As filed with the Securities and Exchange Commission on July 20, 2005
Registration No. 333-_____
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DONAR ENTERPRISES, INC.
(Name of Small Business Issuer as specified in its charter)
Delaware 7372 23-3083371
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. employer identification
incorporation or organization) Classification Code Number) number)
Concertgebouwplein 13, 1071 LL Amsterdam, The Netherlands
(011) 31-20-676-0304
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
_______________________________
Harvard Business Services, Inc.
25 Greystone Manor
Lewes, Delaware 19958
Telephone: (302) 645-7400
Facsimile: (302) 645-1280
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
_______________________________
Copies to:
Paul D. Downs
Heller Ehrman LLP
7 Times Square
New York, NY 10036
Telephone: (212) 832-8300
Facsimile: (212) 763-7600
________________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering.
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering.
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box.
CALCULATION OF REGISTRATION FEE
====================================== =================== ========================= ====================== ====================
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities to Amount to be Aggregate Price Per Aggregate Offering Registration Fee
be Registered Registered Security Price
- -------------------------------------- ------------------- ------------------------- ---------------------- --------------------
Common Stock, par value $.001 6,236,132 $5.00 (1) $31,180,660(1) $ 3,670
====================================== =================== ========================= ====================== ====================
(1) Estimated solely for the purpose of computing the amount of
registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, based on the average of the bid and asked price reported of the
Registrant's Common Stock on the OTC Bulletin Board on July 13, 2005.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
PROSPECTUS (Subject to Completion) Dated July 20, 2005
DONAR ENTERPRISES, INC.
6,236,132 SHARES OF COMMON STOCK
_____________
The selling stockholders identified on page 51 of this prospectus are
offering on a resale basis up to 6,236,132 shares of our common stock. The
selling shareholders may sell their shares from time to time at the prevailing
market price or in negotiated transactions.
The selling stockholders will receive all of the proceeds from the sale of
the shares. We will pay the expenses of registration of the sale of the shares.
Our common stock trades on the Over the Counter (OTC) Bulletin Board(R), an
electronic stock listing service provided by the Nasdaq Stock Market, Inc. under
the symbol "DNRR". On July 18, 2005, the last bid price for the common stock on
the OTC Bulletin Board was $5.42 per share.
The selling stockholders, and any participating broker-dealers may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933,
and any commissions or discounts given to any such broker-dealer may be regarded
as underwriting commissions or discounts under the Securities Act. The selling
stockholders have informed us that they do not have any agreement or
understanding, directly or indirectly, with any person to distribute their
common stock.
Brokers or dealers effecting transactions in the shares should confirm the
registration of these securities under the securities laws of the states in
which transactions occur or the existence of an exemption from registration.
____________
Beginning on page 6, we have listed several "Risk Factors" which you
should consider. You should read the entire prospectus carefully before you make
your investment decision.
____________
Neither the Securities and Exchange Commission nor state regulatory
authorities has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
____________
The date of this prospectus is July __, 2005
1
TABLE OF CONTENTS
FORWARD-LOOKING INFORMATION.......................................................................................2
PROSPECTUS SUMMARY................................................................................................3
THE COMPANY.......................................................................................................3
SUMMARY FINANCIAL AND OPERATING INFORMATION.......................................................................6
RISK FACTORS.....................................................................................................16
USE OF PROCEEDS..................................................................................................24
MARKET PRICE OF OUR COMMON STOCK; DIVIDENDS......................................................................25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................26
BUSINESS.........................................................................................................33
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............................................................46
EXECUTIVE COMPENSATION...........................................................................................47
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS......................................................................48
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................48
DESCRIPTION OF SECURITIES........................................................................................50
SELLING STOCKHOLDERS.............................................................................................51
PLAN OF DISTRIBUTION.............................................................................................52
CHANGE IN CERTIFYING ACCOUNTANT..................................................................................53
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS..............................................................53
LEGAL MATTERS....................................................................................................54
EXPERTS..........................................................................................................54
WHERE YOU CAN FIND MORE INFORMATION..............................................................................54
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The selling stockholders are offering to sell, and
seeking offers to buy, shares of Donar Enterprises, Inc. common stock only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of the shares.
Conversion from the Euro to the US dollar.
The functional currency of Playlogic International N.V. and its
subsidiaries is the euro, so where applicable, we have converted amounts shown
in euros into US dollars at a rate of 1.3645 (for the December 31, 2004
information), 1.2570 (for the December 31, 2003 information), 1.2967 (for the
March 31, 2005 information) and 1.2958 (for the April 30, 2005) euro per US
dollar.
FORWARD-LOOKING INFORMATION
Statements made in this prospectus or in the documents incorporated by
reference herein that are not statements of historical fact are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. A number of risks and
uncertainties, including those discussed under the caption "Risk Factors"
beginning on page 6 and the documents incorporated by reference in this
prospectus could affect such forward-looking statements and could cause actual
results to differ materially from the statements made in this prospectus.
2
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all the information that you should
consider before investing in the common stock. You should carefully read the
entire prospectus, including "Risk Factors" and the financial statements, before
making an investment decision.
THE COMPANY
Background
Donar Enterprises, Inc. was incorporated in the State of Delaware in May
2001. Initially, our plan was to engage in the business of converting and filing
registration statements, periodic reports and other forms of small to mid-sized
companies with the U.S. Securities and Exchange Commission electronically
through EDGAR. We had limited operations until June 30, 2005, when we entered
into a share exchange agreement with the shareholders of Playlogic International
N.V., a corporation formed under the laws of The Netherlands, that commenced
business in 2002. Pursuant to this agreement, the former shareholders of
Playlogic became the owners of over approximately 91% of our common stock, as
described below. Playlogic has become our wholly-owned subsidiary and represents
all of our commercial operations.
Acquisition of Playlogic International N.V.
On June 30, 2005, we entered into a share exchange agreement with Playlogic
and Playlogic's shareholders whereby all of the Playlogic shareholders exchanged
all of their ordinary shares (which are substantially similar to shares of
common stock of a US company) and priority shares (which are substantially
similar to shares of preferred stock of a US company) of Playlogic for
21,836,924 shares of Donar common stock. Pursuant to the share exchange
agreement, the former stockholders of Playlogic received approximately 91.0% of
the outstanding common stock of Donar, and 1,399,252 of the 21,836,924 shares of
Donar common stock were placed in escrow and are currently being held by
Securities Transfer Corporation, as escrow agent. These escrowed shares will be
released as soon as practicable after March 30, 2006 as set forth below:
o In the event that our net income for the twelve months ending March 30,
2006 (the "Actual Net Income") is greater than $7.6 million and less than
$8.4 million, 1,028,965 of our common shares will be distributed to the
former Playlogic shareholders and 370,287 of our common shares will be
distributed to an affiliate of a shareholder of Donar, Halter Financial
Group, Inc. or its assigns.
o In the event that our net income for the twelve months ending March 30,
2006 is greater than $8.4 million, the number of shares that will be
distributed to the former Playlogic shareholders shall equal 1,028,965 +
(1,028,965 x (Actual Net Income - 8.4 million)/16.8 million) and the
remaining escrowed shares, if any, will be delivered to Halter Financial
Group or its assigns.
o In the event that our net income for the twelve months ending March 30,
2006 is less than $7.6 million, the number of shares that will be
distributed to Halter Financial Group shall equal 370,287 + (1,028,965 x
(7.6 million - Actual Net Income)/7.6 million) and the remaining escrowed
shares, if any, will be delivered to the former Playlogic shareholders.
Upon the closing of the share exchange with Playlogic's shareholders,
Timothy Halter, our sole director, resigned and was replaced by Willem M. Smit,
the President and Chief Executive Officer of Playlogic, and our executive
officers were replaced by the Playlogic executive officers. Upon the expiration
of the 10-day period of the filing and/or mailing of an Information Statement
pursuant to Rule 14f-1 under the Securities Exchange Act of 1934 (the "Exchange
Act"), the board of directors was increased to five persons and the designees of
Playlogic mentioned herein became our directors. Our board of directors
currently has two vacancies.
3
For accounting purposes, the share exchange was treated as a reverse
acquisition with Playlogic as the acquiror and Donar as the acquired party. When
we refer in this prospectus to business and financial information for periods
prior to the share exchange, we are referring to the business and financial
information of Playlogic.
Our Business
Playlogic is the leading Dutch publisher of interactive entertainment
software for consoles, such as Sony's PlayStation2, Microsoft's Xbox and
Nintendo's Game Cube, PCs and handheld, such as Nintendo's Game Boy, and mobile
devices. As a publisher, we are responsible for distribution, sales and
marketing of our products. We seek to publish high quality products developed
both by our own studio in Breda, The Netherlands, called Playlogic Game Factory,
and by external developers with whom we have contractual relationships.
Wedbush Morgan Securities, a leading investment banking and brokerage firm,
has stated that in 2003, the US market for interactive entertainment was larger
than the U.S. movie industry (based in box office receipts). According to
Wedbush Morgan Securities, in 2003, the global video games market represented a
total value of $25.5 billion and will likely grow to exceed $30 billion in 2005.
According to Computer World magazine, the industry is expected to grow to a
value of more than $100 billion by 2010. According to the NPD Group, a leading
global sales and marketing firm, and the Entertainment Software Association, a
video game trade association, total video game software sales (not including
hardware and accessories) in the US reached a record of $ 7.3 billion in 2004.
According to the Entertainment Software Association, this growth has more than
doubled since 1996 and is expected to continue. We believe that this growth is
likely to be increased by the expected development of new game platforms, the
increasing popularity of games being played on mobile phones and on the Internet
and emerging markets such as China.
According to Screen Digest, a global media market and research firm, total
video game software sales worldwide were more than $18 billion in 2003 and are
expected to exceed $21 billion in 2007. Further, 239.3 million computer or video
games were sold in 2003. According to the Entertainment Software Association,
this number grew to 248 million in 2004, which means almost two games for every
household in the US.
According to the Entertainment Software Association, the average game
player is 30 years old, and the average game buyer is 37 years old. In 2005, 95%
of computer game buyers and 84% of console game buyers were over the age of 18.
Various studios, based in the US and throughout Europe, develop the games
which we publish. One of these studios is our subsidiary, Playlogic Game
Factory, located in The Netherlands. Other independent studios in various
countries develop our games under development contracts. These development
contracts generally provide that we pay the studio an up front payment
which is
an advance on future royalties earned and a payment upon achievement of various
milestones. In addition, we license the rights to our existing titles to other
studios who then develop those titles for other platforms.
We have released four games to date:
o Alpha Black Zero, a mission-based tactical shooting game for the PC;
o Airborne Troops, an infiltration action adventure game based on World
War II for PC and PlayStation2;
o Cyclone Circus, a racing game for PlayStation2; and
o Xyanide, a "shoot 'em up" adventure game for mobile devices.
On April 22 2005, we signed an agreement with TDK Recording Media Europe
S.A. (Luxembourg) for publishing and transferring to us all of the related
intellectual property rights of the following three games:
4
o World Racing 2, for PS2, Xbox and PCs;
o Knights of the Temple 2, for PS2, Xbox and PC; and
o Gene Troopers, for PS2, Xbox and PC.
In addition, different studios and developers frequently contact us
requesting financing and publishing their games. We evaluate each of these
offers based on several factors, including sales potential (primarily based on
past performance by the studio or developer), technology used, game play,
graphics and sounds.
We select which games we develop based on our analysis of consumer trends
and behavior and our experience with similar or competitive products. Once we
select a game to develop, we then assign a development studio, based upon its
qualifications, previous experience and prior performance. Once developed, we
distribute our games in both the US and abroad through existing distribution
channels with experienced distributors. We are currently negotiating with a
leading distributor to become the worldwide distributor for our games. We
generally aim to release our titles simultaneously across a range of hardware
formats in order to spread development risks and increase sales potential, with
a minimum increase in development time and resources.
The following table shows expected information about our products (we also
expect to add new products from time to time):
Release Date
or Expected
Game Studio Platform Release Date
- ----------------------------- ------------------------------- -------------------------------------- ----------------
Completed Games
Alpha Black Zero Khaeon (NL) PC Released
Airborne Troops Widescreen Games (F) PS2, PC Released
Cyclone Circus Playlogic Game Factory (NL) PS2 Released
Xyanide Playlogic Game Factory (NL) Xbox live Q4 2005
Xyanide Advance Engine Software (NL) GBA Q4 2005
Xyanide Overloaded (NL) Mobile Phone &N-Gage Released
Under Development
World Racing 2 Synetic (D) PS2, Xbox, PC Q3/Q4 2005
Knights of the Temple 2 Cauldron (SK) PS2, Xbox, PC Q3/Q4 2005
Gene Troopers Cauldron (SK) PS2, Xbox live, PC Q3/Q4 2005
Xyanide Playlogic Game Factory (NL) PSP Q2 2006
Xyanide Playlogic PS2 Q3 2006
StateShift Engine Software (NL) PSP Q1/Q2 2006
Wizard of Funk Playlogic Game Factory (NL) PS2's EyeToy Q3 2006
Sparta -Ancient Wars World Forge PC Q3 2006
P.R.I.S.M. Rival Interactive (USA) PC Q3
2006
"Project Delta" Playlogic Game Factory (NL) PS3, Xbox360, PC Q3/Q4 2006
Alpha Black Zero Mobile Overloaded (NL) Mobile Phone &N-Gage TBD
5
General
Our principal business office is located at Concertgebouwplein 13, 1071 LL
Amsterdam, The Netherlands, and our telephone number at that address is (011)
31-20-676-0304.
Our corporate web site is www.playlogicgames.com. The information found on
our web site is not intended to be part of this prospectus and should not be
relied upon by you when making a decision to invest in our common stock.
In this prospectus, "Donar," the "Company," "we," "us" and "our" refer to
Donar Enterprises, Inc. and, unless the context otherwise indicates, our
subsidiary Playlogic International N.V. and/or its subsidiary Playlogic Game
Factory B.V.
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following selected financial information is derived from the financial
statements appearing elsewhere in this prospectus and should be read in
conjunction with the financial statements, including the notes thereto.
Playlogic and its consolidated subsidiaries' functional currency is the euro, so
the following information has been converted into US dollars at a rate of 1.3645
(for the December 31, 2004 information), 1.2570 (for the December 31, 2003
information), 1.2967 (for the March 31, 2005 information) and 1.2958 (for the
April 30, 2005) euro per US dollar.
6
(euro) / $ rate 1.36450 (euro) / $ rate 1.25700
(In Euro/US$) December 31 December 31 December 31 December 31
(In Euro) (In Euro) (In US$) (In US$)
-------------------- --------------------- -------------------- ----------------------
CONSOLIDATED STATEMENTS OF 2004 2003 2004 2003
OPERATIONS
- --------------------------------------------------------- --------------------- -------------------- ----------------------
Net sales 87,931 - 119,982 -
Product costs 28,836 - 39,347 -
-------------------- --------------------- -------------------- ----------------------
Gross profit 59,095 - 80,635 -
Operating expenses:
Selling and marketing 464,382 361,738 633,649 454,704
General and administrative (1) 9,841,126 1,933,362 13,428,216 2,430,238
Research and development 3,638,733 3,285,841 4,965,051 4,130,302
Depreciation 289,765 367,017 395,384 461,340
Impairment goodwill 11,250 3,750 15,351 4,714
-------------------- --------------------- -------------------- ----------------------
Total operating expenses 14,245,256 5,951,708 19,437,651 7,481,298
-------------------- --------------------- -------------------- ----------------------
Loss from operations (14,186,161) (5,951,708) (19,357,016) (7,481,298)
Interest expense (2,007,080) (140,206) (2,738,661) (176,238)
-------------------- --------------------- -------------------- ----------------------
Income before income taxes (16,193,241) (6,091,914) (22,095,677) (7,657,536)
Benefit from income taxes - - - -
-------------------- --------------------- -------------------- ----------------------
Net loss (16,193,241) (6,091,914) (22,095,677) (7,657,536)
-------------------- --------------------- -------------------- ----------------------
Net loss per share:
Basic (2.13) (0.96) (2.90) (1.21)
Diluted (1.06) (0.96) (1.44) (1.21)
Number of shares used in
computation:
Basic 7,614,160 6,330,125 7,614,160 6,330,125
Diluted 15,342,352 6,330,125 15,342,352 6,330,125
(1) General and administrative expenses: includes a one-time expense of
(euro)7,200,000 ($9,824,400) related to granted options to certain stock holders.
7
(euro) / $ rate 1.36450 (euro) / $ rate 1.25700
CONSOLIDATED BALANCE SHEETS Dec 31, Dec 31, Dec 31, Dec 31,
(in Euro/US$) 2004 2003 2004 2003
(In Euro) (In Euro) (In US$) (In US$)
-------------------- -------------------- -------------------- ---------------------
ASSETS
Current assets:
Cash 16,277 65,005 22,210 $ 81,711
Accounts receivable, net - 9,334 - 11,733
Software development 860,049 393,557 1,173,537 494,701
Prepaid royalties - - - -
Loan to associated companies 65,000 - 88,693 -
Prepaid expenses and other current
assets 199,794 147,771 272,618 185,748
Deferred tax asset - - - -
-------------------- -------------------- -------------------- ---------------------
Total current assets 1,141,120 615,667 1,557,058 773,893
Fixed assets, net 528,357 491,461 720,943 617,766
Investments in affiliates
- - - -
Goodwill, net - 11,250 - 14,141
Intangibles, net - - - -
Other assets, net - - - -
-------------------- -------------------- -------------------- ---------------------
TOTAL ASSETS 1,669,477 1,118,378 2,278,001 1,405,800
-------------------- -------------------- -------------------- ---------------------
8
(euro) / $ rate 1.36450 (euro) / $ rate 1.25700
CONSOLIDATED December 31 December 31 December 31 December 31
LIABILITIES AND STOCKHOLDERS' DEFICIT
(in Euro/US$) 2004 2003 2004 2003
(In Euro) (In Euro) (In US$) (In US$)
-------------------- --------------------- -------------------- --------------------
Current liabilities:
Accounts payable 2,334,377 816,596 3,185,258 $ 1,026,461
Bank overdraft 683,278 - 932,333 -
Short term loans from third parties 156,000 212,862 -
Accrued expenses:
Personnel expenses 427,921 241,190 583,898 303,176
Financing software development 435,000 593,558 -
Auditors and advisors 165,000 8,000 225,143 -
Management fee - 150,000 - 188,550
Other 170,883 206,526 233,168 269,659
Loan from stockholder 5,563,622 4,995,148 7,591,562 6,278,900
Wage tax and social securities
payable 101,665 596,502 138,722 749,803
-------------------- --------------------- -------------------- --------------------
Total current liabilities 10,037,746 7,013,962 13,696,504 8,816,549
Long-term liabilities 240,000 262,500 327,480 329,963
-------------------- --------------------- -------------------- --------------------
Total liabilities 10,277,746 7,276,462 14,023,984 9,146,512
Stockholders' Deficit:
Ordinary shares, par value EUR 0.05
per share; 640,177 319,175 873,521 401,203
30,000,000 shares authorized; 12,083,537 and
6,383,497 issued and outstanding at
31 December 2004 and 31 December 2003
respectively
Priority shares, par value EUR 0.05 per share
3 shares issued at 31 December 2004 and
31 December 2003 respectively - - - -
Additional paid-in capital 9,408,138 1,711,638 12,837,404 2,151,529
Subscribed capital 5,725,555 - 7,812,520 -
Accumulated deficit (24,382,139) (8,188,897) (33,269,428) (10,293,444)
-------------------- --------------------- -------------------- --------------------
Total stockholders' Deficit (8,608,269) (6,158,084) (11,745,983) (7,740,712)
-------------------- --------------------- -------------------- --------------------
TOTAL LIABILITIES, AND
STOCKHOLDERS' DEFICIT 1,669,477 1,118,378 $ 2,278,001 $ 1,405,800
-------------------- --------------------- -------------------- --------------------
9
(euro) / $ rate 1.29670(euro) / $ rate 1.22420
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED Three months ended, Three months ended, Three months ended,Three months ended,
STATEMENTS OF OPERATIONS DATA March 31, March 31, March 31, March 31,
(in Euro/US$) 2005 (Unaudited) 2004 (Unaudited) 2005 (Unaudited) 2004 (Unaudited)
(In Euro) (In Euro) (In US$) (In US$)
- ----------------------------------------------------------- --------------------------------------------------------------
Net sales 403,358 - $ 523,034 $ -
Product costs 93,292 - 120,972 -
--------------------- -------------------- -----------------------------------------
Gross profit 310,066 - 402,062 -
Operating expenses:
Selling and marketing 4,487 12,024 5,818 14,720
General and administrative (1) 493,438
7,816,449 639,841 9,568,897
Research and development 274,598 651,756 356,071 797,879
Depreciation 78,882 59,899 102,287 73,328
--------------- --------------------------------------------------------------
Total operating expenses 851,405 8,540,128 1,104,017 10,454,824
--------------- --------------------------------------------------------------
Loss from operations (541,339) (8,540,128) (701,955) (10,454,824)
Interest expense (78,324) (274,111) (101,562) (335,567)
--------------- --------------------------------------------------------------
Income before income taxes (619,663) (8,814,239) (803,517) (10,790,391)
Benefit from income taxes 195,194 - 253,108 -
--------------- --------------------------------------------------------------
Net loss (424,469) (8,814,239) $ (550,409) $(10,790,391)
--------------- --------------------------------------------------------------
Net income (loss):
Basic (424,469) (8,814,239) $(550,409) $(10,790,391)
Diluted (424,469) (8,814,239) $(550,409) $(10,790,391)
Net income (loss) per share:
Basic (0.03) (1.38) $ (0.04) $ (1.69)
Diluted (0.02) (0.59) $ (0.03) $ (0.72)
Number of shares used in
computation:
Basic 12,983,530 6,383,500 12,983,530 6,383,500
Diluted 18,035,222 14,899,111 18,035,222 14,899,111
(1) General and administrative expenses: includes a one-time expense of
(euro)7,200,000 ($9,824,400) related to granted options to certain
stock holders (2004).
