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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(Mark One)
x AMENDED ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _____________
Commission file number: 0-25624
LOTTOWORLD, INC.
(Exact name of registrant as specified in its charter)
-----------------------------
Florida 65-0399794
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2150 Goodlette Road
Suite 200
Naples, Florida 34102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (941) 643-1677
---------------------------
Securities registered pursuant to Section 12(b) of the Act: None
---------------------------
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Name of each exchange on which registered: The NASDAQ Stock Market
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ----
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB/A or any amendment to this Form
10-KSB/A.
---
Issuer's revenue for the most recent fiscal year are $797,466. The number of
common shares outstanding on March 25, 1996, was 3,573,522. The aggregate market
value of the voting stock held by non-affiliates, based on the closing NASDAQ
sale price on March 25, 1996 was $10,770,527.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the at LottoWorld, Inc. 1996 Notice of Annual Meeting of
Stockholders and Proxy Statement, to be filed with the Securities and exchange
Commission within 120 days after the close of the Registrant's fiscal year are
incorporated by reference in Part III
Transitional Small Business Disclosure Format: Yes No X
--- ---
1
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<PAGE>
LottoWorld, Inc.
Index to Amended Annual Report on Form 10-KSB/A
Filed with the Securities and Exchange Commission
Year ended December 31, 1995
Items in Form 10-KSB/A
Page
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Facing Page 1
Part II
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 3
Signatures................................................................ 10
Financial Statements
2
<PAGE>
<PAGE>
Part II
Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
The statements contained in this filing that are not historical facts are
forward-looking statements. Actual results may differ materially from those
projections in the forward-looking statements. These forward-looking statements
involve risks and uncertainties including, without limitation, those mentioned
in previous filings with the Securities Exchange Commission under "Risk
Factors". The Company cannot assure that it will be able to anticipate or
respond timely to changes in any of the risk factors mentioned above, which
could adversely affect operating results in one or more fiscal quarters. Results
of operations in any past period should not be considered indicative of the
results to be expected for future periods. Fluctuations in operating results may
also result in fluctuations in the price of the Company's common stock.
The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto appearing elsewhere in Form 10-KSB/A.
The Company had operating revenues of $189,000; operating expenses of
$1,935,000; an operating loss of $1,746,000; and a net loss of $1,756,000 for
the year ended December 31, 1994. This loss was attributable to expansion of the
Company's professional staff, increased office space in Naples, Florida and the
opening of a New York City advertising office. The loss per share for the year
was $.93.
For the year ended December 31, 1995, the Company had operating revenues
of $797,000; operating expenses of $6,439,000; an operating loss of $5,641,000;
and a net loss of $5,595,000. The loss per share was $2.21. The Company
attributes approximately $1,327,000 of production; $1,000,000 of distribution,
marketing and merchandising; and $750,000 of promotion expense to be associated
with the failure to timely place LottoWorld(R) magazine in retail sales
locations because pockets were not properly prepared to accept delivery of the
magazine.
The Company, through its efforts to increase circulation and to manage the
newsstand distribution of the magazine, expects operating revenues to increase
in 1996 as a result of increased newsstand, advertising and ancillary revenues.
Newsstand sales are expected to increase as a result of the promotion of
the Lucky 7 Prepack for display at grocery store service counters and
non-traditional magazine outlets. This promotion has already placed over 2,500
Lucky 7 Prepack at wholesalers throughout the Northeast United Sates.
3
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The Company expects to generate the major portion of its revenue through
the sale of advertising in the controlled circulation magazines it will be
publishing. The Company anticipates the sale of advertising to be the leading
source of it's revenues in 1996 and firmly believes it will be able to sell
sufficient advertising to make the controlled circulation magazines successful.
The Company expects to begin renting its list of subscribers during the
second quarter and has entered into an agreement with a List Rental Manager to
develop this stream of revenues. The Company anticipates receiving revenues of
approximately $1 per subscriber per year. In addition, the Company feels it will
experience an increase in advertising due to the increase in circulation and the
ancillary revenues of $.45 per subscriber per month is expected to continue.
The Company prints a sufficient number of each issue of the magazine to
supply each retail location, each subscriber and additional copies for
promotional and office use. The number of copies ordered from the printer for
retail sales locations is dependent on data the Company receives from vendors
representing the number of retail locations available to receive magazines for
display and sale to the public. Based on preliminary sales data and on-site
surveys of retail locations indicated by vendors to be available to display and
sell the magazine, it was apparent in August 1995, that the Company had been
supplied inaccurate data. As a result of being supplied data which indicated a
greater number of retail locations available for retail display than were
actually present, the Company printed an excessive number of magazines for each
issue in June, July and August 1995. In response to this information, the
Company reduced the frequency of issues from bi-weekly to monthly and the number
of copies printed for each edition from approximately 400,000 copies to
approximately 210,000 copies.
