SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 0-25624
LOTTOWORLD, INC.
(Name of small business issuer in its charter)
Florida 65-0399794
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
2150 Goodlette Road
Suite 200
Naples, Florida 34102
(Address of principal executive offices) (Zip Code)
Issuer's Telephone number: (941) 643-1677
Securities registered under 12 (b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
$.001 par value
The Nasdaq Stock Market
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes No X
--- ---
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Registrant's operating revenues for its most recent year were: $ 902,336
The aggregate market value of voting stock held by non-affiliates of the
Registrant, based on the average of the closing bid and asked prices of the
Registrant's Common Stock in the over-the-counter market as reported by the
Nasdaq Stock Market, Inc. on March 21, 1997, was approximately $ 3,792,442.
Shares of voting stock held by each officer and director and by each person who
owns 5% or more of the outstanding voting stock have been excluded in that such
persons may be deemed to be affiliates. The determination of affiliate status is
not necessarily conclusive.
As of March 21, 1997, 6,609,541 shares of Common Stock, $.001 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part IV herein on page number 15.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: YES NO X
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TABLE OF CONTENTS
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Page
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PART I:
Item 1. Business ...................................................................... 1
Item 2. Properties .................................................................... 4
Item 3. Legal Proceedings ............................................................. 4
Item 4. Submission of Matters to a Vote of Shareholders................................ 4
PART II:
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ....................................................................... 4
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................................... 5
Item 7. Financial Statements .......................................................... 9
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .......................................................... 9
PART III:
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act ........................................ 9
Item 10. Executive Compensation ........................................................11
Item 11. Security Ownership of Certain Beneficial Owners and Management ................13
Item 12. Certain Relationships and Related Transactions ................................14
PART IV:
Item 13. Exhibits, and Reports on Form 8-K .............................................15
SIGNATURES .........................................................................................17
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PART I
ITEM 1. BUSINESS
COMPANY PROFILE
LottoWorld, Inc., a Florida corporation (the "Company") was founded in
1993 as Dynamic World Distributors, Inc. and changed its name to LottoWorld,
Inc. in April 1995. The Company publishes and distributes LottoWorld magazine, a
publication directed at lottery players, primarily through subscription and
retail sales at checkout and service counters. The 100+ page, four color
magazine, which currently is published monthly in a digest size format, deals
with all aspects of state lottery games, information and news. LottoWorld is
nationally distributed in 48 states, the District of Columbia and in twelve
foreign countries. At present there are over 50,000 subscribers and monthly
newstand distribution of the magazine is over 35,000 copies per issue in one
national edition.
On April 8, 1996, the New York State Division of Lottery announced that
Lottery Players Publishing Company, Inc. (a wholly-owned subsidiary of
LottoWorld, Inc.) had won the award to publish a monthly New York Lottery
magazine based on the Company's response to a Request for Proposal. Initial
projections for the monthly magazine, NEW YORK PLAYERS MONTHLY, was to have been
650,000 copies distributed at more than 12,000 lottery retailers throughout the
state. On May 23, 1996, the New York Lottery increased the initial projection
from 650,000 copies monthly to a minimum of approximately 1,100,000 copies
monthly beginning in October 1996. The January 1997 issue had a circulation in
excess of 1,128,000.
The NEW YORK PLAYERS MONTHLY is a free 48-page, four color, digest-size
magazine offering lottery players information about new and existing New York
lottery games, profiles of lottery winners throughout the state, and state
lottery news.
BUSINESS DEVELOPMENT
The initial roll-out phase of the magazine resulted in the inaugural issue
of LottoWorld magazine in August 1993. During this stage, the Company published
a 16-24 page monthly magazine with a monthly print order of 20,000 copies. The
Company self-distributed the magazine primarily in Southwest Florida, Atlanta,
Georgia and Minneapolis, Minnesota.
The intermediate roll-out phase began in October 1993 and continued
through March 1995. During this period, the magazine increased to 100 pages per
issue and the national edition was supplemented with three separate state
editions (Florida, Georgia and Texas). During this phase, the Company increased
monthly prints to approximately 80,000 to 100,000 copies and expanded
distribution to 30 wholesalers in eight states.
In December 1994, the Company entered into a one-year agreement with
International Circulation Distributors The Hearst Corporation ("ICD") for the
national distribution of LottoWorld. The Company, in January 1995, also entered
into a contract with Time Distribution Services, Inc. ("TDS") to obtain the
approvals necessary to position the magazine in supermarket check-out lanes and
similar locations and perform certain follow-up marketing and merchandising
functions.
The national roll-out phase was targeted at 23 lottery states (primarily
east of the Mississippi River) As part of this phase, LottoWorld began
publishing the magazine every two weeks in 16 separate editions that were
distributed through 171 wholesalers in 23 states.
Due to the inherent time delay between the time a magazine is delivered to
the store, placed into the check-out counter pocket, purchased by the consumer,
and unsold copies returned to the wholesaler and reports and payments made to
the national distributor, a minimum of four months will transpire before the
publisher has any reasonable basis upon which to analysis sales of a particular
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issue. In July 1995, the Company began to suspect substantial differences
between reports as to the number of properly placed and logoed pockets with
actual magazine sales reports.
Because the Company was unable to reconcile reports as to the number of
available pockets with corresponding sales reports for these pockets, the
Company began to send its own employees and, in some cases, independent
contractors, to stores purported to have pockets available for the magazine
and/or in which the magazine was already in place. The result of this
investigation was a determination by the Company that the Company was printing a
significantly greater quantity of magazines than were necessary to fill the
actual number of available pockets.
As soon as it was apparent that the Company was printing an excessive
number of copies of the magazine, the Company immediately reduced the frequency
of issues from every two weeks to monthly and the number of copies printed for
each issue from approximately 400,000 copies to approximately 210,000 copies. In
addition, the Company adopted a new strategic plan that significantly reduced
expenditures (including a lay-off of six employees and an across the board 15%
salary reduction), set magazine print orders to verified pocket availability,
accelerated development of a controlled circulation magazine to be published in
cooperation with State Lotteries and began to implement a subscription marketing
program with Publishers Clearing House and other national companies.
At 1,100,000 copies monthly the Company believes the NEW YORK PLAYERS
MONTHLY will be the largest newsstand distributed magazine in New York state
(more than twice the size of TV Guide's New York newsstand circulation). Based
on advertising revenue generated by other publications with a minimum of
circulation of at least 1,100,000 copies monthly, the Company estimates revenue
from the NEW YORK PLAYERS MONTHLY MAGAZINE could be in excess of $3,700,000
annually. There can be no assurance that the NEW YORK PLAYERS MONTHLY magazine
will generate revenue at the levels of similarly sized publications.
CURRENT BUSINESS
Through Lottery Players Publishing Company, Inc. ("LPPC") (a
wholly-owned subsidiary of LottoWorld, Inc.) the Company enters into exclusive
contractual agreements with individual state lottery authorities to publish a
48-page, four color, digest-size magazine specifically tailored to offer lottery
players information about new and existing lottery games, profiles of lottery
winners throughout the state and state lottery news.
The primary benefit of this program to state lottery authorities is that
they receive, without any cost, an efficient and effective means of educating
and communicating with their lottery players. The primary benefits to the
Company are: (i) a unique cost effective or free distribution system; (ii)
potential advertising revenue; (iii) instant circulation; and (iv) a monopoly.
With respect to the distribution system, the program is designed so that
each state lottery is responsible for distribution of their magazine, without
cost to LPPC, to each retail lottery location statewide and to display the
magazine with lottery tickets. In the aggregate, there are more than 220,000
retail lottery ticket locations in the 38 states. Concerning potential
advertising revenue, there can be no assurance that advertising revenue will be
generated in excess of expenses associated with the program. However, the
Company has devoted significant personnel and capital resources to generate
advertising revenue. Although advertising revenue to-date has been less than
expected, the Company believes advertising sales should increase as the
advertising community becomes aware of the aggregate circulation of the
magazines within the program (the circulation goal for 1997 is 1,900,000 copies
monthly) and third party advertising research corroborates readership patterns
and demographic information usually required by advertisers.
LPPC now has exclusive contracts to publish magazines in conjunction with
state lotteries in New York, West Virginia , Georgia and Nebraska totaling a
combined 1,800,000 copies distributed monthly. Under these Agreements, the
Company does not have to begin publishing the magazine until there is sufficient
advertising to pay for the printing.
Nebraska. On January 15, 1997, the Nebraska Lottery signed an exclusive three
year contract with LPPC to publish new monthly magazine, the NEBRASKA LOTTERY
PLAYERS DIGEST. Specifically tailored for the Nebraska Lottery, the NEBRASKA
LOTTERY PLAYERS DIGEST will have an initial circulation of 150,000 copies
monthly and will be available at over 1,300 Nebraska lottery ticket outlets
statewide.
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Georgia. On December 24, 1996, the Georgia Lottery Corporation signed an
exclusive three year contract with LPPC to publish a monthly Georgia Lottery
magazine similar in format to the NEW YORK PLAYERS MONTHLY. Initial projections
are for distribution of 400,000 copies monthly which will be available to more
than 5,700 retailers throughout Georgia.
West VirginiOn January 17, 1997, the West Virginia Lottery signed an exclusive
three year agreement with LPPC to publish a monthly West Virginia Lottery
magazine titled, WEST VIRGINIA LOTTERY PLAYERS DIGEST. Initial projections are
for distribution of 150,000 copies monthly to all lottery retailers throughout
the state.
LOTTOWORLD MAGAZINE
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LOTTOWORLD(R) magazine continues to experience increasing subscriptions
sales and steady newsstand sales. Primarily due to the very significant capital
outlays necessary to successfully maintain a traditional newsstand distribution
system and promotional campaigns, the Company has decided to conserve capital in
this area and focus expansion of LOTTOWORLD(R) magazine circulation through
various subscription sales vehicles.
Subscription. Monthly subscribers to LOTTOWORLD(R) magazine numbered
approximately 64,900 at year end 1996. Current subscription sales programs for
LOTTOWORLD(R) magazine include: (i) the national Publishers Clearing House
Sweepstakes (PCH) mailing in March 1997, which PCH estimates could generate up
to 45,000 new subscribers; (ii) full-page advertising for LOTTOWORLD(R) magazine
subscriptions in each issue of the NEW YORK PLAYERS MONTHLY; (iii) $3 Billion
Lotto Club promotions sponsored by civic organization like the Kiwanis Clubs;
and (iv) through various promotional activities of telemarketing organizations.
Newsstand. Effective with the March 1997 edition, the single issue cover price
of LOTTOWORLD(R) magazine was increased from $1.95 to $2.49 per copy. Further
changes to be instituted with this issue include consolidation of 8 separate
state/regional editions to a single national edition and reduction of the number
of copies printed for newsstand sales to more closely match actual newsstand
sales. Monthly newsstand sales have been averaging approximately 22,000 copies
monthly.