10
(euro) / $ rate 1.29670 (euro) / $ rate 1. 22420
CONSOLIDATED BALANCE SHEETS March 31, March 31, March 31, March 31,
(in Euro/US$) 2005 (Unaudited) 2004 (Unaudited) 2005 (Unaudited) 2004 (Unaudited)
(In Euro) (In Euro) (In US$) (In US$)
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash 15,654 48,923 $ 20,299 $ 59,891
Accounts receivable, net 416,334 9,334 539,860 11,427
Software development 1,080,050 692,367 1.,400,501 847,596
Prepaid royalties - -
Loan to associated companies 112,015 - 145,250 -
Taxes receivables 119,570 155,685 155,046 190,590
Prepaid expenses and other current assets 12,039 223,816 15,612 273,996
Deferred tax asset 195,195 - 253,109 -
----------------------------------------------------------------------------------
Total current assets 1,950,857 1,130,125 2,529,677 1,383,450
Fixed assets, net 449,475 673,176 582,834 824,102
Investments in affiliates - - - -
Goodwill, net - 9,376 - 11,477
Intangibles, net - - - -
Other assets, net - - - -
----------------------------------------------------------------------------------
TOTAL ASSETS 2,400,332 1,812,677 $ 3,112,511 $ 2,219,079
----------------------------------------------------------------------------------
11
(euro) / $ rate 1.29670 (euro) / $ rate 1.22420
CONSOLIDATED
LIABILITIES AND STOCKHOLDERS' DEFICIT March 31, March 31, March 31, March 31,
(in Euro/US$) 2005 (Unaudited) 2004 (Unaudited) 2005 (Unaudited) 2004 (Unaudited)
(In Euro) (In Euro) (In US$) (In US$)
- --------------------------------------------------------- ----------------------------------------- ----------------------
Current liabilities:
Accounts payable 1,547,915 1,113,462 2,007,181 1,363,100
Bank overdraft 542,220 363,251 703,097 444,692
Short term loans from third parties 150,000 - 194,505 -
Accrued expenses:
Personnel expenses 280,899 288,787 364,242 353,533
Financing software development 200,000 259,340 -
Other current liabilities 305,577 258,659 396,242 316,650
Loan from stockholder 7,548,782 6,622,131 9,788,505 8,106,813
Wage tax and social securities
payable 275,327 683,710 357,016 836,998
-------------------- ----------------------------------------- ----------------------
Total current liabilities 10,850,720 9,330,000 14,070,129 11,421,786
Long-term liabilities 232,500 255,000 301,483 312,171
-------------------- ----------------------------------------- ----------------------
Total long-term liabilities 232,500 255,000 301,483 312,171
-------------------- ----------------------------------------- ----------------------
Stockholders' deficit:
Ordinary shares, par value EUR 0.05
per share; 649,177 319,175 841,787 390,734
30,000,000 shares authorized; issued and outstanding
at March 31, 2004: 6,383,500;
at March 31, 2005: 12,983,530;
Priority shares, par value EUR 0.05 per share;
issued and outstanding
at April 30, 2005; 3
at April 30, 2004; 3 - -
Additional paid-in capital 9,671,140 8,911,638 12,540,567 10,909,627
Subscribed capital 5,803,403 - 7,525,273 -
Accumulated deficit (24,806,608) (17,003,136) (32,166,729) (20,815,239)
-------------------- ----------------------------------------- ----------------------
Total stockholders' deficit (8,682,888) (7,772,323) (11,259,101) (9,514,878)
-------------------- ----------------------------------------- ----------------------
TOTAL LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' DEFICIT 2,400,332 1,812,677 3,112,511 2,219,079
-------------------- ----------------------------------------- ----------------------
12
(euro) / $ rate 1.29580 (euro) / $ rate 1.19480
------------------------------------------ -------------------------------------------
Four months ended, Four months ended, Four months ended, Four months ended,
STATEMENTS OF OPERATIONS DATA April 30, April 30, April 30, April 30,
(in Euro/US$) 2005 (Unaudited) 2004 (Unaudited) 2005 (Unaudited) 2004 (Unaudited)
(In Euro) (In Euro) (In US$) (In US$)
- --------------------------------------------------------- -------------------- -------------------- ----------------------
Net sales 494,958 - $ 641,367 $ -
Product costs 94,663 - 122,665 -
-------------------- -------------------- -------------------- ----------------------
Gross profit 400,295 - 518,702 -
Operating expenses:
Selling and marketing 4,785 21,576 6,201 25,779
General and administrative (1) 655,302 8,000,178 849,139 9,558,613
Research and development 360,807 820,931 467,533 980,848
Capitalization on software
development - - - -
Depreciation 105,306 82,517 136,456 98,591
-------------------- -------------------- -------------------- ----------------------
Total operating expenses 1,126,200 8,925,202 1,459,329 10,663,831
-------------------- -------------------- -------------------- ----------------------
Loss from operations (725,905) (8,925,202) (940,628) (10,663,831)
Interest expense (115,755) (308,534) (149,995) (368,636)
-------------------- -------------------- -------------------- ----------------------
Income before income taxes (841,660) (9,233,736) (1,090,623) (11,032,467)
Benefit from income taxes 265,123 - 343,546 -
-------------------- -------------------- -------------------- ----------------------
Net loss (576,537) (9,233,736) $ (747,076) $ (11,032,467)
-------------------- -------------------- -------------------- ----------------------
Net income (loss) per share:
Basic (0.04) (1.45) $ (0.05) $ (1.73)
Diluted (0.03) (0.62) $ (0.04) $ (0.74)
Number of shares used in
computation:
Basic 13,583,530 6,383,500 13,583,530 6,383,500
Diluted 18,462,576 14,922,122 18,462,576 14,922,122
(1) General and administrative expenses: includes a one-time expense of
(euro)7,200,000 ($9,824,400) related to granted options to certain stock holders
(2004).
13
Playlogic International N.V. (unaudited)
(euro) / $ rate 1.29580 (euro) / $ rate 1.19480
CONSOLIDATED BALANCE SHEETS April 30, April 30, April 30, April 30,
(in Euro/US$) 2005 (Unaudited) 2004 (Unaudited) 2005 (Unaudited) 2004 (Unaudited)
(In Euro) (In Euro) (In US$ (In US$)
-------------------- -------------------- -------------------- ----------------------
ASSETS
Current assets:
Cash 99,268 48,949 $ 128,631 $ 58,484
Accounts receivable, net
416,334 9,334 539,486 11,152
Software development
1,150,050 735,546 1,490,234 878,830
Prepaid royalties
- -
Loan to associated companies
170,015 - 220,306 -
Taxes receivables
150,140 186,984 194,551 223,409
Prepaid expenses and other current
assets 450,640 131,150 583,940 156,698
Deferred tax asset
265,124 - 343,548 -
------------------- ------------------- -------------------- ----------------------
Total current assets 2,701,571 1,111,963 3,500,696 1,328,573
Fixed assets, net 423,051 662,351 548,189 791,377
Investments in affiliates - - - -
Goodwill, net 11,250 - 13,442
Intangibles, net - - - -
Other assets, net - - - -
-------------------- -------------------- -------------------- ----------------------
TOTAL ASSETS 3,124,622 1,785,564 $ 4,048,885 $ 2,133,392
-------------------- -------------------- -------------------- ----------------------
14
(euro) / $ rate 1.29580 (euro) / $ rate 1.19480
CONSOLIDATED LIABILITIES, MINORITY
INTEREST AND STOCKHOLDERS' EQUITY April 30, April 30, April 30, April 30,
(in Euro/US$) 2005 (Unaudited) 2004 (Unaudited) 2005 (Unaudited) 2004 (Unaudited)
(In Euro) (In Euro) (In US$) (In US$)
-------------------- --------------------- -------------------- ----------------------
Current liabilities:
Accounts payable 1,135,916 1,200,049 $ 1,471,920 $ 1,433,818
Bank overdraft - 434,136 - 518,706
Short term loans from third parties 150,000 - 194,370 -
Accrued expenses:
Personnel expenses 299,491 408,305 388,080 487,843
Financing software development 200,000 259,160 -
Other current liabilities 280,482 184,625 363,449 220,590
Loan from stockholder 161,880 6,731,877 209,764 8,043,247
Wage tax and social securities
payable 355,566 763,392 460,742 912,101
-------------------- --------------------- -------------------- ----------------------
Total current liabilities 2,583,335 9,722,384 3,347,485 11,616,305
Long-term liabilities 225,000 255,000 291,555 304,674
-------------------- --------------------- -------------------- ----------------------
Total long-term liabilities 225,000 255,000 291,555 304,674
-------------------- --------------------- -------------------- ----------------------
Stockholders' equity:
Ordinary shares, par value EUR 0,05
per share; 679,177 319,175 880,077 381,350
30,000,000 shares authorized; issued and outstanding
at April 30, 2005; 13,583,537;
at April 30, 2004; 6,383,497;
Priority shares, par value EUR 0,05 per share;
issued and outstanding
at April 30, 2005; 3
at April 30, 2004; 3 - -
Additional paid-in capital 11,076,138 8,911,638 14,352,460 10,647,625
Subscribed capital
13,519,648 - 17,518,760 -
Accumulated deficit (24,958,676) (17,422,633) (32,341,452) (20,816,562)
-------------------- --------------------- -------------------- ----------------------
Total stockholders' equity 316,287 (8,191,820) 409,845 (9,787,587)
-------------------- --------------------- -------------------- ----------------------
TOTAL LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY 3,124,622 1,785,564 $ 4,048,885 $ 2,133,392
-------------------- --------------------- -------------------- ----------------------
15
RISK FACTORS
Our shares are speculative and involve a high degree of risk. You should
carefully consider the following risk factors before making an investment
decision.
WE HAVE A LIMITED OPERATING HISTORY, WE HAVE EXPERIENCED SIGNIFICANT LOSSES
IN PRIOR YEARS AND WE MAY NOT BE ABLE TO MAINTAIN PROFITABILITY ON A CONSISTENT
BASIS.
We commenced operations in May 2002. Accordingly, we have a limited
operating history and our business strategy may not be successful. Our failure
to implement our business strategy or an unsuccessful business strategy could
materially adversely affect our business, financial condition and operations.
We had net consolidated losses of (euro)16,193,241 ($22,095,677) in 2004,
(euro)6,091,914 ( $7,657,536) in 2003 and (euro)2,096,983 ($2,199,945) in 2002.
The net consolidated losses of (euro)16,193,241 ($22,095,677) in 2004 include a
one-time expense of (euro)7,200,000 ($9,824,400) related to the grant of options
to some of our stockholders in 2004.
Although we expect to be profitable in the future, we may never achieve
profitability. If we do achieve profitability, we may not be able to maintain
profitability on a consistent basis. The report of Playlogic's independent
auditors on Playlogic's December 31, 2004 financial statements included an
explanatory paragraph indicating there is substantial doubt at year end 2004
about Playlogic's ability to continue as a going concern. In 2005, all loans
granted to Playlogic were redeemed. The amount redeemed was used as payment on
the shares issued therefor. Accordingly, Playlogic does not have any material
loans outstanding. Nevertheless, if we do not raise additional capital, we may
need to cease operations.
WE ARE DEPENDENT ON FINANCING BY THIRD PARTIES, AND IF WE ARE NOT ABLE TO
ACQUIRE ANY NECESSARY FINANCING FOR OUR OPERATIONS, OUR BUSINESS WILL BE
SIGNIFICANTLY HARMED, AND WE MAY NEED TO CEASE OPERATIONS.
We expect that our current cash balance and cash generated from operations
will be sufficient to cover our working capital costs through the third quarter
of 2005. We will need to obtain additional financing from third parties. We
expect our capital requirements to increase over the next several years as we
continue to develop new products, increase marketing and administration
infrastructure, and embark on in-house business capabilities and facilities. Our
future liquidity and capital funding requirements will depend on numerous
factors, including, but not limited to, the cost of hiring and training
production personnel who will produce our titles, the cost of hiring and
training additional sales and marketing personnel to promote our products, and
the cost of hiring and training administrative staff to support current
management. If we do not obtain any necessary financing in the future, we may
need to cease operations.
MANY OF OUR TITLES HAVE SHORT LIFECYCLES AND MAY FAIL TO GENERATE
SIGNIFICANT REVENUES.
The market for interactive entertainment software is characterized by short
product lifecycles and frequent introduction of new products. Many software
titles do not achieve sustained market acceptance or do not generate a
sufficient level of sales to offset the costs associated with product
development. A significant percentage of the sales of new titles generally occur
within the first three months following their release. Therefore, our
profitability depends upon our ability to develop and sell new, commercially
successful titles and to replace revenues from titles in the later stages of
their lifecycles. Any competitive, financial, technological or other factor
which delays or impairs our ability to introduce and sell our software could
adversely affect our future operating results.
A SIGNIFICANT PORTION OF OUR REVENUES ARE DERIVED FROM A LIMITED NUMBER OF
TITLES. IF WE FAIL TO DEVELOP NEW, COMMERCIALLY SUCCESSFUL TITLES, OUR BUSINESS
MAY BE HARMED.
For the year ended December 31, 2004, one title, Alpha Black Zero accounted
for 100% of our revenues. We did not have any revenue in 2003 or 2002. Our
future titles may not be commercially viable. We also may not be able to release
new titles within scheduled release times or at all. If we fail to continue to
develop and sell new, commercially successful titles, our revenues and profits
may decrease substantially and we may incur losses.
16
OUR BUSINESS IS DEPENDENT ON LICENSING AND PUBLISHING ARRANGEMENTS WITH
THIRD PARTIES, AND IF WE CANNOT CONTINUE TO LICENSE POPULAR PROPERTIES ON
COMMERCIALLY REASONABLE TERMS, OUR BUSINESS WILL BE HARMED.
Our success depends on our ability to identify and exploit new titles on a
timely basis. We have entered into agreements with third parties to acquire the
rights to publish and distribute interactive entertainment software. These
agreements typically require us to make advance payments, pay royalties and
satisfy other conditions. Our advance payments may not be sufficient to permit
developers to develop new software successfully. In addition, software
development costs, promotion and marketing expenses and royalties payable to
software developers have increased significantly in recent years and reduce the
potential profits derived from sales of our software. Future sales of our titles
may not be sufficient to recover advances to software developers and we may not
have adequate financial and other resources to satisfy our contractual
commitments. If we fail to satisfy our obligations under these license
agreements, the agreements may be terminated or modified in ways that may be
burdensome to us. Our profitability depends upon our ability to continue to
license popular properties on commercially feasible terms. Numerous companies
compete intensely for properties and we may not be able to license popular
properties on favorable terms or at all in the future.
ACQUIRING LICENSES TO CREATE GAMES BASED ON MOVIES MAY BE VERY EXPENSIVE.
IF WE SPEND A SIGNIFICANT AMOUNT OF RESOURCES TO ACQUIRE SUCH LICENSES AND THE
RESULTING GAMES ARE NOT SUCCESSFUL, OUR BUSINESS MAY BE MATERIALLY HARMED.
Many current video game titles are based on popular motion pictures. Some
of these games have been successful, but many have not. We do not have any such
games in the development stage as of yet, but we are currently considering
creating a game based on a successful horror movie. We hope to release a game
based on this movie concurrent with the release of the movie's sequel in
theaters which is expected to occur in 2006. In order to create this game, we
will need to acquire a license from the producer of the movie, and it is likely
that this license will be expensive. If the game is not successful due to the
movie's sequel not being popular or for any other reason, our business may be
materially harmed.
WE ARE EXPOSED TO SEASONALITY IN THE PURCHASES OF OUR PRODUCTS AND IF WE
FAIL TO RELEASE PRODUCTS IN TIME DURING PERIODS OF HIGH CONSUMER DEMAND, SUCH AS
THE HOLIDAYS, OUR REVENUES MAY BE NEGATIVELY AFFECTED.
The interactive entertainment software industry is highly seasonal, with
the highest levels of consumer demand occurring during the year-end holiday
buying season. Additionally, in a platform transition period, sales of game
console software products can be significantly affected by the timeliness of the
introduction of game console platforms by the manufacturers of those platforms,
such as Sony, Microsoft and Nintendo. The timing of hardware platform
introduction is also often tied to holidays and is not within our control. If a
hardware platform is released unexpectedly close to the holidays, this would
result in a shortened holiday buying season and could negatively impact the
sales of our products. Delays in development, licensor approvals or
manufacturing can also affect the timing of the release of our products, causing
us to miss key selling periods such as the year-end holiday buying season.
WE CONTINUALLY NEED TO DEVELOP NEW INTERACTIVE ENTERTAINMENT SOFTWARE FOR
VARIOUS OPERATING SYSTEMS AND IF DEVELOPERS OF OPERATING SYSTEMS FACE FINANCIAL
OR OPERATIONAL DIFFICULTIES, WE MAY NOT BE ABLE TO RELEASE OUR TITLES AND MAY
INCUR LOSSES.
We depend on third-party software developers and our internal development
studios to develop new interactive entertainment software within anticipated
release schedules and cost projections. Many of our titles are externally
developed. If developers experience financial difficulties, additional costs or
unanticipated development delays, we will not be able to release titles
according to our schedule and may incur losses.
The development of new interactive entertainment software is a lengthy,
expensive and uncertain process. Considerable time, effort and resources are
required to complete development of our proposed titles. We have in the past and
may in the future experience delays in introducing new titles. Delays, expenses,
technical problems or difficulties could force the abandonment of or material
changes in the development and commercialization of our proposed titles. In
addition, the costs associated with developing titles for use on new or future
platforms may increase our development expenses.
17
TRANSITIONS IN CONSOLE PLATFORMS HAVE A MATERIAL IMPACT ON THE MARKET FOR
INTERACTIVE ENTERTAINMENT SOFTWARE AND DELAYS IN THE LAUNCH, SHORTAGES,
TECHNICAL PROBLEMS OR LACK OF CONSUMER ACCEPTANCE OF THESE PLATFORMS AND NEXT
GENERATION PLATFORMS COULD ADVERSELY AFFECT OUR SALES OF PRODUCTS FOR THESE
PLATFORMS.
When new console platforms are announced or introduced into the market,
consumers typically reduce their purchases of game console entertainment
software products for current console platforms in anticipation of new platforms
becoming available. During these periods, sales of our game console
entertainment software products can be expected to slow down or even decline
until new platforms have been introduced and have achieved wide consumer
acceptance. Each of the three current principal hardware producers launched a
new platform in recent years. Sony made the first shipments of its PlayStation2
console system in North America and Europe in the fourth quarter of calendar
year 2000. Microsoft made the first shipments of its Xbox console system in
North America in November 2001 and in Europe and Japan in the first quarter of
calendar 2002. Nintendo made the first shipments of its GameCube console system
in North America in November 2001 and in Europe in May 2002. Additionally, in
June 2001, Nintendo launched its Game Boy Advance hand-held device. Most
recently, in late 2004 Sony introduced its hand-held gaming device, PlayStation
Portable ("PSP") and Nintendo introduced its Nintendo Dual Screen ("DS"). We
expect that the next hardware transition cycle will commence in late calendar
2005 or calendar 2006. Delays in the launch, shortages, technical problems or
lack of consumer acceptance of these platforms and next generation platforms
could adversely affect our sales of products for these platforms.
DEVELOPING GAMES FOR THE NEXT GENERATION GAME CONSOLES BY SONY, MICROSOFT
AND NINTENDO (WHICH ARE EXPECTED TO BE RELEASED IN THE NEXT FEW YEARS) WILL
LIKELY BE MORE EXPENSIVE AND TIME CONSUMING FOR US AND OUR STUDIOS. IF WE ARE
NOT ABLE TO PRODUCE GAMES FOR THESE CONSOLES IN A COST-EFFECTIVE MANNER, OUR
BUSINESS MAY BE SIGNIFICANTLY HARMED.
Each of Sony, Nintendo and Microsoft are expected to release next
generation game consoles in the next few years. These new consoles will likely
be more powerful, and games for these consoles will have greater graphics and
features. With this increased power and capabilities, there are likely to be
increased costs to develop games and it is likely that each game will need
larger development teams. Budgets for next generation games are likely to be
twice those of games for current consoles and development teams may need to
increase three-fold. The rising costs may make it prohibitively expensive for
small game publishers like us to take the risk of creating new, unproven games.
If we cannot create games for the next generation consoles in a cost effective
manner, our business is likely to be significantly harmed.
WE DEPEND ON SONY, NINTENDO AND MICROSOFT FOR THE MANUFACTURING OF PRODUCTS
THAT WE DEVELOP FOR THEIR HARDWARE PLATFORMS. ACCORDINGLY, ANY OF THEM COULD
CAUSE UNANTICIPATED DELAYS IN THE RELEASE OF OUR PRODUCTS AS WELL INCREASES TO
OUR DEVELOPMENT, MANUFACTURING, MARKETING OR DISTRIBUTION COSTS, WHICH COULD
MATERIALLY HARM OUR BUSINESS AND FINANCIAL RESULTS.
Generally, when we develop interactive entertainment software products for
hardware platforms offered by Sony, Nintendo or Microsoft, the products are
manufactured exclusively by that hardware manufacturer or their approved
replicator. We pay a licensing fee to the hardware manufacturer for each copy of
a product manufactured for that manufacturer's game platform.
The agreements with these manufacturers include certain provisions such as
approval rights over all products and related promotional materials and the
ability to change the fee they charge for the manufacturing of products, that
allow them substantial influence over our costs and the release schedule of our
products. In addition, since each of the manufacturers is also a publisher of
games for its own hardware platforms and manufactures products for all of its
other licensees, a manufacturer may give priority to its own products or those
of our competitors in the event of insufficient manufacturing capacity.