The effect of printing a large number of copies for each issue of the
magazine that were never offered for retail sale resulted in the Company
spending a significant amount of operating cash without experiencing sales
revenue from magazine sales. In response to this situation and in attempt to
conserve remaining capital and increase revenue, the Company adopted a new
strategic plan that significantly reduced expenditures, (including the lay-off
of six (6) employees and an across the board 15% salary reduction), set future
magazine print orders to verified pocket availability, reduced the frequency of
the magazine from every two weeks to every month, initiated a Lucky 7 Prepack
retail sales program, accelerated development of a controlled circulation
magazine to be published in cooperation with State Lotteries and began
negotiations with Publishers Clearing House and other national companies to
begin a subscription marketing program.
It is anticipated that reducing the frequency of the magazine from every
two weeks to every month and reducing the actual number of magazines printed for
each issue will significantly reduce printing costs without materially reducing
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revenue from retail sales because the Company will be printing only enough
magazines as required to fill truly existing retail sales displays. The Company
projects revenue from retail magazine sales to remain constant or increase as
the number of verified retail display pockets increase and as a result of
promotion of the Lucky 7 Prepack display at grocery store service counters and
non-traditional magazine outlets.
In addition, the new strategic plan calls for accelerated development of a
controlled circulation magazine to be published in cooperation with State
Lotteries and expansion of subscription sales of the magazine.
The controlled circulation magazine concept has been discussed with over
fifteen (15) state lotteries and each have expressed interest and desire to
participate in the program. The New York Lottery has indicated a strong desire
to proceed in conjunction with the Company to publish a magazine dedicated
specifically to New York lottery players. The Company anticipates circulation of
a New York lottery magazine may exceed 1,000,000 copies monthly with monthly
circulation of other state specific magazines possibly exceeding 2,500,000
copies per month by year end 1996. The Company anticipates substantial revenue
associated with publication of state specific magazines exclusively from the
sale of advertising.
With respect to expansion of subscription sales of the magazine, the
Company has agreed to participate in the Publishers Clearing House ("PCH")
spring 1996, national sweepstakes mailing. Depending on the particular type and
number of mailings sent by PCH, PCH estimates new subscribers to LottoWorld(R)
magazine may increase between 50,000 to 150,000 per mailing. The Company is in
the process of negotiating with other national companies to initiate similar
subscription marketing programs. Advantages of subscription sales include
prepayment of magazine sales, known printing requirements and reduced
distribution expenses. The Company plans to regularly participate in national
and regional subscription sales campaigns in the future.
The immediate effect of instituting the new strategic plan should be to
reduce total monthly cash expenditures by reducing the number of employees,
salary reductions for remaining employees and the elimination of excess copies
of the magazine printed each month without reducing revenue or impacting the
publication of any magazine. As implementation of the new strategic plan takes
effect, the Company plans to reinstate salary reductions and hire additional
employees as may be necessary to expand publication of magazines associated with
specific state lotteries. Although the Company anticipates a substantial
expansion of operations as a result of increasing subscription sales and the
publication of state specific lottery magazines, plans to expand operations are
wholly dependent on acceptance by state lottery authorities of the Company's
state specific magazine concept and participation in successful direct mail and
sweepstakes subscription campaigns, the certainty of which is unknown.
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The effect of the Distribution Contract with ICD/Hearst and the Marketing
Contract entered into with TDS were to provide the Company with a means of
achieving its national roll-out of LottoWorld(R) magazine. ICD/Hearst was
responsible for billing and collecting from the wholesalers, and assumed all
costs associated therewith. TDS was to provide merchandising services such as
obtaining checkout displays, maintaining the magazine in the checkout displays,
removing unauthorized magazines from checkout pockets which display the
LottoWorld(R) logo, and to provide the Company with store reports or "checks"
detailing and comparing displays and sales reports among various magazines for
each issue of LottoWorld(R). In February 1996, the Company renewed its contract
with ICD/Hearst to provide services similar to the Distribution Contract as well
as some additional services previously provided by TDS. The term of the
ICD/Hearst agreement is for a period of two years. The Company did not renew the
Marketing Contract with TDS. The new strategic plan of the Company places less
emphasis on checkout counter sales then in the past while expanding subscription
sales. As a result, the Company's dependence on ICD/Hearst to facilitate
magazine sales is substantially reduced.