SUPPLIERS
The printing of both magazines is done by S. Rosenthal & Company, Inc., of
Cincinnati, Ohio. S Rosenthal is a national publications printing company who
has printed LOTTOWORLD since August 1994. The contract with S. Rosenthal is for
a period of five years and pursuant to the agreement, S. Rosenthal purchases
required amounts of paper for the Company and passes the increases or decreases
in paper prices on to the Company as the paper is used. There is a 30 day
minimum advance notice required for any change in paper prices The Company
considers its relationship with S. Rosenthal to be excellent and has no reason
to believe that the paper supplied by S. Rosenthal or the printing operations
will become unavailable in the future. However, there are many publication
printers to which the Company can engage should it be necessary.
The processing of subscriptions and the preparation of mailing labels for
LOTTOWORLD is done by the largest fulfillment house in the United States,
Neodata, located in Boulder, Colorado under a three year contract at prices
which the Company feels is very favorable. Relations with Neodata are excellent.
TRADEMARKS AND SERVICE MARKS
The Company has various trademark and service marks to protect proprietary
interests of the Company. The Company perceives these trademark and service
marks to be highly important to the Company's business and vigorously polices
and defends these rights. Each magazine contains notice of the Company's
trademark and service marks and a notice of the prohibitions against
unauthorized duplication, distribution and exhibition. However, since the
playing methods and game strategies in the Company's magazines are not
protectible under trademark and service mark laws, the Company cannot preclude
other parties from
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offering instructional aids which might also employ these methods and
strategies. Furthermore, there can be no assurance that any action by the
Company against an infringer will be successful, or that any recovery by the
Company will adequately compensate it for any damages it might incur.
COMPETITION
The Company is aware of only a few competitors in its market, none of
which has product lines or distribution channels which are comparable to the
Company's. However, there can be no assurance that other competitors, which may
have greater financial and other resources than the Company, will not be drawn
into the market, or that the Company's resources and marketing strategies will
allow the Company to compete successfully.
GOVERNMENT REGULATION
Lotteries, and activities associated therewith, such as promotion, are
subject to substantial regulation under federal laws and by each state which
conducts a lottery. The application of such regulation is subject to the
interpretation by, and the 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.
EMPLOYEES
As of March 3, 1997, the Company employed 36 persons, of which 2 are
part-time employees. All full-time employees are salaried and all part-time
employees are paid on an hourly basis. The Company provides life insurance for
its full-time employees in addition to medical insurance premiums. Employees
with less than two years service pay a portion of the premium.
None of the Company's employees are represented by a union, and the
Company does not anticipate any union organization activities among its
employees.
ITEM 2. PROPERTIES
The Company owns no real estate. The Company leases approximately 8,100
square feet of office space in Naples, Florida from an unaffiliated party at a
monthly rental of $ 10,829 plus operating costs. The leases expire in January
1999, and provide for increases in the operating costs. The space is used for
the Company's administrative, editorial and production offices. The Company
expects this facility will be adequate for the foreseeable future. The Company
also leases an approximately 1,700 square foot warehouse in Naples, Florida from
an unaffiliated party for a monthly rental of $675. This lease expired on March
31, 1997 and the Company expects to renew this lease for another year at
approximately the same rental.
The Company also leases approximately 1,466 square feet of office space at
420 Lexington Avenue, New York, NY at a monthly rental of $2,565.50 plus
electricity. In addition, the Company will pay any increases in real estate
taxes and operating expenses. The lease expires on May 30, 2002. The Company
uses this facility for its New York advertising sales staff and feels the space
is adequate for its needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property the subject of,
any material legal proceeding.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in
the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq SmallCap Market tier of
The Nasdaq Stock Market under the symbol LTTO. The following table sets forth
the high and low sales prices for the period indicated:
Period High Low Last
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1995:
First Quarter $ 9.00 $7.00 $8.50
Second Quarter $10.25 $8.625 $9.75
Third Quarter $10.25 $6.00 $6.00
Fourth Quarter $ 7.00 $4.00 $4.75
1996
First Quarter $5.75 $3.00 $3.5157
Second Quarter $4.75 $1.25 $1.875
Third Quarter $2.5625 $1.4063 $1.75
Fourth Quarter $1.875 $1.00 $1.25
At December 31, 1996, the Company had 196 holders of record of its common
stock and, the Company estimates, approximately 500 to 900 beneficial owners of
its common stock.
The Company has never paid or declared any cash dividends on its common
stock and does not contemplate paying any cash dividends on its common stock in
the foreseeable future. Holders of the Company's common stock are entitled to
receive dividends when and as declared by the Board of Directors out of funds
legally available. All accrued and unpaid dividends on the Company's outstanding
shares of Series A Convertible Preferred Stock must be paid before dividends are
paid on common stock.
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 and 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 this Form 10-KSB.
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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, $1,500,000 of distribution,
marketing and merchandising; and $750,000 of promotion expense to be associated
with the failure to timely place LOTTOWORLD magazine in retail sales locations
because pockets were not properly prepared to accept delivery of the magazine.
For the year ended December 31, 1996, the Company had operating revenues
of $902,000; operating expenses of $5,331,000; an operating loss of $4,429,000
and a net loss of $4,359,000. The loss per share of common stock was $0.92.
Included in the operating expenses are: $550,000 attributable to the start-up of
the NEW YORK LOTTERY PLAYERS MONTHLY; $500,000 attributable to investor
relations; as well as a net cost of the initial program with Publishers Clearing
House ("PCH") of approximately $350,000. It is customary, in the industry, to
lose money in the first year of a PCH subscription. The Company, depending upon
renewal rates, hopes to have a positive cash flow beginning in the second year
of a subscription.
Newsstand sales increased by $95,000, of which $18,000 was attributable to
a cover price increase which took place with the June 1996 issue of LOTTOWORLD
magazine. By effective management of the distribution of the newsstand copies of
LOTTOWORLD MAGAZINE, sales were increased despite the reduction in the number of
copies printed and distributed each month. The newsstand distribution of
LOTTOWORLD decreased steadily from 193,000 copies in February to 150,000 copies
in July to finally 101,000 copies with the January 1997 issue. Subsequent to
year end, these decreases continued and the April 1997 issue had a newsstand
distribution of 35,000 copies with no anticipated significant reduction in the
number of copies sold.
Advertising sales decreased $60,000 from $281,000 for the year ended
December 31, 1995 to $221,000 for the year ended December 31, 1996. The Company
attributes this decrease to the uncertainty of the newsstand sales of LOTTOWORLD
magazine following the announcement of the problems with the distribution of the
magazine which was made in the Fall of 1995. Advertising is usually purchased in
advance and the Company has found it difficult to regain lost sales, but
projects advertising revenues to increase significantly in the second half of
1997 due to increased ad pages sold at rates which reflect the increased
circulation of the NEW YORK LOTTERY PLAYERS MONTHLY. The Company projects
advertising revenues of $167,000 and $4,258,000 in 1997 for LOTTOWORLD and
Lottery Players Publishing Company respectively. This takes into consideration
projected revenues for magazines to be published for New York; Georgia,
beginning in July 1997; Virginia and Massachusetts, beginning in August 1997;
Kentucky and Nebraska, beginning in September; West Virginia and New Jersey,
starting in October, and Iowa, Michigan and Florida, beginning in December 1997.
As of March 21, 1997, contracts for publishing these various magazines have been
received from New York, Georgia, Nebraska and West Virginia.
Other operating income rose by $70,000 from $129,000 to $199,000 and
consists of various different products which are sold through the magazines
published by the Company. No one product accounts for more than 10% of total
revenues.
Operating expenses of the Company have been reduced by $1,108,000 from the
preceding year from $6,438,000 in 1995 to $5,331,000 in 1996. Production,
distribution and editorial expenses have decreased a net of $372,000 even after
giving effect to the costs associated with the NEW YORK LOTTERY PLAYERS MONTHLY,
which was introduced in October 1996, and which amounted to $335,000.
Circulation expenses for the year ended December 31, 1996 are $621,000 lower
than the preceding year. This is largely attributable to the non-renewal of the
marketing and merchandising contract with Time Distribution Services, Inc. and
the reduction of the fees charged by ICD/The Hearst Corporation for the
distribution of the magazine. Costs for fulfillment of LOTTOWORLD magazine
increased due to the additional subscriptions received from PCH. The cost of
fulfilling each subscription was reduced from $1.80 per name per year to $.84
per name per year.
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For the year ended December 31, 1995, the Company spent almost $1,000,000
to promote LOTTOWORLD magazine when it began its check-out counter sales program
in 1995. These sums did not have to be expended again as the check-out counter
program was dropped due to the failure of TDS to properly and completely rack
and logo the check-out positions it had secured for the Company. For the year
ended December 31, 1996, the Company spent $555,000 on advertising, promotion
and business development, a reduction of $800,000 from the previous year.
Administrative expenses increased 55% over the previous year, from
$1,252,000 for the year ended December 31, 1995 to $1,938,000 for the year ended
December 31, 1996. Of the increase of $686,000, $500,000 is attributable to
funds expended for investor relations. The Company has actively participated in
a variety of efforts to acquaint more people with the Company and will continue
this activity for the foreseeable future. The Company will have $500,000 in
similar expenses during the first two quarters of fiscal 1997. Also included in
administrative expenses for the current year was $116,600 in executive salaries
for the president and publisher of Lottery Players Publishing Company.
LIQUIDITY AND CAPITAL RESOURCES:
The following table represents the capital resources of the Company:
December 31,
----------------------------
1996 1995
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Current Assets $ 1,012,000 $ 1,097,000
Current Liabilities 1,212,000 1,099,000
------------ ------------
Working Capital (Deficiency) $ (200,000) $ (2,000)
------------ ------------
Common Shareholders' Equity
Common stock $ 6,100 $ 3,100
Common stock subscribed -- 1,316,200
Additional paid-in capital 12,492,000 7,933,800
Accumulated deficit (12,248,300) (7,789,500)
Less treasury stock (34,100) --
Less unpaid stock subscriptions -- (866,200)
------------ ------------
$ 215,700 $ 597,400
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Cash used in operations during 1996 was $3,291,000 as compared to
$5,138,000 used in operations in 1995. The decrease is primarily due to a lower
net loss in 1996 and an increase in the deferred revenues attributable to
increased subscriptions.
The Company used $39,000 for investing activities during 1996 compared to
$411,000 used in 1995. In 1995 the Company was acquiring equipment for the
distribution of LOTTOWORLD and furniture and equipment for the increased staff
anticipated when the Company had its national roll-out in June 1995. When the
Company experienced the problems with the distribution, it was determined that
the Company no longer needed to complete the acquisition of this equipment ,
which it halted in 1995. The Company was able to meet all its requirements with
no additional acquisitions of furniture or equipment.
