the Company issued 538,532 shares of its common stock to
several creditors of the Company, in consideration for their cancellation of
trade payable indebtedness owed by the Company in the aggregate amount of
$386,106.
During 1996, the Company also entered into two capital leases for
equipment totaling $37,860.
NOTE D - 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 paid cash of approximately $99,000 in order to
settle indebtedness of approximately $326,000. The Company reduced accounts
payable and other accrued expenses on its balance sheet by approximately
$326,000 and recorded an extraordinary after tax gain of approximately $201,000,
net of expenses of approximately $26,000.
The Company has continued this program during 1997 and has 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.
NOTE E - FINANCING ARRANGEMENTS
During 1996, the Company sold approximately $380,000 of accounts
receivable to a third party and was advanced approximately $306,000 in cash.
Pursuant to the related contract, the Company was responsible for repayment to
the third party factoring company of the amount initially advanced plus a fee
equivalent to one percent (1%) for each ten day period (or portion thereof) the
account receivable remained outstanding. Amounts collected in excess of the
amount advanced and related fees remained with the Company. The accounts
receivable were paid within terms of approximately thirty (30) days.
In August 1996, the Company was advanced $150,000 by Taglich Brothers,
D'Amadeo, Wagner & Company, Incorporated at a zero percent interest rate. The
Company repaid this note payable out of the proceeds of the private placement
completed in October 1996.
Interest expense and cash paid for interest totaled $2,378 and $15,567
in 1997 and 1996, respectively.
NOTE F - LEASES
During 1996 and 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.
NOTE G - 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.
-10-
<PAGE> 20
SMART GAMES INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
Provisions for product returns for the year 1996 were approximately $84,000. All
sales were final and no additional warranty or right of return exists for sales
made in 1997.
NOTE H - 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 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. (See Note B)
PURCHASE COMMITMENTS - As of December 31, 1996, the Company was
committed under contractual purchase agreements to acquire inventory totaling
$187,294. Losses that were incurred upon fulfillment of these purchase
commitments for inventory used in the Company's 16-bit technology products have
been recognized in the accompanying statements of income (see Note B)
LICENSING AGREEMENTS - The Company has 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 call 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 1996 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 BaseballTM. This agreement expired in
September 1997 and was not renewed. No royalty expense related to this agreement
was recorded during 1997 and 1996.
NOTE I - 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 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.
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.
-11-
<PAGE> 21
SMART GAMES INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
Also, 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 May 1996, the Company issued 538,532 shares of common stock to
certain trade payable creditors in exchange for the cancellation of $386,106 in
trade payable indebtedness.
During June 1996, the Company's stock was no longer listed on the
NASDAQ Small Cap Market. The Company's stock is currently traded on the over the
counter (OTC) market.
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 October 20, 1998, 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, (i) 538,532 shares of common stock the Company
issued to certain trade payable creditors in exchange for cancellation of trade
payable indebtedness, (ii) 6,933,333 shares of common stock the Company issued
in the October 1996 private placement, (iii) 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 (iv) 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.
-12-
<PAGE> 22
SMART GAMES INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE J - COMMON STOCK OPTIONS
On November 15, 1993, the Company's Board of Directors adopted the 1993
Nonqualified 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.
The options detailed below apply to 1997 and 1996 and 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. The
following is a summary of the options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Currently Exercisable
------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Number Life Price Number Price
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.00 - $0.10 635,000 10.0 years $0.900 525,000 $0.900
$0.11 - $0.50 375,000 8.7 years $0.500 350,500 $0.500
$0.51 - $1.00 5,000 7.0 years $0.625 5,000 $0.625
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board Statement No. 123 ("FASB 123"), "Accounting
for Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employees stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
NOTE K - 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 2012.
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.
-13-
<PAGE> 23
SMART GAMES INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
Significant components of the Company's deferred tax liabilities and
assets are as follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities, principally property and equipment,
patents and return reserves $ - 0 - $ 76,000
Deferred tax assets:
Accrued expenses 3,900 13,000
Start up costs - 0 - 49,000
Trade credits - 0 - 239,000
Net operating loss carryforwards 2,795,000 2,204,000
Other - 0 - 38,000
---------- -----------
Total deferred tax assets 2,798,900 2,543,000
Valuation allowance for deferred tax assets (2,798,900) (2,467,000)
---------- -----------
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.