The Statement of Operations indicates the substantial financial effects
associated with the national roll-out of LottoWorld(R) magazine in June 1995.
Primarily based on an increased number of retail sales locations for the
magazine, sales revenue increased from $189,478 at year end 1994 to $797,466, or
320% for year end 1995. Offsetting sales revenue, operating expenses illustrate
the extent of costs associated with printing an excessive number of magazines
than were actually necessary to fill existing retail display pockets. Based on
vendor data which indicated retail display pocket availability, the Company
incurred Production, Distribution and Editorial expenses 253% greater than for
the one year period ending December 31, 1995, than for the same period in 1994;
Circulation expenses 1,253% greater than for the one year period ending December
31, 1995, than for the same period in 1994; Advertising, Promotion and Business
Development expenses 255% greater than for the one year period ending December
31, 1995, than for the same period in 1994; while Selling, General and
Administrative expenses increased 67% for the one year period ending December
31, 1995, than for the same period in 1994. The result of such large operating
expenses caused the Company to report a 1995 net loss of $5,595,191 or 218%
greater than reported for 1994. The Company believes the receipt of inaccurate
vendor data as to the number of available retail display pockets was an unusual
and non-recurring event which had a material adverse effect on 1995 operating
revenues. The Company has taken substantial strategic actions, such as reducing
reliance on vendor retail reports, increasing subscription sales, expanding the
state lottery sponsored magazines program and printing only enough magazines for
retail display sufficient to fill verified display pockets. The above actions
should have a material favorable impact on sales revenue and operating
expenditures during 1996.
Interest income and interest expense each increased materially in 1995.
Interest income increased by over 3,526% to $133,727, primarily from interest
earned on capital raised by the Company through the sale of common stock in
6
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March 1995. During this same period, interest expense increased 550% to $87,609.
Of the total interest expense of $87,609, $80,000 was paid on the $1,000,020
face amount 12% secured subordinated promissory notes issued by the Company in
March 1995. These promissory notes were converted to common stock of the Company
in November 1995, and as such the Company does not anticipate significant
interest expense in 1996, absent the issuance of new debt obligations.
Conversely, absent the sale of securities during 1996, some portion of which is
retained and invested in interest bearing instruments, the Company does not
anticipate the receipt of a significant amount of interest income in 1996.
Liquidity and Capital Resources:
During the year ended December 31, 1994, the Company issued 166,670 shares
of redeemable convertible preferred stock for a total consideration of
$1,000,020. This stock pays an annual cumulative dividend of $.60 per share and
is convertible into common stock on a one for one share basis. The preferred
stock is subject to mandatory redemption at $6.00 per share for any shares of
convertible preferred stock which remains outstanding on December 15, 1998.
Pursuant to terms and conditions under which the Company issued the preferred
stock, during the period that any preferred shares remain outstanding, the
Company shall keep on deposit at First Bank National Association, Minneapolis,
Minnesota, the sum of $6.00 for each share of outstanding preferred stock.
The following table represents the capital resources of the Company:
December 31
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1995 1994
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Current Assets $ 1,155,209 $ 133,031
Current Liabilities 1,099,191 238,935
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Working Capital (Deficiency) $ 56,018 $ (105,904)
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Common Shareholders' Equity
Common stock $ 3,106 1,885
Common stock subscribed 1,316,230 --
Additional paid-in capital 7,933,759 2,095,394
Accumulated deficit (7,789,523) (2,094,330)
Less unpaid stock subscriptions (866,250) --
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$ 597,322 $ 1,241,904
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The Company used more cash in operating activities during 1995 than during
1994 due to a larger loss and increased current assets partially off-set by
increased current liabilities. The Company received cash during 1995 from the
7
<PAGE>
sale of common stock, mainly through an Initial Public Offering of the Company's
common stock on March 10, 1995 and the proceeds from secured subordinated
promissory notes from two of the Company's officers. On November 10, 1995, these
officers, Dennis B. Schroeder and A. Richard Holman, the Chief Executive Officer
and President respectively, exchanged an aggregate amount of $1,000,020 of the
Company's secured subordinated promissory notes for an aggregate of 333,340
shares of the Company's $.001 common stock. The Company additionally purchased
wire magazine racks, equipment and furniture totaling $411,000 which appears to
meet the Company's need for 1996 without any further major capital expenditures.