Accordingly, Sony, Nintendo or Microsoft could cause unanticipated delays in the
release of our products as well increase our development, manufacturing,
marketing or distribution costs, which could materially harm our business and
financial results.
18
WE PARTLY DEPEND ON INDEPENDENT DEVELOPERS, AND WE MAKE ADVANCE PAYMENTS TO
THEM PRIOR TO THE COMPLETION OF THE PRODUCT. THERE IS NO ASSURANCE THAT WE CAN
RECOUP THESE PAYMENTS IF WE DO NOT ACCEPT THE PRODUCT FROM A THIRD PARTY
DEVELOPER.
We make advance payments to independent software developers prior to
completion of the games, which are for the development of intellectual property
related to our games. The advance payments become due when the developer meets
agreed milestones.
Upon termination of the contract for any reason prior to the completion of
a game, the advance payments are repayable by the independent software
developers, who then remain the sole owner of the source material and
intellectual property. These advance payments that are due prior and after
completion of the product are partly capitalized and expensed as cost of goods
sold at the higher of the contractual or effective royalty rate based on net
product sales. However, there is no assurance that the independent developer
will return the advance payments to us, and if they do not, our business may
suffer.
WE MAY FAIL TO ANTICIPATE CHANGING CONSUMER PREFERENCES, AND IF WE DO, OUR
RESULTS OF OPERATIONS MAY BE MATERIALLY HARMED.
Our business is speculative and is subject to all of the risks generally
associated with the interactive entertainment software industry, which has been
cyclical in nature and has been characterized by periods of significant growth
followed by rapid declines. Our future operating results will depend on numerous
factors beyond our control, including:
o the popularity, price and timing of new software and hardware
platforms being released and distributed by us and our competitors;
o international, national and regional economic conditions, particularly
economic conditions adversely affecting discretionary consumer
spending;
o changes in consumer demographics;
o the availability of other forms of entertainment; and
o critical reviews and public tastes and preferences, all of which
change rapidly and cannot be predicted.
In order to plan for acquisition and promotional activities we must
anticipate and respond to rapid changes in consumer tastes and preferences. A
decline in the popularity of interactive entertainment software or particular
platforms could cause sales of our titles to decline dramatically. The period of
time necessary to develop new game titles, obtain approvals of manufacturers and
produce CD-ROMs or game cartridges is unpredictable. During this period consumer
appeal of a particular title may decrease, causing projected sales to decline.
RAPIDLY CHANGING TECHNOLOGY AND PLATFORM SHIFTS COULD HURT OUR OPERATING
RESULTS.
The interactive software market and the PC and video game industries in
general are associated with rapidly changing technology, which often leads to
software and platform obsolescence and significant price erosion over the life
of a product. The introduction of new platforms and technologies can render
existing software obsolete or unmarketable. We expect that as more advanced
platforms are introduced, consumer demand for software for older platforms will
decline. As a result, our titles developed for such platforms may not generate
sufficient sales to make such titles profitable. Obsolescence of software or
platforms could leave us with increased inventories of unsold titles and limited
amounts of new titles to sell to consumers which would have a material adverse
effect on our operating results.
19
We have devoted and will continue to devote significant development and
marketing resources on products designed for next-generation video game systems,
such as the PlayStation 3 and Xbox360, that have not yet been released. If
PlayStation 3 and/or Xbox360 do not achieve wide acceptance by consumers or
Sony/Microsoft is unable to ship a significant number of PlayStation 3/Xbox360
units in an timely fashion, or if our titles fail to sell through, we will have
spent a substantial amount of our resources for this platform without
corresponding revenues, which would have a material adverse effect on our
business, operating results and financial condition.
We need to anticipate technological changes and continually adapt our new
titles to emerging platforms to remain competitive in terms of price and
performance. Our success depends upon our ability and the ability of third-party
developers to adapt software to operate on and to be compatible with the
products of original equipment manufacturers and to function on various hardware
platforms and operating systems. If we design titles to operate on new
platforms, we may be required to make substantial development investments well
in advance of platform introductions and we will be subject to the risks that
any new platform may not achieve initial or continued market acceptance.
A number of software publishers who compete with us have developed or are
currently developing software for use by consumers over the Internet. Future
increases in the availability of such software or technological advances in such
software or the Internet could result in a decline in platform-based software
and impact our sales. Direct sales of software by major manufacturers over the
Internet would adversely affect our distribution business.
IF OUR PRODUCTS CONTAIN DEFECTS, OUR BUSINESS COULD BE HARMED
SIGNIFICANTLY.
Software products as complex as the ones we publish may contain undetected
errors when first introduced or when new versions are released. Despite
extensive testing prior to release, we cannot be certain that errors will not be
found in new products or releases after shipment which could result in loss of
or delay in market acceptance. This loss or delay could significantly harm our
business and financial results.
RETURNS OF OUR TITLES MAY ADVERSELY AFFECT OUR OPERATING RESULTS.
Our arrangements with retailers for published titles require us to accept
returns for stock balancing, markdowns or defects. We establish a reserve for
future returns of published titles at the time of sales, based primarily on
these return policies and historical return rates and we recognize revenues net
of returns.
Our distribution arrangements with retailers generally do not give them the
right to return titles to us or to cancel firm orders, although we do accept
returns for stock balancing, markdowns and defects. We sometimes negotiate
accommodations to retailers, including price discounts, credits and returns,
when demand for specific titles falls below expectations.
Our sales returns and allowances for the year ended December 31, 2004, they
were (euro)0 ($0). If return rates for our published titles significantly exceed
our estimates, our operating results will be materially adversely affected.
OUR BUSINESS IS HIGHLY COMPETITIVE AND INCREASINGLY "HIT" DRIVEN. IF WE DO
NOT CONTINUE TO DELIVER "HIT" PRODUCTS, OUR SUCCESS WILL BE LIMITED.
Competition in our industry is intense and new products are regularly
introduced. We compete for both licenses to properties and the sale of
interactive entertainment software with Sony, Nintendo and Microsoft, each of
which is the largest developer and marketer of software for its platforms. Sony,
Microsoft and Nintendo currently dominate the industry and have the financial
resources to withstand significant price competition and to implement extensive
advertising campaigns, particularly for prime-time television. These companies
may also increase their own software development efforts or focus on developing
software products for third-party platforms.
In addition, we compete with domestic public and private companies,
international companies, large software companies and media companies. Many of
our competitors have far greater financial, technical, personnel and other
resources than we do and many are able to carry larger inventories, adopt more
aggressive pricing policies and make higher offers to licensors and developers
for commercially desirable properties than we can. Our titles also compete with
other forms of entertainment such as motion pictures, television and audio and
DVDs featuring similar themes, on-line computer programs and forms of
entertainment which may be less expensive or provide other advantages to
consumers.
20
Retailers typically have limited shelf space and promotional resources and
competition is intense among an increasing number of newly introduced
interactive entertainment software titles for adequate levels of shelf space and
promotional support. Competition for retail shelf space is expected to increase,
which may require us to increase our marketing expenditures just to maintain
current levels of sales of our titles. Competitors with more extensive lines and
popular titles frequently have greater bargaining power with retailers.
Accordingly, we may not be able to achieve the levels of support and shelf space
that such competitors receive. Similarly, as competition for popular properties
increases, our cost of acquiring licenses for such properties is likely to
increase, possibly resulting in reduced margins. Prolonged price competition,
increased licensing costs or reduced operating margins would cause our profits
to decrease significantly.
If our competitors develop more successful products, or if we do not
continue to develop consistently high-quality products, our revenue will
decline.
Our products are sold internationally through third-party distribution and
licensing arrangements and through our wholly-owned European distribution
subsidiaries. Our sales are made primarily on a purchase order basis without
long-term agreements or other forms of commitments. The loss of, or significant
reduction in sales to, any of our principal retail customers or distributors
could significantly harm our business and financial results.
WE MAY BE BURDENED WITH PAYMENT DEFAULTS AND UNCOLLECTIBLE ACCOUNTS IF OUR
DISTRIBUTORS OR RETAILERS CANNOT HONOR THEIR CREDIT ARRANGEMENTS WITH US.
Distributors and retailers in the interactive entertainment software
industry have from time to time experienced significant fluctuations in their
businesses and a number of them have failed. The insolvency or business failure
of any significant retailer or distributor of our products could materially harm
our business and financial results. We typically make sales to most of our
retailers and some distributors on unsecured credit, with terms that vary
depending upon the customer's credit history, solvency, credit limits and sales
history, as well as whether we can obtain sufficient credit insurance. Although,
as in the case with most of our customers, we have insolvency risk insurance to
protect us against our customers' bankruptcy, insolvency or liquidation, this
insurance contains a significant deductible and a co-payment obligation and the
policy does not cover all instances of non-payment. In addition, although we
maintain a reserve for uncollectible receivables, the reserve may not be
sufficient in every circumstance. As a result, a payment default by a
significant customer could significantly harm our business and financial
results.
WE MAY NOT BE ABLE TO MAINTAIN OUR DISTRIBUTION RELATIONSHIPS WITH KEY
VENDORS, AND IF WE DO NOT, OUR RESULTS OF OPERATIONS MAY BE MATERIALLY HARMED
We distribute interactive entertainment software and hardware products and
provide related services in the Benelux countries, Germany, the United Kingdom,
and in other European countries for a variety of entertainment software
publishers, many of which are our competitors, and hardware manufacturers. These
services are generally performed under limited term contracts. Although we
expect to use reasonable efforts to retain these vendors, we may not be
successful in this regard. The cancellation or non-renewal of one or more of
these contracts could significantly harm our business and financial results.
OUR SOFTWARE MAY BE SUBJECT TO LEGAL CLAIMS WHICH COULD BE VERY COSTLY AND
TIME CONSUMING AND CAUSE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
In prior years lawsuits were filed against numerous video game companies by
the families of victims who were shot and killed by teenage gunmen in attacks
perpetrated at schools. In these lawsuits plaintiffs alleged that the video game
companies manufactured and/or supplied these teenagers with violent video games,
teaching them how to use a gun and causing them to act out in a violent manner.
Both lawsuits have been dismissed. It is possible, however, that similar,
additional lawsuits may be filed in the future. If such future lawsuits are
filed and ultimately decided against us and our insurance carrier does not cover
the amounts we are liable for, it could have a material adverse effect on our
business and financial results. Payment of significant claims by insurance
carriers may make such insurance coverage materially more expensive or
unavailable in the future, thereby exposing our business to additional risk.
21
OUR BUSINESS, OUR PRODUCTS AND OUR DISTRIBUTION ARE SUBJECT TO INCREASING
REGULATION IN KEY TERRITORIES OF CONTENT, CONSUMER PRIVACY AND ONLINE DELIVERY.
IF WE DO NOT SUCCESSFULLY RESPOND TO THESE REGULATIONS, OUR BUSINESS MAY SUFFER.
Legislation is continually being introduced that may affect both the
content of our products and their distribution. For example, privacy laws in the
United States and Europe impose various restrictions on our web sites. Those
rules vary by territory although the Internet recognizes no geographical
boundaries. Other countries, such as Germany, have adopted laws regulating
content both in packaged goods and those transmitted over the Internet that are
stricter than current United States laws. In the United States, the federal and
several state governments are considering content restrictions on products such
as ours, as well as restrictions on distribution of such products. Any one or
more of these factors could harm our business by limiting the products we are
able to offer to our customers and by requiring additional differentiation
between products for different territories to address varying regulations. This
additional product differentiation would be costly.
IF WE DO NOT CONSISTENTLY MEET OUR PRODUCT DEVELOPMENT SCHEDULES, WE WILL
EXPERIENCE FLUCTUATIONS IN OUR OPERATING RESULTS.
Product development schedules, particularly for new hardware platforms,
high-end multimedia PCs and the Internet, are difficult to predict because they
involve creative processes, use of new development tools for new platforms and
the learning process, research and experimentation associated with development
for new technologies. We have in the past experienced development delays for
several of our products. Failure to meet anticipated production or "go live"
schedules may cause a shortfall in our revenue and profitability and cause our
operating results to be materially different from expectations. Delays that
prevent release of our products during peak selling seasons may reduce lifetime
sales of those products.
OUR EXPANSION MAY STRAIN OUR OPERATIONS.
We have expanded through internal growth and acquisitions, which has placed
and may continue to place a significant strain on our management,
administrative, operational, financial and other resources. We have released a
number of titles on new platforms, expanded our publishing and distribution
operations, increased our advances to developers and manufacturing expenditures,
enlarged our work force and expanded our presence on international markets. To
successfully manage this growth, we must continue to implement and improve our
operating systems as well as hire, train and manage a substantial and increasing
number of management, technical, marketing, administrative and other personnel.
We may be unable to effectively manage rapidly expanded operations which are
geographically dispersed.
We have acquired rights to various properties and businesses, and we may
pursue opportunities by making selective acquisitions consistent with our
business strategy. We may be unable to successfully integrate any new personnel,
property or business into our operations. If we are unable to successfully
integrate future personnel, properties or businesses into our operations, we may
incur significant charges.
Our publishing and distribution activities require significant amounts of
capital. We may seek to obtain additional debt or equity financing to fund the
cost of expansion. The issuance of equity securities would result in dilution to
the interests of our stockholders.
A LIMITED NUMBER OF CUSTOMERS MAY ACCOUNT FOR A SIGNIFICANT PORTION OF OUR
SALES, AND THE LOSS OF OUR RELATIONSHIPS WITH PRINCIPAL CUSTOMERS OR A DECLINE
IN SALES TO PRINCIPAL CUSTOMERS COULD HARM OUR OPERATING RESULTS.
22
Sales to our three largest customers accounted for approximately 95% of our
revenues for the year ended December 31, 2004. The loss of our relationships
with principal customers or a decline in sales to principal customers could harm
our operating results.
RATING SYSTEMS FOR INTERACTIVE ENTERTAINMENT SOFTWARE, POTENTIAL
LEGISLATION AND CONSUMER OPPOSITION COULD INHIBIT SALES OF OUR PRODUCTS.
The home video game industry requires interactive entertainment software
publishers to provide consumers with information relating to graphic violence or
sexually explicit material contained in software titles. Certain countries have
also established similar rating systems as prerequisites for sales of
interactive entertainment software in such countries. We believe that we comply
with such rating systems and display the ratings received for our titles. Our
software titles generally receive a rating of "G" (all ages), "E10-Plus" (age 10
and over) or "T" (age 13 and over), although certain of our titles receive a
rating of "M" (age 17 and over), which may limit the potential markets for these
titles.
Several proposals have been made for federal legislation to regulate the
interactive entertainment software, motion picture and recording industries,
including a proposal to adopt a common rating system for interactive
entertainment software, television and music containing violence and sexually
explicit material and an inquiry by the Federal Trade Commission with respect to
the marketing of such material to minors. Consumer advocacy groups have also
opposed sales of interactive entertainment software containing graphic violence
and sexually explicit material by pressing for legislation in these areas and by
engaging in public demonstrations and media campaigns. If any groups were to
target our titles, we might be required to significantly change or discontinue a
particular title. In addition, certain retailers, such as WalMart, Kmart, Sears
and Target Stores, have declined to sell interactive entertainment software
containing graphic violence or sexually explicit material, which also limits the
potential markets for certain of our games.
WE ARE SUBJECT TO RISKS AND UNCERTAINTIES OF INTERNATIONAL TRADE, AND IF
ANY OF THESE RISKS MATERIALIZE, OUR RESULTS OF OPERATIONS MAY BE HARMED.
Sales in international markets, primarily in the UK, France, Spain and the
Benelux, have accounted for an increasing portion of our revenues. For the year
ended December 31, 2004, sales in international markets accounted for
approximately 99% of our revenues. We are subject to risks inherent in foreign
trade, including:
o increased credit risks;
o tariffs and duties;
o fluctuations in foreign currency exchange rates;
o shipping delays; and
o international political, regulatory and economic developments, all of
which can have a significant impact on our operating results.
WE ARE DEPENDENT UPON OUR KEY EXECUTIVES AND PERSONNEL, AND IF WE FAIL TO
HIRE AND RETAIN NECESSARY PERSONNEL AS NEEDED, OUR BUSINESS WILL BE
SIGNIFICANTLY IMPAIRED.
Our success is largely dependent on the personal efforts of certain key
personnel. The loss of the services of one or more of these key employees could
adversely affect our business and prospects. Our success is also dependent upon
our ability to hire and retain additional qualified operating, marketing,
technical and financial personnel. Competition for qualified personnel in the
computer software industry is intense, and we may have difficulty hiring or
retaining necessary personnel in the future. If we fail to hire and retain
necessary personnel as needed, our business will be significantly impaired.
23
FLUCTUATIONS IN FOREIGN EXCHANGE RATES AND INTEREST RATES COULD HARM OUR
RESULTS OF OPERATIONS
We are exposed to currency risks and interest rate risks. We are
particularly exposed to fluctuations in the exchange rate between the U.S.
dollar and the euro, as we incur manufacturing costs and price our systems
predominantly in euro while a portion of our revenue and cost of sales is
denominated in U.S. dollars.
In addition, a substantial portion of our assets, liabilities and operating
results are denominated in euros, and a minor portion of our assets, liabilities
and operating results are denominated in currencies other than the euro and the
U.S. dollar. Our consolidated financial statements are expressed in U.S.
dollars. Accordingly, our results of operations are exposed to fluctuations in
various exchange rates.
Furthermore, a strengthening of the euro, particularly against the U.S.
dollar could lead to intensified price-based competition in those markets that
account for the majority of our sales, resulting in lower prices and margins and
an adverse impact on our business, financial condition and results of
operations.
We are also exposed to fluctuations in interest rates. As of December 31,
2004 we had a net bank overdraft. An increase of the short-term interest rates
could increase the interest expense on our bank overdraft and adversely
affecting our financial results.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
The market price of the common stock may be highly volatile. Disclosures of
our operating results, announcements of various events by us or our competitors
and the development and marketing of new titles affecting the interactive
entertainment software industry may cause the market price of the common stock
to change significantly over short periods of time. Sales of shares under this
prospectus may have a depressive effect on the market price of our common stock.
SOME OF OUR EXISTING SHAREHOLDERS CAN EXERT CONTROL OVER US AND MAY NOT
MAKE DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL SHAREHOLDERS.
As of June 30, 2005, officers, directors, and shareholders holding more
than 5% of our outstanding shares collectively controlled approximately 59% of
our outstanding common stock. As a result, these shareholders, if they act
together, would be able to exert a significant degree of influence over our
management and affairs and over matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions. Accordingly, this concentration of ownership may harm the market
price of our ordinary shares by delaying or preventing a change in control of
us, even if a change is in the best interests of our other shareholders.
In addition, the interests of this concentration of ownership may not
always coincide with the interests of other shareholders, and accordingly, they
could cause us to enter into transactions or agreements that we would not
otherwise consider.
IT MAY BE DIFFICULT TO ENFORCE A US JUDGMENT AGAINST US, OR OUR OFFICERS
AND DIRECTORS.
Service of process upon our directors and officers, all of whom reside
outside the United States, may be difficult to obtain within the United States.
In addition, because substantially all of our assets and all of our directors
and officers are located outside the United States, any judgment obtained in the
United States against us or any of our directors and officers may not be
collectible within the United States.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock by the selling stockholders.
24
MARKET PRICE OF OUR COMMON STOCK; DIVIDENDS
Since January 7, 2003, our common stock has been quoted on the
Over-the-Counter ("OTC") Bulletin Board, an electronic stock listing service
provided by The Nasdaq Stock Market, Inc., under the symbol DNRR.OB (our symbol
had been DNRE.OB until May 2005).
As of July 20, 2005, there were approximately 90 holders of record
of our common stock.
The price range of our common stock during the past two fiscal years is
shown below. High and low prices given here refer to the high and low bid quoted
on the OTC Bulletin Board. These prices reflect our one-for -10 reverse stock
split effective April 15, 2005. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
Fiscal 2003 High Low
First Quarter........................ $3.80 $0.30
Second Quarter....................... $1.00 $0.20
Third Quarter........................ $2.00 $0.30
Fourth Quarter....................... $0.90 $0.50
Fiscal 2004 High Low
First Quarter........................ $0.70 $0.70
Second Quarter....................... $0.80 $0.80
Third Quarter........................ $1.00 $1.00
Fourth Quarter....................... $0.70 $0.70
Fiscal 2005 High Low
First Quarter........................ $3.10 $1.40
Second Quarter $31.10 $2.80
______________
No dividends have been paid on the common stock since our inception, and we
do not anticipate paying any dividends in the foreseeable future.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking Statements
The Information in this registration statement contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. This Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about themselves so long
as they identify these statements as forward looking and provide meaningful
cautionary statements identifying important factors that could cause actual
results to differ from the projected results. All statements, other than
statements of historical fact, made in this registration statement are forward
looking. In particular, the statements herein regarding industry prospects and
future results of operations or financial position are forward-looking
statements. Forward-looking statements reflect management's current expectations
and are inherently uncertain. Our actual results may differ significantly from
management's expectations.
The following discussion and analysis should be read in conjunction with
our financial statements, included herewith. This discussion should not be
construed to imply that the results discussed herein will necessarily continue
into the future, or that any conclusion reached herein will necessarily be
indicative of actual operating results in the future. Such discussion represents
only the best present assessment of our management.
Overview
Donar Enterprises, Inc. was incorporated in the State of Delaware in May
2001. Initially, our plan was to engage in the business of converting and filing
registration statements, periodic reports and other forms of small to mid-sized
companies with the U.S. Securities and Exchange Commission electronically
through EDGAR. We had limited operations until June 30, 2005, when we entered
into a share exchange agreement with the shareholders of Playlogic International
N.V., a corporation formed under the laws of the Netherlands, that commenced
business in 2002. Pursuant to this agreement, the former shareholders of
Playlogic became the owners of over 91% of our common stock. Playlogic has
become our wholly-owned subsidiary and represents all of our commercial
operations.