NOTE L - RELATED PARTY TRANSACTIONS
During 1996, the Company borrowed a total of $10,000 from the wife of
the president of the Company, which accrued interest at a rate of 0%. This loan
was repaid out of the net proceeds of the October 1996 private placement.
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 M - 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 N - 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.
-14-
<PAGE> 24
SMART GAMES INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
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 $147,597 in order to settle indebtedness of approximately
$597,597. The following is a proforma balance sheet at December 31, 1997 and
statement of operations, reflecting the subsequent reduction of accounts payable
and other accrued expenses on its balance sheet by approximately $450,000 and
recorded an extraordinary after tax gain of approximately $450,000.
<TABLE>
<CAPTION>
1997 Proforma
- ---------------------------------------------------------------------------------
Assets
<S> <C> <C>
Current Assets
Cash $ 2,578 $ 2,578
Accounts Receivable, less allowances of $32,284 1,925 1,925
Inventories:
Raw Materials - 0 - - 0 -
Work-in-Process - 0 - - 0 -
Finished Goods 21,300 21,300
Total Inventories 21,300 21,300
-------- --------
Prepaid Expenses and Other Current Assets 1,000 1,000
-------- --------
Total Current Assets 26,803 26,803
-------- --------
Property Plant & Equipment. less Accumulated Depreciation
and Amortization
Machinery & Equipment 10,462 10,462
Computer & Communication Equipment 50,446 50,446
Furniture & Fixtures 29,170 29,170
Leasehold Improvements - 0 - - 0 -
Capital Leases - 0 - - 0 -
-------- --------
90,078 90,078
-------- --------
Less Accumulated Depreciation and Amortization (80,456) (80,456)
-------- --------
Total Property, Plant & Equipment 9,622 9,622
-------- --------
Other Assets
Trades Credits - 0 - - 0 -
Other Assets - 0 - - 0 -
-------- --------
Total Other Assets - 0 - - 0 -
-------- --------
Total Assets $ 36,425 $ 36,425
======== ========
</TABLE>
-15-
<PAGE> 25
SMART GAMES INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
1997 Proforma
- --------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Shareholder's Equity (Deficit)
Current Liabilities
Current portion of Capital Lease Obligations $ - 0 - $ - 0 -
Note Payable 14,000 14,000
Accounts Payable 577,252 127,252
Accrued Compensation and Related Liabilities 15,000 15,000
Other Accrued Expenses 46,328 46,328
----------- -----------
Total Current Liabilities 652,580 $ 202,580
----------- -----------
Long-term Liabilities
Capital Lease Obligations, net of current portion - 0 - - 0 -
----------- -----------
Shareholders' Equity (Deficit)
Preferred Stock - 0 - - 0 -
Common Stock 2,530 2,530
Paid-in Capital 6,262,943 6,262,943
Accumulated Deficit (6.881,628) (6,431,628)
----------- -----------
Total Shareholders' Equity (Deficit) (616,155) (166,155)
----------- -----------
Total Liabilities & Shareholders' Equity (Deficit) $ 36,425 $ 36,425
=========== ===========
Statements of Operations
</TABLE>
<TABLE>
<CAPTION>
1997 Proforma
- --------------------------------------------------------------------------------------
<S> <C> <C>
Net Sales $ 159,133 $ 159,133
Cost of Goods Sold 143,754 143,754
----------- -----------
Gross Margin 15,379 15,379
----------- -----------
Selling, General and Administrative Costs 769,809 769,809
Research and Development Costs 1,433 1,433
Non - recurring Charges 783,620 783,620
----------- -----------
1,554,862 1,554,862
Loss from Operations (1,539,483) (1,539,483)
Other Expenses 12,970 12,970
----------- -----------
Loss before Extraordinary Items (1,552,453) (1,552,453)
Extraordinary Items 241,004 691,004
----------- -----------
Net Loss ($1,311,449) ($ 861,449)
=========== ===========
</TABLE>
-16-