In two private transactions, on March 12, 1996, the Company sold 180,000
shares and on June 28, 1996, the Company sold 1,188,164 shares of its $.001 par
value common stock. The net proceeds to the Company from these transactions were
$2,325,882. The following table sets forth at December 31, 1995; (i) the total
assets and the capitalization of the Company; and (ii) the pro-forma
capitalization to give effect to the transactions:
at December 31, 1995
--------------------
Actual Pro-forma
-------------------------------
Total assets $ 2,721,583 $ 5,047,465
Long-Term Debt, less current maturities $ 25,050 $ 25,050
Redeemable convertible preferred stock $ 1,000,020 $ 1,000,020
Common Shareholders' Equity
Common stock $ 3,106 $ 4,474
Common stock subscribed 1,316,230 1,316,230
Additional paid in capital 7,933,759 10,258,273
Accumulated deficit (7,789,523) (7,789,523)
Less stock subscriptions (866,250) (866,250)
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$ 597,322 $ 2,923,204
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The Company believes that its capital resources on hand at December 31,
1995, together with the above private transaction and the expected revenues from
sales, will be sufficient to satisfy its working capital requirements for the
next 12 months.
Government Regulation
Lotteries, and activities associated therewith such as promotion, are
subject to regulation under federal laws and by each state which conducts a
lottery. For example, all states have prohibitions on the sale of lottery
tickets for more than face value and the sale of lottery tickets from other
states' lotteries. LottoWorld(R) provides information concerning the legal
lotteries of various states, as well as advice on strategies for
8
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participating in such lotteries. While the Company does not believe that its
magazine contravenes such prohibitions, the application of such regulation is
subject to the interpretation by, and enforcement policy of, each state's
lottery commission and/or attorney general. The Company actively attempts to
comply with all applicable laws and has no knowledge of any regulatory action
that has been taken or threatened that would impact the activities of the
Company. Nevertheless, there can be no assurance that such regulatory action
could not be taken. Any regulatory action could have a material effect upon the
Company's business.
9
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.
LottoWorld, Inc.
By:/s/A. Richard Holman
------------------------------
A. Richard Holman
President
By:/s/Stuart Dubow
------------------------------
Stuart Dubow
Chief Financial Officer
Date: July 17, 1996
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant in the capacities and the
dates indicated.
/s/Dennis B. Schroeder Date: July 17, 1996
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Dennis B. Schroeder, Chief Executive Officer
and a director
/s/A. Richard Holman Date: July 17, 1996
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A. Richard Holman, President and a director
/s/James D. Cullen Date: July 17, 1996
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James D. Cullen, a director
10
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<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
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INDEPENDENT AUDITOR'S REPORT F - 2
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FINANCIAL STATEMENTS
Balance sheets as of December 31, 1995 and 1994 F - 3
Statements of operations for the years ended December 31, 1995 and 1994 F - 4
Statements of common shareholder's equity for the years ended December 31,
1995 and 1994 F - 5 - F - 6
Statements of cash flows for the years ended December 31, 1995 and 1994 F - 7
Notes to financial statements F - 8 - F - 13
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</TABLE>
F - 1
<PAGE>
McGLADREY & PULLEN, LLP
-----------------------
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
LottoWorld, INC.
Naples, Florida
We have audited the accompanying balance sheets of LottoWorld, Inc. as of
December 31, 1995 and 1994, and the related statements of operations, common
shareholders' equity 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 financial statements referred to above present fairly, in
all material respects, the financial position of LottoWorld, Inc. as of December
31, 1995 and 1994, 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 discussed in Note 8 to the
financial statements, the Company has suffered recurring losses from operations.
This raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Notes 8 and 9. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/McGLADREY & PULLEN, LLP
Naples, Florida
March 15, 1996
F - 2
<PAGE>
LOTTOWORLD, INC.
BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
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<S> <C> <C>
Current Assets
Cash and cash equivalents $ 318,963 $ 61,835
Accounts receivable, less allowance for doubtful accounts
1995 $65,800; 1994 $-0- 159,479 68,861
Stock subscriptions receivable (Note 4) 449,980 --
Accounts receivable, officers 58,375 --
Prepaid expenses 168,412 2,340
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Total current assets 1,155,209 133,036
Restricted Cash, redeemable convertible preferred stock (Note 3) 1,000,020 1,000,020
Furniture, Fixtures and Equipment, less accumulated depreciation
1995 $106,050; 1994 $10,786 (Note 2) 556,253 100,281
Other Assets 10,101 8,567
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$ 2,721,583 $ 1,241,904
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt (Note 2) $ 16,667 $ --
Accounts payable 851,673 151,017
Accrued expenses 56,302 27,265
Deferred revenue 149,549 60,653
Dividends payable 25,000 --
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Total current liabilities 1,099,191 238,935
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Long-Term Debt, less current maturities (Note 2) 25,050 --
----------- -----------
Commitments (Note 6)
Redeemable convertible preferred stock, $.01 par value, 250,000
shares authorized, 166,670 shares issued and outstanding
(Note 3) 1,000,020 1,000,020
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Common Shareholders' Equity
Common stock, $.001 par value, 10,000,000 shares authorized;
3,106,022 and 1,884,932 shares issued and outstanding 3,106 1,885
Common stock subscribed, 637,500 shares (Note 4) 1,316,230 --
Additional paid-in capital 7,933,759 2,095,394
Accumulated deficit (7,789,523) (2,094,330)
Less subscriptions for 387,500 shares (Note 4) (866,250) --
----------- -----------
597,322 2,949
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$ 2,721,583 $ 1,241,904
=========== ===========
</TABLE>
See Notes to Financial Statements.