Playlogic is the leading Dutch publisher of interactive entertainment
software for consoles, such as Sony's PlayStation2, Microsoft's Xbox and
Nintendo's Game Cube, PCs and handheld, such as Nintendo's Game Boy, and mobile
devices. As a publisher, we are responsible for distribution, sales and
marketing of our products. We seek to publish high quality products developed
both by our own studio in Breda, The Netherlands, called Playlogic Game Factory,
and by external developers with whom we have contractual relationships.
Various studios, based in the US and throughout Europe, develop the games
which we publish. One of these studios is our subsidiary, Playlogic Game
Factory, located in The Netherlands. Other independent studios in various
countries develop our games under development contracts. These development
contracts generally provide that we pay the studio an upfront payment which is
an advance on future royalties earned and a payment upon achievement of various
milestones. In addition, we license the rights to our existing titles to other
studios who then develop those titles for other platforms.
We have released four games to date:
o Alpha Black Zero, a mission-based tactical shooting game for the
PC;
o Airborne Troops, an infiltration action adventure game based on
World War II for PC and PlayStation2;
o Cyclone Circus, a racing game for PlayStation2; and
o Xyanide, a "shoot 'em up" adventure game for mobile devices.
26
On April 22 2005, we signed an agreement with TDK Recording Media Europe
S.A. (Luxembourg) for publishing and transferring to us all of the related
intellectual property rights of the following three games:
o World Racing 2, for PS2, Xbox and PCs;
o Knights of the Temple 2, for PS2, Xbox and PC; and
o Gene Troopers, for PS2, Xbox and PC.
Management's Overview of Historical and Prospective Business Trends
Increased Console Installed Base. As consumers purchase the current
generation of consoles, either as first time buyers or by upgrading from a
previous generation, the console installed base increases. As the installed base
for a particular console increases, we believe we will generally able to
increase our unit volume. However, as consumers anticipate the next generation
of consoles, unit volumes often decrease. In March 2004, Microsoft reduced the
retail price of its box consoles in the US, and in May and December 2004, Sony
did the same with its PlayStation2 consoles. As price reductions drive sales of
consoles and the related installed base of these current generation consoles
increases during fiscal 2005, we believe that our unit sales of current
generation titles are likely to be increased.
Software Prices. As current generation console prices decrease, we expect
more value-oriented consumers to become part of the interactive entertainment
software market. We believe that hit titles will continue to be launched at
premium price points and will maintain those premium price points longer than
less popular games. However, as a result of a more value-oriented consumer base,
and a greater number of software titles being published, we expect average
software prices to gradually come down, which we expect to negatively impact our
gross margin. To offset this, as the installed base increases, total volume of
software sales are expected to increase, compensating for the lower margins on
software sales.
Increasing Cost of Titles. Hit titles have become increasingly more
expensive to produce and market as the platforms on which they are played
continue to advance technologically and consumers demand continual improvements
in the overall game play experience. We expect this trend to continue as we
require larger production teams to create our titles, the technology needed to
develop titles becomes more complex, we continue to develop and expand the
online gaming capabilities included in our products and we develop new methods
to distribute our content via the Internet. Any increase in the cost of
licensing third-party intellectual property used in our products would also make
these products more expensive to publish.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of net sales and expenses during the reporting periods. The
most significant estimates and assumptions relate to the recoverability of
prepaid royalties, capitalized software development costs and intangibles,
inventories, realization of deferred income taxes and the adequacy of allowances
for returns, price concessions and doubtful accounts. Actual amounts could
differ significantly from these estimates.
Period Ended March 31, 2005 Compared to Period Ended March 31, 2004
Net sales. Net sales for the three months ended March 31, 2005 were
(euro)403,358 ($523,034), as compared to (euro)0 ($0) for the three months ended
March 31, 2004. This represents an increase of (euro)403,358 ($523,034), or
100%. This increase in revenue is primarily the result of starting sales of
Playlogic's games in the fourth quarter of 2004. (euro)139,358 ($180,943) of
the revenues for the three months ended March 31, 2005 were from Europe, and
(euro)264,000 ($342,091) were from the US. All of these revenues were derived
from Playlogic's game distributors.
27
Gross Profit. Gross profit totaled approximately (euro)310,066 ($402,062)
for the three months ended March 31, 2005. For the three months ended March 31,
2004, gross profit totaled (euro)0 ($0). This increase in gross profit is
primarily the result of an increase in net sales.
Selling, Marketing, General and Administrative Expenses. Selling,
marketing, general and administrative expenses totaled (euro)497,925 ($645,659)
for the three months ended March 31, 2005. For the three months ended March 31,
2004, selling, general and administrative expenses totaled (euro)7,828,473
($9,583,617). This decrease was primarily caused by a one-time charge of granted
options to certain stock holders. No options have been granted in the first
three months ending March 31, 2005.
Research and development. Research and development expenses totaled
(euro)274,598 ($356,071) for the three months ended March 31, 2005. For the
three months ended March 31, 2004, research and development totaled
(euro)651,756 ($797,879). This represents a decrease of (euro)377,158
($441,808), or 58% (55%). This decrease was due to a lesser amount of our
research and development expenses being capitalized.
Depreciation. Depreciation expenses totaled (euro)78,882 ($102,287) for the
three months ended March 31, 2005. For the three months ended March 31, 2004,
the depreciation expense totaled (euro)59,899 ($73,328). The increase of
(euro)18,983 ($28,959) or 32% (39%) was caused by an increase in fixed assets
that are depreciated on a straight line basis over the economic life time.
Interest Expense. Interest expense totaled (euro)78,324 ($101,562) for the
three months ended March 31, 2005. For the three months ended March 31, 2004,
interest expense totaled (euro)274,111 ($335,567). This represents a decrease of
(euro)195,787 ($234,005), or 71% (70%). This decrease in interest expense is
primarily the result of Playlogic's debt holders converting their loans into
ordinary shares of Playlogic.
Benefit from income taxes. The benefit from income taxes totaled
(euro)195,194 ($253,108) for the three months ended March 31, 2005 and (euro)0
($0) for the three months ended March 31, 2004. This increase was caused by our
entering into contracts to purchase finished products and for distribution of
these games; therefore, deferred tax income has been recognized.
Net Loss. Our net loss was (euro)424,469 ($550,409) for the three months
ended March 31, 2005. For the three months ended March 31, 2004, net loss
totaled (euro)8,814,239 ($10,790,391). This was primarily due to a one-time
charge related to the grant of stock options to certain stockholders in 2004,
recognition of benefits from income taxes, increased gross profit, lower
interest expenses and lower research and development costs.
Period Ended April 30, 2005 Compared to Period Ended April 30, 2004
Net sales. Net sales for the four months ended April 30, 2005 were
(euro)494,958 ($641,367), as compared to (euro)0 ($0) for the four months ended
April 30, 2004. This increase in revenue is primarily the result of increased
sales of our games. (euro)230,958 ($299,276) of the revenues for the four months
ended April 30, 2005 were from Europe and (euro)264,000 ($342,091) were from the
US. All of these revenues were derived from our game distributors.
Gross Profit. Gross profit totaled (euro)400,295 ($518,702) for the four
months ended April 30, 2005. For the four months ended April 30, 2004, gross
profit totaled (euro)0 ($0).This increase in gross profit is primarily the
result of an increase in net sales.
Selling, Marketing, General and Administrative Expenses. Selling,
marketing, general and administrative expenses totaled (euro)660,087 ($855,340)
for the four months ended April 30, 2005. For the four months ended April 30,
3004, selling, general and administrative expenses totaled (euro)8,021,754
($9,584,392). This represents a decrease of (euro)7,361,667 ($8,729,052), or 92%
(91%). This decrease in selling, general and administrative expenses is
primarily the result of a one-time charge of granted options to certain stock
holders in 2004. No options have been granted in the first four months ending
April 30, 2005.
28
Research and development. Research and development expenses totaled
(euro)360,807 ($467,533) for the four months ended April 30, 2005. For the four
months ended April 30, 2004, research and development expenses totaled
(euro)820,931 ($980,848). This represents a decrease of (euro)460,124
($513,315), or 56% (52%). This decrease is due to our research and development
expenses not being able to be capitalized.
Depreciation. Depreciation expense totaled (euro)105,306 ($136,456) for the
four months ended April 30, 2005. For the four months ended April 30, 2004,
depreciation expense totaled (euro)82,517 ($98,591). The increase of
(euro)22,789 ($37,865), or 28% (38%) was caused by an increase in fixed assets
that are depreciated on a straight line basis over the economic life time.
Interest Expense. Interest expense totaled (euro)115,755 ($149,995) for the
four months ended April 30, 2005. For the four months ended April 30, 2004,
interest expense totaled (euro)308,534 ($368,636). This represents a decrease of
(euro)192,779 ($218,641), or 62% (59%). This decrease in interest expense is
primarily the result of our debt holders converting their loans into ordinary
shares of Playlogic.
Benefit from income taxes. Benefit from income taxes totaled (euro)265,123
($343,546) for the four months ended April 30, 2005. For the four months ended
April 30, 2004, benefit from income taxes totaled (euro)0 ($0). This increase
was caused by our entering into contracts to purchase finished products and for
distribution of these games; therefore deferred tax income has been recognized.
Net Loss. Our net loss was (euro)576,537 ($747,076) for the four months
ended April 30, 2005. For the four months ended April 30, 2004, net loss totaled
(euro)9,233,736 ($11,032,467). This was primarily due to a one-time charge
related to the grant of stock options to certain stockholders in 2004,
recognition of benefits from income taxes, increased gross profit, lower
interest expenses and lower research and development costs.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net sales. For the fiscal year ended December 31, 2004, we had total
revenue of (euro)87,931 ($119,982) compared to revenue of (euro)0 ($0) for the
fiscal year ended December 31, 2003. This increase in revenue of is a primarily
the result of starting sales of our games in the fourth quarter of 2004. All of
the revenues for the year ended December 31, 2004 were from Europe. All of these
revenues were from our game distributors.
Gross Profit. Gross profit totaled (euro)59,095 ($80,635) for the fiscal
year ended December 31, 2004 as compared to (euro)0 ($0) for the fiscal year
ended December 31, 2003. The increase in our gross profit is a result of
increased sales.
Selling, Marketing, General and Administrative Expenses. Selling,
marketing, general and administrative expenses totaled (euro)10,305,508
($14,061,865) for the fiscal year December 31, 2004. For the fiscal year ended
December 31, 2003, selling, general and administrative expenses totaled
(euro)2,295,100 ($2,884,942). This represents an increase of (euro)8,010,408
($11,176,923), or 349% (387%). This increase in selling, general and
administrative expenses is primarily the result of a one-time charge of granted
options to certain stock holders and the increased number of employees and
related costs.
Interest Expense. Interest expense totaled (euro)2,007,080 ($2,738,661) for
the fiscal year ended December 31, 2004. For the fiscal year ended December 31,
2003, interest expense totaled (euro)140,206 ($176,238). This represents an
increase of (euro)1,866,874 ($2,562,423), or 1,332% (1,454%). This increase in
interest expense is primarily the result of our increased loan commitments and
related interest rates.
Net Loss. Our net loss was (euro)16,193,241 ($22,095,677) for the fiscal
year ended December 31, 2004. For the fiscal year ended December 31, 2003, net
loss totaled (euro)6,091,914 ($7,657,536). This decrease in profitability is
primarily the result of our increased costs incurred with research and
development and increased loan commitments and an expense related to granted
options to certain shareholders.
29
Liquidity And Capital Resources
March 31, 2005
As of March 31, 2005, we had (euro)15,654 ($20,299) of cash on hand.
April 30, 2005
As of April 30, 2005, we had (euro)99,268 ($128,631) of cash on hand.
Our management believes that the current cash on hand and additional cash
expected from operations will be sufficient order to cover our working capital
requirements through the third quarter of 2005. After that time, we will need to
obtain additional financing from third parties. We are currently in negotiations
for a revolving credit line for game financing, and we are also seeking bank
financing. In addition, we may raise funds through equity financings. We do not
have material outstanding debt. If we do not obtain any necessary financing in
the future, we may need to cease operations.
We expect our capital requirements to increase over the next several years
as we continue to develop new products both internally and through our
third-party developers, increase marketing and administration infrastructure,
and embark on in-house business capabilities and facilities. Our future
liquidity and capital funding requirements will depend on numerous factors,
including, but not limited to, the cost and hiring and training production
personnel who will produce our titles, the cost of hiring and training
additional sales and marketing personnel to promote our products, and the cost
of hiring and training administrative staff to support current management.
30
December 31, 2004
As of December 31, 2004, our cash balance was (euro)16,277 ($22,210), as
compared to (euro)65,005 ($81,711) at December 31, 2003.
2004 2003 2004 2003
Cash Flows from Operating (In Euro) (In Euro) (In US$) (In US$)
activities
--------------------- -------------------- ------------------ ---------------
Net cash used in operating activities (6,216,739) (3,869,166) $ (8,482,740) $(4,863,542)
--------------------- -------------------- ------------------ ---------------
--------------------- -------------------- ------------------ ---------------
Cash Flows from investing
activities (326,661) (245,384) (445,729) (308,448)
--------------------- -------------------- ------------------ ---------------
Net cash provided by financing 6,494,672 4,133,225 8,861,980 5,195,464
activities
--------------------- -------------------- ------------------ ---------------
Increase (decrease) in Cash (48,728) 18,675 $ (66,489) $23,474
The net cash used in operating activities increased (euro)2,347,573
($3,619,200) in 2004. The majority of this increase was caused by more general
and administrative, research and development and interest expenses. The increase
in net cash provided by financing activities was caused by the payment.
Our accounts receivable at December 31, 2004 was (euro)0 ($0), as compared
to (euro)9,334 ($11,733) at December 31, 2003.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
results of operations, liquidity or capital expenditures.
Contractual Obligations
We have the following contractual obligations associated with its lease
commitments and other contractual obligations:
Contractual Obligations Payments Due By Period (in thousands)
Total Less Than 1 1 - 3 Years 3-5 Years More than 5 Years
Year
Long-Term Debt Obligations $327 $41 $ 82 $82 $66
Capital Lease Obligations - - - - -
Operating lease Obligations
(Including Rent) $2,981 $591 $1,245 $659 $715
Purchase obligations - - - - -
Other contractual obligations - - - - -
Total
$3,308 $632 $1,327 $568 $781
31
Note
On June 1, 2005, we entered into a lease for new offices at Amstelveenseweg
639-710 in Amstelveen. We plan on moving our principal executive officers there
on August 1, 2005. The leased premises spans 1,500 square meters. The lease
amounts to $272.90 ((euro)200) per square meter for rent and $34 ((euro)25) per
square meter for service costs. Payment starts mid July 2006 for 750 square
meters and by January 1, 2007, we will start paying for the remaining 750 square
meters. Payment of the service costs is due immediately upon the move. Our
landlord has given us the right to sublease this property. If we do not find a
subleasee, the lease may be terminated. We have hired a real estate agent to
find a subleasee
Summary Of Significant Accounting Policies
Accounts receivable
Accounts receivable are shown after deduction of a provision for bad and
doubtful debts where appropriate.
Software Development Costs
Capitalized software development costs include payments made to independent
software developers under development agreements, as well as direct costs
incurred for internally developed products. We account for software development
costs in accordance with SFAS No. 86 "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed". Software development costs
are capitalized once technological feasibility of a product is established and
such costs are determined to be recoverable.
We utilize both internal development teams and third-party software
developers to develop our products.
We capitalize internal software development costs and other content costs
subsequent to establishing technological feasibility of a title. Amortization of
such costs as a component of cost of sales is recorded on a title-by-title basis
based on the greater of the proportion of current year sales to the total of
current and estimated future sales for the title or the straight-line method
over the remaining estimated useful life of the title. At each balance sheet
date, we evaluate the recoverability of capitalized software costs based on
undiscounted future cash flows and charge to cost of sales any amounts that are
deemed unrecoverable. Our agreements with third-party developers generally
provide us with exclusive publishing and distribution rights and require us to
make advance payments that are recouped against royalties due to the developer
based on the contractual amounts of product sales, adjusted for certain costs.
Prepaid royalties
We capitalize external software development costs (prepaid royalties) and
other content costs subsequent to establishing technological feasibility of a
title.
Advance payments are amortized as royalties in cost of sales on a
title-by-title basis based on the greater of the proportion of current year
sales to the total of current and estimated future sales for that title or the
contractual royalty rate based on actual net product sales as defined in the
respective agreements. At each balance sheet date, we evaluate the
recoverability of advanced development payments and unrecognized minimum
commitments not yet paid to determine the amounts unlikely to be realized
through product sales. Advance payments are charged to cost of sales in the
amount that management determines is unrecoverable in the period in which such
determination is made or if management determines that it will cancel a
development project.
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Revenue Recognition
We evaluate the recognition of revenue based on the criteria set forth in
SOP 97-2, "Software Revenue Recognition", as amended by SOP 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions"
and Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", as revised by SAB 104, "Revenue Recognition". We evaluate revenue
recognition using the following basic criteria:
o Evidence of an arrangement: We recognize revenue when we have evidence
of an agreement with the customer reflecting the terms and conditions
to deliver products.
o Delivery: Delivery is considered to occur when the products are
shipped and risk of loss has been transferred to the customer.
o Fixed or determinable fee: If a portion of the arrangement fee is not
fixed or determinable, we recognize that amount as revenue when the
amount becomes fixed or determinable.
o Collection is deemed probable: At the time of the transaction, we
conduct a credit review of each customer involved in a significant
transaction to determine the creditworthiness of the customer.
Collection is deemed probable if we expect the customer to be able to
pay amounts under the arrangement as those amounts become due. If we
determine that collection is not probable, we recognize revenue when
collection becomes probable (generally upon cash collection).
Product Revenue
Product revenue, including sales to resellers and distributors, is
recognized when the above criteria are met. We reduce product revenue for
estimated customer returns by distributing our products through experienced
distributors with whom we had previously worked.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (R), "Share-Based Payment"
which revised Statement of Financial Accounting Standards No. 123 (R),
"Accounting for Stock-Based Compensation". This statement supercedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees". The revised statement
addresses the accounting for share-based payment transactions with employees and
other third parties, eliminates the ability to account for share-based
compensation transactions using APB 25 and requires that the compensation costs
relating to such transactions be recognized in the condensed consolidated
statement of operations. The revised statement is effective as of the first
fiscal year beginning after June 15, 2005.
Although we are currently analyzing the method of adoption and impact of
the adoption of this standard, effective January 1, 2006, we expect it will have
an impact on our condensed consolidated financial statements similar to the pro
forma disclosure under Statement of Financial Accounting Standards No. 123 (R),
"Accounting for Stock-Based Compensation" ("SFAS 123 (R)").
BUSINESS
Background
Donar Enterprises, Inc. was incorporated in the State of Delaware in May
2001. Initially, our plan was to engage in the business of converting and filing
registration statements, periodic reports and other forms of small to mid-sized
companies with the U.S. Securities and Exchange Commission electronically
through EDGAR. We had limited operations until June 20, 2005, when we entered
into a share exchange agreement with the shareholders of Playlogic International
N.V., a corporation formed under the laws of The Netherlands, that commenced
business in 2002. Pursuant to this agreement, the former shareholders of
Playlogic became the owners of over 91% of our common stock. Playlogic has
become our wholly-owned subsidiary and represents all of our commercial
operations.
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We had very limited operations of our own as of the date of the share
exchange. Since the date of the share exchange, all of our commercial operations
are those of Playlogic.
Overview
We are the leading Dutch publisher of interactive entertainment software
for consoles, such as Sony's PlayStation2, Microsoft's Xbox and Nintendo's Game
Cube, PCs and handheld and mobile devices, such as Nintendo's Game Boy Advance
and Sony's PSP. As a publisher, we are responsible for distribution, sales and
marketing of our products. We seek to publish high quality products developed
both by our own studio in Breda, the Netherlands, called Playlogic Game Factory,
and by external developers with whom we have contractual relationships. We
publish a wide variety of games for all platforms and different genres of games
rather than focusing our development efforts and resources on attempting to
produce the next "hit" title. We believe this strategy decreases our risks
because if one of our titles turns out not to be successful, we still have other
titles that may be successful.
Our Industry
Wedbush Morgan Securities, a leading investment banking and brokerage firm,
has stated that in 2003, the US market for interactive entertainment was larger
than the U.S. movie industry (based in box office receipts). According to
Wedbush Morgan Securities, in 2003, the global video games market represented a
total value of $25.5 billion and will likely grow to exceed $30 billion in 2005.
According to Computer World magazine, the industry is expected to grow to a
value of more than $100 billion by 2010. According to the NPD Group, a leading
global sales and marketing firm, and the Entertainment Software Association, a
video game trade association, total video game software sales (not including
hardware and accessories) in the US reached a record of $ 7.3 billion in 2004.
According to the Entertainment Software Association, this growth has more than
doubled since 1996 and is expected to continue. We believe that this growth is
likely to be increased by the expected development of new game platforms, the
increasing popularity of games being played on mobile phones and on the Internet
and emerging markets such as China.
According to Screen Digest, a global media market and research firm, total
video game software sales worldwide were more than $18 billion in
2003 and are expected to exceed $21 billion in 2007. Further, 239.3 million
computer or video games were sold in 2003. According to the Entertainment
Software Association, this number grew to 248 million in 2004, which means
almost two games for every household in the US.
According to the Entertainment Software Association, the average game
player is 30 years old, and the average game buyer is 37 years old. In 2005, 95%
of computer game buyers and 84% of console game buyers were over the age of 18.
Products
We have been certified as an official publisher worldwide by Nintendo and
Sony Computer Entertainment Europe (for Europe, Middle East, Africa and
Australia) and Xbox worldwide. We received our official publishers' license for
Microsoft worldwide in April of 2005.