Cash provided by financing was $3,149,000 in 1996 compared to cash
provided by financing of $5,806,000 in 1995. Most of the funds were from the
issuance of common stock in both periods. Cash used to reduce long-term debt was
$16,600 in 1996 and $8,300 in 1995.
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The Company does not have any material commitments for capital
expenditures at December 31, 1996. The Company believes that it does not have
the capital resources and liquidity necessary to meet all of the obligations or
its projections during 1997 and feels it will need to raise approximately
$4,000,000 in additional financing to meet its goals.
On March 12, 1996, the Company sold 180,000 shares of its common stock to
a private investor at the price of $3.75 per share. The net proceeds to the
Company was $607,500. This sale was subject to a price adjustment based upon the
market performance of the Company's stock in a period subsequent to the sale and
based upon that price adjustment, another 120,000 shares were issued for a total
of 300,000 shares. These securities were sold pursuant to an exemption from
registration under Regulation S promulgated by the Securities and Exchange
Commission.
As of March 31, 1996, the Company entered into agreements with four
unrelated parties to promote the Company through various means, including, but
not limited to, investment shows, magazine articles, and radio interviews. In
return these parties received 666,667 shares of the Company's common stock which
had a market value of $1,000,000. Those shares were subsequently registered on a
Form S-8 Registration Statement (file number: 333-03931 filed on May 17, 1996).
On June 28, 1996, the Company sold 1,188,164 shares at a price of $1.625
per share and the net proceeds to the Company from this transaction was
$1,718,382, exclusive of legal fees of $13,472. These securities were sold
pursuant to an exemption from registration under Regulation D promulgated by the
Securities and Exchange Commission.
On September 12, 1996, the Company sold 1,188,164 shares at a price of
$1.625 per share and the net proceeds to the Company from this transaction was
$537,282. These securities were sold pursuant to an exemption from registration
under Regulation D promulgated by the Securities and Exchange Commission. As
compensation for acting as Selling Agent for the above two sales, a registered
broker-dealer received warrants entitling it to purchase 155,966 shares of the
Company's common stock for $1.65 per share. The warrant is exercisable for a
period of five years from the date of grant. On October 10, 1996, the Company
filed a Registration Statement on Form S-3 (file number: 333-13863)(the
"Registration Statement") to register the above two transactions as well as the
shares underlying the warrants issued to the Selling Agent.
The Registration Statement was amended on February 14, 1997 and again on
April 9, 1997 to include 333,340 shares of the common stock of the Company
issued to Dennis B. Schroeder and A. Richard Holman, the Company's Chief
Executive Officer and President respectively, on November 10, 1995 in exchange
for an aggregate amount of $1,000,020 of the Company's secured subordinated
promissory notes. The Registration Statement, as amended, includes 56,000 shares
of the common stock of the Company issued to Parkway Financial Group, the
landlord of the premises rented in Naples, Florida for the executive offices of
the Company, in exchange for four months rent, valued at $56,000.
TRANSACTIONS SUBSEQUENT TO DECEMBER 31, 1996
In various private transactions, the Company either sold shares of its
common stock for cash or exchanged shares of its common stock for payments due
certain vendors of the Company in lieu of a cash payment of those payables.
In January 1997 the Company exchanged 56,000 shares of its common stock in
payment of rent on its executive offices for a period of four months. The rent
for this period would be $56,000. In a series of transactions with individuals,
the Company sold 178,188 shares of the Company's common stock for an aggregate
amount of $163,000. In March 1997, the Company exchanged 200,000 shares of its
common stock for printing services worth an estimated $101,000.
On April 9, 1997, the Company acquired 2,666,666 shares of the common
stock of Sound Money Investors, Inc. ("SMI")with a market value of $500,000 in
exchange for 516,129 shares of common stock of the Company.
-8-
<PAGE>
The following table sets forth at December 31, 1996; (i) the total assets
and the capitalization of the Company; and (ii) the pro-forma capitalization to
give effect to the subsequent transactions:
December 31, 1996
------------------------------
Actual Pro-forma
------------ ------------
Total assets $ 2,436,000 $ 3,140,700
Long-Term Debt, less current maturities 8,000 8,000
Redeemable convertible preferred stock 1,000,000 1,000,000
Common Shareholders' Equity
Common stock 6,100 7,100
Additional paid-in capital 12,492,000 13,311,200
Accumulated deficit (12,248,300) (12,248,300)
Less, treasury stock (34,100) (34,100)
------------ ------------
$ 215,700 $ 1,035,900
============ ============
ITEM 7. FINANCIAL STATEMENTS
All financial statements required to be filed hereunder are attached
hereto following the signature page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
(a) IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTORS.
The present term of office of each director will expire at the next Annual
Meeting of Shareholders. The name and position with the Company and age of each
director and the period during which each director has served are as follows:
Director
Name and Position, if any, in the Company Age Since
- ----------------------------------------- --- --------
Dennis B. Schroeder
(Publisher, Chairman of the Board and Chief
Executive Officer) 59 1993
A. Richard Holman
(Editor-in-Chief and President) 53 1993
James D. Cullen 42 1995
-9-
<PAGE>
EXECUTIVE OFFICERS.
The executive officers of the Company are elected by the Company's Board
of Directors and serve at the discretion of the Board of Directors. The current
executive officers of the Company are as follows:
Officer
Name of Executive Officer and Position in Company Age Since
- ------------------------------------------------- --- -------
Dennis B. Schroeder
(Publisher, Chairman of the Board, and Chief
Executive Officer) 59 1993
A. Richard Holman
(Editor-in-Chief and President) 53 1993
Judith A. Schroeder
(Secretary/Treasurer and Vice President) 55 1993
Bonnie Fussell
(President, Lottery Players Publishing Company, Inc.
A wholly-owned subsidiary of the Company) 57 1996
Stuart Dubow
(Chief Financial Officer and Senior Vice President) 53 1994
Barry A. Miller
(Managing Editor and Senior Vice President) 54 1994
BUSINESS EXPERIENCE
The following is a brief account of the business experience for the last
five years of each director and executive officer of the Company:
Name of Director or Executive Principal Occupation During the Last Five Year
- ----------------------------- ------------------------------------------------
Dennis B. Schroeder Publisher, Chairman of the Board and Chief
Executive Officer of the Company since it was
founded in 1993; Chief Executive Officer and
Chairman of the Board of Financial Marketing
Consultants, Inc. ("FMC"), FMC provides new and
developing business with marketing strategies,
business plans, capital structure analysis and
assistance and advice in obtaining private and
public investor financing, since 1991.
A. Richard Holman Editor-in-Chief and President since it was
founded in 1993; President, Home Services
Alliance from 1992 to 1993; President of FMC
since 1993.
James D. Cullen Attorney-at-law, specializing in the areas of
corporate and transactional matters, Naples,
Florida, since 1992; Associate General Counsel
and Vice President of Investments, Transmark
USA, Inc., an international investment holding
company, from 1991 to 1992.
Judith A. Schroeder Secretary/Treasurer and Vice President of the
Company since 1993; Secretary/Treasurer of FMC
since 1991.
Bonnie Fussell President of Lottery Players Publishing Company
since August 1996; President of Louisiana
Lottery from March 1992 to July 1996; Chief of
Staff, Louisiana State Police, February 1962 to
February 1992.
-10-
<PAGE>
Stuart Dubow Chief Financial Officer and Senior Vice
President of the Company since 1994; President
of Mercury Lighting Corp-oration, a manufacturer
of electric light sockets, from 1991 to 1994.
Barry A. Miller Managing Editor and Senior Vice President of the
Company since 1994; President and Chief
Executive Officer of World Steel, Inc., a trader
of steel, from 1991 to 1993.
(b) IDENTIFY SIGNIFICANT EMPLOYEES
Not applicable
(c) FAMILY RELATIONSHIPS
Judith A. Schroeder is the wife of Dennis B. Schroeder.
(d) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None
(e) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires Company's
officers and directors and persons who own more than ten percent of the
Company's outstanding common stock to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Officers,
directors and greater than ten percent shareholders are required by SEC
regulations to furnish the company with copies of all Section 16(a) forms they
file.
Based solely on a review of Forms 3 and 4 furnished to the Company during
the Company's fiscal year ended December 31, 1996, there were no directors,
officers, or more than 10% shareholders of the Company who failed to timely file
a Form 3 or Form 4.
ITEM 10. EXECUTIVE COMPENSATION
(a) AND (b) GENERAL AND SUMMARY COMPENSATION TABLE
The following table shows all plan and non-plan compensation paid by the
Company and its subsidiary for services rendered for the year ended December 31,
1996. No executive officer earned in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
-----------------------
Annual Compensation Awards
---------------------------------- -----------------------
Name and Other Annual Restricted Options All Other
Principal Position Year Salary Bonus Compensation Stock Awards Granted Compensation
- ---------------------- ---- ------ ------- -------------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dennis B. Schroeder 1996 $87,182 100,000
Publisher, Chairman 1995 $76,750 0 0 0 33,401 0
of the Board, Chief 1994 $76,750 0 0 0 0 0
Executive Officer
</TABLE>
-11-
<PAGE>
(c) and (d) STOCK OPTION AND STOCK APPRECIATION RIGHTS
STOCK OPTION PLANS
In August 1993, the Company's Board of Directors and shareholders adopted
the Company's 1993 Stock Option Plan (the"Plan") which provides for the granting
of stock options to key employees, consultants and directors. The Plan was
amended by the shareholders in 1995 to increase the aggregate number of shares
of common stock reserved for issuance from 100,000 shares to 350,000 shares.
Shares covered by expired or terminated stock options may be used for subsequent
awards under the Plan.
The Plan is currently administered by the Company's Board of Directors.
The Board has the power to select recipients, make awards of stock options and
adopt regulations and procedures for the Plan.
The Plan permits the award of both stock options that qualify as
"incentive stock options " ("ISOs") under the Internal Revenue Code and options
that do not so qualify ("non-qualified options"). ISOs differ as to their tax
treatment and are subject to a number of limitations under the Internal Revenue
Code. The exercise price on non-qualified options may not be less than 85% of
the fair market value of the stock on the date the option is granted. ISOs may
not be granted with an exercise price less than the fair market value of the
common stock on the date of the grant (or for an option granted to a person
holding more than 10% of the Company's voting stock, at less than 110% of the
fair market value.) An optionee is not taxed on the grant of either an ISO or
non-qualified option. An optionee is taxed on the exercise of a non-qualified
option in the amount of the "spread" between the exercise price of the option
and the fair market value of the underlying shares at the time of the exercise.
This amount is taxed as ordinary income and the Company is entitled to a tax
deduction of this amount. In the case of an ISO, an optionee generally has no
tax on the exercise and is only taxed upon a sale of the shares purchased upon
exercise of the option. If the shares are held for the time required under the
Internal Revenue Code, all of the gain is taxed as a long-term capital gain. In
that event, the Company is not entitled to any deduction.
The options expire between one and four years from the date of grant.