F - 3
<PAGE>
LOTTOWORLD, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
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<S> <C> <C>
Revenue:
Magazine sales $ 387,123 $ 156,543
Advertising 280,657 21,886
Other 129,686 11,049
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797,466 189,478
--------------------------------
Operating expenses:
Production, distribution and editorial 2,500,252 707,211
Circulation 1,331,594 98,390
Advertising, promotion and business development 1,354,530 381,451
Selling, general and administrative 1,252,399 748,303
--------------------------------
6,438,775 1,935,355
--------------------------------
Operating (loss) (5,641,309) (1,745,877)
--------------------------------
Other income (expense):
Interest income 133,727 3,687
Interest expense (87,609) (13,469)
--------------------------------
46,118 (9,782)
--------------------------------
Net (loss) $ (5,595,191) $ (1,755,659)
--------------------------------
Net (loss) per common share $ (2.21) $ (0.93)
--------------------------------
Weighted average number of common shares outstanding 2,576,152 1,884,932
--------------------------------
</TABLE>
See Notes to Financial Statements.
F - 4
<PAGE>
LOTTOWORLD, INC.
STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Common Additional
Common Stock Paid-in
Stock Subscribed Capital
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1993 $ 1,270 $ - $ 308,730
Common stock issued (614,932 shares) 615 - 1,786,664
Net (loss) - - -
-----------------------------------------
Balance, December 31, 1994 1,885 - 2,095,394
Common stock issued (1,221,090 shares) 1,221 - 5,838,365
Stock subscriptions (Note 4) - 1,316,230 -
Dividend distributions - - -
Net (loss) - - -
-----------------------------------------
Balance, December 31, 1995 $ 3,106 $ 1,316,230 $ 7,933,759
=========================================
</TABLE>
F - 5
<PAGE>
<TABLE>
<CAPTION>
Common Total
Accumulated Stock Shareholders'
(Deficit) Subscriptions Equity
- ---------------------------------------------------
<S> <C> <C>
$ (338,671) $ - $ (28,671)
- - 1,787,279
(1,755,659) - (1,755,659)
- ---------------------------------------------------
(2,094,330) - 2,949
- - 5,839,586
- (866,250) 449,980
(100,002) - (100,002)
(5,595,191) - (5,595,191)
- ---------------------------------------------------
$ (7,789,523) $ (866,250) $ 597,322
===================================================
</TABLE>
F - 6
<PAGE>
LOTTOWORLD, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1994
1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net (loss) $ (5,595,191) $ (1,755,659)
Adjustments to reconcile net (loss) to net cash
net cash (used in) operating activities:
Depreciation 96,108 10,786
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (90,618) (50,170)
Accounts receivable - officers (58,375)
Prepaid expenses (166,072) 47,812
Other assets (1,534) (8,567)
Increase in:
Accounts payable and accrued expenses 588,624 157,876
Deferred revenue 88,896 56,849
----------------------------------
Net cash (used in) operating activities (5,138,162) (1,541,073)
----------------------------------
Cash Flows From Investing Activities
Purchase of furniture and equipment (411,011) (111,067)
Increase in restricted cash - (1,000,020)
----------------------------------
Net cash (used in) investing activities (411,011) (1,111,087)
----------------------------------
Cash Flows From Financing Activities
Proceeds from long-term debt 50,000 -
Proceeds from secured subordinated promissory notes from officers 1,000,020 -
Principal payments on long-term debt (8,283) -
Proceeds from issuance of common stock 4,839,566 1,612,279
Issuance of redeemable convertible preferred stock - 1,000,020
Dividends paid on redeemable convertible preferred stock (75,002) -
---------------------------------
Net cash provided by financing activities 5,806,301 2,612,299
---------------------------------
Net increase (decrease) in cash and cash equivalents 257,128 (39,861)
Cash and cash equivalents:
Beginning 61,835 101,696
---------------------------------
Ending $ 318,963 $ 61,835
=================================
Supplemental Disclosure of Cash Flow Information
Cash payments for interest $ 89,421 $ 11,657
=================================
Supplemental Schedule of Noncash Investing and Financing Activities
Notes payable converted to common stock $ 1,000,020 $ 175,000
=================================
Furniture and equipment acquired through accounts payable $ 141,069 $ -
=================================
Dividends payable $ 25,000 $ -
=================================
</TABLE>
See Notes to Financial Statements.
