SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10QSB Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended March 31, 1999 Commission File No. 0-6518 TRILOGY GAMING CORPORATION State of Incorporation I.R.S. Employer Identification No. Delaware 87-0280129 1717 E. Bell Road, Suite 12 Phoenix, Arizona 85022 Telephone: (602) 788-5801 Securities Registered Pursuant to Section 12 (b) of this Act: Title of Each Class Name of Each Exchange on Which Registered None None Securities Registered Pursuant to Section 12 (g) of this Act: Title of Each Class Name of Each Exchange on Which Registered Common Voting Stock, None Par Value $0.01 Per Share Indicate by check mark whether the Registrant (1) has filed all annual, quarterly and other reports required to be filed with the Commission, and (2) has been subject to the filing requirements for at least the past ninety days. Yes x No The Issuer^s Revenue for the most recent fiscal year was $ 00.00 As of March 31, 1999 there were 3,015,127 shares of Common Stock, .001 Par Value issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE There is no annual report, proxy statement, or prospectus to incorporate by reference. PART I ITEM 1. BUSINESS OF THE COMPANY The name of the Company is Trilogy Gaming Corporation, incorporated in the State of Delaware on 3/7/1972. The Company's address is 1717 E. Bell Road, Suite 12, Phoenix, Arizona 85022 (602) 7885801. The Company is a public Trading company. The Company^s trading symbol listed with the National Association of Securities Dealers Automated Quotation (^NASDAQ^) System , on the Bulletin Board, is ^TGGC^. As a reporting company, the Company intends to furnish its shareholders with annual reports containing financial statements and may distribute other information from time to time. All outstanding Common Shares, excluding control persons holding 10% or more of the common stock of the Company and all restricted shares, are eligible to be sold in the open market. Sales of substantial amounts of common stock of the Company in a public market, may have a depressive effect on the market price of the common stock. THE COMPANY'S AUTHORIZED CAPITAL 75,000,000 Common noncumulative voting shares, par value $0.001 per share, 5,000 Preferred noncumulative voting shares, par value $0.01 per share 5,000 Preferred noncumulative, nonvoting shares, par value $0.01 per share Holders of common stock are entitled to one vote per share on all matters to be voted upon by the shareholders. Holders of common stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors out of funds legally available therefore after preferred dividend payments have been paid to the Preferred shares. BUSINESS OF THE COMPANY The Company has from the patent owner, who is the CEO, President and majority shareholder of the Company, the exclusive license for the United States to patent # 5,158,293 (referred to in this document as the Trilogy progressive jackpot tab/lotto type game) and patent #2,128,150 for the trade name ^Trilogy^ and the ^ Game with Multiple Incentives and Multiple Levels of Game Play and combination Lottery Game^ With Time of Purchase Win Progressive Jackpot^ . The Company has a contract for 100 Trilogy pull tab bingo game tables with the St Regis Mohawk Tribe located in the State of New York. The contract provides in part that: the Company shall begin to deliver the first 10 of 100 tables on or before December 31, 1998. Beginning after the first 10 tables become operational, the Company shall deliver 10 tables per month until all 100 tables have been delivered. Prior to December 31, 1998, the Company begin delivering the first ten tables and components pursuant to the Agreement. The Company plans to market 30 additional tables per month to additional Indian gaming locations until the Company^s first marketing goal of 440 tables are placed on line by the end of the first twelve months of operation. The first 100 tables will be given to the St Regis Indian Casino at no cost to them. The Company will sell the tables to additional Indian Casinos that sign future contracts with TGC. The operations of the Company ending 03/31/1999 were financed by selling part of the 98 Units for 480,000 common shares of the Company^s common stock for $2 per share, for $980,000. Each Unit is for $10,000 for 5,000 common shares for $2 per share and (1) one non detachable series A warrant to purchase on or before 6/31/99, 5,000 common shares for $3 per share and (1) one non detachable series B warrant to purchase on or before 12/31/99, 5,000 common shares for $7 per share. As of 03/31/99 the Company had sold 227.5 said Units for $925,000. The Units were sold by Private placement to accredited investors only. With the successful placement of all 98 Units, the Company could finance the first 10 Trilogy pull tab bingo game tables for delivery and the on line game communications operation system to the St Regis Mohawk Tribe pursuant to the St Regis Mohawk 100 Trilogy table game Agreement. The Company plans to finance 90 additional tables by offering a 20% Revenue Share interest in the first 20 Trilogy pull tab bingo game tables for three years for $1,150,000 by private placement to accredited investors only. The final price and structure of the Unit has not been set by the Company as of 03/31/1999. The Company also has a contract for 1,500 Trilogy pull tab video dispensers with the St. Regis Mohawk Indian Tribe located in thew State of New York. That agreement provides in part that the ^Company shall begin to deliver on or before 120 days after receipt of Class II classification from either the State of New York or National Indian Gaming Commission three hundred (300) Trilogy tab dispensers to the TRIBE and from said dispensers, the TRIBE shall market TNAG^s Trilogy scratch tabs on consignment from the Tribes Indian Reservation within the State of New York and 60 days after said 300 dispensers have been delivered, TGC