Options granted under the Plan are not transferable except: (i) in the case of
death of the optionee; (ii) by laws of descent and distribution; or (iii)
pursuant to a qualified domestic relations order, and each option provides for
early expiration upon the death of the optionee or, for employees of the
Company, upon termination of the optionee's employment with the Company.
At December 31, 1996, there was outstanding under the Plan options to
acquire 186,668 shares of common stock at exercise prices ranging from $1.00 per
share to $5.50 per share, the price determined by the Board of Directors to be
the fair market value of the shares on the date of the grant (except for 10%
shareholders whose options are at 110% of the fair market value).
The following table contains information concerning the grant of stock
options by the Company in 1996 to each executive officer named in the Summary
Compensation Table and each director:
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
---------------------------------
Individual Grants
- ---------------------------------------------------------------------------------------------
Percentage of
Options Total Options Exercise or
Granted Granted Base Price Expiration
Name In 1996(1) Employees in 1996 Per Share Date
- ---------------------- ----------- ----------------- ------------ ----------
<S> <C> <C> <C> <C>
Dennis B. Schroeder 33,401 4.58% $5.50 3/1/98
75,000 10.29% $1.65 5/31/2000
25,000 3.43% $1.88 7/29/99
A. Richard Holman 22,267 3.06% $5.50 3/1/98
75,000 10.29% $1.65 5/31/2000
25,000 3.43% $1.88 7/29/99
-12-
<PAGE>
James D. Cullen 50,000 6.86% $3.50 3/1/99
50,000 6.86% $1.65 5/31/99
15,000 2.06% $5.00 7/1/98
</TABLE>
(1) The exercise price may be paid in cash or by such other method permitted
by the Board of Directors, including (a) tendering (either actually or by
attestation) shares of LottoWorld, Inc. common stock already owned having
a fair market value equal to the cash exercise price of the option being
exercised, (b) surrendering another LottoWorld, Inc. award having a market
value on the date of exercise equal to the cash exercise price of the
option being exercised, or (c) any combination of the foregoing.
Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
The following table contains information concerning options held at
December 31, 1996 by each of the executive officers named in the Summary
Compensation Table and director:
Value of
Number of Unexercised
Unexercised In the Money
Shares Acquired Value Options Options
Name On Exercise Realized At Year-End At Year-End
- ------------------- --------------- -------- ----------- -----------
Dennis B. Schroeder 0 0 193,401* 0
A. Richard Holman 0 0 157,267* 0
James D. Cullen 0 0 170,000* 0
* All options shown are exercisable as of December 31, 1996.
(i) REPORT ON REPRICING OF OPTIONS
On February 8, 1996, the Board of Directors voted to reprice all the
options which were issued to employees of the Company at the time of the Initial
Public Offering of the Company. The option price at that time, March 10, 1995,
was $7.00 (except for 10% holders, for which the price was 110% of market.
Included in this repricing were the Chairman and Chief Executive Officer and the
President of the Company.
<TABLE>
<CAPTION>
Ten-Year Option/SAR Repricings
Number of Length of
Securities Market Price Exercise Original
Underlying Of stock at Price at Option Term
Options/ Time of Time of Remaining at
SARs Repricing or Repricing or New Date of
Repriced or Amendment Amendment Exercise Repricing or
Name Date Amended $ $ Price ($) Amendment
- ---- ------- ---------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dennis B. Schroeder 2/8/96 33,401 $5.00 $7.70 $5.50 2 years
Chairman and Chief
Executive Officer
A. Richard Holman 2/8/96 22,267 $5.00 $7.70 $5.50 2 years
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) and (b) Security Ownership of Certain Beneficial Owners and Management
-13-
<PAGE>
The following table sets forth as of March 21, 1997, the number of shares
of the Company's $0.001 par value common stock owned by each person who owned of
record, or was known to own beneficially, more than 5% of the number of shares
of the Company's outstanding common stock, sets forth the number of shares of
the Company's outstanding common stock beneficially owned by each of the
Company's directors, and sets forth the number of shares of the Company's common
stock beneficially owned by all of the Company's directors and officers as a
group:
<TABLE>
<CAPTION>
Presently
Exercisable Presently
Name of Percent Common Options Convertible
Beneficial Total Of Shares And Preferred Beneficial
Owners (1) Ownership Class Owned Warrants Stock Ownership
- ---------------- --------- ------- ------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Perkins Capital
Management(2) 615,832 9.3 615,832
Dennis B.
Schroeder(2)(3)(4) 961,541 14.1 718,142 193,401 49,998
A. Richard
Holman(2)(5) 627,665 7.0 470,398 157,267
James D.
Cullen(2)(6)(7) 172,610 2.6 2,000 170,000 610
All Directors and
executive officers
as a group
(7 persons) 2,173,816 28.9 1,192,540 875,668 49,998 610
____________________
(1) All beneficial owners listed have sole voting and/or investment power with respect
to the shares shown unless otherwise indicated.
(2) The address for Perkins Capital Management, Inc. is 730 East Lake Street, Wayzata,
MN, 55391-1769. The address for Messrs. Schroeder, Holman and Cullen is Suite 200,
2150 Goodlette Road, Naples, FL 34102.
(3) Includes 193,401 shares of common stock underlying presently exercisable stock
options that have exercise prices between $1.50 per share and $5.50 per share.
(4) Represents shares of common stock underlying shares of Series A 10% Redeemable
Convertible Preferred Stock with a par value of $0.01 per share, a redeemable value
of $6.00 per share, convertible into common stock at $.96 per share.
(5) Includes 157,267 shares of common stock underlying presently exercisable stock
options that have exercise prices between $1.50 per share and $5.50 per share.
(6) Includes 170,000 shares of common stock underlying presently exercisable stock
options that have exercise prices between $1.50 per share and $5.50 per share.
(7) Includes 10 shares beneficially held by his son and over which he has voting and
investment power.
</TABLE>
-14-
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
James D. Cullen, a director, was paid $92,500 for legal services performed
on behalf of the Company.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are filed herewith in ITEM 7.
(i) Balance Sheets as of December 31, 1996 and 1995
(ii) Statements of Operations for the years ended December 31, 1996
and 1995.
(iii) Statements of Common Shareholders Equity for the years ended
December 31, 1996 and 1995
(iv) Statements of Cash Flows for the years ended December 31, 1996
and 1995
(v) Notes to financial statements
(a)(2) The following exhibits are submitted herewith:
3.1 Articles of Incorporation of Registrant, with amendments. Filed as an
Exhibit to the Company's Registration Statement on Form SB-2, dated
January 17, 1995, (File No. 33-88462-a) and incorporation herein by
reference.
3.2 By-Laws of Registrant. Filed as an Exhibit to the Company's Registration
Statement on Form SB-2, dated January 17, 1995, (File No. 33-88462-a) and
incorporation herein by reference.
4.1 Form of Common Stock Certificate. Filed as an Exhibit to the Company's
Registration Statement on Form SB-2, dated January 17, 1995, (File No.
33-88462-a) and incorporation herein by reference.
10.1 Employment Contract of Dennis B. Schroeder, with attached agreements to
grant stock options. Filed as an Exhibit to Amendment No. 1 to the
Company's Registration Statement on Form SB-2, dated February 17, 1995 and
incorporated herein by reference.
10.2 Employment Contract of A. Richard Holman, with attached agreements to
grant stock options. Filed as an Exhibit to Amendment No. 1 to the
Company's Registration Statement on Form SB-2, dated February 17, 1995 and
incorporated herein by reference.
10.3 Employment Contract of Stuart Dubow. Filed as an Exhibit to the Company's
Registration Statement on Form SB-2, dated January 17, 1995, (File No.
33-88462-a) and incorporation herein by reference.
10.4 Employment Contract of Barry Miller. Filed as an Exhibit to the Company's
Registration Statement on Form SB-2, dated January 17, 1995, (File No.
33-88462-a) and incorporation herein by reference.
10.7 Stock Option Plan of the Registrant. Filed as an Exhibit to the Company's
Registration Statement on Form SB-2, dated January 17, 1995, (File No.
33-88462-a) and incorporation herein by reference.
10.9 Form of Stock Option Agreement between Registrant and each of Dennis B.
Schroeder, A. Richard Holman, and James D. Cullen. Filed as an Exhibit to
the Company's Registration Statement on Form SB-2, dated January 17, 1995,
(File No. 33-88462-a) and incorporation herein by reference.
10.18 Form of Common Stock Warrant between the Company and purchasers of Units.
Filed as an Exhibit to the Company's Registration Statement on Form SB-2,
dated January 17, 1995, (File No. 33-88462-a) and incorporation herein by
reference.
-15-
<PAGE>
10.19 Lease between the Company and Parkway Financial Center commencing February
1, 1994, as amended. Filed as an Exhibit to the Company's Registration
Statement on Form SB-2, dated January 17, 1995, (File No. 33-88462-a) and
incorporation herein by reference.
10.21 Printing Agreement between the Company and S. Rosenthal & Company, Inc.
dated November 15, 1994. Filed as an Exhibit to the Company's Registration
Statement on Form SB-2, dated January 17, 1995, (File No. 33-88462-a) and
incorporation herein by reference.
10.22 Stock Option Agreement between Dennis B. Schroeder and A. Richard Holman.
Filed as an Exhibit to Amendment No. 2 to the Company's registration
Statement on Form SB-2, dated March 1, 1995, and incorporated herein by
reference.
10.23 Lease between the Company and Parkway Financial Center commencing May 1,
1995. Filed as an Exhibit on the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1995 and incorporated herein by
reference.
10.24 Distribution Agreement between the Company and International Circulation
Distributors - The Hearst Corporation, dated February 20, 1996. Filed as
an Exhibit on the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995 and incorporated herein by reference.
10.25 Form of Stock Option Agreement between the Registrant and each of Stuart
Dubow and Barry Miller. Filed as an Exhibit on the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1995 and
incorporated herein by reference.
10.26 Exchange Agreement between the Company and each of Dennis B. Schroeder and
A. Richard Holman dated November 10, 1995. Filed as an Exhibit on the
Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995 and incorporated herein by reference.
10.31 Employment Contract between the Company and Bonnie Fussell dated June 25,
1996.
10.32 Form of contract between Lottery Players Publishing Company, Inc., a
wholly-owned subsidiary of the Company, and the New York State Lottery,
the Georgia Lottery, the Nebraska Lottery and the West Virginia Lottery
for the publication of a monthly magazine.
21 List of subsidiaries
27 Financial Data Schedule
(b) There were no Reports on Form 8-K for the quarter ended December 31,
1996
-16-
<PAGE>
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: Dennis B. Schroder
-----------------------------
Dennis B. Schroeder
Chief Executive Officer
By: Stuart Dubow
-----------------------------
Stuart Dubow
Chief Financial Officer
Date: April 15, 1997
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 on the
dates indicated.