Various studios, based in the US and throughout Europe, develop the games
which we publish. One of these studios is our subsidiary, Playlogic Game
Factory, located in The Netherlands. Other independent studios in various
countries develop our games under development contracts. These development
contracts generally provide that we pay the studio an upfront payment which is
an advance on future royalties earned, and a payment upon achievement of various
milestones. In addition, we license the rights to our existing titles to other
studios who then develop those titles for other platforms.
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To date, we have released four games. They are:
o Alpha Black Zero
Alpha Black Zero is a mission-based tactical shooting game set in the
future in which an elite commando group carries out secret missions in hostile
worlds. The player must meet varied objectives through numerous alternative
solutions.
Genre Tactical Shooting
Platform PC
Developer Khaeon (A version for mobile phones and N-Gage will be developed
by Overloaded Pocket Media B.V. We do not yet have an expected release date for
the mobile phone and N-Gage version).
o Airborne Troops
Airborne Troops was released for PCs and PlayStation 2 in the first quarter
of 2005; it is an infiltration action adventure game set during World War II
that is based on historical facts. Characters use actual weapons used during
World War II and face actual World War II scenarios an environments. The game
has three-dimensional graphics and dramatic music.
Genre Infiltration action-adventure
Platform PlayStation2 and PC
Developer Widescreen Games S.A.R.L.
o Cyclone Circus
Cyclone Circus is an arcade global racing game. Set in the year 2078, it
enables players to take control of a futuristic wind-propelled vehicle and race
in an international league across a range of exotic locations.
Players can choose from a variety of distinctive characters, each with
their own customized vehicle. The number of characters from which to choose
means there is something for everyone - from a sexy Russian daredevil to a
lunatic Scottish brute.
Cyclone Circus' gameplay introduces the functionality of sail-trim as a
means to control the speed of the vehicle. Mastering sail-trim at different wind
velocities will enable the player to attain maximum speeds. However,
over-trimming, as well as using the sail-trim too lightly, will result in slower
speeds.
Players can check wind speed and direction, as well as their competitors'
progress, through radar in the corner of the screen. They must execute stunts to
earn points and performance bonuses.
Genre Arcade racer
Platform PlayStation2
Developer Playlogic Game Factory B.V.
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o Xyanide
Xyanide is an advanced 3D version of an old-school shoot-'em-up, taking
place in the year 2715 on Mardar, a lonely isolated planet, which has been under
the influence of a black hole since the beginning of time.
Aguira the witch has been sentenced to death by the Judges of Mardar. The
charges: devastation of worlds and civilizations. The sentence: disintegration
by dumping into the Maelstrom (a.k.a. the black hole). The player takes the role
of Drake, the chosen guard, whose role it is to craft and enforce the execution,
but an asteroid hits the execution craft. The asteroid is made up of Xyanide, a
substance that instantly materializes thoughts and after the collision Drake
sees the instant creation of hostile worlds between the execution craft and his
fighter and realizes what happens. Aguira tries to use Xyanide to escape and
Drake knows he has only one option: battle his way through the goriest worlds of
horror and destruction and encountering mass enemy attack waves.
Genre Shoot-'em-up
Platform Mobile devices
Developer Overloaded Pocket Media B.V.
On April 22, 2005, we signed an agreement with TDK Recording Media Europe S.A.
(Luxembourg) for publishing and transferring to us all of the related
intellectual property rights of the following three games:
o World Racing 2, for PS2, Xbox and PC;
o Knights of the Temple 2, for PS2, Xbox and PC; and
o Gene Troopers, for PS2, Xbox and PC.
We expect the following games to be completed and released in the third or
fourth quarter of 2005:
o World Racing 2
World Racing 2 puts the fun of driving at center stage and presents a
challenging racing experience featuring an advanced 3D Landscape Engine,
adjustable driving characteristics, improved technology and an exciting
selection of different cars from various manufacturers. World Racing 2 is all
about fun racing. Players will enjoy better physics, simplified menus,
speed-optimized track layouts and livelier 3D environments. With more than 40
cars from 16 brands, over 100 challenging tracks, technical and optical tuning
plus a huge variety of licensed accessories and lifestyle products the game is
very authentic and customizable.
Genre Racing
Platform PlayStation2, Xbox, PC
Developer Synetic
o Gene Troopers
In Gene Troopers the player is in the heart of a unique, vibrant and living
universe. The player explores amazing new worlds, develops the character into a
stealth or battle professional, controls supernatural powers, makes friends with
powerful characters and leads them into battle against the forces of evil. The
game's universe is entangled in the greatest conflict it ever witnessed. A
terrifying elite battle force named Gene Troopers (GT) sets out to mercilessly
fulfil its task: to find, gather and secure life forms. Genetic material is the
new strategic resource. Gene transformation technology changes suitable
individuals into loyal and powerful GT units. The GTs took away the player's
body and daughter, Mareen. But what they couldn't take away was the player's
courage. It is time to fight back!
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Genre First Person Shooter
Platform PlayStation2, Xbox, PC
Developer Cauldron
o Knights of the Temple II
In Knights of the Temple II players will join the ultimate battle of Paul
de Raque, Grand Master of the Order of the Temple and hero of the first version
of the game, against the forces of Hell. Travelling the lands and kingdoms of
13th century Europe, Paul must unveil the secret of three mysterious ancient
artefacts and fight the demon armies attacking the world.
Paul has fought many battles in the eternal war between Good and Evil, but
now he faces his greatest challenges yet, evil forces invading the world, undead
beings ravaging the peaceful lands of northern Europe and a dark menace opening
a portal which had closed millennia ago.
Players fight their way through a forgotten Roman city, deadly dungeons of
the Saracen Empire, discover long forgotten islands, ruins and catacombs on a
search for a secret hidden on the ground of an ancient underwater fortress.
Players test their fighting skills, overcome the hordes of darkness and
discover that victory must be paid with blood, pain and even the player's very
own soul.
Genre Action Adventure
Platform PlayStation2, Xbox, PC
Developer Cauldron
o Xyanide
Xyanide is an advanced 3D version of an old-school shoot-'em-up, taking
place in the year 2715 on Mardar, a lonely isolated planet, which has been
under the influence of a black hole since the beginning of time.
Aguira, the witch, has been sentenced to death by the Judges of Mardar. The
charges: devastation of worlds and civilizations. The sentence: disintegration
by dumping into the Maelstrom (a.k.a., the black hole). The player takes the
role of Drake, the chosen guard, whose role it is to craft and enforce the
execution, but an asteroid hits the execution craft. The asteroid is made up of
Xyanide, a substance that instantly materializes thoughts, and after the
collision, Drake sees the instant creation of hostile worlds. Aguira tries to
use Xyanide to escape, and Drake knows he has only one option: battle his way
through the goriest worlds of horror and destruction and encountering mass enemy
attack waves.
Genre Shoot-'em-up
Platform Xbox Live Developer
Playlogic Game Factory B.V.
We also have six additional games currently in development which are
expected to be released in 2006. They are:
o Xyanide
For the PlayStation2 and PSP, currently under development by Playlogic Game
Factory B.V. The GameBoy Advance version has been developed by Engine Software.
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o StateShift
StateShift is an underground street racing game, which can be played on the
new Sony PlayStation Portable. It takes place in the next century where the
streets are dark and the player drives in a futuristic and technological world.
The game addictively combines racing, action and strategy. It features advanced
extras, such as offensive and defensive weapon systems. This creates a fun and
absorbing racing experience.
Genre Racing / Action Platform PlayStation Portable (PSP)
Developer Engine Software
o PRISM
PRISM is a first person shooter game with an exciting blend of stealth
operations and fast action game play. The core PRISM experience focuses on the
unconventional application of new and emerging weapons and surveillance
technologies in the war against terrorism. The compelling, campaign mode
contains scenarios that include attacks on key US infrastructure such as
seaports, airports, museums, shopping malls and areas along the borders.
The game will take place in the near future with the player becoming the
newest member of a highly secretive homeland defense unit known as PRISM. PRISM
is also an acronym for the Preemptive Reconnaissance and Identification Security
Mainframe, a new computer system that the government is using to wirelessly hack
into video surveillance equipment across America. When terrorist activities are
suspected or potential targets are identified, players are called into action.
A shorter version of PRISM will be used as a recruitment tool by the US
Army National Guard.
Genre First Person Shooter
Platform PC
Developer Rival Interactive
o Delta
Project Delta is a tactical first-person shooter in which the player is
drawn into an epic story of men against an alien invasion force. The player will
feel for the men and see them grow, developing their true potential as soldiers
and friends, as the player commands, comforts or threatens them through
nerve-wrecking and spectacular battles set in future earth, alien habitats, and
back to the Dark ages.
While investigating a strange, buried structure on a remote island, the
player suddenly is placed in the middle of an invasion by the Cryzen, a ruthless
alien race with fluid-metal bodies. Though the player fights bravely alongside
the local military, but it is only when a second force, the Dorians, arrives
that the tide of battle is turned. Betrayal mars any celebration, as the player
and the other survivors become prisoners of the Dorians and transported to their
planet.
Escaping with the aid of a local priest, the player becomes instrumental in
unraveling a web of high action intrigue and further betrayal, in which it
becomes increasingly difficult to tell enemies from allies. When the player
finds that the planet he or she is on is actually Earth, seven hundred years in
the future, the player quickly discovers that the Cryzen and the Dorians both
threaten the very future of humanity.
To save mankind, the player must travel back to the dark ages and in a
final, desperate battle, destroy the alien structure on the island.
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Genre Tactical first person shooter Platform Next Gen Consoles, PC
Developer Playlogic Game Factory
o Wizard of Funk
Wizard of Funk is a game for the Playstation2 with EyeToy cameras which we
believe is much more advanced and compelling than the handful of games which are
currently available for the EyeToy, which has sold more than 5 million cameras
worldwide to date. Most of the currently available games rely on a combination
of mini games, but Wizard of Funk is a light role playing game (RPG) with a back
story, infused with music, using actual gesture recognition instead of motion
detection without the need for extra peripherals such as gloves of coloured
fingers.
The player becomes a young and clumsy apprentice wizard. As his master gets
wrongfully accused and imprisoned he needs to find out how to solve this
mystery. The player will need to travel through the musical lands and battle
foul monsters and defeat them with musical spells of all sorts, getting stronger
and learning more and more powerful spells in order to defeat the evil that
caused all this.
Genre EyeToy RPG
Platform PlayStation 2/EyeToy
Developer Playlogic Game Factory
o Sparta
In ancient Greece the Spartans were infamously feared warriors. The battles
between mighty ancient Greek tribes were fought with such an intense power and
unknown soldiers became heroes on the battlefield. Sparta - Ancient Wars will
bring this mighty time to new life, where each player will have the opportunity
to bring his own tribe to health, fame and wealth. We believe that it will be
the first real time strategy game that will deliver new stunning graphics, high
level of detail, complete 3D gameplay, rich economics, no unit limitation, a
physics engine developed solely for the game and many never before seen features
to this genre. The main emphasis is on large-scaled battles and complex tactical
manoeuvres. Furthermore, a new method of army equipment is represented in the
game. Warriors can be equipped with weapons, shields, put on horses or on
chariots and they can be given special abilities. The player can collect
abandoned weapons after battles or import powerful weapons from other cultures
to build more powerful and different special units. The forces of nature are
very important, because fire, wind and other elements will effect the whole
environment. The economic aspect of the game includes control of labor force,
construction of cities and resources collection. We believe that Sparta will
offer every aspect which real time strategy gamers like.
Genre Real Time Strategy
Platform PC
Developer World Forge
Product selection and the development process
We select the games to publish based on an analysis of consumer trends and
behavior and the performance of similar titles currently in the market.
Furthermore, besides a commercial analysis and an analysis of the development
team, technical, conceptual, competition and gameplay analyses take place. We
use the combination of these factors as a guideline for the expected sales
potential of each new title.
We select third party developers based on many factors. Initially, we
perform an extensive "due diligence" review of each developer, in which we
examine the capabilities and expertise of the developer's staff, its track
record, budget and expected sales performance. Then, once we approve a
developer, we enter into a definitive agreement, pursuant to which the
production process is governed by a milestones and deliverables schedule. Under
this arrangement, we pay the developers upon the obtaining of different
milestones and delivery of different items to us. Through this milestone
process, we believe we are able to control production time, quality and budget.
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Approval by Sony, Microsoft or Nintendo is required before the game can be
published on one of their game consoles. For PC games, no such approval is
required.
Throughout the development of a game, the title is continuously tested on
all possible aspects, such as game play, technical requirements and marketing
materials, including packaging.
After we and Sony, Microsoft or Nintendo approve the final version of the
game, called a Gold Master, the product is sent to a duplicator to produce
finished goods.
We believe the commercial success of a game partly depends on its
marketing. The marketing of our games is usually accomplished through a
co-operation between us, co-publishers and local distributors. Another important
element of marketing the games is public relations and advertising. We believe
consumers base their purchase decision on coverage in the media and word of
mouth. Basing games on known properties, such a movies or prior versions of a
popular game, also enhance the visibility of a game to consumers.
Our Technology
While creating our games, we have developed some very useful technology
tools that we believe other companies in the interactive entertainment software
industry may desire to purchase. Therefore, we are currently considering selling
and/or licensing these tools.
Examples of these tools are:
MemAnalyze
MemAnalyze is a multi-platform tool for monitoring an application's memory
behavior. It runs on a PC and communicates with the game console using a network
connection. MemAnalyze tracks the console's memory state in real-time and offers
multiple views on the memory state of the console. Besides instant, real-time
memory debugging, MemAnalyze also offers a powerful recording feature. Visually
represented in a graph, the recording feature allows a user to monitor the
activity of an application's memory behavior. After recording, the memory state
of the console can be played back and debugged off-line.
MudGE
The mud Game Engine, also referred to as mudGE, is a multiplatform game
engine specifically developed for two dimensional and three dimensional games on
current and next generation platforms. Currently working for Windows, Xbox and
PlayStation2, we believe it is one of the very few game engines developed with
each specific platform in mind to get the utmost performance on every platform.
Evolver
Evolver is Playlogic's in-house version control system. After evaluation of
several third party tools (such as Perforce, SourceSafe, Alienbrain, Co-Op,
AccuRev, Surround, CVS, Subversion, Evolution, VESTA, and others) we did not
find a single tool that was useable by both artists and developers and we
decided to write our own system. We believe Evolver meets requirements of both
artists, developers and testers, and it presents the simple workflow in a
compact user interface. Because of the integration in Windows Explorer and
Visual Studio, it can be used on nearly every computer system.
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Logix
Logix, a tool that is currently under development, is a visual, high-level
programming language. It uses a node-based approach with a mixture of techniques
used in tools like Shake, Virtools, Quest3D and Houdini. We believe that Logix
can produce a programming environment that resembles Lego toys. Publishers will
be able to build a game by connecting several building blocks.
Research and Development
In each of 2002 ((euro)52,000/$65,364) and 2004 ((euro)55,000/$75,047), we
received a financial grant from the Dutch government to be used for research and
development (R&D). The grant is called the WBSO and it is a fiscal incentive to
invest in research into and development of technological innovations. It applies
to new products, processes and software that have a direct relationship to an
end product.
Our approach to R&D is systematic. Each of our projects has, in its
development cycle, a research phase. In this phase, we examine the opportunities
and risks of the project and design an approach to exploit new opportunities and
mitigate risks. We define and build a prototype which is intended to prove each
individual technical opportunity and limit the risks.
Our current R&D projects include tool development to improve efficiency and
accuracy during the production phase; research into artificial intelligence and
emotion to revolutionize in game team dynamics and game play immersion and
research into next generation game console hardware, which poses technical
challenges to all game developers in the near future.
Our other research activities focus on technical and scientific research
into simulation and visualization of natural phenomena such as lighting, shadows
and fluids. This research focuses on the laws of physics to generate new
concepts and methodologies for practical application of these phenomena in our
games.
Sales and Distribution
Our sales expectations for each game are based mostly upon similar or
competitive products and the success that those products have achieved. We also
work with our distributors to generate realistic unit sales figures and revenues
based upon their experience, and after giving presentations to and consulting
with the retail stores in each of our global territories.
For example, we based our sales expectation for the P.R.I.S.M. game, which
is 1.6 million unit sales across three formats, on two comparative titles,
America's Army from Ubisoft, a PC only title, and Far Cry, a first person
shooter game for PCs. To date, more than 3.3 million units of America's Army
have been manufactured, and players have completed more than 600 million
missions and logged over 60 million hours of playing time. Far Cry, has sold
over 730,000 units. P.R.I.S.M. is similar to both of those games, and we believe
we will sell more units of P.R.I.S.M. than Far Cry, but less than America's
Army. We determined our sales expectation based on this assumption.
Generally, we aim to release our titles simultaneously across a range of
hardware formats, rather than exclusively for one platform. We believe this
allows us to spread the development risk and increase the sales potential, with
only a minimal increase in development time and resources spent.
We seek to increase sales and maximize profit potential of all our games by
reducing the wholesale and recommended retail prices of our products at various
times during the life of a product. Price reductions may occur at anytime in a
product's life cycle, but we expect they will typically occur six to nine months
after a product's initial launch. We also employ various other marketing methods
designed to promote consumer awareness and sales, such as attendance at trade
and consumer shows, and we intend to organize in-store promotions, point of
purchase displays and co-operative advertising.
We use two methods to distribute our products. Under the first distribution
method, our third party pressing plants will deliver fully finished games,
manufactured from the Gold Master which we created, to our third party
distributor partners, and the third party distributor partners then distribute
the games to retail stores. Under this model, we are responsible for all
elements of finalizing and printing the packaging, age rating and certification,
territory specific EAN barcodes and disc replication. We receive income on each
unit sold in the retail stores, based on a royalty report created by the
distributor. We use this model for Alpha Black Zero in Greece and Benelux, and
we expect to use this model for Airborne Troops in France, Italy, Benelux and
Greece and for Cyclone Circus in Benelux.
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For our second distribution method, we supply the Gold Master to a
third-party co-publisher who manufactures, finalizes and distributes the
finished games to the retail stores. We receive lower per unit income on retail
sales under this distribution model. We use this model in countries in which we
do not currently have a console publishing license. For example, we use this
distribution process for Alpha Black Zero in the US, UK, France, Italy, Spain
and Russia, and we expect to use it for Airborne Troops in the US.
In both models, we ensure that sufficient inventory quantities of the
titles are stocked by the distributors to provide rapid response to retail
orders.
Seasonality
We expect that a significant percentage of the sales of our games will take
place in the third and fourth quarter of each year due to heightened demand
around Thanksgiving and Christmas. We also believe that there is increased
demand around Easter because many games are given as gifts then. However, we
expect that, over time, seasonality will be less important as consumers are
tending to buy games throughout the year. Also, we may decide not to release new
games during the holiday seasons because of the increased competition in the
market and because we believe that consumers typically buy only one or two games
each over the holidays.
Competition
We compete for both licences and game sales with the other international
games publishing houses, including Atari, Electronic Arts, Take Two Interactive,
Activision, THQ and Ubisoft. Many of our competitors have greater financial,
technical and personnel resources than we do and are able to carry larger
inventories and make higher offers to licensors and developers for commercially
desirable properties than we can. Competition in the entertainment software
industry is based on product quality and features, brand name recognition,
access to distribution channels, effectiveness of marketing and price. Further,
many of our competitors, including the ones mentioned above, have the financial
resources to withstand significant price competition and to implement extensive
advertising and marketing campaigns.
Retailers have limited shelf space and promotional resources, and
competition is intense among and increasing number of games titles for adequate
levels of shelf space and promotional support. We expect competition for retail
shelf space to continue to increase, which may require us to increase marketing
expenditures to maintain our current levels of sales.
Competitors with more extensive ranges and popular titles may have greater
bargaining power with retailers. Accordingly, we may not be able to achieve the
levels of support or shelf space that such competitors receive. Similarly, as
competition for popular properties increase, our cost of acquiring licenses for
such properties is also likely to increase, possibly resulting in reduced
margins. Prolonged price competition, increased licensing costs or reduced
margins would cause our profits to decrease.
Intellectual Property
Like other entertainment companies, our business is based on the creation,
acquisition, exploitation and protection of intellectual property. Each of our
products embodies a number of separately protected intellectual properties. Our
products are copyrighted as software, our product names are trademarks of ours
and our products may contain voices and likenesses of third parties or the
musical compositions and performances of third parties. Our products may also
contain other content licensed from third parties, such as trademarks, fictional
characters, storylines and software code.
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Our products are susceptible to unauthorized copying. Our primary
protection against unauthorized use, duplication and distribution of our
products is copyright and trademark. We typically own the copyright to the
software code as well as the brand or title name trademark under which our
products are marketed. We register our copyrights worldwide.
43
We own all of the trademark and copyrights, through purchase, of the
following games
Games Platform Area
1. a. Alpha Black Zero PC Worldwide
2. Airborne Troops PS2 Worldwide
PC Worldwide
3. StateShift (PSP Racing) PSP Worldwide
4. a. Xyanide Xbox live Worldwide
PSP Worldwide
PS2 Worldwide
b. Xyanide Advance Game Boy Advance Worldwide
c. Xyanide Mobile Mobile Worldwide
5. Cyclone Circus PS2 Worldwide
6. World Racing 2 PS2 Worldwide
Xbox Worldwide
PC Worldwide
7. Knights of the Temple 2 PS2 Worldwide
Xbox Worldwide
PC Worldwide
8. Gene Troopers PS2 Worldwide
Xbox Live Worldwide
PC Worldwide
Employees
As of June 30, 2005, we had 52 full-time employees and no part-time
employees. Substantially all of our employees have executed employment
agreements with us.
44
Legal Proceedings
None
Properties
We do not own any real property. Currently, we lease properties in Breda
and Amsterdam, the Netherlands.