shall deliver two hundred fifty (250) additional Trilogy dispensers per month until a total of one thousand five hundred (1,500) Trilogy dispensers have been delivered^. The Company plans to pursue final development of its Trilogy video pull tab dispenser and seek classification sometime in later 1999. No financing plan for the video dispensers has been finalized as of this filing date of this report. The Law firm of Snell & Wilmer of Phoenix, AZ has given its legal opinion to the Company that the Trilogy multiple jackpot game is a Class II game pursuant to the definitions set forth by the United States Congress to NIGC and has submitted the Company^s Trilogy scratch tab game to the NIGC for Class II classification or Class II use. The Company cannot state the length of NIGC classification review process. The Company plans to file with the St. Regis Tribe Gaming Commission on its Gaming Enterprise Registration Application form, the Company^s Trilogy scratch tab bingo game and table dispenser, communications, accounting and security specifications as a Class II pull tab game pursuant to rules stated by NIGC. The ST. Regis Tribal Gaming Commission has also provided the Company with its Temporary Gaming Registration form regarding the Trilogy video pull tab dispensers, which states that the application is granted providing the application is complete and that the gaming application submitted to the St. Regis Gaming Commission is contracted to the New York State Racing and Wagering Board, Gaming Unit to process such applications. Thereafter, the Company could be eligible to market its Trilogy video pull tab dispensers to the St. Regis Tribe from which the Tribe could be eligible to market Trilogy pull tab scratch game on its reservation. SUMMARY PATENT LICENSE AGREEMENTS Wayne Mullins, the Company's CEO, President and Director, owns patent # 5,158,293 ^Lottery game and method for playing same" and Trilogy trademark patent Reg. # 1,533,082. In 1993 Mr. Mullins granted the exclusive U. S. licensee agreement to patent # 5,158,293 and Reg. # 1,533,082 to the Company, which states in part that; Licensee (the Company) will pay Licensor (Mr. Mullins): 1% Royalties payments due and payable to Licensor by the end of each month for all royalties earned by the end of the preceding month along with an accurate accounting of all sales/revenues covered by the license agreement. Said minimum royalty payments are due December 31 of each year of the license agreement and payable to Licensor or his assigns on or before 30 days following each said minimum royalty payment due date. (ii) 1,310,00 common voting shares of Trilogy Gaming Corporation and (iii) 3,690 convertible non-voting preferred shares issued to Licensor. Said preferred shares shall be increased or decreased in proportion to the exact number of shares resulting from any and all stock splits of TGC or its successors common stock until all said preferred shares and splits therefrom have been issued to Licensor. For each 1,000 new common shares issued by the Company, from time to time, Beginning March 1, 1998, said Preferred shares are convertible at the rate of ^one Preferred share for 1,000 common shares^ until all said preferred shares have been converted. The licensee Agreement renews annually providing the License is not in default. Mr. Mullins is the inventor of the ^ Game with Multiple Incentives and multiple Levels of Game Play and combination Lottery Game With Time of Purchase Win Progressive Jackpot^ (patent pending) and referred to in this document as the Trilogy 9-Jackpot tab/card table game. Mr. Mullins Licensed the Company the Trilogy 9-Jackpot tab/card table game, which states in part that: Licensee (the Company) will pay Licensor (Mr. Mullins): [i] a royalty of one percent (1%) of the gross dollar amount, of all revenues generated from all game plays (excluding revenues generated from patent # 5,158,293) and progressive jackpot ^drops^ generated directly or indirectly by Licensee, its agents and/or sub-licensees, who use any part of above stated invention to generate game play and/or multiple progressive jackpot game plays, or the annual minimum royalty payment of $50,000, whichever is greater. Royalties are due and payable to Licensor by the end of each month for all royalties earned by the end of the preceding month along with an accurate accounting of all sales/revenues covered by the license agreement. Said minimum royalty payments are due December 31 of each year of the license agreement and payable to Licensor or his assigns on or before 30 days following each said minimum royalty payment due date. and [ii] 3,500 convertible non-voting preferred shares issued to Licensor. Said preferred shares shall be increased or decreased in proportion to the exact number of shares resulting from any and all stock splits of TGC or its successors common stock until all said preferred shares and splits therefrom have been issued to Licensor. For each 1,000 new common shares issued by the Company, from time to time, Beginning January 2, 2000, said Preferred shares are convertible at the rate of ^one Preferred share for 1,000 common shares^ until all said preferred shares have been converted. The licensee Agreement renews annually providing the License is not in default. The license agreements further states that; the licensee agreement shall be in default in the event Licensee fails to pay Licensor the consideration stated above. CONFLICTS OF INTEREST Wayne Mullins, the Company's CEO, President and Director, owns the Company's Trilogy game and Trilogy trademark patents. Mr. Mullins granted the Company the exclusive U. S. licensee agreement to patent # 5,158,293 "lottery game and method for playing same" and U. S. patent/Trademark Reg. # 1,533,082 for the Trilogy mark and the Trilogy 9-Jackpot tab/card table game, patent pending. Mr. Mullins as President, CEO and Director of the Company, will be in the