S/ Dennis B. Schroeder Date: April 15, 1997
- ----------------------------------------
Dennis B. Schroeder, Chief Executive
Officer and a director
S/A. Richard Holman Date: April 15, 1997
- ----------------------------------------
A. Richard Holman, President and
a director
S/ James D. Cullen Date: April 15, 1997
- ----------------------------------------
James D. Cullen, a director
-17-
<PAGE>
LOTTOWORLD, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1996
<PAGE>
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F - 2
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets as of December 31, 1996 and 1995 F - 3
Consolidated statements of operations for the years ended
December 31, 1996 and 1995 F - 4
Consolidated statements of common shareholders' equity for the
years ended December 31, 1996 and 1995 F - 5
Consolidated statements of cash flows for the years ended
December 31, 1996 and 1995 F - 7
Notes to consolidated financial statements F - 9
- --------------------------------------------------------------------------------
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
LottoWorld, INC. and Subsidiary
Naples, Florida
We have audited the accompanying consolidated balance sheets of LottoWorld, Inc.
and subsidiary as of December 31, 1996 and 1995, and the related consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LottoWorld, Inc. and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 9 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 9 and 10. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ McGladery & Pullen LLP
Naples, Florida
March 21, 1997, except for Note 10
as to which the date is April 8, 1997
F-2
<PAGE>
LOTTOWORLD, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 137,752 $ 318,963
Accounts receivable, less allowance for doubtful accounts
1996 $-0-; 1995 $65,800 324,297 159,479
Stock subscriptions receivable (Note 5) - 449,980
Prepaid expenses (Note 2) 549,664 168,412
------------------------------
Total current assets 1,011,713 1,096,834
Restricted cash - redeemable convertible preferred stock
(Note 4) 1,000,020 1,000,020
Accounts receivable, officers 58,375 58,375
Furniture, Fixtures and Equipment, less accumulated depreciation
1996 $221,723; 1995 $106,050 (Note 3) 338,729 556,253
Other Assets 26,820 10,101
------------------------------
$ 2,435,657 $ 2,721,583
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt (Note 3) $ 16,667 $ 16,667
Accounts payable (Note 10) 757,789 851,673
Accrued expenses 45,724 56,302
Deferred revenue 366,372 149,549
Dividends payable 25,000 25,000
------------------------------
Total current liabilities 1,211,552 1,099,191
------------------------------
Long-Term Debt, less current maturities (Note 3) 8,383 25,050
------------------------------
Commitments (Note 7)
Redeemable convertible preferred stock, $.01 par value, 250,000
shares authorized, 166,670 shares issued and outstanding
(Note 4) 1,000,020 1,000,020
------------------------------
Common Shareholders' Equity
Common stock, $.001 par value, 10,000,000 shares authorized;
6,164,853 and 3,106,022 shares issued 6,165 3,106
Common stock subscribed, 637,500 shares (Note 5) - 1,316,230
Additional paid-in capital 12,491,870 7,933,759
Accumulated deficit (12,248,259) (7,789,523)
Less cost of 11,500 common shares acquired (34,074) -
Less subscriptions for 387,500 shares (Note 5) - (866,250)
------------------------------
215,702 597,322
------------------------------
$ 2,435,657 $ 2,721,583
==============================
See Notes to Consolidated Financial Statements.
</TABLE>
F-3
<PAGE>
LOTTOWORLD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Magazine sales $ 482,213 $ 387,123
Advertising 221,060 280,657
Other 199,063 129,686
-------------------------------
902,336 797,466
-------------------------------
Operating expenses:
Production, distribution and editorial 2,127,824 2,500,252
Circulation 710,405 1,331,594
Advertising, promotion and business development 554,663 1,354,530
Selling, general and administrative 1,938,382 1,252,399
-------------------------------
5,331,274 6,438,775
-------------------------------
Operating loss (4,428,938) (5,641,309)
-------------------------------
Other income (expense):
Interest income 73,725 133,727
Interest expense (3,521) (87,609)
-------------------------------
70,204 46,118
-------------------------------
Net loss $ (4,358,734) $ (5,595,191)
==============================
Net loss per common share $ (0.92) $ (2.21)
Weighted average number of common shares outstanding 4,841,564 2,576,152
See Notes to Consolidated Financial Statements.
</TABLE>
F-4
<PAGE>
LOTTOWORLD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Common Additional
Common Stock Paid-in
Stock Subscribed Capital
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1994 $ 1,885 $ - $ 2,095,394
Common stock issued (1,221,090 shares) 1,221 - 5,838,365
Stock subscriptions (Note 5) - 1,316,230 -
Dividend distributions - - -
Net loss - - -
---------------------------------------------
Balance, December 31, 1995 3,106 1,316,230 7,933,759
Common stock issued (3,058,831 shares) 3,059 (449,980) 4,558,111
Common stock subscriptions expired - (866,250) -
Treasury shares purchased (11,500 shares) - - -
Dividend distributions - - -
Net loss - - -
---------------------------------------------
Balance, December 31, 1996 $ 6,165 $ - $ 12,491,870
=============================================
See Notes to Consolidated Financial Statements.
</TABLE>
F-5
<PAGE>
Common Total
Accumulated Treasury Stock Shareholders'
(Deficit) Stock Subscriptions Equity
- ---------------------------------------------------------------------
$ (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
- - - 4,111,190
- - 866,250 -
- (34,074) - (34,074)
(100,002) - - (100,002)
(4,358,734) - - (4,358,734)
- ---------------------------------------------------------------------
$ (12,248,259) $ (34,074) $ - $ 215,702
=====================================================================
F-6
<PAGE>
LOTTOWORLD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (4,358,734) $ (5,595,191)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 115,673 96,108
Common stock issued in exchange for vendor services 761,400 -
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (164,818) (90,618)
Accounts receivable, officers - (58,375)
Prepaid expenses 118,748 (166,072)
Other assets (16,719) (1,534)
Increase in:
Accounts payable and accrued expenses 36,607 588,624
Deferred revenue 216,823 88,896
--------------------------------
Net cash used in operating activities (3,291,020) (5,138,162)
--------------------------------
Cash Flows Used In Investing Activities
Purchase of furniture, fixtures and equipment (39,218) (411,011)
--------------------------------
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 (16,667) (8,283)
Proceeds from issuance of common stock 3,299,770 4,839,566
Purchase of treasury stock (34,074) -
Dividends paid on redeemable convertible preferred stock (100,002) (75,002)
--------------------------------
Net cash provided by financing activities 3,149,027 5,806,301
--------------------------------
Net increase (decrease) in cash and cash equivalents (181,211) 257,128
Cash and cash equivalents:
Beginning 318,963 61,835
---------------------------------
Ending $ 137,752 $ 318,963
=================================
(Continued)
F-7
<PAGE>
LOTTOWORLD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1996 and 1995
1996 1995
- ----------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash payments for interest $ 3,521 $ 89,421
Supplemental Schedule of Noncash Investing And
Financing Activities
Common stock issued for prepaid expenses 500,000 -
Notes payable converted to common stock - 1,000,020
Furniture and equipment acquired through accounts payable - 141,069
Dividends payable - 25,000
See Notes to Consolidated Financial Statements.
</TABLE>
F-8
<PAGE>
LOTTOWORLD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: The Company's principal business is the publishing and
distribution of magazines ("LottoWorld(R)") that report 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. Effective February 22, 1996, the Company incorporated Lottery Players
Publishing Company to publish news and information regarding state sanctioned
lotteries.
A summary of the Company's significant accounting policies follows:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of LottoWorld, Inc. and its wholly-owned subsidiary, Lottery Players
Publishing Company, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
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 as a result of the rapid turnover of these
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,
consisting primarily of the provision for estimated returns, 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.
F-9
<PAGE>
LOTTOWORLD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 adjusting for the effect of the convertible preferred stock
dividend requirement.
STOCK-BASED COMPENSATION: In October 1995, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
123, Accounting for Stock-Based Compensation, which establishes a fair value
based method for financial accounting and reporting for stock-based employee
compensation plans and for transactions in which an entity issues its equity
instruments to acquire goods and services from nonemployees. However, the new
standard allows compensation to continue to be measured by using the intrinsic
value based method of accounting prescribed by Accounting Principles Board
Opinion ("APBO") No. 25, Accounting for Stock Issued to Employees, but
requires expanded disclosures. The Company has elected to continue to apply
the intrinsic value based method of accounting for stock options issued to
employees. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date
of grant over the amount an employee must pay to acquire the stock.
RECLASSIFICATION: Certain reclassifications have been made to the 1995
financial statements to conform with the 1996 presentation. The
reclassifications had no effect on the net loss for the year ended December
31, 1995.
NOTE 2. CONSULTING AGREEMENTS
Effective July 1, 1996, the Company entered into various consulting agreements
to provide public relations services and other consulting services for the term
of one year. In consideration for these services, the Company issued 666,667
shares of common stock valued at $1,000,000. Included in prepaid expenses is
$500,000 related to these agreements as of December 31, 1996.
NOTE 3. LONG-TERM DEBT
Long-term debt as of December 31, 1996 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, 1996 are as
follows:
Year Ending
December 31, Amount
- --------------------------------------------------------------------------------
1997 $ 16,667
1998 8,383
-------------
$ 25,050
=============
F-10
<PAGE>
LOTTOWORLD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. 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.
NOTE 5. COMMON SHAREHOLDERS' EQUITY, STOCK OPTIONS AND WARRANTS
COMMON STOCK TRANSACTIONS: During the year ended December 31, 1996, the Company
issued 1,859,664 shares of common stock for $2,849,790 from private placement
offerings. The prices paid ranged from $1.625 per share to $2.25 per share. In
addition, the Company issued 911,667 shares in exchange for various services
totaling $1,261,400 at prices ranging from $1.00 per share to $1.82 per share
(See Note 2).
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 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. Certain of the
subscriptions provided for adjustment of the number of shares to be issued in
the event of decreases in the price of the Company's stock. The Company received
$449,980 on January 26, 1996 for 287,500 of the shares subscribed. Subscriptions
for the remaining 350,000 shares were canceled for non-payment.
STOCK WARRANTS: As compensation for acting as Selling Agent, a registered
broker-dealer received warrants entitling it to purchase 155,966 shares of the
Company's common stock for $1.65 per share. The warrants were issued in 1996 and
are exercisable for a period of five years from the date of grant.
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. All stock options outstanding are currently exercisable.