Our offices located at Hambroeklaan 1 in Breda are leased by our
subsidiary, Playlogic Game Factory, from Neglinge BV pursuant to a lease
agreement which expires on October 1, 2013. Playlogic Game Factory has an option
to extend the lease agreement. If this option is exercised, the lease agreement
will expire on October 1, 2018. The lease property spans 1,600 square meters and
may only be used as office space. At signing of the lease agreement, the lessor
committed itself to invest $409,350 ((euro)300,000) in the lease property which
amount shall be repaid by Playlogic Game Factory B.V. in ten years. Payment is
due on a quarterly basis and amounts to $40,935 ((euro)30,000) per year.
Our offices located at Hoge Mosten 16-24 in Breda are leased by Playlogic
Game Factory from Kantoren Fonds Nederland B.V. pursuant to a lease agreement
which expires on February 28, 2007. The lease property spans 451 square meters
and may only be used as office space. Payment is due on a yearly basis and
amounts to $85,327 ((euro)62,534) per year. As Playlogic Game Factory is no
longer using this location, it decided to terminate the lease agreement as of
February 28, 2007, by an official notice to the landlord. The landlord has
granted us permission to sublease this property, but we have not found an
interested party to date. We have recognized an obligation for the payments
until February 28, 2007.
We lease our offices located at Concertgebouwplein 13 in Amsterdam from Mr.
Prof. Dr. D. Valerio pursuant to a lease agreement which expires on March 31,
2007. We have an option to extend the lease agreement. If this option is
exercised, the lease agreement will expire on March 31, 2012. The lease property
spans 260 square meters and may only be used as office space. Payment is due on
a quarterly basis and amounts to $81,363 ((euro)59,628.52) per year.
On June 1, 2005 we entered into a lease for offices at Amstelveenseweg
639-710 in Amstelveen. We plan on moving our principal executive officers there
on August 1, 2005. The leased premises spans 1,500 square meters. The lease
amounts to $272.90 ((euro)200) per square meter for rent and $34 ((euro)25) per
square meter for service costs. Payment starts mid July 2006 for 750 square
meters and by January 1, 2007, we will start paying for the remaining 750 square
meters. Payment of the service costs is due immediately upon the move. Our
landlord has given us the right to sublease this property. If we do not find a
subleasee, the lease may be terminated. We have hired a real estate agent to
find a subleasee.
45
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers are as follows:
Name Age Position
Willem M. Smit 58 Director and Chief Executive Officer
Willy J. Simon 53 Chairman of the Board of Directors
Erik L.A. van Emden 56 Director
Rogier W. Smit 30 Executive Vice President
Stefan Layer 34 Chief Operating Officer
Leo van de Voort 47 Chief Financial Off`icer
Upon the closing of the share exchange with Playlogic's shareholders,
Timothy Halter, our sole director, resigned and was replaced by Willem M. Smit,
the Chief Executive Officer of Playlogic, and our executive officers were
replaced by the Playlogic executive officers. Upon the expiration of the 10-day
period of the filing and/or mailing of an Information Statement pursuant to Rule
14f-1 under the Exchange Act, the board of directors was increased to five
persons and the persons mentioned below became our directors. Our board of
directors currently has two vacancies.
The principal occupations and brief summary of the background of each
director and executive officer are as follows:
Willem M. Smit has been our Chief Executive Officer since 2001. In 1976, he
founded Datex Software B.V., where he grew the company over nine years from 20
to 900 employees. Datex went public on 1985 and it merged with Getronics in
1987. Since that time, Mr. Smit has been a private investor in various
companies. He is the father of Rogier W. Smit, our Executive Vice President.
Willy J. Simon has been on Playlogic International N.V.'s Supervisory Board
(which is similar to the board of directors of a US company) since 2003. Since
2002 he has been the Director of IMC Holding and Chairman of Bank Oyens & van
Eeghen. From 2001 to 2002, he was an Advisor to the Board of NIB Capital. From
1997-2001, he was a Board member of the Fortis Bank. He also currently serves as
a Non-Executive Director of Redi & Partners, a hedge fund.
Erik L.A. van Emden has been on Playlogic International N.V.'s Supervisory
Board since December 2003. Since 1993 he has been an attorney with Bosselaar &
Strengers. He also currently serves as a Director of several private Dutch
companies.
Rogier W. Smit co-founded Playlogic International N.V. and Playlogic Game
Factory B.V. in 2001. He has worked in various management positions at those two
companies since then. He has been our Executive Vice President since 2002. He is
the son of Willem M. Smit, our Chief Executive Officer.
Stefan Layer has been our Chief Operating Officer since April 2005. From
1999 until joining us, Mr. Layer was the Vice President of Licensing Europe for
Atari Deutschland GmbH where he was responsible for the development of new
markets and an European marketing strategy, expansion into Eastern Europe and
the acquisition of third party products.
Leo van de Voort has been our Chief Financial Officer since April 2005.
From 2004 until April 2005 he was the Chief Financial Officer of RDM, Wilton
Feijenoord Holding. From 2001 to 2004, he was Chief Financial officer of Flex
Group Nederland and from 2000 to 2001 he was the Director of Corporate Finance
of Kempen & Co.
46
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation for the
fiscal years ended December 31, 2002, 2003 and 2004 received by the individual
who served as our Chief Executive Officer during 2004 and our other most highly
compensated executive officers whose total annual salary and bonus for fiscal
year 2004 exceeded $100,000 (the "Named Officers").
Summary Compensation Table
Long-Term
Annual Compensation Compensation
Awards
Name and Principal Position as of December
31, 2004 Year Salary (euro)/($) Bonus($) Options(#)
Willem M. Smit 2004 Eu 0 0 0
- ------------------------------------------------ 2003 Eu 0 0 0
Chief Executive Officer 2002 Eu 0 0 0
Sloterhof Investments N.V. (of which Mr. Willem 2004 Eu 100,000/$147,096 0 0
M. Smit is the beneficial owner) 2003 Eu 100,000/$135,458 0 0
Managing Director 2002 Eu 50,000/$ 63,873 0 0
Rogier W. Smit 2004 Eu 100,000/$147,096 0 0
Executive Vice President 2003 Eu 100,000/$135,458 0 0
2002 Eu 97,200/$124,170 0 0
Willem M. Smit, our Chief Executive Officer, will not receive any salary
until there are positive cash flows from operations. Currently, we only pay Mr.
Smit for his business related expenses, and we provide him a company car.
Employment Agreements
Effective as from February 1, 2002 we entered into an employment agreement
with Rogier M. Smit, to be executive vice president and managing director of
Playlogic Game Factory B.V. The agreement is for an indefinite period, but can
be terminated by us upon three months notice and one additional month per year
of service or by Mr. Rogier Smit upon three months notice. Mr. Smit's
starting salary was $9,427 ((euro) 7,500) per month. On July 1, 2005, his base
salary increased to $15,009 ((euro)11,000) per month. In addition to his salary,
Mr. Smit is entitled to a company car. Pursuant to the agreement, Mr. Smit is
also subject to confidentiality, non-competition and invention assignment
requirements.
In January 2005, we entered into an employment agreement with Stefan Layer,
our Chief Operating Officer and Vice President Marketing and Sales, effective as
from April 1, 2005. Pursuant to the terms of the agreement, Mr. Layer is
responsible for our marketing, sales and licensing. The agreement is for an
indefinite period, but can be terminated by us upon six months notice or by Mr.
Layer upon three months notice. Mr. Layer's starting salary is $15,009
((euro)11,000) per month. In addition to his salary, Mr. Layer is entitled to an
annual bonus equal to 1% of our net profit of the net consolidated year figures
after taxes. However, during the first two years of his employment (from April
2005 to April 2006 and from April 2006 to April 2007) the amount of profit
sharing to which Mr. Layer is entitled will be no less than $7,641 ((euro)5,600)
per month. Under this agreement, Mr. Layer received 500,000 ordinary shares of
Playlogic at a nominal value of $0.068 ((euro)0.05) per share which were
exchanged for 364,556 shares of Donar common stock. Such shares will be subject
to a two year lock up period. After the lock up period Mr. Layer will be
permitted to sell up to 50% of his shares each year. If Mr. Layer terminates the
agreement or is dismissed, the shares he still owns must be sold back to us at
nominal value. Pursuant to the agreement, Mr. Layer is also subject to
confidentiality, non-competition and invention assignment requirements.
47
In April 2005 we entered into an employment agreement with Leo van de
Voort, our Chief Financial Officer, effective as from May 1, 2005. The agreement
is for an indefinite period, but can be terminated by us upon twelve months
notice or by Mr. Van de Voort upon six months notice. Mr. Van de Voort's
starting salary will be $15,055 ((euro)11,034) per month. Under this agreement,
Mr. Van de Voort received 200,000 ordinary shares of Playlogic International
N.V. at a nominal value of $0.068 ((euro)0.05) per share which were exchanged
for 145,823 shares of Donar common stock. Such shares will be subject to a two
year lock up period. After the lock up period, Mr. Van de Voort will be
permitted to sell up to 25% of his shares each year. If Mr. Van de Voort
terminates the agreement or is dismissed, the shares he still owns must be sold
back to us at nominal value. Pursuant to the agreement, Mr. Van de Voort is also
subject to confidentiality, non-competition and invention assignment
requirements.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
We do not have a stock option plan or stock appreciation rights plan. We
intend to implement a stock option plan, which will require the prior approval
of at least a majority of our shareholders in 2005.
Directors' Compensation
In 2004, we paid Mr. Van den Emden $34,113 and Mr. Simon $40,935 for their
service as members of Playlogic's supervisory board. We expect to pay the
members of our board of directors similar amounts in 2005 and the future.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a loan agreement dated April 6, 2004 between Playlogic and
Sloterhof Investments N.V., Sloterhof agreed to loan $6,481,375
((euro)4,750,000) to Playlogic. Our CEO, Willem M. Smit is the beneficial owner
of Sloterhof. We paid Sloterhof $1,058,245 ((euro)775,555) as interest on this
loan. This loan has subsequently been redeemed and is no longer outstanding.
In 2004, Sloterhof Investments N.V. and Castilla Investments B.V. were
granted a stock option right for in total 8,609,189 ordinary shares with an
exercise price at par value. The intrinsic value of this option right was
recognized as an expense in 2004.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding our outstanding shares
of each class of equity securities beneficially owned as of June 30, 2005 by:
(1) each person who is known to us to own beneficially more than five percent of
each class of the outstanding equity securities; (2) each of our directors; (3)
all officers named in the Summary Compensation Table above; and (4) all
directors and executive officers as a group. The information relating to share
ownership is based upon information furnished to us. The number of shares of
common stock shown includes shares subject to warrants or options exercisable
within 60 days after June 30, 2005 as if such shares were outstanding on June
30, 2005 and assumes that no other person has exercised any outstanding warrants
or options. We believe that the beneficial owners of each class of equity
securities, based on information supplied by such owners, have sole investment
and voting power with respect to the shares of each class of equity securities
shown as being beneficially owned by them, except as otherwise set forth in the
footnotes to the table.
48
Number
Subject to
Number of Shares Options and Percentage of
of Common Stock Warrants Common Stock
Name and Address (1) Exercisable
Within 60 days
- ----------------------------------------------------------------------------------------
Sloterhof Investments N.V. (2) 7,303,357 0 31.72%
Kaya Richard J.
Beaujon Z/N
Curacao, Netherlands Antilles
Castilla Investments B.V. (3) 1,777,496 0 7.72%
Concertgebouwplein 13
1071 LL Amsterdam
The Netherlands
Wind Worth Luxembourg Holding S.A.H (4) 2,138,874 0 9.29%
19 Rue de l'Industrie
8069 Betrange
Luxembourg
Sophia International Holding S.A.H. (5) 1,611,500 0 7.0%
3 Rue de Bains
Luxembourg L-2016
Luxembourg
Willem Smit (6) 7,303,357 0 31.72%
Rogier Smit (7) 1,777,496 0 7.72%
Stefan Layer 364,556 0 1.58%
Leo van de Voort 145,823 0 *
Erik L.A. van Emden 0 0 *
Willy J. Simon 87,494 0 *
All directors and executive officers as
a group (6 persons) ....................
9,678,726 0 41.08%
- -----------------------------------------------
*Less than 1%
(1) Unless otherwise indicated, the address is our address at
Concertgebouwplein 13, 1071 LL Amsterdam, The Netherlands
(2) Willem M. Smit may be deemed to exercise voting and investment control
over the shares held by this entity and, therefore, may be deemed to
beneficially own the shares held by such entity.
(3) Rogier W. Smit may be deemed to exercise voting and investment control
over the shares held by this entity and, therefore, may be deemed to
beneficially own the shares held by such entity.
(4) Luc Voet may be deemed to exercise voting and investment control over
the shares of this entity and, therefore, may be deemed to beneficially own the
shares held by such entity.
(5) Maria Keersmaekers may be deemed to exercise voting and investment
control over the shares of this entity and, therefore, may be deemed to
beneficially own the shares held by such entity.
(6) Includes shares held by Sloterhof Investments N.V.
(7) Includes shares held by Castilla Investments B.V.
49
DESCRIPTION OF SECURITIES
The following statements are qualified in their entirety by reference to
the detailed provisions of our Donar's Certificate of Incorporation and Bylaws.
The shares registered pursuant to the registration statement of which this
prospectus is a part are shares of common stock, all of the same class and
entitled to the same rights and privileges as all other shares of common stock.
Common Stock
We are presently authorized to issue 10,000,000 shares of $0.001 par value
common stock. The holders of our common stock are entitled to equal dividends
and distributions, per share, with respect to the common stock when, as and if
declared by the Board of Directors from funds legally available therefor. No
holder of any shares of our common stock has a pre-emptive right to subscribe
for any of our securities nor are any common shares subject to redemption or
convertible into other securities. Upon our liquidation, dissolution or winding
up, and after payment of creditors and preferred stockholders, if any, the
assets will be divided pro-rata on a share-for-share basis among the holders of
the shares of common stock. All shares of common stock now outstanding are fully
paid, validly issued and non-assessable. Each share of common stock is entitled
to one vote with respect to the election of any director or any other matter
upon which shareholders are required or permitted to vote. Holders of our common
stock do not have cumulative voting rights, so that the holders of more than 50%
of the combined shares voting for the election of directors may elect all of the
directors, if they choose to do so and, in that event, the holders of the
remaining shares will not be able to elect any members to the Board of
Directors.
Preferred Stock
We are also presently authorized to issue 2,000,000 shares of $0.001 par
value preferred stock. Under our Certificate of Incorporation, as amended, the
Board of Directors has the power, without further action by the holders of the
common stock, to designate the relative rights and preferences of the preferred
stock, and issue the preferred stock in such one or more series as designated by
the Board of Directors. The designation of rights and preferences could include
preferences as to liquidation, redemption and conversion rights, voting rights,
dividends or other preferences, any of which may be dilutive of the interest of
the holders of the common stock or the preferred stock of any other series. The
issuance of preferred stock may have the effect of delaying or preventing a
change in control without further shareholder action and may adversely effect
the rights and powers, including voting rights, of the holders of common stock.
In certain circumstances, the issuance of preferred stock could depress the
market price of the common stock. The Board of Directors effects a designation
of each series of preferred stock by filing with the Delaware Secretary of State
a Certificate of Designation defining the rights and preferences of each such
series. Documents so filed are matters of public record and may be examined in
accordance with procedures of the Delaware Secretary of State, or copies thereof
may be obtained from us.
Options and Warrants
We do not presently have any options or warrants authorized or any
securities that may be convertible into common stock. However, our Board of
Directors may later determine to authorized options and warrants for our
company.
Transfer Agent
The transfer agent for our common stock will be Securities Transfer
Corporation,. Its address and telephone number are 2591 Dallas Parkway, Suite
102 Frisco, Texas 75034, (469) 633-0100.
50
SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock by the selling stockholders (1) as of June 30,
2005 and (2) as adjusted to reflect the sale by selling stockholders of shares
offered by this prospectus. Except as set forth in the footnotes to the table,
none of the selling stockholders have held any position, office or material
relationship with Donar or any of its affiliates within the past three years.
Number of
Shares Number of Percentage
Beneficially shares beneficial
Owned owned Ownership
Before Shares Offered after the after
Holder Offering in Offering offering Offering
J. Bos 656,201 625,381 30,920 *
BvanB, LLC (1) 158,582 151,110 7,742 *
W.P. Deegan 826,449 787,507 38,943 *
George L. Diamond (2) 80,000 44,444 35,556 *
DVW Holding S.A.H (3) 601,882 573,522 28,361 *
Kevin B. Halter (4) 80,000 44,444 35,556 *
Halter Financial Group, Inc.
(5) 288,886 116,048 172,838 *
J. Kluijtmans 162,100 162,100 0 *
River Green Capital LLC(6) 269,258 149,588 119,670 **
Sophia International Holding
S.A.H. (7) 1,611,501 1,535,566 75,935 **
Dawn Michelle Titus (8) 15,000 8,333 6,667 **
Wind Worth Luxembourg Holding
S.A.H (9) 2,138,874 2,038,089 100,785 **
* Less than 1.0%
- --------------------------------------------------------------------------------
(1) Gijs van Thiel and Marc der Kinderen may be deemed to exercise voting
and investment control over the shares held by this selling stockholder and,
therefore, may be deemed to beneficially own the shares held by such entity. Mr.
van Thiel is a member of 747 Capital LLC which provided financial advisory
services to Playlogic.
(2) Mr. Diamond served as outside legal counsel for Donar prior to the
share exchange transaction between Donar, Playlogic and the shareholders of
Playlogic on June 30, 2005.
(3) Veronique De Meester may be deemed to exercise voting and investment
control over the shares held by this selling stockholder and, therefore, may be
deemed to beneficially own the shares held by such entity.
(4) Kevin Halter is the brother of Timothy Halter, who, prior to the share
exchange transaction between Donar, Playlogic and the shareholders of Playlogic
on June 30, 2005, was President and Chief Executive Officer of Donar. Kevin
Halter is the president of Securities Transfer Corporation, the transfer agent
for Donar.
51
(5) Prior to the share exchange transaction between Donar, Playlogic and
the shareholders of Playlogic on June 30, 2005, Timothy Halter was President and
Chief Executive Officer of Donar.
(6) Marat Rosenberg may be deemed to exercise voting and investment control
over the shares held by this selling stockholders and, therefore, may be deemed
to beneficially own the shares held by such entity. Mr. Rosenberg is a managing
director of Halter Financial Group, Inc.
(7) Maria Keersmaekers may be deemed to exercise voting and investment
control over the shares held by this selling stockholder and, therefore, may be
deemed to beneficially own the shares held by such entity.
(8) Ms. Titus is an employee of Halter Financial Group, Inc.
(9) Luc Voet, as director of this selling stockholder may be deemed to
exercise voting and investment control over the shares held by this selling
stockholder and, therefore, may be deemed to beneficially own the shares held by
such entity.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on the OTC Bulletin Board, market or trading facility on which
the shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales entered into after the date of this
prospectus;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
52
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledge or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
The selling stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. The selling stockholders have informed us
that they do not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
We are required to pay certain fees and expenses incurred by us incident to
the registration of the shares. We have agreed to indemnify the selling
stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
CHANGE IN CERTIFYING ACCOUNTANT
On June 30, 2005, upon closing of the share exchange transaction, S.W.
Hatfield ("SWHCPA") ceased being Donar's Registered Independent Certified Public
Accounting Firm.
The Report of Registered Independent Certified Public Accounting Firm
issued by SWHCPA for the year ended December 31, 2004 did not contain an adverse
opinion or a disclaimer of opinion or was qualified or modified as to
uncertainty, audit scope or accounting principles, except for a going concern
opinion expressing substantial doubt about the ability of Donar to continue as a
going concern.
During Donar's most recent fiscal year (ended December 31, 2004) and from
January 1, 2005 to the date of this prospectus, there were no disagreements with
SWHCPA on any matter of accounting principles or practices, financial
disclosure, or auditing scope or procedure, except that SWHCPA's opinion
expressed substantial doubt with respect to Donar's ability to continue as a
going concern for both fiscal years. Further, there were no reportable events,
as described in Item 304(a)(1)(iv)(B) of Regulation S-B, during Donar's most
recent fiscal year (ended December 31, 2004) and from January 1, 2005 to the
date of this prospectus.
SWHCPA has furnished a letter addressed to the SEC stating whether or not
it agreed with the above statements. A copy of such letter, dated June 30, 2005,
is attached as an exhibit to the Form 8-K filed by Donar on July 1, 2005.
BDO CampsObers has acted as the independent accountants for Playlogic
International N.V. since its formation, and is currently Playlogic International
N.V.'s independent accountants. During the two most recent fiscal years and to
June 30, 2005, Donar had not consulted with BDO CampsObers regarding either (I)
the application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
Donar's financial statements, and either a written report was provided to Donar
or oral advice was provided that BDO CampsObers concluded was an important
factor considered by Donar in reaching a decision as to the accounting, auditing
or financial reporting issue; or (ii) any matter that was the subject of a
disagreement and required to be reported under Item 304(a)(1)(iv) of Regulation
S-B and the related instructions thereto.
Donar is currently seeking a new Registered Independent Certified Public
Accounting Firm.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of us
pursuant to the above provisions, or otherwise, we have been advised that in the
opinion of the Securities Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
53
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for us by
Heller Ehrman, LLP New York, NY, counsel to us in connection with the offering.
EXPERTS
The financial statements included in the Prospectus and in the Registration
Statement have been audited by BDO CampsObers Accountants, independent
registered public accounting firm, to the extent and for the periods set forth
in their report (which contains an explanatory paragraph regarding the company's
ability to continue as a going concern) appearing elsewhere herein and in the
Registration Statement, and are included in reliance on such report, given the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements and other
documents with the Securities and Exchange Commission. You may read and copy any
document we file at the SEC's public reference room at Judiciary Plaza Building,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You should call
1-800-SEC-0330 for more information on the public reference room. The SEC
maintains an internet site at http://www.sec.gov where certain information
regarding issuers (including Donar Enterprises, Inc.) may be found.