position to represent both the patent Licensor (Mr. Mullins) and the patent Licensee (the Company) and his interest will most likely be first to himself as the Licensor. In the event of a default of the patent license agreement by the Company, Mr. Mullins will be in a position to make demand upon the Company to cure the default pursuant to the provisions of the license Agreement and to terminate the license agreement if the default is not cured pursuant to the license agreement. Because of this disclosure by the Company regarding these circumstances surrounding the Patent Licensor and the Patent Licensee, neither the Company as Patent Licensee, or any of its shareholders, Officers or Directors, shall have or make any claim or demand that a conflict of interest existed anytime prior to, during or after any default demand or upon termination of the patent license agreement in the event Mr. Mullins, as Patent Licensor, enforced any default of the license agreement including, but not limited to, termination of the license Agreement. ITEM 2. PROPERTIES None ITEM 3. LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS. DECEASE IN AMOUNT OUTSTANDING OF SECURITIES OR INDEBTEDNES None. INCREASE IN AMOUNT OUTSTANDING OF SECURITIES OR INDEBTEDNES 394,500 The following table shows the high and low bid prices for the Company^s Common Stock as reported by the NASD electronic bulletin board (Bulletin Board Symbol - -- TGGC) for the year ended December 31,1998. The company started trading in the fourth quarter of 1998. 1999 HIGH LOW FIRST QUARTER MARCH 31,1999 4.500 3.250 SECOND QUARTER JUNE 30,1999 THIRD QUARTER SEPTEMBER 30,1999 FOURTH QUARTER DECEMBER 31, 1999 Approximate number of equity securities holders: Title of Class Approximate number of Record Holders (as of March 31, 1999 Common stock $.001 Par Value 525 Dividends: The Company paid no dividends in the years ended December 31, 1997 nor 1998 Recent Sale of Unregistered Securities: The Company began a $ 980,000 financing thru the placement of common shares and warrants to be placed only by Qualified Investors. The Company placed 322,000 units @ $2.00 each for a total of $ 645,000 for the year ended 12/31/98. And an additional 165,000 shares for $330,000 in the first quarter of 1999 ITEM 6. MANAGEMENTS PLAN OF OPERATION. SUMMARY OF OPERATIONS The Company is in the business of marketing its products to Indian Gaming enterprises, Charitable Gaming entities and State Lotteries in the United States. Gaming & Wagering magazine reported in 1995 in the United States: Indian Reservation Gaming Revenues of 49 billion dollars, Charitable Gaming revenues of 9.8 billion dollars and State Lottery sales of 38.8 billion dollars. Most Indian Gaming enterprises market bingo, pull-tabs, and video slot games. There are Charitable Gaming enterprises that market bingo, raffle and pull-tabs games. State lotteries market on-line lottery drawings, or numbers type games, scratch or instant type scratchier tickets games. Upon St. Regis Tribal casinos marketing Trilogy scratch tabs from 100 Trilogy Table Games and the Company adding 20 tables a month from operations for a total of 460 Trilogy tables on line by the end of 12 months, the Company anticipates The first full 12 months of TRILOGY scratch tab sales to generate 86 million dollars in gross revenues with pre-tax operating earnings of 48.3 million dollars to the Company. The Company is presently in the final development stage of design of its Class II designed electronic video visual ticket display pull tab game dispensing machines. The Company^s initial plans are to market its Patented/Licensed Trilogy pull tab Progressive Mega Cash jackpot scratch tabs to Indian gaming casinos. Sales to and Revenues from Indian gaming casinos are targeted to begin in 1999. The Company does not plan to operate or manage any gaming enterprise marketing Trilogy scratch tabs. The primary business of the Company is to sell its Trilogy scratch tabs on consignment, administer the progressive jackpots and communication system. Therefore, the Company^s work force should be relatively small. Most of the Company^s work should be performed by experienced contracted manufacturers, installers, dispenser hardware and software, tab manufacturers, technicians, field consultants and commissioned sales professionals. The Company has two employees, the President and Chief Operating Officer of the Company. They are salary approved but as of 12/31/98 they have elected to defer the approved salary. See the attached Notes to Financial Statements for further details Registrant has announced its intention to provide supplemental information to its stockholders and other interested parties from time to time; and in all cases, the information contained herein must be read in light of subsequent information which may be issued, including but not limited to more recent financial statements herein contained are current as of their date, and are presumed to be ^current^ for a period of six months after their date, barring extraordinary circumstances. No inference can be drawn that the financial condition of the Registrant has not changed since the effective date of any financial statement contained herein. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS FILED (A) Financial Statements. (1) Report of Certified Public Accountants on Schedules as of 03/31/99. (I) Audited Balance Sheet ending 03/31/99 (II) Audited Statement of Operations from 1/1/1989 to 12/31/97 (III) Compiled Statement of Changes in Shareholders Equity as of 03/31/99 (1V) Compiled Statement of Common Stock issued from 1/1/1989 ending 03/31/99 Compiled Statement of Cash Flows from 1/1/1989 ending 03/31/99 Notes to Financial Statements ending 12/31/98 (consisting of 12 Notes) (B) No reports on Form 8-K have been filed during any quarter from 10-1-77 to 9-31-98. ITEM 8. CHANGES IN AND DIAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None PART III ITEM 9. DIRECTORS OF THE REGISTRANT Wayne Mullins age 62. CEO/President and Director. He is a former Insurance Executive and inventor holding several patents. The United States Patent Office granted Mr. Mullins the registered trademark Trilogy ( and a patent for his Trilogy ^Lotto game and method for playing same^. Mr. Mullins has licensed his patent, registered trademark and patent pending to the Company. Mike Maledon, age 47. Chief Operating Officer, Secretary, Treasurer and Director. He has held senior financial and controllership management positions with American Express, American Hospital Supply Corp. and Bally Mfg. Corporation. Jim Holmes, Director. age 56. He is President of Multimedia Games Inc. MG provides the communications network and its ^MegaMania^ bingo game played from 3,200 bingo machines at Tribal bingo/casinos located in multiple states. He is former Executive Vice-President of Gamma International and directed the company^s satellite network marketing program for its ^Million Dollar Mega Bingo^ played in multiple Indian Gaming locations. He is the former Missouri Lottery Director. Tommy McLees, Director. age 34. He is President and Director of Phoenix Gaming International (PGI) Las Vegas, Nevada since 1988. PGI business in the United States and foreign countries is marketing and servicing of slot machines to casinos, game, software and hardware designs, machine services, casino operations setup, training and operate casinos. PGI developed technical training courses to produce better-qualified casino personal and taught its courses at the Clark County Comm. College for IGT, Bally and Sigma gaming seminars. PGI is developing the Trilogy Game software/hardware and communications network for TGC. John Wertheim, Director. age 55. President and Director of Single Stick, Inc., Phoenix, Arizona, SSI packages and markets individually packaged premium and miniature cigars. He is the former President and CEO of J. W. & Associates, a consulting firm specializing in providing financing capital to small to medium size companies. He is a Founder of First Business Bank of Arizona which begin operations in 1985. FBA was merged with Century Bank, the name was changed to Caliber Bank in 1990. During Mr. Wertheim^s tenure as President and CEO of Caliber Bank, CB grew to $250 million in assets with nine branches. He is the former President and CEO of Valley Bank Corp., Inc. and Valley Bank of Arizona, a full-service commercial and consumer bank service Phoenix, Arizona Thomas P. Burns, Director. age 59. Former Sr. Vice President of marketing of America West Airlines. Former Director of International Sales of Continental Airlines. Former Manager of Sales for UTA French Airlines. Robert Rettig, age 70. Director. Former Executive Vice-President of Illinois Tool Works, Inc. from 1983 to 1990. He is presently a TWI Director and consultant. From 1976 to 1983 he was President of Packaging Systems and Instrument Group. At Registrants special meeting of the Shareholders of the Company held on November 16, 1998, the above named Directors were elected and shall hold office until his successor shall have been elected and qualified. ITEM 10. EXECUTIVE COMPENSATION AND REMUNERATION The following table shows the compensation of each executive officer and significant employee during the fiscal years ended December 31,1996,1997, and 1998. Name and Year Salary Bonus Restricted Securities All Other Principal Position Stock Underlying Compensatio n Award(s) Options ($) (#) Wayne Mullins 1998 36,235 President CEO 1997 17,750 1996 22,276 Michael Maledon 1998 0 62,500 50,000 COO 1997 0 Secretary/Treasurer 1996 0 The Board of Directors approved the following options for common stock granted to the Chief Operating Officer of the Company as of September 1, 1998 and exercisable for a period of three years from 3/1/1999 for 150,000 common shares at the price of $1.25 per share and three years from 3/1/2000 for 150,000 common shares at the price of $1.25 per share The Registrant has no annuity, pension or retirement benefits proposed to be paid to any of its officers or directors. There is no existing plan for the payment of such benefits. ITEM 11. PRINCIPAL SECURITY HOLDERS AND SECURITY HOLDERS OF MANAGEMENT (A) Voting Securities owned of record or beneficially in excess of five percent (10%) of the issued and outstanding stock of Registrant. (1) (2) (3) (4) (5) Title of Class Name and Address Type of Amount Percent Ownership Owned of Class Common Voting Wayne Mullins Restrictive 1,265,000 44.4% Stock Par Value 1717 E. Bell Rd, # 12 $0.001 Per share Phoenix, AZ 85022 (B) Equity Securities of the Registrant beneficially owned directly or indirectly by all directors and officers of the Registrant as a group. (1) (2) (3) Title of Class Amount Beneficially Owned Percent of Class Common Voting Stock 1,572,260 55.5% Par Value $0.001 Per share ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS No Director, Officer or person holding an excess of ten percent (10%) of the outstanding securities of the Registrant, or any relative or spouse of any such persons or relative or spouse of such person, had any interest in any transactions or presently proposed transactions to which the Registrant was a party, except Registrants patent licensor Wayne Mullins, who is a Director and Officer of Registrant. No Director or Officer of the Registrant or associate of any such Director or Officer has been indebted to the Registrant from 12/ 31/ 1997 to 12/ 31/ 1998. There were no transactions since the beginning of the Registrant^s last fiscal year (December 31, 1997), and are presently no proposed transactions wherein any retirement, saving or other similar plan will be provided by the Registrant to any person. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K YEAR 2000 COMPLIANCE EXHIBIT A Letter From Phoenix Gaming International Inc. See Exhibit A EXHIBIT B Letter From Cyber Net Ventures Inc. See Exhibit B Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATED this 13th day of May 1999. TRILOGY GAMING CORPORATION By: __________________________________________ Mike Maledon, Chief Operating Officer and Secretary EXHIBIT A February 3, 1999 Trilogy Gaming Corporation Attn: Mike Maledon, COO, 1717 East Bell Road #12 Phoenix, AZ 85022 Re: Y2K Compliance Mike; As per your request the following information is submitted to you for your records. Phoenix Gaming International Inc. has two subsections of the overall Trilogy project that deals with the Y2K problem. Data Base Platform and the MPU board that drives each table. The MPU boards are Y2K ready and are more than capable of handling the current 133MHz processor up to a 266 MHz processor of which both of these processors are OK. As you know we program each board from the ground up. It isn^t just an off the shelf board as some people say it could be. The Data base platform is the most important of all. The Data base platform for the Trilogy System is Oracle8 version 8.050. Oracle8 is the strongest data base platform on the market and 8.050 is Y2K ready. As I have stated in the above paragraph, Phoenix Gaming International Inc. literally programs the MPU boards for each table but the data base is not programmed by us. Oracle8 provides the tools and support within their package to be configured and or redesigned for almost any applications. In our case we have designed the data base that will best fit the needs for Trilogy both present and future. Again, within this data base the tools and applications used are Y2k ready. You can contact Oracle on the web or by phone. Either way, simply mention that you are utilizing Oracle8 version 8.050. You will find along with this letter other documents for the PC^s, Routers, and Hubs. If there is anything else I can do for you please let me know. Sincerely, Tommy P. McLees Jr. Tommy P. McLees Jr., CEO 4535 West Sahara 105-13H, Las Vegas, Nevada 89102 Tele: (702) 597-8360 Fax: (702) 242-8928 EXHIBIT B Computer MD. LTD. 6010 West Cheyenne #15 Las Vegas, Nevada 89108 Voice: (702) 645-1674 Fax: (702) 658-1110 February 4, 1999 Trilogy Gaming 1717 East Bell Road Phoenix , Arizona Re: Y2K Specifications To whom it may concern: All equipment sold to Trilogy Corporation to date meets the Y2K specifications. If we can be of any further assistance, please contact Donald C. Mason, or Heidi Foreman at (702) 645-1674. Sincerely, Donald C. Mason Donald C. Mason Owner / President TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) FINANCIAL STATEMENTS MARCH 31, 1999 TABLE OF CONTENTS Page No. ACCOUNTANTS= REPORT 1 FINANCIAL STATEMENTS Balance Sheet 2 Statements of Operations 3 Statement of Changes in Shareholders' Equity 4 - 6 Statement of Common Stock Issued 7 - 8 Statements of Cash Flows 9 - 10 Notes to Financial Statements 11 - 16 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders Trilogy Gaming Corporation Phoenix, Arizona We have compiled the accompanying balance sheet of Trilogy Gaming Corporation as of March 31, 1999, and the related statements of operations, changes in shareholders= equity and cash flows for the three months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them. The accompanying financial statements have been prepared assuming that the company will continue as a going concern. As of March 31, 1999 , the company was in the development stage of operations. It is imperative that the company acquire additional financing to fulfill its requirements for its contract with the St. Regis Mohawk Indian Tribe of New York. The financial statements do not include any adjustments that might result if this additional financing is not acquired. Moffitt & Company, P.C. May 11, 1999 TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET MARCH 31, 1999 ASSETS CURRENT ASSETS Cash and cash equivalents $ 62,002 Inventory of tickets, at cost 55,930 Prepaid expenses 3,101 TOTAL CURRENT ASSETS $ 121,033 PROPERTY AND EQUIPMENT Construction in process for gaming tables and computers 458,525 TOTAL PROPERTY AND EQUIPMENT 458,52 5 OTHER ASSETS Equipment lease security deposits 12,506 TOTAL OTHER ASSETS 12,506 TOTAL ASSETS $ 592,064 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 48,653 Accrued officers= salaries and expenses 179,56 1 TOTAL CURRENT LIABILITIES $ 228,21 4 REDEEMABLE PREFERRED STOCK Non-cumulative, non-voting shares Par value $0.01 per share Authorized 5,000,000 shares Issued and outstanding - 6 shares 0 SHAREHOLDERS' EQUITY Capital stock Preferred stock, convertible, non-cumulative Voting shares Par value $0.01 per share Authorized 5,000,000 shares Issued and outstanding - 3,690 shares 37 Common stock Par value $0.001 per share Authorized 75,000,000 non-cumulative voting shares Issued and outstanding - 3,015,127 shares 3,01 5 Paid in capital in excess of par value of stock 2,58 2,217 Advance on stock subscription 7,500 Retained earnings (deficit) ( 477,376) Deficit accumulated during the development stage ( 1,751,543) TOTAL SHAREHOLDERS' EQUITY 363,850 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 592,06 4 TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND FOR THE PERIOD JANUARY 1, 1989 (DATE OF INCEPTION OF DEVELOPMENT) TO MARCH 31, 1999 January 1, 1989 Three (Date of Months Inception of Ended Development) March 31, to March 31, 1999 1999 REVENUE $ 0 $ 0 DEVELOPMENT COSTS 119,792 1,751,543 NET (LOSS) $ ( 119,792) $ ( 1,751,543) NET (LOSS) PER COMMON SHARE Basic and diluted $ ( .04) AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic 2,995,752 Diluted 6,985,752 TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE PERIOD JANUARY 1, 1989 (DATE OF INCEPTION OF DEVELOPMENT) TO MARCH 31, 1999 Preferred Stock (Convertible) Common Stock Shares Amount Shares Amount BALANCE, JANUARY 1, 1989 (DATE OF INCEPTION OF DEVELOPMENT) 0 $ 0 49,985,211 $ 1,9 79 NET LOSS FOR THE YEAR ENDED DECEMBER 31, 1989 0 0 0 0 BALANCE, DECEMBER 31, 