F-11
<PAGE>
LOTTOWORLD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. COMMON SHAREHOLDERS' EQUITY, STOCK OPTIONS AND WARRANTS (CONTINUED)
Information regarding stock options is summarized below:
<TABLE>
<CAPTION>
Weighted-
Average
Stock Other Exercise
Option Stock Price
Plan Options Per share
-------------------------------
<S> <C> <C> <C>
Shares under option:
Outstanding and exercisable as of December 31, 1994 5,000 260,000 $ 3.63
Granted 115,168 86,000 6.71
Exercised - - -
Canceled (11,000) (10,000) 7.73
--------------------
Outstanding and exercisable as of December 31, 1995 109,168 336,000 4.83
Granted 181,668 741,500 3.18
Exercised - - -
Canceled 104,168 206,500 6.99
--------------------
Outstanding and exercisable as of December 31, 1996 186,668 871,000 2.76
====================
</TABLE>
Weighted fair value per option for options granted
during the period ended:
December 31, 1995 $ -
December 31, 1996 $ .07
Fair value of warrants issued during the year
ended December 31, 1996 $ 35,471
Stock Other
Option Stock
Plan Options
---------------------------------
Option price per share:
As of December 31, 1995 $1.00 - $10.00 $1.50 - $10.00
As of December 31, 1996 $1.00 - $ 5.50 $1.50 - $ 5.00
Expiration date:
As of December 31, 1995 1997 - 1999 1998 - 1999
As of December 31, 1996 1997 - 2000 1997 - 2000
F-12
<PAGE>
LOTTOWORLD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. COMMON SHAREHOLDERS' EQUITY, STOCK OPTIONS AND WARRANTS (CONTINUED)
Additional information regarding stock options as of December 31, 1996 is as
follows:
Option Price Number Weighted-Average Weighted-Average
Per Share of Shares Exercise Price Remaining Life
- --------------------------------------------------------------------------------
$1.00 5,000 $1.00 1.00 years
$1.50 - $2.50 737,000 1.87 2.36 years
$3.50 50,000 3.50 2.25 years
$5.00 - $5.50 265,668 5.10 1.72 years
No compensation cost for the grant of stock options and warrants was recognized
for the years ended December 31, 1996 and 1995. Had compensation cost for the
stock option plans and warrants been determined based on the grant date fair
values of awards (the method described in SFAS No. 123), there would be no
significant effect on the reported net loss for the year ended December 31,
1995. The reported net loss and loss per common share for the year ended
December 31, 1996 would have been increased to the pro forma amounts shown
below:
Net loss:
As reported $ (4,358,734)
Pro forma (4,455,342)
Loss per common share:
As reported (0.92)
Pro forma (0.94)
The fair value of each grant is estimated at the grant date using the
Black-Sholes option pricing model, the method described in SFAS No. 123, with
the following weighted-average assumptions for grants after December 31, 1994:
dividend rate of 0%, price volatility of 35%, risk free interest rate of 5.5%
and expected lives ranging from 3 to 4 years.
The effects of applying SFAS No. 123 are not indicative of future amounts since,
among other reasons, options are exercisable over several years and additional
awards generally are granted each year.
F-13
<PAGE>
LOTTOWORLD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. 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, 1996 and 1995 due to losses incurred. Deferred income
taxes related to net operating loss carryforwards have not been recognized due
to uncertainty of realization. The valuation allowance for deferred tax assets
increased from approximately $2,300,000 as of December 31, 1995 to approximately
$3,750,000 as of December 31, 1996. The net operating loss carry forwards as of
December 31, 1996 expire as follows:
Year Expires Amount
- --------------------------------------------------------------------------------
2009 $ 1,519,737
2010 5,253,641
2011 4,221,572
------------
$10,994,950
============
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.
NOTE 7. COMMITMENTS
OPERATING LEASES: The Company leases office space under operating leases. 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, 1996, 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
- --------------------------------------------------------------------------------
1997 $ 196,962
1998 196,962
1999 44,634
2000 30,786
2001 30,786
Thereafter 12,827
------------
$ 512,957
============
Rent expense amounted to $165,376 and $131,800 for the years ended December 31,
1996 and 1995, respectively.
F-14
<PAGE>
LOTTOWORLD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. COMMITMENTS (CONTINUED)
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 payments of $500,000 and $75,000 in 1995 and 1996
respectively and payments of $63,000 in 1997.
STATE LOTTERY PUBLICATIONS: The Company has entered into agreements to publish
lottery publications for the states of New York, Georgia, Nebraska and West
Virginia. The Company will produce the publications at no cost to the various
states with the individual states being responsible for distribution of the
publications. The agreement with the New York state lottery provides for the
payment of royalty and license fees of $.02 per copy based on an estimated
average circulation in excess of 1,000,000 copies per month. The Company
receives all advertising revenue from the publications.
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 LOTTOWORLD(R) 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 LOTTOWORLD(R)
magazine reach 500,000 copies. In addition, the first time in which monthly
sales of LOTTOWORLD(R) magazine 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.
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 LOTTOWORLD(R)
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.
F-15
<PAGE>
LOTTOWORLD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. 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.
The Company incurred legal costs with a director totaling approximately $92,500
and $58,000 for the years ended December 31, 1996 and 1995, respectively.
NOTE 9. CONTINUED EXISTENCE
The Company has had cumulative losses since inception aggregating $12,048,255.
The Company continues to raise capital through offerings of its common stock to
fund operations. The Company believes that it does not have the capital
resources and liquidity necessary to meet all of it obligations and projections
during 1997. The Company estimates it will require additional financing of
approximately $4,000,000. The Company has retained several investment bankers to
assist in raising the requisite capital. The Company anticipates it will
generate significant increases in advertising revenue as a result of publishing
magazines for various state lottery authorities. In addition the Company
anticipates it will generate operating income and additional working capital
from increases in magazine sales and reductions in operating expenses.
NOTE 10. SUBSEQUENT EVENTS
The Company sold 178,188 shares of its common stock for an aggregate amount of
$163,000 in 1997 in a private placement of its securities under Regulation D. In
addition, the Company exchanged 256,000 shares of its common stock for printing
services and rent valued at $157,000, of which approximately $116,000 was
included in accounts payable as of December 31, 1996.
On April 8, 1997, the Company acquired 4,000,000 shares of the common stock of
Sound Money Investors, Inc. ("SMII") with a market value of $500,000 in exchange
for 516,129 shares of common stock of the Company with a market value of
$500,000. SMII is a financial communications company which provides news and
investor information to individual investors, holds conferences for investors
and broker dealers, and provides media and financial relations services to
private and publicly-traded companies. During 1996, certain stockholders of SMII
received common stock of the Company in consideration for consulting services
(see Note 2).
F-16
Exhibit 10.31
- -------------
LottoWorld, Inc.
EMPLOYMENT AGREEMENT
--------------------
This Agreement is made this 25th day of June, 1996, between LottoWorld,
Inc. ("Employer" or "LWI"), having its principal place of business at 2150
Goodlette Road, Suite 200, Naples, Florida 33940 and Bonnie Fussell (the
"Employee"). In consideration of the mutual covenants contained in this
Agreement, the Employer and the Employee hereby agree as follows:
ARTICLE I
1.0 Term of Employment
1.1 The Employer employs the Employee and the Employee accepts
employment with the Employer for a period of twenty four (24) months, beginning
on the 25th day of June, 1996 and renewable for a period of twelve (12) months
thereafter unless notified of intent not to renew sixty (60) days prior to the
end of any term at the option of the Employer; however, this Agreement may be
terminated earlier as provided in this Agreement.
ARTICLE II
2.0 Duties of Employee
2.1 The Employee is employed as President of Lottery Players Publishing
Company, Inc. ("LPPC"), a wholly-owned subsidiary of LWI. The Employee shall
perform the following duties:
(a) Act as the principal team member of a staff of executives to execute the
directions of the board of directors.
(b) Maintain a familiarity and relationship with personnel employed by each
State and Province that establishes a lottery.
(c) Promote state lottery participation in publication programs of Employer.
(d) Promote advertising in publications of Employer.
(e) Develop marketing and promotional strategies to increase individual
state lottery sales.
(f) Assist and coordinate with LPP, LWI and state lottery office personnel to
provide timely information flow to meet all deadlines.
(g) Assist the Executive Officers and others on a daily basis to operate the
business in an efficient and effective manner.
-18-
<PAGE>
2.2 Place of Employment
The Employee shall perform his duties from a LPPC office in Baton Rouge,
Louisiana. However, at any time it is deemed necessary or advisable by the
Employer for business purposes, the Employee shall have access to other offices
of the Employer.
2.3 Engaging in Other Employment
The Employee shall devote a sufficient amount of time and interest to the
satisfaction of his duties as set forth in this Agreement for the benefit of
Employer. The Employee shall not directly or indirectly render any services of a
business, commercial or professional nature to any other person, entity or
organization, whether for compensation or otherwise, without the prior written
consent of the Employer. Employer hereby consents to the continued business
relationship between Employee and Cutting Edge Marketing Network.
2.4 Mutual Consent to Change of Duties
The duties of the Employee may be changed from time to time by the mutual
consent of the Employer and the Employee. Notwithstanding any such change, the
employment of the Employee shall be construed as continuing under this Agreement
as modified.
2.5 Change of Duties if Employee Disabled
In the event Employee at any time during the term of this Agreement should
be unable because of personal injury, long-term illness, or any other cause to
perform the duties under this Agreement, the Employer may assign the Employee to
other duties and the compensation to be paid after reassignment shall be
determined by the Employer in its sole discretion. If the Employee is unwilling
to accept the modification in duties and compensation made by the Employer, or
if the Employee's inability to perform such duties to an extent as to make
modification of the duties not feasible, this Agreement shall terminate
immediately.
ARTICLE III
3.0 Compensation of Employee
3.1 As compensation for services rendered under this Agreement, the
Employee shall be entitled to receive from the Employer a salary of $7,500 per
month, during the term of this Agreement, prorated for any partial employment
period. Employer shall establish an escrow account with James D. Cullen, P.A.
and deposit an amount equal to Ninety Thousand and No/00 Dollars ($90,000) in
said escrow (the "Escrow Account") for the purpose for funding compensation to
Employee pursuant to this paragraph.
3.2 For services rendered under this Agreement and upon each occurrence
of an increase in the aggregate circulation of the Lottery Players Digest
program by Five Hundred Thousand (500,000) copies, for any state or combination
of states which sanction a state lottery, Employee shall be entitled to a bonus
-19-
<PAGE>
in the amount of Five Thousand and No/00 Dollars ($5,000)(the "Incentive
Bonus"), provided, however, the Incentive Bonus shall not apply to the first One
Million One Hundred Thousand (1,100,000) copies of the New York Players Monthly
magazine.
3.3 For services rendered under this Agreement and upon each occurrence
of an increase in the aggregate circulation of the Lottery Players Digest
program by Five Hundred Thousand (500,000) copies, for any state or combination
of states which sanction a state lottery, Employee shall be entitled to receive
an option to purchase Seven Thousand Five Hundred (7,500) common shares of LWI
exercisable for a term of three (3) years after date of grant, at an exercise
price equal to the fair market value of the underlying shares on the date of
grant and upon such terms and conditions then in effect with respect to LWI
stock options (the "Incentive Option").