F - 7
<PAGE>
LOTTOWORLD, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: The Company's principal business is the publishing and
distribution of a magazine ("LottoWorld(R)") that reports on legally operated
state lotteries throughout the United States and Canada. On May 15, 1995 the
Company changed its name to LottoWorld, Inc. from Dynamic World Distributors,
Inc.
A summary of the Company's significant accounting policies follows:
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION: Magazine sales, less provisions for estimated returns, are
recorded at the time of shipment. Provisions for estimated returns are based on
the Company's actual experience. Magazine subscription sales are deferred and
recognized ratably over the subscription period. Advertising revenue is
recognized upon publication of the advertisement.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Cash and cash equivalents, accounts
receivable, stock subscriptions receivable, accounts receivable - officers,
accounts payable and dividends payable are reflected in the financial statements
at fair value because of the rapid turnover of those instruments. The Company's
long-term debt is reflected in the financial statements at fair value based on
the borrowing rates currently available to the Company for loans with similar
terms and maturities.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers money market funds to be cash equivalents. The Company maintains its
cash in bank deposit accounts which, at times, may exceed federally-insured
limits. The Company has not experienced any losses on such accounts. The Company
believes it is not exposed to any significant credit risk on cash.
FURNITURE, FIXTURES AND EQUIPMENT: Furniture, fixtures and equipment are stated
at cost. Depreciation is computed using the straight-line method over the
estimated useful lives of five to seven years.
INCOME TAXES: Deferred taxes are provided on the liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
NET (LOSS) PER COMMON SHARE: The net (loss) per common share amounts are
computed using the weighted average number of common shares outstanding during
the period after giving retroactive effect to the stock issued during 1994 as if
issued at the inception of the Company and the effect of the convertible
preferred stock dividend requirement.
F - 8
<PAGE>
LOTTOWORLD, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARD: In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, which establishes new standards for
stock-based employee compensation plans. The Statement establishes a
fair-value-based method of accounting for stock-based compensation plans and
encourages, but does not require, entities to adopt that method in place of APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, for all arrangements
under which employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts based on the
price of its stock. Entities that elect to continue under Opinion No. 25 must
disclose pro forma net income (and earnings per share) for all years presented
as if Statement No. 123 had been adopted.
The Company does not intend to adopt Statement No. 123 in measuring expense,
however it must present the pro forma disclosures beginning in 1996, and those
pro forma amounts will likely reflect higher compensation expense than the
amounts shown in future statements of operations.
NOTE 2. LONG-TERM DEBT
Long-term debt as of December 31, 1995 consisted of a note payable to a bank
payable in monthly installments of $1,389, plus interest at prime plus 2%, with
final payment due in June 1998 and collateralized by equipment. Minimum
principal payments required on long-term debt as of December 31, 1995 are as
follows:
Year Ending
December 31, Amount
- --------------------------------------------------------------------------------
1996 $ 16,667
1997 16,667
1998 8,383
--------------
$ 41,717
==============
NOTE 3. REDEEMABLE CONVERTIBLE PREFERRED STOCK
During the year ended December 31, 1994, the Company issued 166,670 shares of
mandatorily redeemable convertible preferred stock for total consideration of
$1,000,020. This stock pays an annual cumulative dividend of $.60 per share and
is convertible into common stock on a one for one share basis. The preferred
stock is subject to mandatory redemption at $6.00 per share for any shares of
convertible preferred stock which remain outstanding on December 15, 1998.