This prospectus is part of a registration statement that we filed with the
SEC (Registration No. 333-___________________). The registration statement
contains more information than this prospectus regarding Donar Enterprises, Inc.
and its common stock, including certain exhibits and schedules. You can obtain a
copy of the registration statement from the SEC at the address listed above or
from its internet site.
54
INDEX TO FINANCIAL STATEMENTS
Page
Audited - For the Year Ended December 31, 2004
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as per December 31, 2004 F-3
Consolidated Profit and Loss Account 2004 F-5
Consolidated Cash Flow Statement 2004 F-7
Consolidated Statement of Changes in Stockholders' Deficit F-8
Notes to Consolidated Financial Statements F-9
Unaudited - For the Three Months Ended March 30, 2005
Consolidated Balance Sheets as per March 31, 2005 F-31
Consolidated Profit and Loss Account Three Months Ended March 31, 2005 F-33
Consolidated Cash Flow Statement Three Months Ended March 31, 2005 F-34
Consolidated Statement of changes Changes in Stockholders' Deficit F-35
Notes to Consolidated Financial Statements F-36
Unaudited - For the Four Months Ended April 30, 2005
Consolidated Balance Sheets as per April 30, 2004 F-45
Consolidated Profit and Loss Account - Four Months Ended April 30, 2005 F-47
Consolidated Cash Flow Statement - Four Months Ended April 30, 2005 F-48
Consolidated Statement of Changes in Stockholders' Equity F-49
Notes to Consolidated Financial Statements F-50
F-1
Report of the Independent Registered Public Accounting firm
To the board of directors and shareholders of
Playlogic International N.V.
We have audited the accompanying consolidated balance sheets of Playlogic
International N.V., Amsterdam, and its subsidiaries ("the company") as of
December 31, 2004 and December 31, 2003, and the related consolidated statements
of operations, cash flows and changes in stockholders' deficit for each of the
years in the two-year period ended December 31, 2004. These consolidated
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 of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also 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 statements
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 Playlogic
International N.V., Amsterdam, and its subsidiaries as of December 31, 2004 and
December 31, 2003 and the results of their operations, their cash flows and
their changes in stockholders' deficit for each of the years in the two-year
period ended December 31, 2004, in accordance with United States generally
accepted accounting principles.
The consolidated financial statements referred to above have been prepared
assuming that the company will continue as a going concern. As discussed in the
note to the consolidated financial statements named "Financial position and
continuity", the company has experienced losses from operations, and has a
working capital deficiency and accumulated deficit that raised substantial doubt
at year end 2004 about its ability to continue as a going concern. However, in
2005, all loans granted by stockholders are redeemed. The redemption will be
used as payment on shares to be issued. By doing so, the company will enter the
reverse merger without any material loans. Further new stock has been issued.
Nevertheless new capital has to be raised. Management's plans in regard to these
matters are also described in the note referred to above. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Amstelveen, The Netherlands, 13th July 2005
BDO CampsObers Accountants
/s/ O. van Agthoven RA /s/ H. Kroeze RA
O. van Agthoven RA H. Kroeze RA
F-2
Consolidated balance sheet as per December 31, 2004
Playlogic International N.V.
Preliminary Note
The financial statements of Playlogic International N.V. have been prepared
in euro. The euro to dollar exchange rate on December 31, 2004 was approximately
1.3645, and the euro per dollar exchange rate for December 31, 2003 was
approximately 1.2570. Note 33 sets unaudited pro forma financial information as
if the share exchange transaction with Donar Enterprises, Inc. had occurred on
March 31, 2005. This pro forma financial information has been prepared in US$,
with a euro to dollar exchange rate of 1.2967.
CONSOLIDATED BALANCE SHEETS December 31, December 31,
(in EUR) 2004 2003
---------------------- ----------------------
ASSETS
Current assets:
Cash Eu 16,277 Eu 65,005
Accounts receivable, net - 9,334
Software development 860,049 393,557
Prepaid royalties - -
Loan to associated companies 65,000 -
Prepaid expenses and other current assets 199,794 147,771
Deferred tax asset - -
---------------------- ----------------------
Total current assets 1,141,120 615,667
Fixed assets, net 528,357 491,461
Goodwill, net - 11,250
---------------------- ----------------------
TOTAL ASSETS 1,669,477 1,118,378
---------------------- ----------------------
F-3
Playlogic International N.V.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT December 31, December 31,
(in EUR) 2004 2003
--------------------------------------------------
--------------------------------------------------
Current liabilities:
Accounts payable Eu 2,334,377 Eu 816,596
Bank overdraft 683,278
-
Short term loans from third parties 156,000
-
Accrued expenses:
Personnel expenses 427,921 241,190
Financing software development 435,000
Auditors and advisors 165,000 8,000
Management fee - 150,000
Other 170,883 206,526
Loan from stockholder 5,563,622 4,995,148
Wage tax and social securities payable 101,665 596,502
---------------------- -----------------------
---------------------- -----------------------
Total current liabilities 10,037,746 7,013,962
Long-term liabilities 240,000 262,500
-------------- -----------------------
Total liabilities 10,277,746 7,276,462
Stockholders' Deficit:
Ordinary Shares, par value EUR 0.05 per share; 640,177 319,175
30,000,000 shares authorized; 12,083,537 and
6,383,497 issued and outstanding at
31 December 2004 and 31 December 2003
Respectively
Priority shares, par value EUR 0.05 per share
3 shares issued at 31 December 2004 and
31 December 2003 respectively
- -
Additional paid-in capital 9,408,138 1,711,638
Subscribed capital 5,725,555
-
Accumulated deficit (24,382,139) (8,188,897)
------------ -----------------------
------------ -----------------------
------------ -----------------------
Total stockholders' Deficit (8,608,269) (6,158,084)
------------ -----------------------
------------ -----------------------
TOTAL LIABILITIES, AND
STOCKHOLDERS' DEFICIT 1,669,477 1,118,378
----------------- -----------------------
F-4
Item 2. Consolidated Profit and Loss account 2004
Playlogic International N.V. Year Ended December 31,
---------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS 2004 2003
- ------------------------------------------------------ ------------- ---------------
Net sales 87,931 -
Product costs 28,836 -
------------- ---------------
Gross profit 59,095 -
Operating expenses:
Selling and marketing 464,382 361,738
General and administrative 9,841,126 * 1,933,362
2004 includes an one time expense of (euro)7,200,000 for
granted options)
Research and development 3,638,733 3,285,841
Impairment goodwill 11,250 3,750
Depreciation 289,765 367,017
------------- ---------------
Total operating expenses 14,245,256 5,951,708
------------- ---------------
Loss from operations (14,186,161) (5,951,708)
Interest expense (2,007,080) (140,206)
------------- ---------------
Income before income taxes (16,193,241) (6,091,914)
Benefit from income taxes - -
--------------- ---------------
Net loss (16,193,241) (6,091,914)
--------------- --------------
F-5
Playlogic International N.V. Year Ended December 31,
------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS 2004 2003
(In Euros)
- ------------------------------------------------------ ------------------------------------
Basic
Net loss (16,193,241) (6,091,914)
Priority shares - -
Net loss available to ordinary stockholder (16,193,241) (6,091,914)
Diluted
Net loss (16,193,241) (6,091,914)
Priority shares - -
Net loss available to ordinary stockholder (16,193,241) (6,091,914)
Net loss per share:
Basic (2.13) (0.96)
Diluted (1.06) (0.96)
Number of shares used in
computation:
Basic 7,614,160 6,330,125
Diluted 15,342,352 6,330,125
F-6
Consolidated Cash Flow Statement 2004
Playlogic International N.V.
CONSOLIDATED CASH FLOW STATEMENT December 31, December 31,
2004 2003
Cash Flows from Operating activities (In Euros)
--------------------------------------
--------------------------------------
Net loss (16,193,241) (6,091,914)
Adjustments to reconcile net loss
to net cash provided by operating activities
Add back depreciation 289,765 367,017
Add back impairment goodwill 11,250 3,750
Add back interest accrued into loan from stock holder 1,433,637 141,230
Add back one time expense for granted options 7,200,000 -
Increase/decrease Software development (466,492) (393,557)
Increase/decrease Accounts receivable 9,334 (9,334)
Increase/decrease prepaid royalties (65,000) -
Increase/decrease Prepaid expenses and other current assets (52,024) 785,367
Increase/decrease Accounts payable 1,517,781 527,753
Increase/decrease Wage tax and social securities payable (494,837) 507,899
Increase/decrease Accrued expenses 593,088 300,588
Increase/decrease deferred income taxes - (7,965)
----------------------------------------
Net cash used in operating activities (6,216,739) (3,869,166)
----------------------------------------
Investing activities
Investment Intangibles - (15,000)
Investment Fixed assets (326,661) (230,384)
-------------------------------------
Cash Flows from investing activities (326,661) (245,384)
-------------------------------------
Cash Flows from financing activities
Increase/decrease loan from stockholder 4,660,392 3,870,725
Repayment loan from stockholder (5,525,555) -
Increase /decrease Long-term liabilities (22,500) 262,500
Increase /decrease Short-term liabilities 156,000 -
Increase /decrease Bank overdraft 683,278 -
Issuance of new shares 817,502 -
Subscribed capital 5,725,555 -
-------------------------------------
Net cash provided by financing activities 6,494,672 4,133,225
-------------------------------------
Increase (decrease) in Cash (48,728) 18,675
Cash at beginning of period 65,005 46,330
-------------------------------------
Cash at end of period 16,277 65,005
The net loss includes interest accrued in 2004 on loans aggregating
(euro)2,007,080 and in 2003 on loans aggregating (euro)140,206. In 2004 , the
company paid (euro)146,312 interest (in 2003 was the company paid no interest).
No income tax has been paid in 2004 and 2003.
F-7
Consolidated statement of changes in Stockholders' deficit
Playlogic International N.V.
STOCKHOLDERS' Issued capital
DEFICIT Ordinary Additional Subscribed Accumulated
Shares share Paid-in capital capital Deficit Total
par value
-----------------------------------------------------------------------------------------------------
December, 31 2002 6,117,000 305,850 625,963 (2,096,983) (1,165,170)
Issue of share capital 266,500 13,325 1,085,675 1,099,000
Net loss 2003 (6,091,914) (6,091,914)
-----------------------------------------------------------------------------------------------------
At 31 December 2003 6,383,500 319,175 1,711,638 - (8,188,897) (6,158,084)
-----------------------------------------------------------------------------------------------------
December 31, 2003 6,383,500 319,175 1,711,638 (8,188,897) (6,158,084)
Issue of share capital 6,420,040 321,002 496,500 - - 817,502
Subscribed capital 2,290,222 - - 5,725,555 - 5,725,555
)
One time granted option - - 7,200,000 - - 7,200,000
Net loss 2004 - - - - (16,193,242) (16,193,242)
-----------------------------------------------------------------------------------------------------
At 31 December 2004 15,093,762 640,177 9,408,138 5,725,555 (24,382,139) (8,608,269)
-----------------------------------------------------------------------------------------------------
F-8
Playlogic International N.V.
Notes to consolidated financial statements
Note 1 Description of the business
Playlogic International N.V. (the "company") was incorporated in the
Netherlands in May 2002. The company publishes interactive entertainment
software for video game consoles, PCs and handheld and mobile devices and
developed by its internal studio and by third parties.
Note 2 - General
Currency. The financial statements are prepared in Euros (the functional
currency). The applicable exchange rates of the various currencies against the
Euro were used for the conversion. Exchange differences have been included in
the financial results in the profit and loss account.
Financial Risk Management. The company's vulnerabilities, such as trade
receivables and payables, borrowings and liquid resources arise directly from
its operations. The main purpose of our its financial risk management is to keep
the company's exposure at a reasonable level.
Currency and interest risk. The company is exposed to currency risks. The
company is particularly exposed to fluctuations in the exchange rate between the
U.S. dollar and the Euro, as it incurs manufacturing costs and price its systems
in Euro (the functional currency) while a portion of its revenue is
denominated in U.S. dollars. A substantial portion of the company's assets,
liabilities and operating results are denominated in Euros, and a minor portion
of its assets, liabilities and operating results are denominated in currencies
other than the Euro. The company's consolidated financial statements are
expressed in Euros. Accordingly, its results of operations are exposed to
fluctuations in various exchange rates. As of the applicable balance sheet
dates, the exposure was very limited, hence, no hedging activities were deemed
necessary. In the company's exchange rate agreements it uses fixed interest
rates.
Credit risk. From time to time distributors and retailers in the
interactive entertainment software industry have experienced significant
fluctuations in their businesses, and a number of them have failed. The
insolvency or business failure of any significant retailer or distributor of the
company's products could materially harm the company's business and financial
results. The company typically makes sales to most of its retailers and some
distributors on unsecured credit, with terms that vary depending upon the
customer's credit history, solvency, credit limits and sales history. If
necessary, a sufficient reserve will be maintained to attempt to a avoid
detriment to the company's business and financial results as a result of payment
default. As of per December 31, 2004 this reserve was zero.
Liquidity risk. The company's management believes that the current cash on
hand and additional cash expected from operations will be sufficient order to
cover its working capital requirements through the third quarter of 2005. After
that time, it will need to obtain additional financing from third parties. If it
does obtain any necessary financing in the future, it may need to cease
operations.
Item 3 - Legal proceedings
None.
Item 4 - Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements of the company
have been prepared in accordance with the instructions to Regulation S-X.
Accordingly, the financial statements do not include all information and
disclosures necessary for a presentation of the company's financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles in the United States of America. In the opinion of
management, the financial statements reflect all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the company's
financial position, results of operations and cash flows. The results of
operations for any interim periods are not necessarily indicative of the results
for the full year. The unaudited financial statements should be read in
conjunction with the audited financial statements and notes thereto contained in
this prospectus.
F-9
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 the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of net sales and expenses during the
reporting periods. The most significant estimates and assumptions relate to the
recoverability of prepaid royalties, capitalized software development costs and
intangibles, inventories, realization of deferred income taxes and the adequacy
of allowances for doubtful accounts. Actual amounts could differ significantly
from these estimates.
Accounts receivable
Accounts receivable are shown after deduction of a provision for bad and
doubtful debts where appropriate.
Software Development
Capitalized software development costs include payments made to independent
software developers under development agreements, as well as direct costs
incurred for internally developed products. The company accounts for software
development costs in accordance with SFAS No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed". Software
development costs are capitalized once technological feasibility of a product is
established and such costs are determined to be recoverable.
The company utilizes both internal development teams and third-party
software developers to develop our its products. It capitalizes internal
software development costs and other content costs subsequent to establishing
technological feasibility of a title. Amortization of such costs as a component
of cost of sales is recorded on a title-by-title basis based on the greater of
the proportion of current year sales to the total of current and estimated
future sales for the title or the straight-line method over the remaining
estimated useful life of the title. At each balance sheet date, the company
evaluates the recoverability of capitalized software costs based on undiscounted
future cash flows and charge to cost of sales any amounts that are deemed
unrecoverable. The company's agreements with third-party developers generally
provide it with exclusive publishing and distribution rights and require it to
make advance payments that are recouped against royalties due to the developer
based on the contractual amounts of product sales, adjusted for certain costs.
Prepaid royalties
The company capitalizes external software development costs (prepaid
royalties) and other content costs subsequent to establishing technological
feasibility of a title. Advance payments are amortized as royalties in cost of
sales on a title-by-title basis based on the greater of the proportion of
current year sales to the total of current and estimated future sales for that
title or the contractual royalty rate based on actual net product sales as
defined in the respective agreements. At each balance sheet date, the company
evaluates the recoverability of advanced development payments and unrecognised
minimum commitments not yet paid to determine the amounts unlikely to be
realized through product sales. Advance payments are charged to cost of sales in
the amount that management determines is unrecoverable in the period in which
such determination is made or if management determines that it will cancel a
development project.
Deferred tax asset
Referred tax assets are recognized for as far as the management believes
that it is more likely than not that the valued deferred tax asset will be
realized.
F-10
Fixed assets
Tangible fixed assets are stated at acquisition cost less depreciation
calculated on a straight-line basis over the estimated useful life. Acquisitions
during the year are written-off from the date of acquisition.
Goodwill
Goodwill arises from investments in subsidiaries and associated companies.
Goodwill is the difference between the purchase price and the company's share in
the amount at which the identifiable assets and liabilities of the acquired
associated company are valued at on initial recognition. Investments in
subsidiaries and associated companies are accounted for by using the equity
method, determined using the same accounting principles as in the companies
accounts. The carrying value of the goodwill will be tested annually for
impairment based on the projected cash flows for the coming years.
Impairment
Impairment is the condition that exists when the carrying amount of a long
lived asset, or group of assets, exceeds its fair value. An impairment loss
shall be recognized only if the carrying amount of the long-lived asset, or
group of assets, is not recoverable and exceeds its fair value. The carrying
amount of a long-lived asset is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual disposition
of the asset at the date. The assessment shall be based on the carrying amount
at the date it is tested for recoverability, whether in use or under
development. An impairment loss shall be measured as the amount by which the
carrying amount of a long-lived asset exceeds its fair value.
Fair value of an asset is the amount at which an asset could be bought or
sold in a current transaction between willing parties, that is, other than in a
forced or liquidation sale.
Current liabilities
Current liabilities are stated at cost.
Long-term liabilities
The long-term loans concern loans with a maturity date beyond one year.
Revenue Recognition
The company evaluates the recognition of revenue based on the criteria set
forth in SOP 97-2, "Software Revenue Recognition", as amended by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" and Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements", as revised by SAB 104, "Revenue
Recognition".
The company evaluates revenue recognition using the following basic
criteria:
o Evidence of an arrangement: the company recognizes
revenue when it has evidence of an agreement with the
customer reflecting the terms and conditions to deliver
products.
o Delivery: Delivery is considered to occur when the products
are shipped and risk of loss has been transferred to the
customer.
o Fixed or determinable fee: If a portion of the arrangement
fee is not fixed or determinable, the company recognizes
that amount as revenue when the amount becomes fixed or
determinable.
o Collection is deemed probable: At the time of the
transaction, the company conducts a credit review of each
customer involved in a significant transaction to determine
the creditworthiness of the customer. Collection is deemed
probable if the company expects the customer to be able
to pay amounts under the arrangement as those amounts become
due. If the company determines that collection is not
probable, it recognizes revenue when collection becomes
probable (generally upon cash collection).
F-11
Product Revenue
Product revenue, including sales to resellers and distributors, is
recognized when the above criteria are met.
Selling and marketing
Selling and marketing expenses are expensed in the period in which the
service has been received.
Depreciation
Depreciation on fixed assets (property, plant and equipment) is calculated
at fixed percentages of cost, based on the estimated useful life of the assets.
Interest expense
Interest income (loss) relates to interest received or due from and paid or
due to third parties, stockholders, subsidiaries and associated companies.
Benefit from (provision for) income taxes
The income taxes on the profit and loss account are deferred taxes.
Deferred income tax is recognized to the extent that it is probable that future
taxable profits will be available against which deductible temporary differences
can be utilized. Deferred tax is calculated at the tax rate that is expected to
apply to the period when the asset is realized or the liability is settled.
Earnings per share
Basic EPS shall be computed by dividing net income available to common
ordinary stockholders (the numerator) by the weighted-average number of common
ordinary shares outstanding (the denominator) during the period. Shares issued
during the period and shares reacquired during the period shall be weighted for
the portion of the period that they were outstanding.
Stock based compensation
The company accounts for its employees stock based compensation plans in
accordance with APB 25, accounting for stock issued to employees. The company
adopts the intrinsic value method, measured at the grant date and is recognized
over the service period, which is usually the vesting period.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" which revised Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation". This statement supersedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees". The revised statement
addresses the accounting for share-based payment transactions with employees and
other third parties, eliminates the ability to account for share-based
compensation transactions using APB 25 and requires that the compensation costs
relating to such transactions be recognized in the condensed consolidated
statement of operations. The revised statement is effective as of the first
fiscal year beginning after June 15, 2005.
Although the company is currently analyzing the method of adoption and
impact of the adoption of this standard, effective January 1, 2006, it is
expected to have an impact on the Company's condensed consolidated financial
statements similar to the pro forma disclosure under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123").
F-12
Principles of consolidation and reporting entity.
The consolidated accounts comprise the fully consolidated financial
information for Playlogic International N.V. and its subsidiaries in which
Playlogic International N.V. has majority control. Playlogic International N.V.
is considered to control a company if it has, directly or indirectly, more than
50% of the voting rights in that company, enabling it to influence the company's
finance and business policies and profit from its activities.
The consolidated accounts comprise the financial statements of Playlogic
International N.V. (having its registered office in Amsterdam, The Netherlands)
as head of the group and its 100%-subsidiary Playlogic Game Factory B.V. based
in Breda, The Netherlands (having its registered office in Amsterdam, The
Netherlands).
The financial statements of the parent and its subsidiaries are combined on
a line by line basis by adding together items like assets, liabilities, equity,
income and expenses. Unrealized intercompany results included in development
costs of games at balance sheet date, resulting from intercompany transactions
and intercompany balances, have been eliminated.
Investments in associated companies
If the value of the identifiable assets and liabilities of the acquired
associate was below zero, this value has been recognized for as far as the
company is obliged to satisfy obligations of the associated company which it has
guaranteed or is otherwise committed to.
Note 5 - Financial position and continuity
The company needs additional capital to fund future operations. Without
this capital, the company will not be able to continue its operations on a stand
alone basis. Through 2005, Playlogic International N.V. secured investment of
approximately (euro) 3.8 million. These investors can be characterized as
informal. They are committed to the long term future of the company.