3.4 For services rendered under this Agreement, Employee shall entitled
to receive an option to purchase One Hundred Thousand (100,000) common shares of
LWI exercisable for a term of three (3) years after date of grant, at an
exercise price equal to the fair market value of the underlying shares on the
date of grant and upon such terms and conditions then in effect with respect to
LWI stock options (the "Signing Option").
3.5 As additional compensation for services rendered under this
Agreement, Employee shall be entitled to receive from the Employer an automobile
allowance in the amount of $400 per month during the term of this Agreement,
prorated for any partial employment period.
3.6 Employee shall be paid such additional compensation from the
Employer for services rendered under this Agreement as may be determined from
time to time, in the sole discretion of the Board of Directors.
ARTICLE IV
4.0 Employee Benefits
4.1 Medical Benefits
The Employer agrees to include the Employee in any hospital, surgical and
medical benefit plan when, if and as from time to time adopted by the Employer
and upon the terms and conditions as set forth for said participation in
Employer's Employee Handbook. The Employee shall be entitled to participate in
any such plan at the time specified in the benefit plan rules.
4.2 Group Life Insurance
The Employer agrees to include the Employee under the Employer's group
term life insurance policy when, if and as from time to time adopted by the
Employer and upon the terms and conditions as set forth for said participation
in Employer's Employee Handbook.
-20-
<PAGE>
4.3 Vacation / Holidays
The Employee shall be entitled to an annual vacation leave of two (2)
weeks at full pay. The Employee shall be entitled to a holiday with full pay on
each holiday as from time to time adopted by the Employer and upon the terms and
conditions as set forth in Employer's Employee Handbook.
4.4 Disability
If the Employee becomes disabled during the employment term because of
sickness, physical or mental disability, or for any other reason, so that he is
unable to perform his duties under this Agreement, the Employer agrees to pay
the Employee fifty percent (50%) of his salary during the period of said
disability, for a period up to one hundred eighty (180) days, but not exceeding
the term of this Agreement.
ARTICLE V
5.0 Reimbursement of Employee Expenses
The Employer, in accordance with the rules and procedures that the
Employer shall issue from time to time, shall reimburse the Employee for
business expenses incurred in the performance of the Employee's duties.
ARTICLE VI
6.0 Properties Rights of the Parties
6.1 Trade Secrets
The Employee during the term of employment under this Agreement will have
access to and become familiar with various trade secrets, including but not
limited to, policy, plans, procedures, strategies, financial data, processes,
compilations of information, records and specifications (collectively
hereinafter "Trade Secrets"), that are owned by the Employer and LWI and that
are regularly used in the operation of the Employer's and LWI's business. The
Employee shall not disclose any of these Trade Secrets, directly or indirectly,
or use them in any way, either during the term of this Agreement or at any later
time, except as required in the course of employment with the Employer. All
files, records, documents, drawings, specifications, equipment and similar items
relating to the business of the Employer, whether prepared by the Employee or
otherwise, coming into the Employee's possession shall remain the exclusive
property of the Employer.
6.2 Non-competition During Term of Employment
During the term of this Agreement, the Employee shall not, directly or
indirectly, either as an employee, employer, consultant, agent, principal,
partner, stockholder, corporate officer, director, or in any other individual or
representative capacity, engage or participate in any business that is in
competition in any manner whatsoever with the business of the Employer or LWI.
-21-
<PAGE>
6.3 Post-Employment Non-competition
In consideration of the Employer employing the Employee in a position in
which the Employee will gain specialized knowledge and experience and will
establish personal relationships with the Employer's and LWI's customers,
suppliers and other employees, the Employee covenants and agrees as follows:
On termination of employment, whether by termination of this Agreement, by
wrongful discharge, or otherwise, the Employee shall not directly or indirectly
engage in competition with the Employer or LWI. The Employee agrees not to
engage in competition with the Employer or LWI for a period of two (2) years
after the date of termination of employment under the Agreement. This covenant
shall be construed as an agreement independent of any other provision of this
Agreement and it is agreed that this covenant shall survive the termination of
this Agreement. The existence of any claim or cause of action of the Employee
against the Employer or LWI, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement by the Employer or LWI, of
this covenant. In the event of a breach or threatened breach by the Employee of
the obligations under this paragraph, the Employee acknowledges that the
Employer or LWI will not have an adequate remedy at law and shall be entitled to
such equitable and injunctive relief as may be available to restrain the
Employee from the violation of the provisions of this paragraph. Nothing in this
paragraph shall be construed as prohibiting the Employer or LWI from pursuing
any other remedies available for the breach or threatened breach of this
covenant not to compete, including but not limited to, injunctive relief and the
recovery of damages from the Employee.
ARTICLE VII
7.0 Termination
7.1 Termination of Employment by Employer for Cause
If the Employee breaches or fails to perform the duties he is required to
perform in the opinion of the Board of Directors of the Employer under the terms
of this Agreement, the Employer may, at the Employer's sole discretion,
terminate the Employee. Such termination shall not prejudice any other remedy
which the Employer may be entitled either at law, in equity or under this
Agreement.
7.2 Effect of Termination on Compensation
In the event of the termination of this Agreement, without cause, prior to
the completion of the initial twelve (12) months of the term of employment
specified in Article I, the Employee shall be entitle to the balance of funds
then remaining in the Escrow Account and shall be entitled to no further
compensation as of the date of termination. In the event of the termination of
this Agreement, with cause, prior to the completion of any term of employment,
the Employee shall be entitled to compensation earned by him prior to the date
of termination as provided for in this Agreement, computed pro rata up to and
including that date. The Employee shall be entitled to no further compensation
as of the date of termination.
-22-
<PAGE>
ARTICLE VIII
8.0 General Provisions
8.1 Any notices to be given under this Agreement by any party to the other
may be effected either by personal delivery in writing or by registered or
certified mail, with the postage prepaid, and return receipt requested. Mail
notices shall be addressed, if to Employer at the principal office of Lottery
Players Publishing Company, Inc., Attention: Chief Executive Officer and if to
Employee at the addresses appearing in Employees employment file, but each party
may change the address by notice in accordance with this paragraph. Notices
delivered personally shall be deemed received as of actual receipt; mailed
notices shall be deemed received as of one (1) day after mailing.
8.2 Entire Agreement
This Agreement supersedes any and all other agreement, whether oral or in
writing between the parties with respect to the employment of the Employee by
the Employer, and this Agreement contains all of the covenants and agreements
between the parties with respect to employment. Each party to this Agreement
acknowledges that no representations, inducements, promises or agreements,
orally or otherwise, have been made by any party, or anyone acting on behalf of
any party, that are not embodied in this Agreement, and that no other agreement,
statement or promise not contained in this Agreement shall be valid or binding.
Any modification of this Agreement will be effective only if it is in writing
signed by the party to be charged.
8.3 Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of Florida. Any claim or controversy that arises out of or
relates to this Agreement shall be settled by arbitration in the City of Naples,
Florida in accordance with the rules then obtaining of the American Arbitration
Association. Judgment upon any award rendered pursuant to such arbitration may
be entered in any court possessing jurisdiction of arbitration awards.
Employer: Employee:
LottoWorld, Inc.
By: ____________________________ _______________________
Dennis B. Schroeder Bonnie Fussell
Chief Executive Officer
-23-
Exhibit 10.32
Lottery Publishing Agreement
----------------------------
This Agreement is made this __ day of ______ 199__, by and between
the _______________ State Lottery, an entity of the State of _______________
having an office at 600 North 10th Street, _________, _______________ _____ (the
"Lottery") and Lottery Players Publishing Company, Inc., a New York corporation
having its primary office at 2150 Goodlette Road, Suite 200, Naples, Florida
34102 (the "Publisher").
WHEREAS the Lottery desires to expand the lines of communication with the
citizens of _______________ to report on the vast amount of good that results
from the _______________ Lottery and establish an effective means of
communicating with _______________ lottery players; and
WHEREAS Publisher is in the business of designing, writing, printing
and publishing lottery players' magazines;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises hereinafter set forth, the parties agree as follows:
1. Scope of Services
-----------------
The Lottery hereby engages the Publisher to design, write, edit,
publish and print a monthly lottery players' magazine for the Lottery. The
magazine shall be a digest-size, four color, __-page, __-pound paper, saddle
stitched publication. The magazine shall be titled, _______________ LOTTERY
PLAYERS DIGEST (the "DIGEST"). Subject to the mutual agreement between the
Lottery and Publisher, the DIGEST shall be published _______________. The
determining factor _______________shall be the ability of Publisher to
________________ associated with the DIGEST. The initial issue of the DIGEST is
tentatively scheduled to be _____ 199__.
-24-
<PAGE>
2. Purpose
-------
The primary purpose of the DIGEST is to effectively expand the lines of
communication with _______________ lottery players regarding the following
areas:
a. To create a communications platform and forum for the Director to
reach the players.
b. To help create a counter balance to inaccurate and misleading press
reports.
c. To communicate pertinent news and releases from the Lottery.
d. To answer letters and questions that arise from players.
e. To convey reasons and benefits for playing games.
f. To introduce new games and new features of existing games.
g. To provide a cost effective means of cross selling, cross promoting
and enhancing sales of all games with both frequent players and
infrequent players.
h. To provide a cost effective and quick means of conducting informal
research of _______________ lottery players.
i. To provide instructions for playing on-line and instant games.
j. To present more information and options regarding general systems
and strategies for on-line play.
k. To provide numbers, results and statistics of on-line games.
l. To provide a premium for such programs as Lotto subscriptions,
Players Club, etc.
m. To allow for promotion of the DIGEST as a value added incentive
available for free only at the Lottery 's licensed lottery
retailers.
n. Other mutually agreed upon areas of interest.
3. Price
-----
Publisher shall furnish all copies of the DIGEST requested by the Lottery
at
________________________________________________________________________________
________________________________________________________________________________
-25-
<PAGE>
4. Delivery and Distribution
-------------------------
Direct shipment by Publisher to such locations within _______________ as
the Lottery may from time to time direct. It is anticipated that the Lottery
may eventually have as many as ____ (__) locations within _____________for
which they desire delivery of the Digest. ____________________________________
deliver the DIGEST to lottery retailers _________________________________.
The DIGEST shall be packaged ________ (_____) copies and in packs of ___
(___) copies for shipping. The number of DIGESTS to be distributed per lottery
ticket retailer will be determined upon review by the Publisher and the
Lottery. Current estimates are __________ copies per lottery ticket retailer on
average. It is anticipated that some lottery ticket retailers could receive
________________ copies while there could be as few as ______ copies delivered
to other locations. The Lottery and Publisher shall develop an initial
distribution formula based upon _______________________. Initially, a minimum
of _______ copies shall be delivered to the Lottery.