F - 9
<PAGE>
LOTTOWORLD, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. COMMON SHAREHOLDERS' EQUITY, STOCK OPTIONS AND WARRANTS
COMMON STOCK TRANSACTIONS: On March 10, 1995 and March 17, 1995 for the
overallotment option, the Company issued 787,750 shares of common stock for
total consideration of $4,592,086, net of offering costs and commissions,
resulting from the initial public offering on Form SB-2 at $7.00 per share. The
Company also issued 433,340 shares of common stock during 1995 for total net
proceeds of $1,247,500 resulting from a private placement of its stock and
conversion of debt to equity, as more fully described in Note 8, at prices
ranging from $2.75 to $3.00 per share. In addition, in December 1995, stock
subscriptions for 637,500 shares were issued to entities unrelated to the
Company for net proceeds of $1,316,230 at prices ranging from $2.00 to $2.75 per
share. The Company received $449,980 on January 26, 1996 for 250,000 of the
shares subscribed. Subscriptions for the remaining 387,500 shares have not been
collected and therefore are reflected as a reduction of common stockholders'
equity.
During the year ended December 31, 1994, the Company issued 614,932 shares of
common stock for total consideration of $1,787,279 representing exercises of
stock options, conversion of debt to equity and exempt sales. The prices paid
ranged from $1.00 per share to $4.75 per share. In connection with these
transactions, warrants to purchase 275,000 shares at $4.75 per share were
issued. These warrants expire five years from the issuance date.
STOCK OPTIONS: The Company adopted a stock option plan in 1993 for the grant of
options to certain key employees, consultants and directors. In March 1995, the
stock option plan was amended whereby the number of shares authorized for
issuance was increased from 100,000 shares to 350,000 shares. Option prices may
not be less than the fair market value at the date of the grant. In addition to
the stock option plan, the Company has granted options to certain key employees
and consultants.
Information regarding stock options is summarized below:
Stock Other
Option Stock
Plan Options
----------------------
Shares under option:
Outstanding and exercisable as of December 31, 1993 10,000 95,000
Granted - 165,000
Exercised (3,332) -
Canceled (1,668) -
----------------------
Outstanding and exercisable as of December 31, 1994 5,000 260,000
Granted 115,168 86,000
Exercised - -
Canceled (11,000) (10,000)
----------------------
Outstanding and exercisable as of December 31, 1995 109,168 336,000
======================
F - 10
<PAGE>
LOTTOWORLD, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. COMMON SHAREHOLDERS' EQUITY, STOCK OPTIONS AND WARRANTS (CONTINUED)
Stock Other
Option Stock
Plan Options
--------------------------------
Option price per share:
As of December 31, 1994 $1.00 $1.50 - $7.00
As of December 31, 1995 $1.00 - $10.00 $1.50 - $10.00
Expiration date:
As of December 31, 1994 1997 1997 - 1998
As of December 31, 1995 1997 - 1999 1998 - 1999
In February 1996, the Company canceled options to purchase 104,168 shares of
common stock under the stock option plan and canceled other stock options for
121,000 shares of common stock. At that time, the Company also granted stock
options for 139,168 shares of common stock under the stock option plan,
exercisable at $5.00 to $5.50 per share with expiration dates in 1997 and 1998.
The Company also granted other stock options for 255,000 shares of common stock
which are exercisable at $5.00 per share with expiration dates in 1998.
NOTE 5. INCOME TAXES
Effective in April 1994 the Company's Subchapter S election was terminated. No
provision for income taxes is reflected in the statements of operations for the
years ended December 31, 1995 and 1994 due to losses incurred. Deferred income
taxes related to net operating loss carryforwards have not been recognized due
to uncertainty of realization. The net operating losses from 1994 and 1995
expire as follows:
Year Incurred Year Expires Amount
- ------------------------------------------------------------------------------
1994 2009 $ 227,050
1995 2010 5,676,479
-----------------
Net operating loss carryforward $ 5,903,529
=================
The amount and availability of the net operating loss carryforwards may be
subject to limitations set forth by the Internal Revenue Code. Factors such as
the number of shares ultimately issued within a three-year look-back period;
whether there is a deemed more than 50 percent change in control; the applicable
long-term tax exempt bond rate; continuity of historical business; and
subsequent income of the Company all enter into the annual computation of
allowable annual utilization of the carryforwards.
F - 11
<PAGE>
LOTTOWORLD, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. COMMITMENTS
OPERATING LEASES: The Company leases office space under operating leases which
expire on January 31, 1999. In accordance with these leases, the Company paid no
rent for a 6-month period during the initial year of the lease. Rental expense
is recognized on a straight-line basis over the lease term.
As of December 31, 1995, future minimum rental payments required under all
leases with initial or remaining terms in excess of one year are as follows:
Year Ending
December 31, Amount
- -----------------------------------------------------------------------------
1996 $ 166,176
1997 166,176
1998 166,176
1999 13,848
-----------------
$ 512,376
=================
Rent expense amounted to $131,800 and $86,161 for the years ended December 31,
1995 and 1994, respectively.