1989 0 0 49,985,211 1,979 NET LOSS FOR THE YEAR ENDED DECEMBER 31, 1990 0 0 0 0 BALANCE, DECEMBER 31, 1990 0 0 49,985,211 1,979 NET LOSS FOR THE YEAR ENDED DECEMBER 31, 1991 0 0 0 0 BALANCE, DECEMBER 31, 1991 0 0 49,985,211 1,979 NET LOSS FOR THE YEAR ENDED DECEMBER 31, 1992 0 0 0 0 BALANCE, DECEMBER 31, 1992 0 0 49,985,211 1,979 NET LOSS FOR THE YEAR ENDED DECEMBER 31, 1993 0 0 0 0 BALANCE, DECEMBER 31, 1993 0 0 49,985,211 1,979 NET LOSS FOR THE YEAR ENDED DECEMBER 31, 1994 0 0 0 0 BALANCE, DECEMBER 31, 1994 0 0 49,985,211 1,979 NET LOSS FOR THE YEAR ENDED DECEMBER 31, 1995 0 0 0 0 BALANCE, DECEMBER 31, 1995 0 $ 0 49,985,211 $ 1,979 Paid in Deficit Capital Accumulated in Excess Advance Retained During the of Par on Stock Earnings Development Value of Stock Subscription (Deficit) Stage $ 1,003,753 $ 0 $ ( 447,376) $ 0 0 0 0 ( 47,037) 1,003,753 0 ( 447,376) ( 47,037) 0 0 0 ( 160,296) 1,003,753 0 ( 447,376) ( 207,333) 0 0 0 ( 111,886) 1,003,753 0 ( 447,376) ( 319,219) 0 0 0 ( 37,250) 1,003,753 0 ( 447,376) ( 356,469) 0 0 0 ( 52,882) 1,003,753 0 ( 447,376) ( 409,351) 0 0 0 ( 39,250) 1,003,753 0 ( 447,376) ( 448,601) 0 0 0 ( 27,075) $ 1,003,753 $ 0 $ ( 447,376) $ ( 475,676) TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED) FOR THE PERIOD JANUARY 1, 1989 (DATE OF INCEPTION OF DEVELOPMENT) TO MARCH 31, 1999 Preferred Stock (Convertible) Common Stock Shares Amount Shares Amount BALANCE AFTER REVERSE STOCK SPLIT - MARCH 1, 1996 0 $ 0 494,684 $ 0 MERGER OF INTERNATIONAL LOTTERY PRODUCTIONS LTD. 0 0 1,596,893 0 ISSUANCE OF COMMON STOCK FOR Cash 0 0 118,000 118 Royalties 0 0 78,750 0 NET LOSS FOR THE YEAR ENDED DECEMBER 31, 1996 0 0 0 0 BALANCE, DECEMBER 31, 1996 0 0 2,288,327 2,097 ISSUANCE OF PREFERRED STOCK FOR CASH 3,690 37 0 0 ISSUANCE OF COMMON STOCK FOR Services rendered 0 0 6,200 62 Cash 0 0 15,000 150 NET LOSS FOR THE YEAR ENDED DECEMBER 31, 1997 0 0 0 0 BALANCE, DECEMBER 31, 1997 3,690 $ 37 2,309, 527 $ 2,309 Paid in Deficit Capital Accumulated in Excess Advance Retained During the of Par on Stock Earnings Development Value of Stock Subscription (Deficit) Stage $ 0 $ 0 $ 0 $ 0 0 0 0 0 147,382 0 0 0 0 0 0 0 0 0 0 ( 167,434) 1,151,135 0 ( 477,376) ( 643,110) 0 0 0 0 7,688 0 0 0 34,850 0 0 0 0 0 0 ( 74,748) $ 1,193,673 $ 0 $ ( 477,376) $ ( 717,858) TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED) FOR THE PERIOD FROM JANUARY 1, 1989 (DATE OF INCEPTION OF DEVELOPMENT) TO MARCH 31, 1999 Preferred Stock (Convertible) Common Stock Shares Amount Shares Amount ISSUANCE OF COMMON STOCK FOR Cash, net of commission paid 0 $ 0 386,50 0 $ 387 Services rendered 0 0 50,000 50 Directors= fee 0 0 105,000 105 CORRECTION OF ISSUED SHARES 0 0 ( 900) ( 1) OUTSTANDING STOCK OPTIONS 0 0 0 0 ADVANCE ON STOCK SUBSCRIPTION 0 0 0 0 NET LOSS FOR THE YEAR ENDED DECEMBER 31, 1998 0 0 0 0 BALANCE, DECEMBER 31, 1998 3,690 37 2,850, 127 2,850 ISSUANCE OF COMMON STOCK FOR CASH, NET OF COMMISSIONS PAID 0 0 165,000 165 NET LOSS FOR THE THREE MONTHS ENDED MARCH 31, 1999 0 0 0 0 BALANCE, MARCH 31, 1999 3,690 $ 37 3,015,127 $ 3,015 Paid in Deficit Capital Accumulated in Excess Advance Retained During the of Par on Stock Earnings Development Value of Stock Subscription (Deficit) Stage $ 627,464 $ 0 $ 0 $ 0 62,450 0 0 0 209,895 0 0 0 0 0 0 0 225,000 0 0 0 0 7,500 0 0 0 0 0 ( 913,893) 2,318,482 7,500 ( 477,376) ( 1,631,751) 263,735 0 0 0 0 0 0 ( 119,792) $ 2,582,217 $ 7,500 $ ( 477,376) $ ( 1,751,543) TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENT OF COMMON STOCK ISSUED FOR THE PERIOD JANUARY 1, 1989 (DATE OF INCEPTION OF DEVELOPMENT) TO MARCH 31, 1999 Date Number Shares of Shares Price Total Issued Issued Consideration Per Share Consideration 01/01/89 49,985,211 Balance at date of inception of development 03/01/96 493,784 Balance after reverse stock split 05/05/96 1,596,893 Merger of International Lottery Productions LTD. 03/27/96 40,000 Cash $ 1.25 $ 50,00 0 04/04/96 8,000 Cash 1.25 10,00 0 07/08/96 10,000 Cash 1.25 12,50 0 08/12/96 78,750 Royalties - - 08/16/96 16,000 Cash 1.25 20,00 0 11/08/96 12,000 Cash 1.25 15,00 0 11/14/96 4,000 Cash 1.25 5,000 11/18/96 8,000 Cash 1.25 10,00 0 12/02/96 20,000 Cash 1.25 25,00 0 03/10/97 8,000 Cash 1.25 10,00 0 06/18/97 3,600 Commission 1.25 4,500 06/18/97 2,000 Office rent 1.25 2,500 06/18/97 600 Legal fees 1.25 750 09/18/97 3,000 Cash 5.00 15,00 0 11/06/97 4,000 Cash 2.50 10,00 0 01/08/98 8,000 Cash 1.25 10,00 0 03/01/98 50,000 Services 1.25 62,5 00 03/24/98 40,000 Cash 1.25 50,00 0 05/06/98 16,000 Cash 1.25 20,00 0 05/12/98 5,000 Cash 2.00 10,00 0 05/13/98 20,000 Cash 2.00 40,00 0 05/14/98 20,000 Cash 2.00 40,00 0 05/15/98 5,000 Cash 2.00 10,00 0 05/26/98 5,000 Cash 2.00 10,00 0 06/10/98 5,000 Cash 2.00 10,00 0 07/01/98 5,000 Cash 2.00 10,00 0 07/09/98 5,000 Cash 2.00 10,00 0 07/21/98 5,000 Cash 2.00 10,00 0 07/23/98 20,000 Cash 2.00 40,00 0 07/27/98 5,000 Cash 2.00 10,00 0 TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENT OF COMMON STOCK ISSUED (CONTINUED) FOR THE PERIOD JANUARY 1, 1989 (DATE OF INCEPTION OF DEVELOPMENT) TO MARCH 31, 1999 Date Number Shares of Shares Price Total Issued Issued Consideration Per Share Consideration 07/30/98 5,000 Cash $ 2.00 $ 10,00 0 08/18/98 5,000 Cash 2.00 10,00 0 08/21/98 5,000 Cash 2.00 10,00 0 10/12/98 5,000 Cash 2.00 10,00 0 10/20/98 10,000 Cash 2.00 20,00 0 10/23/98 5,000 Cash 2.00 10,00 0 10/28/98 1 5,000 Cash 2.00 30,00 0 11/04/98 10,000 Cash 2.00 20,00 0 11/05/98 7,500 Cash 2.00 15,00 0 11/06/98 5,000 Cash 2.00 10,00 0 11/26/98 10,000 Cash 2.00 20,00 0 11/27/98 10,000 Cash 2.00 20,00 0 12/03/98 5,000 Cash 2.00 10,00 0 12/07/98 45,000 Cash 2.00 90,00 0 12/09/98 10,000 Cash 2.00 20,00 0 12/11/98 20,000 Cash 2.00 40,00 0 12/14/98 25,000 Cash 2.00 50,00 0 12/17/98 10,000 Cash 2.00 20,00 0 12/22/98 5,000 Cash 2.00 10,00 0 12/28/98 10,000 Cash 2.00 20,00 0 12/28/98 105,000 Directors= fees 2.00 210,000 01/14/99 5,000 Cash 2.00 10,00 0 01/26/99 65,000 Cash 2.00 130,0 00 01/27/99 