5. Racking
-------
Upon the mutual agreement between the parties ______ may procure one (1)
magazine display rack for each _______________ Lottery retailer. In the event
__________ determines that it does not desire to procure the magazine display
racks, _______ shall procure one (1) magazine display rack for each
_______________ Lottery retailer. __________ shall distribute the magazine racks
for display of the DIGEST in one or more ways:
(1)
(2)
(3)
(4)
6. Free Advertising Pages Available to _______________ Lottery
-----------------------------------------------------------
The Publisher shall make available to the Lottery, in each issue of the
DIGEST, __________________ for the purposes of promoting the Lottery and
specific _______________ Lottery games.
7. DIGEST Price to Customer:
------------------------
The DIGEST will be distributed ________________________________ to players
and will be available at all Lottery retailers.
-26-
<PAGE>
8. Editorial Content
-----------------
The Lottery will be allocated _____ pages per issue. Lottery will have
final review and approval for each issue of the DIGEST. Publisher shall submit
manuscript copy of all editorial content to the Lottery for approval. In the
event the Lottery does not object to any proposed editorial manuscript copy
within five (5) business days from the date received by the Lottery, the
editorial manuscript copy shall be deemed approved. In the event the Lottery
does make a timely objection to an editorial matter, the objectionable matter
may be amended and resubmitted to the Lottery for approval or withdrawn. In the
event the Lottery does not object to any amended editorial matter within two (2)
business days from the date received by the Lottery, the amended editorial
matter shall be deemed approved. In the event the Lottery does make a timely
objection, the amended editorial matter may be amended and approved as provided
in the preceding sentence until approved or withdrawn. Overall editorial content
and design can be augmented or changed as agreed by the Lottery and Publisher.
9. Editorial Coordination
----------------------
Publisher shall appoint one primary editor to coordinate the
communications and information flow with the Lottery. A back-up editor shall
also be identified. The Lottery shall appoint one primary contact person and a
back-up person to coordinate the communications and information flow with the
Publisher. Editorial deadlines will be set and agreed to by Publisher and the
Lottery.
10. Advertising Content
-------------------
_____________ shall have absolute control over all advertising in the
DIGEST. Prior to the first use of any advertisement proposed to be printed in
the DIGEST, Publisher shall submit the advertisement in its entirety to the
Lottery for approval. In the event the Lottery does not object to any proposed
advertisement within five (5) business days from the date received by the
Lottery, the advertisement shall be deemed approved. In the event the Lottery
does make a timely objection, the objectionable advertising matter may be
amended and resubmitted to the Lottery for approval or withdrawn. In the event
the Lottery does not object to any amended advertising matter within two (2)
business days from the date received by the Lottery, the amended advertising
matter shall be deemed approved. In the event the Lottery does make a timely
objection, the amended advertising matter may be amended and approved as
provided in the preceding sentence until approved or withdrawn.
-27-
<PAGE>
11. Use of Lottery Logo on Cover and in the DIGEST
----------------------------------------------
Use of the Lottery logo is authorized within the DIGEST as well as the
cover and on related promotional and editorial materials. The Lottery logo shall
not be used in any non-Lottery promotional or editorial materials.
12. Promotions
----------
_______________________________ point of sale, print, broadcast, outdoor
media, direct mail, Lottery newsletters and mailings to ticket vendors, and as a
tie-in to other products (i.e., subscription program, player's club, etc.) or
fulfill any Digest subscription program that might be enacted. _______ shall be
notified prior to any DIGEST promotions and receive hard copies of any such
promotions.
13. Additional Copies
-----------------
Publisher shall furnish additional DIGEST copies __________ to the Lottery
for mailing purposes to satisfy promotional programs, (i.e. Lotto subscription
program incentive, "Player's Club" premium, etc.) or to fulfill any DIGEST
subscription program that might be enacted. Such requests shall be made in a
reasonably timely manner to insure adequate coordination time with advertisers,
printers and distribution channels. _____________ shall absorb any mailing and
distribution costs associated with ___________ distribution of the DIGEST.
14. DIGEST on the Internet
----------------------
Publisher retains the right to promote and reproduce contents of the
DIGEST on the Internet. In the event the Lottery initiates a Web Site, the
Lottery shall have the identical promotional rights as Publisher.
-28-
<PAGE>
15. Term
----
a) The initial term of this Agreement shall commence on the date first
written above and shall continue for a period of ________________ from the date
of the initial publication of the DIGEST. By way of example only, if the
Agreement is fully executed on _____________, and the first issue of the Digest
is ____________, then the Agreement shall terminate ________ after _____. Under
the example given above, the termination date of the Agreement would be
_____________.
b) Upon expiration of the initial term, this Agreement shall be extended
for _______________ upon the same provisions as are set forth in the Agreement,
or upon such modified provisions as may be agreed upon in an amendment to the
Agreement, unless ________________ notice of termination at least ______________
days prior to the end of the initial or any subsequent term.
c) During the initial term of this Agreement and additional term thereof,
Publisher shall be the exclusive publisher of a magazine for the Lottery with a
content and format similar to the DIGEST set forth herein.
16. Copyrights
----------
Copyrights shall be retained by Publisher for articles, charts,
interviews, stories, systems, columns, art, graphics, layouts, design features,
editing and content provided by Publisher for the DIGEST. Permission to reprint
same is hereby granted in perpetuity without the payment of additional
consideration to the Lottery.
17. Confidentiality
---------------
Each party shall take reasonable steps to insure that all confidential
information which such party or any of its representatives, employees or agents
may now possess or may hereafter create or obtain relating to the financial
condition, results of operation, business, properties, assets, liabilities, or
future prospects of the other party, or any affiliate, of the other party, or
any customer or supplier of such other party or any such affiliate shall not be
disclosed or used without the prior written consent of the other party.
18. Right to terminate; Notice of Intention to Terminate; Right to Cure
-------------------------------------------------------------------
a) The Lottery shall have the right to terminate this Agreement for any of
the following causes: (i) a material breach ____________________ (ii) a
determination by a court of competent jurisdiction that the Publisher is
-29-
<PAGE>
bankrupt or insolvent; (iii) a good faith determination by the Lottery that
___________________________; and (iv) a conviction of the Publisher or any of
its parents, affiliates, subsidiaries, directors, officer, or employees of any
criminal offense connected to the Publisher's business which, in the reasonable
opinion of the Lottery, would be prejudicial to public confidence in the
Lottery.
b) In the event that the Lottery decides to exercise such right to
terminate this Agreement, the Lottery shall give the Publisher advance written
Notice of Intention to Terminate for Cause. Such Notice shall state clearly and
specifically the cause for which such termination is sought, and Publisher shall
be entitled to a period of ________________ from receipt of such Notice to
correct or cure the causes so described to the reasonable satisfaction of the
Lottery in which case such Notice shall be deemed withdrawn and a nullity. If
termination is sought because of a criminal conviction as in subparagraph (iv)
of paragraph (a) of this Section 18, the cause for termination shall be deemed
cured if the Publisher causes or obtains the dismissal, resignation, retirement
or other removal of the person convicted of such offense during the __________
cure period.
19. Relationship
------------
The relationship of the Publisher to the Lottery arising out of this
Agreement shall be that of an independent contractor. The Publisher, in
accordance with its status as an independent contractor, agrees that it will
conduct itself consistent with such status, that it will neither hold itself out
as, nor claim to be, an officer or employee of the Lottery or the State of
_______________ by reason thereof, and that it will not by reason thereof, make
any claim, demand or application for any right or privilege applicable to an
officer or employee of the Lottery or the State of _______________, but not
limited to, workers' compensation coverage, unemployment insurance benefits,
social security coverage, or retirement membership or credit. All personnel of
the Publisher shall be within the employ of the Publisher only, which alone
shall be responsible for their work, the direction thereof, and their
compensation. Nothing in this Agreement shall impose any liability or duty on
the Lottery or the State of _______________, on account of any acts, omission,
liabilities or obligation of the Publisher or any person, firm, company, agency,
association, corporation or organization engaged by the Publisher as expert,
consultant, independent contractor, specialist, trainee, employee, servant or
agent for taxes of any nature, including, but not limited to unemployment
insurance compensation, and the Publisher hereby agrees to indemnify and hold
harmless the Lottery and the State of _______________ against any such
liabilities.
-30-
<PAGE>
20. Notice
------
Any notices to be given under this Agreement by any party to the other may
be effected either by personal delivery in writing or by registered or certified
mail, with the postage prepaid, and return receipt requested. Mail notices shall
be addressed to the addresses first appearing herein, but each party may change
the address by notice in accordance with this paragraph. Notices delivered
personally shall be deemed received as of actual receipt; mailed notices shall
be deemed received as of three (3) day after mailing.
21. Assignment
----------
This Agreement is personal in its character, and shall not be assigned,
transferred or hypothecated without the prior written consent of the other
party, which shall not be unreasonable withheld.
22. Entire Agreement
----------------
This Agreement supersedes any and all other agreement, whether oral or in
writing between the parties with respect to the provision herein, and this
Agreement contains all of the covenants and agreements between the parties with
respect thereto. Each party to this Agreement acknowledges that no
representations, inducements, promises or agreements, orally or otherwise, have
been made by any party, or anyone acting on behalf of any party, that are not
embodied in this Agreement, and that no other agreement, statement or promise
not contained in this Agreement shall be valid or binding. Any modification of
this Agreement will be effective only if it is in writing signed by the party to
be charged.
23. Governing Law
-------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of _______________. Any claim or controversy that arises out
of or relates to this Agreement shall be settled by arbitration in accordance
with the rules then obtaining of the American Arbitration Association. Judgment
upon any award rendered pursuant to such arbitration may be entered in any court
possessing jurisdiction of arbitration awards.
-31-
<PAGE>
24. Counterparts
------------
This Agreement may be executed in counterparts each of which when so
executed and taken together shall constitute one and the same Agreement.
Publisher covenants that this Agreement has been duly authorized, executed and
delivered by Publisher and is a legal, valid and binding obligation of Publisher
enforceable against Publisher in accordance with its terms and Publisher has
obtained all necessary Board of Directors' and shareholder consents necessary to
enter into the Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
Lottery Players Publishing Company, Inc. __________ State Lottery
By: ________________________ By: _____________________
President
Exhibit 21
- ----------
LIST OF SUBSIDIARIES
1. Lottery Players Publishing Company, Inc., a New York Corporation
32
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LOTTOWORLD, INC. FOR THE TWELVE MONTHS ENDED DECEMBER
1996, 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 138
<SECURITIES> 0
<RECEIVABLES> 324
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,012
<PP&E> 561
<DEPRECIATION> 222
<TOTAL-ASSETS> 2,436
<CURRENT-LIABILITIES> 1,212
<BONDS> 0
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0
<COMMON> 6
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<TOTAL-LIABILITY-AND-EQUITY> 2,436
<SALES> 902
<TOTAL-REVENUES> 902
<CGS> 2,128
<TOTAL-COSTS> 5,331
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> (4,359)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,359)
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<CHANGES> 0
<NET-INCOME> (4,359)
<EPS-PRIMARY> (.92)
<EPS-DILUTED> (.92)
</TABLE>