NATIONAL DISTRIBUTION: The Company has an agreement with International
Circulation Distributors - The Hearst Corporation ("Hearst") for the national
distribution of LottoWorld(R) which expires February 1998. The agreement as
amended, requires a payment of $500,000 in 1995 and payments of $75,000 and
$125,000 in 1996 and 1997, respectively.
EMPLOYMENT AGREEMENTS: The Company has entered into employment agreements with
the Chairman of the Board and President. Each agreement provides for an annual
base salary and incentive bonuses conditioned upon the Company's achieving
certain levels of annual after-tax earnings and certain levels of monthly
circulation of the magazine. Pursuant to the earnings bonus, each employee will
receive a bonus of two percent of annual after-tax earnings at the end of the
fiscal year in which the Company's first annual after-tax earnings are
$3,000,000 or more. In addition, for each subsequent year in which the Company's
annual after-tax earnings increase by additional $3,000,000 increments, each
employee will receive a one-time bonus of between three and five percent of such
increase. Pursuant to the circulation bonus, each employee will receive $.10 per
copy the first time monthly sales of the magazine reach 500,000 copies. In
addition, the first time in which monthly sales reach 1,000,000 copies, and for
each subsequent 1,000,000 copies, up to 6,000,000, each employee will receive a
one-time bonus ranging from $.12 to $.15 per additional copy.
F - 12
<PAGE>
LOTTOWORLD, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. COMMITMENTS (CONTINUED)
The agreements also provide that the Company will grant an option to each
employee for 50,000 shares at the end of the fiscal year in which the Company's
annual after-tax earnings first are $3,000,000 or more. In addition, for each
subsequent year in which the Company's annual after-tax earnings increase by an
additional $3,000,000, the Company will grant an option to each employee for an
additional 50,000 shares. The agreements also provide that the Company will
grant an option to each employee for 25,000 shares at the end of the first month
in which the Company first sells 500,000 or more copies of the magazine, and at
the end of each subsequent month that monthly sales of the magazine increase by
an additional 500,000 copies.
The agreements also restrict the employee from engaging in business in
competition with the Company during the term of the agreement and for a period
of two years after termination of employment for any reason. These agreements
were entered into on January 1, 1994, are in effect for a period of 84 months,
and renewable at the option of the Company for an additional 12-month period.
The Company also has employment agreements with its Chief Financial Officer,
Managing Editor, Advertising Director, and Marketing Director which contain
nondisclosure and noncompetition provisions benefiting the Company.
NOTE 7. RELATED PARTY TRANSACTIONS
Accounts receivable - officers are noninterest-bearing and due on demand.
The Company issued 12% secured subordinated promissory notes totaling $1,000,020
to its Chief Executive Officer and President during 1995. In November 1995, the
notes were converted to 333,340 shares of common stock at $3.00 per share.
Interest expense related to the shareholder loans totaled $80,000.
NOTE 8. CONTINUED EXISTENCE
The Company has had cumulative losses since inception aggregating $7,689,521.
The Company continues to raise capital through offerings of its common stock to
fund operations. The Company anticipates it will generate operating income and
additional working capital from substantial increases in magazine sales,
advertising revenues, reductions in operating expenses and additional offerings
of its securities. It is uncertain whether sufficient capital can be raised in
these offerings. Subsequent to year-end, the Company formed a subsidiary to
produce a publication for the New York Lottery.
NOTE 9 SUBSEQUENT EVENTS
The Company sold 180,000 shares of its common stock in March 1996 at $3.75 per
share in a private placement of its securities to offshore investors under
Regulation S. Net proceeds to the Company were $607,500.
F - 13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LOTTOWORLD, INC. FOR THE FISCAL YEAR ENDED DECEMBER 31,
1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 318
<SECURITIES> 0
<RECEIVABLES> 225
<ALLOWANCES> 66
<INVENTORY> 0
<CURRENT-ASSETS> 1,155
<PP&E> 662
<DEPRECIATION> 106
<TOTAL-ASSETS> 2,722
<CURRENT-LIABILITIES> 1,099
<BONDS> 0
<COMMON> 3
1,000
0
<OTHER-SE> 593
<TOTAL-LIABILITY-AND-EQUITY> 2,722
<SALES> 797
<TOTAL-REVENUES> 797
<CGS> 0
<TOTAL-COSTS> 6,439
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> (5,595)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,595)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (5,595)
<EPS-PRIMARY> (2.21)
<EPS-DILUTED> 0
</TABLE>