5,000 Cash 2.00 10,00 0 02/02/99 15,000 Cash 2.00 30,00 0 02/11/99 7,500 Cash 2.00 15,00 0 02/19/99 25,000 Cash 2.00 50,00 0 02/22/99 5,000 Cash 2.00 10,00 0 02/24/99 10,000 Cash 2.00 20,00 0 03/05/99 12,500 Cash 2.00 25,00 0 03/09/99 5,000 Cash 2.00 10,00 0 03/12/99 5,000 Cash 2.00 10,00 0 03/28/99 5,000 Cash 2.00 10,00 0 3,015,127 TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND FOR THE PERIOD JANUARY 1, 1989 (DATE OF INCEPTION OF DEVELOPMENT) TO MARCH 31, 1999 January 1, 1989 Three (Date of Months Inception of Ended Development) March 31, to March 31, 1999 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $ ( 119,792) $ ( 1,751,543) Adjustments to reconcile net (loss) to net cash (used) by operating activities: Capital and stock issued for expenses and services 0 50 5,250 Merger of International Lottery Productions Ltd. 0 52 7,608 Increases (decreases) in: Inventory of tickets ( 55,930) ( 55,930) Prepaid expenses 4,249 ( 3,101) Accounts payable 14,803 48,653 Accrued officers= salaries and expenses 36,463 179, 561 NET CASH (USED) BY OPERATING ACTIVITIES ( 120,207) ( 549,502) CASH FLOWS FROM INVESTING ACTIVITIES: Construction in process for gaming tables and computers ( 158,628) ( 458,525) NET CASH (USED) BY INVESTING ACTIVITIES ( 158,628) ( 458,525) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of company stock, net of commissions paid 263,900 1,074,250 Equipment lease security deposits 0 ( 12,506) Advance on stock subscription 0 7,500 NET CASH PROVIDED BY FINANCING ACTIVITIES 263,900 1,069,244 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ ( 14,935) $ 61,217 TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND FOR THE PERIOD JANUARY 1, 1989 (DATE OF INCEPTION OF DEVELOPMENT) TO MARCH 31, 1999 January 1, 1989 Three (Date of Months Inception of Ended Development) March 31, to March 31, 1999 1999 CASH AND CASH EQUIVALENTS BALANCE AT BEGINNING OF PERIOD $ 76,937 $ 785 CASH AND CASH EQUIVALENTS BALANCE AT END OF PERIOD $ 62,002 $ 62,002 SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 0 $ 0 Taxes paid $ 0 $ 0 NON CASH INVESTING AND FINANCING ACTIVITIES Issuance of company stock for expenses and services $ 505,250 Issuance of company stock for merger of International Lottery Productions Ltd. $ 527,60 8 TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES Nature of Business Trilogy Gaming Corporation was incorporated in the State of Delaware for the primary business purpose of selling its Trilogy scratch tab/lotto type tickets on consignment and administering the progressive jackpots and communication systems. Accounting Estimates Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. Cash Equivalents For purposes of the statement of cash flows, the company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Income Taxes Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB Statement No. 109, Accounting for Income Taxes. As changes in tax laws or rate are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Net Loss Per Share Net loss per common share is computed by dividing net loss by the weighted average number of shares outstanding during the period. In accordance with FASB 128, potentially dilutive warrants and options that would have an anti-dilutive effect on net loss per share are excluded. TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 2 DEVELOPMENT STAGE OPERATIONS AND GOING CONCERN As of March 31, 1999, the company was in the development stage of operations. According to the Financial Accounting Standards Board of the Financial Accounting Foundation, a development stage company is defined as a company that devotes most of its activities to establishing a new business activity. In addition, planned principle activities have not commenced, or have commenced and have not yet produced significant revenue. FAS-7 requires that all development costs be expensed during the development period. The company expensed $119,792 of development costs for the three months ended March 31, 1999 and $1,751,543 from January 1, 1989 (date of inception of development) to March 31, 1999. The ability of the company to continue as a going concern is dependent on obtaining additional capital and financing to acquire gaming tables, computers and equipment. The financial statements do not include any adjustments that might be necessary if the company is unable to continue as a going concern. The company began operations at the St. Regis Mohawk Casino on May 4, 1999. NOTE 3 DEFERRED TAX ASSET The deferred tax asset arises from the difference between the accounting for development stage costs. For financial statement purposes, development stage costs are expensed as incurred. For tax purposes, these expenses are capitalized and will be amortized over 60 months once operations begin. The components of the deferred tax asset are as follows: Deferred tax asset from development costs $ 756,000 Less valuation allowance 756,000 Net deferred tax asset $ 0 NOTE 4 LICENSING AGREEMENT WITH RELATED PARTY The company has a licensing agreement with the company's Chief Executive Officer for the exclusive right to use the officer's patents and trade marks for the Trilogy lotto game. The agreement provides that the Chief Executive Officer will receive the following: A. 1,310,000 common voting shares of stock B. 3,690 shares of convertible preferred shares C. Minimum royalty payments of $100,000 beginning in the year 1999 The term of the agreement is for one year plus renewable one year options. TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 5 BEARER ROYALTY CERTIFICATES The company has issued 61 five year Trilogy Lotto royalty interests. The royalty units will receive a 6% minimum royalty payment for two years plus a five year royalty of .01% of pre tax income. Payments begin the first year the company receives gross profits and royalty earnings payments from each state lottery marketing the Trilogy Lotto game. NOTE 6 CONVERTIBLE PREFERRED STOCK As part of the licensing agreement described in footnote number 4, the Chief Executive Officer received 3,690 shares of convertible, non-cumulative voting preferred shares of stock. These shares are convertible at the rate of one preferred share for 1,000 common shares for a total of 3,690,000 common shares. There is no expiration date on this option. NOTE 7 REDEEMABLE PREFERRED STOCK Regulation S-X of the Securities and Exchange Commission states that preferred stock subject to mandatory redemption requirements must be presented separately in the balance sheet and not be included in the shareholders' equity section. The non-cumulative, non-voting shares have a redemption value of $10,000 payable from 25% of the company's quarterly pre-tax earnings as a preferred stock dividend. When the preferred stock dividends paid under this formula equals $10,000 per unit, the preferred unit shares will be terminated on the books of the company. At March 31, 1999, the company was contingently liable to redeem $60,000 of preferred stock from 25% of pre-tax earnings. NOTE 8 INCENTIVE QUALIFIED EMPLOYEE STOCK OPTION PLAN The company has adopted an incentive qualified employee stock option plan. The plan is designed for key employees and will be administered by the Compensation Committee of the Board of Directors and/or the company's Chief Executive officer. The plan will provide that employee options granted by the company are vested in the employee after services have been performed or after one year of full time employment and may be exercised after the options are vested and prior to the termination date of the vested option. The options are exercisable for $1.25 per share and each option shall be vested for services performed for the company or after one year as a full time employee of the company. The company granted the chief operating officer the following options: Three year option for 150,000 shares of common stock from March 1, 1999. Three year option for 150,000 shares of common stock from March 1, 2000. TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 8 INCENTIVE QUALIFIED EMPLOYEE STOCK OPTION PLAN (CONTINUED) A summary of the stock options is as follows: Option Price Shares Per Share Outstanding at January 1, 1999 300,000 1.25 Granted during the year 0 0 Outstanding at March 31, 1999 300,000 $ 1.25 The company has reserved 1,500,000 shares from its authorized common stock under its Incentive Qualified Employee stock option plan. Information regarding stock options outstanding as of March 31, 1999 is as follows: Options Outstanding Weighted Weighted Average Average Remaining Price Exercise Contractual Range Shares Price Life $ 1.25 300,000 $ 1.25 3 years, 5months Options Exercisable Weighted Average Price Exercise Range Shares Price $ 1.25 0 N/A TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 9 EXECUTIVE EMPLOYMENT AGREEMENTS The company has entered into employment contracts with the Chief Executive Officer and Chief Operating Officer. The terms for each agreement are as follows: A. Annual base salary of $104,000 B. $600 monthly automobile allowance C. Medical insurance coverage D. Annual bonus of $10,000 for each $1,000,000 pre tax earnings E. Seven year term for the Chief Executive Officer and five year term for the Chief Operating Officer NOTE 10 DIRECTORS= COMPENSATION The stockholders approved the following compensation for the Directors of the company: A. Issuance of common stock 5,000 shares to each director for each full year of service from November 1, 1995 to November 1, 1998 and 10,000 shares for each full year from November 16, 1998. and B. Bonus An annual director bonus of up to 1,000 common shares for each $1,000,000 of pre tax earnings generated to the company during each of the company=s fiscal year the director served on the Board of Directors of the Company. NOTE 11 PUBLIC OFFERING The Board of Directors have the authority, prior to November 1, 1999, to register with the Securities and Exchange Commission a public offering for up to 10,000,000 common shares of the company=s common stock. NOTE 12 TRIBAL GAMING CONTRACT On September 22, 1998, the company entered into a Trilogy Gaming contract with the St. Regis Mohawk Indian Tribe of New York. The company began operation at this casino on May 4, 1999. TRILOGY GAMING CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 13 EXECUTIVE BONUSES Eight corporation officers have been granted an Executive Bonus program whereby they will receive, for each full year as a full time employee and officer of the company, 10,000 common shares of the company for each $1,000,000 of pre tax earnings generated to the company during the company=s fiscal year. NOTE 14 ROYALTY TO PHOENIX GAMING CORP The company has agreed to pay a 2 2 % royalty to Phoenix Gaming Corp. The royalty will be computed on the company=s gross receipts from the first twenty gaming tables placed with the St. Regis Mohawk Indian Tribe of New York. NOTE 15 EQUIPMENT LEASE On October 14, 1998, the company entered into a twenty-four month lease for telecommunication equipment. The monthly lease rentals are predicated upon the number of communication lines connected and it is estimated that the lease rentals will approximate $10,762 per month. The future minimum annual payments on the lease are: March 31, 1999 $ 129,132 March 31, 2000 75,334 $ 204,466 The equipment lease expense for the three months ended March 31, 1999 is $32,286. NOTE 16 RENT The company rents its office space on a month-to-month basis. The rent expense for the three months ended March 31, 1999 is $2,520. NOTE 17 CONCENTRATION OF RISK Concentration of risk arises since the company has only one gaming contract and the contract is only in the State of New York. NOTE 18 STOCK SPLIT The Board of Directors are authorized to split the company=s outstanding common shares up to a total of five for one. This authorization expires on December 31, 1999.