The company is a global publisher of interactive software games designed
for personal computers, and video game consoles and handheld platforms
manufactured by Sony, Microsoft and Nintendo. Its principal sources of revenue
are derived from publishing and distribution operations. Publishing revenues are
derived from the sale of internally developed software titles or software titles
developed by third parties. Operating margins in its publishing business are
dependent upon its ability to continually release new, commercially successful
products. Operating margins for titles based on licensed properties are affected
by the company's costs to acquire licenses.
The company pursues a growth strategy by capitalizing on the widespread
market acceptance of video game consoles, as well as the growing popularity of
innovative action games that appeal to mature audiences. The company has
established a portfolio of successful proprietary software content for the major
hardware platforms. It expects to continue to become the leader in the mature,
action product category by leveraging its existing franchises and developing new
brands. The company currently anticipates that the release of World Racing 2,
Knights of the Temple 2 and Gene Troopers will generate significant cash flow
from its publishing business in fiscal 2005.
Subsequent Event
On June 30, 2005, the company and its shareholders completed a share
exchange transaction with Donar Enterprises, Inc. ("Donar"), a US company that
is listed on the OTC BB. Following the share exchange transaction, the company
became a wholly-owned subsidiary of Donar and represented all of Donar's
operations. The company's shareholders exchanged all of their shares for shares
of Donar in the share exchange, and the company's former shareholders owned
approximately 91% of the outstanding Donar common stock after the completion of
the share exchange.
The share exchange creates the possibility for the company to obtain new
capital through equity financing in the US public market.
F-13
The consolidated financial statements have been prepared assuming that the
company will continue as a going concern. The company has experienced losses
from operations, and has a working capital deficiency and accumulated deficit
that raised substantial doubt at year end 2004 about its ability to continue as
a going concern. However, in 2005 all loans granted by stockholders are
redeemed. The redemption was used as payment on shares to be issued. By doing
so, the company entered into the share exchange without any material loans.
Further, new stock has been issued. Nevertheless new capital needs to be raised.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Note 6 - Cash
Liquidity and capital resources
The company's primary cash requirements are to fund the development and
marketing of its products. Its cash decreased (euro)48,728 during fiscal 2004 as
follows:
Year Ended December 31, December 31, Increase/
2004 2003 (Decrease)
Cash Flows from Operating
activities (euro) (6,216,739) (3,869,166) (2,347,574)
Cash Flows from investing
activities (326,661) (245,384) (81,277)
Net cash provided by financing
activities 6,494,672 4,133,225 2,361,447
Increase (decrease) in Cash (48,728) 18,675 (67,404)
--------------------------------------------------------------------------
Financing Needs
The company expects its capital requirements to increase over the next
several years as it continues to develop new products both internally and
through its third-party developers, increase marketing and administration
infrastructure, and embark on in-house business capabilities and facilities. The
company's future liquidity and capital funding requirements will depend on
numerous factors, including, but not limited to, the cost and hiring and
training production personnel who will produce its titles, the cost of hiring
and training additional sales and marketing personnel to promote its products,
and the cost of hiring and training administrative staff to support current
management.
Off Balance Sheet Arrangements.
The company does not have any off balance sheet arrangements that are
reasonably likely to have a current or future effect on its financial
condition, revenues, results of operations, liquidity or capital expenditures.
F-14
Contractual obligations and contingent liabilities and commitments.
The company has the following contractual obligations associated with its
lease commitments and other contractual obligations:
Amounts in (euro) thousands
Automobiles Rent Total
(In Euros)
-------------------------------------
2002 11 52 63
2003 203 352 555
2004 143 322 465
2005 134 491 625
2006 130 660 790
2007 58 569 627
2008 19 546 565
2009 0 546 546
Thereafter 0 1,247 1,247
-------------------------------------
698 4,785 5,483
=====================================
Bank guarantees.
The company is required to renew a bank guarantee for a total of
(euro)38,174, as a security for lease obligations of buildings.
Finance commitment
Playlogic International N.V. finances the production of games from
independent and associated game developers in exchange of the copyrights of
these games. As of December 31, 2004, the company has the obligation to
finance game development for a maximum of (euro)2,266,695. The company is able
to terminate all contracts involved, thereby terminating further finance
commitment.
Accounts receivable
The accounts receivables as per December 31, 2004 are zero, and
therefore, no allowance for doubtfull accounts were was necessary. This
allowance as per December 31, 2003 was also zero.
Note 7 - Software development
At the direction of Playlogic International N.V., Playlogic Game Factory
B.V. has developed games. Research and
development costs, which consist primarily of game development costs, are
generally expensed as incurred. Accounting for the cost of games to be sold,
leased or otherwise marketed, provides for the capitalization of certain game
development costs incurred after certain requirements are met. The company
capitalizes internal software development costs and other content costs
subsequent to establishing technological feasibility of a title.
The expenditures underlying the development costs of games were entered on
the basis of project related records and assessed at the directly related costs
of personnel (including salaries, taxes, social securities and other personnel
related costs, machinery and equipement used in R&D, and costs of facilities,
and other directly related costs to R&D activities). The attribution of directly
related costs of personnel is based on the relative share of capitalized working
hours versus the total amount of working hours. Indirect hours are excluded from
the capitalization.
Changes in the development costs of games are:
2004 2003
(In Euros)
Balance at January 1 393,557 0
Amortized during the year (28,836) 0
Capitalized during the year 495,328 393,557
------------- ----------
Balance at December 31 860,049 393,557
======== ========
F-15
It is the expectation that the capitalized games will lead to revenue
within one year and will be recognized as product costs in relation to net
sales. The increase in capitalization is accounted for under the research and
development costs.
Note 8 - Prepaid royalties December 31, 2004 December 31, 2003
( In Euros)
Prepaid royalties to third party
game developers 0 0
The company capitalizes external software development costs (prepaid
royalties) and other content costs subsequent to establishing technological
feasibility of a title.
The future royalties payable to the game developer will be set off against
the prepaid royalties for the game they concern. Repayment will only take place
as far as the royalties to be paid to the developer are sufficient to repay the
prepaid royalties.
Note 9 - Loan to associated companies December 31, December 31,
2004 2003
(In Euros)
Prepaid royalties to associated companies 65,000 0
The associated companies are game developers. The company capitalizes
external software development costs (prepaid royalties) and other content costs
subsequent to establishing technological feasibility of a title.
The future royalties payable to the game developer will be set off against
the prepaid royalties for the game they concern. Repayment will only take place
as far as the royalties to be paid to the developer are sufficient to repay the
prepaid royalties. The financing of the games to associated companies have been
expensed to research and development costs as long as they do not meet the
requirements for capitalization.
The company expects that the games currently under development by the
associated companies will be brought to the market in 2005 and 2006.
Note 10 - Prepaid expenses and other current assets
December 31, 2004 December 31, 31-12-2003
Value added tax receivable (euro) 99,609 (euro) 82,733
Other 100,185 65,038
(euro) 199,794 (euro) 147,771
Note 11 Deferred tax asset
The taxable loss at 31 December 31, 2004 was approximately (euro)17
million. The deferred income taxes were calculated using the Dutch nominal tax
rate of 31.5%, which is to be applied in the future, as per current Dutch law.
Taxable losses
2002 (euro) 2,096,984
2003 (euro) 4,474,764
2004 (euro) 10,610,391
Total (euro) 17,182,139
The total deferred tax asset is (euro)5,412,374 for which valuation
allowance is made of the same amount.
As of December 31, 2004 the deferred tax asset is was valued at zero (in
2003: it was zero). Recognition of the deferred tax asset will take place as
soon the company will become profitable or when there is substantial likelihood
that it will be profitable thereto based on contracted sales.
F-16
Note 12 - Fixed assets
Movements in fixed assets are:
Machinery Other Fixed Prepayments Total
and equipment assets fixed assets
At 1 January 1, 2004:
Cost 531,339 392,262 43,700 967,301
Accumulated depreciation -245,405 -230,435 0 -475,840
---------- ----------- ---------- --------
285,934 161,827 43,700 491,461
========== ========== ========== ========
Movements Changes in 2004:
Acquisitions 33,192 293,469 0 326,661
Transfer 0 43,700 -43,700 0
Depreciation -182,228 -107,537 0 -289,765
---------- -------- ----------- ---------
-149,036 229,632 -43,700 36,896
=========== ======== ========== =========
At 31 December 31, 2004:
Cost 564,531 729,431 0 1,293,962
Accumulated depreciation -427,633 -337,972 0 -765,605
--------- -------- ----------- ---------
136,898 391,459 0 528,357
========= ======= ========== ========
The Machinery and equipment are depreciated in 3 or 5 years. Other fixed
assets (including leasehold improvements) are depreciated in 5 years, or for the
remaining lease term of the leasehold improvements if that is shorter. All the
fixed assets are located in Europe.
Note 13 - Goodwill
The book value of the goodwill on December 31, 2003 has been fully impaired
in 2004 as the investment in the company's associated company (Engine Software
B.V.) is in a continuous net loss situation, and the projected cash flow is
negative. The book value of the goodwill as per December 31, 2004 is therefore
zero.
Note 14 - Bank overdraft
To provide flexibility, the company has the following bank overdraft facility:
Bank overdraft 7% (fixed) (euro)650,000 (at December 31, 2004)
As of December 31, 2004, the company has exceeded the overdraft facility
with anby the amount of (euro)33,278.
In view of the fixed interest rate and the overdraft facility in Euros
(functional currency), no hedging activities were deemed necessary.
Note 15 - Accrued expenses
Short term loan from third parties
This average interest rate on this loan is 16%. The maturity of this loan
is one year and will expire on November 19, 2005. The fair value of this
loan equals its carrying value.
F-17
Management fee
The management fee payable to Sloterhof Investments as at December 31, 2003
has been settled. As per December 31, 2004 the management fee payable is zero.
Personnel expenses
Personnel expenses consist of holiday allowances, holiday accruals, wages
and transfer fees to employees.
Note 16 - Loan from stockholder
December 31,2004 December 31, 2003
(euro) 5,563,622 (euro) 4,995,148
The average interest rate over the loans is 20% (in 2003 was 6%). The
interest on this loan was (euro)1,433,637 over 2004 (in 2003 , it was
(euro)141,227). The fair value of this loan equals its carrying value.
Note 17 - Long-term liabilities
Redemption
Within Within Balance at
1 year 2/5 years > 5 years December 31, 2004
(In Euros)
Long-term Loans 30,000 120,000 120,000 270,000
30,000 120,000 120,000 270,000
Short term portion (30,000)
Due on long term 240,000
The long-term liability represents the net present value of a loan from a
third party, originally amounting to (euro)300,000, concerning leasehold
improvements of our the company's offices at Hambroeklaan 1, Breda, The
Netherlands. Payment on this is over 10 years, payable in quarterly
installments. The contracted annual interest on this loan is 0% in conjunction
with a lease agreement of 10 years. The imputed interest is 4%. The short term
portion of (euro)30,000 is part of the accrued expenses "other" under current
liabilities.
Note 18 - Issued capital
The authorized capital of the company amounts (euro)1,500,000 and is
divided into 29,999,997 ordinary shares and 3 priority shares with a par value
of (euro)0.05.
During 2004 6,420,040 ordinary shares were issued, leading to a total of
12,803,540 ordinary shares and 3 priority shares at 31 December 31, 2004.
During 2004 the company issued 6,300,040 shares to eight parties against
par value. From this part 5,305,030 new common shares are issued to Sloterhof
Investments N.V., which were paid for by an offset against amounts owed to
Sloterhof Investments N.V. from the 2004 loans.
In 2004, Sloterhof Investments N.V. and Castilla Investments B.V. have been
granted a stock option right for in total 8,609,189 shares with an exercise
price at par value.
The priority shares are 6% preferred shares.
The holders of the priority shares (Sloterhof Investments N.V. holds 2 and
Castilla Investments B.V. holds 1) have the following rights:
- The right of approval of transfers of ordinary shares;
- The right to decide about the size of the executive board
and the supervisory board;
- The right to make an obligatory nomination for members of
the executive board and the supervisory board;
- The right to decide about discharge, suspension and
remuneration of members of the management board;
- To make propositions to the general meeting of stockholders
to authorize another board of the company than the
general meeting of stockholders to issue shares.
F-18
The general meeting of stockholders has resolved that the management board
of Playlogic International N.V. shall be the body authorized to issue shares and
to exclude or limit the pre-emptive rights of existing stockholders. This
arrangement will last until July 16, 2007 and is non-revocable, unless the
general meeting of stockholders, at the proposal of the meeting of priority
stockholders, dissolves otherwise.
Note 19 - Additional paid in capital
The additional paid in capital concerns the difference between issue price
(after deduction of the issue costs) and the par value of issued shares.
Note 20 - Subscribed capital
The subscribed capital, to be carried out in 2005, is included in the
stockholders' equity at 31st December 31, 2004. It has been agreed by contract,
dated December 31, 2004, that the loans granted by Sloterhof Investments have
been redeemed at December 31, 2004 and that the concerning redeemed amount
((euro) 5,725,555) have has been paid on the subscribed capital to be carried
out in 2005. The cash was received but the shares had not been issued pending
only notary approval. In lieu for the payment on the loan, ordinary shares are
to be issued in 2005 at a share price of (euro)2.50 per share.
Share issue in the year 2005
During the first four
months of 2005, four transactions were executed with a total issuance of 730,000
ordinary shares.
Note 21- Net sales
The increase in net sales is attributable to growth in the company's
publishing business. The increase in revenues was primarily attributable to
sales of Alpha Black Zero, which was released in October 2004.
Segmentation of net sales
The net sales could be segmented as follows:
European market: (euro)87,931 (In 2003 they were (euro)0)
The products have been delivered to game distributors only. The concerning games
are valued at zero as per December 31, 2004.
Note 22 - Product cost
Once software development projects reach technological feasibility (working
model), a substantial portion of our the company's research and development
costs are capitalized and subsequently amortized as cost of goods sold based on
estimated lifetime product sales.
F-19
Operating expenses
(In EUR, except per share data) Year Ended December 31,
----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS 2004 2003
- ------------------------------------------------------ ----------------
Operating expenses:
Selling and marketing 464,382 361,738
General and administrative 9,841,126 1,933,362
Research and development 3,638,733 3,285,841
Impairment goodwill 11,250 3,750
Depreciation 289,765 367,017
--------------- ----------------
Total operating expenses 14,245,256 5,951,708
--------------- ----------------
Note 23 - Selling and marketing
The selling and marketing expenses consists primarily of costs for promotional
activities of our games on trade shows such as the Electronic Entertainment Expo
(E3), which always takes place in Los Angeles. Additionally the
company was present at two trade shows in The Netherlands.
Note 24 -
General and administrative
This increase in general and administrative expenses is primarily the
result of granted options to Sloterhof and Castilla ((euro)7,200,000), increased
number of employees and related costs. The expense related to this option
is a non-recurring event.
Note 25 - Research and development
Research and development increases are primarily due to the procurement of
development studios, as well as increased personnel costs. Once software
development projects reach technological feasibility, a substantial portion of
the company's research and development costs are capitalized and subsequently
amortized as cost of goods sold based on estimated lifetime product sales.
Part of the research and development consists of game development that meets the
requirements of capitalization. Research and development costs, which consist
primarily of game development costs, are generally expensed as incurred.
Accounting for the cost of games to be sold, leased or otherwise marketed,
provides for the capitalization of certain game development costs incurred after
certain requirements are met. Establishing technological feasibility of the game
and future economic benefit are some of the requirements.
2004 2003
Research and development 4,134,061 3,679,398
Capitalized part software development -495,328 -393,557
Net research and development costs (euro) 3,638,733 3,285,841
The company capitalizes internal software development costs and other content
costs subsequent to establishing technological feasibility of a title.
Amortization of such costs as a component of cost of sales is recorded on a
title-by-title basis based on the greater of the proportion of current year
sales to the total of current and estimated future sales for the title or the
straight-line method over the remaining estimated useful life of the title. At
each balance sheet date, the company evaluates the recoverability of
capitalized software costs based on undiscounted future cash flows and charge to
cost of sales any amounts that are deemed unrecoverable.
F-20
Note 26 -
Impairment of Goodwill
The book value of the goodwill on December 31, 2003 has been fully
impaired in 2004 as the investment in the company's associated company
(Engine Software B.V.) is in a continuous net loss situation and the projected
cash flow is negative. The book value of the goodwill as per December 31,
2004 is therefore zero.
2004 2003
Impairment of Goodwill (euro) 11,250 (euro) 3,750
Note 27 -
Depreciation
The Machinery and equipment are depreciated in 3 or 5 years. Other fixed assets
(including leasehold improvements) are depreciated in 5 years, or for the
remaining lease term of the leasehold improvements if that is shorter. All the
fixed assets are located in Europe.
2004 2003
Other fixed assets 107,537 203,297
Machinery and equipment 182,228 163,720
----------- -------------
(euro) 289,765 367,017
Note 28 - Interest expense
2004 2003
Loans from stock holder (euro) (1,433,637) (141,230)
Other loans (296,937) 0
Bank current account (111,266) (2,474)
Exchange differences 0 3,498
Other financing expenses (165,240) 0
(euro) (2,007,080) (140,206)
The interest concerning the loan from stock holder did not lead to a cash
payment. The interest on the loan from stock holder was accrued until December
31, 2004.
Note 29 - Benefit from income taxes
The Dutch nominal tax rate is 31.5%. Because there have been no income
taxes, recognized the (benefit from) income tax in the profit and loss account
is zero.
Taxes on share issue
According to Dutch law, the taxes on issuance of share are deducted from
the additional paid in capital and not expensed in the profit and loss account.
Note 30 - Other notes
The following company is a wholly - owned subsidiary of Playlogic International
N.V.:
Playlogic Game Factory B.V., having its official seat
in Amsterdam (The Netherlands).
F-21
The following company is an associated company of Playlogic Game Factory B.V:
- Engine Software B.V., having its official
seat in Doetinchem (The Netherlands). The company owns 47.5%
of Engine Software B.V. A summary of the financial
information 2004 is as follows:
- total assets (euro)593,825 (including development costs of
games (euro)541,500)
- total liabilities (euro)747,942 (including loans from
associated companies (euro)465,100)
- revenues (euro) 74,412
- net profit (euro) 14,339
- current assets (euro)589,394
- current liabilities (euro)746,408
During 2004 the company has provided financed Engine Software B.V.
financing in the amount of (euro)285,100.
Security agreement
On August 31, 2004, Playlogic Game Factory B.V. signed a security agreement in
favor of the Dutch Tax Authorities for the amount (euro)81,547 concerning
Engine Software B.V.
Transactions with related parties
In 2004, Sloterhof Investments N.V. and Castilla Investments B.V. were granted a
stock option right for in total 8,609,189 shares with an exercise price at par
value. The intrinsic value of this option right is recognized as an expense in
2004.
Sloterhof Investments N.V. has paid on subscribed capital to be carried out in
2005 (euro)5,525,555 and received (euro)708,080 interest.
Note 31- Relations with affiliated companies and closely related parties
The stockholders with the greatest influence are:
- Sloterhof Investments N.V., Curacao (The Netherlands
Antilles)
- Castilla Investments B.V., Amsterdam (The Netherlands)
Sloterhof Investments N.V. has provided loans to the company.
Note 32 - Members of the management board
Executive board
- Sloterhof Investments N.V., Curacao (The Netherlands
Antilles), from 2 May 2002. Sloterhof Investments N.V. is
represented by Mr. Willem M. Smit.
Supervisory board
- Mr. W.J. Simon, from December 23, 2003
- Mr. E.L.A. van Emden, from December 23, 20035.
F-22
In 2004, the company paid Mr. Van den Emden (euro)25,000 and Mr. Simon
(euro)30,000 for their service as members of Playlogic's supervisory board.
Sloterhof and Mr. Smit received no compensation for service on Playlogic's
executive board.
Note 33 - : Pro fForma consolidation Donar and PlaylogicFinancial Information
The information below contains the pro forma consolidated information of Donar
Enterprises Inc and Playlogic International N.V. as if the share exchange
has occurred on December 31, 2004, March 31, 2005 and April 30, 2005, for
information purposes only. The information is based on the same accounting
principles which apply for the annual report 2004 of Playlogic International
N.V. The US$ amounts below are based on a conversion rate of 1.2967 euro per
US$. The entities have been added on a line by line bases by adding together
like items of assets, liabilities, equity income and expenses.
PRO FORMA CONSOLIDATION
CONSOLIDATED BALANCE SHEETS December 31, December 31, Pro forma December 31,
(in USD) 2004 2004 elimination 2004
Playlogic Donar Combined
International Enterprises
unaudited unaudited unaudited unaudited
------------------ -------------------------------- ------------------
ASSETS
Current assets:
Cash $ 22,210 - $ 22,210
Accounts receivable, net - -
Software development 1,173,537 1,173,537
Prepaid royalties - -
Loan to associated companies 88,693 88,693
Prepaid expenses and other current assets 272,618 272,618
Deferred tax asset -
------------------ -------------------------------- ------------------
Total current assets 1,557,058 - - 1,557,058
Fixed assets, net 720,943 720,943
Investments in affiliates - -
Goodwill, net - -
Intangibles, net - -
Other assets, net - -
------------------ -------------------------------- ------------------
TOTAL ASSETS $ 2,278,001 $ - $ 2,278,001
------------------ -------------------------------- ------------------
F-23
LIABILITIES AND STOCKHOLDERS' DEFICIT December 31, December 31, Pro forma December 31,
(in EUR) 2004 2004 elimination 2004
unaudited unaudited unaudited unaudited
------------------ -------------------------------- ------------------
Current liabilities:
Accounts payable $ 3,185,258 $ 3,185,258
Bank overdraft 932,333 932,333
Short term loans from third parties 212,862 212,862
Accrued expenses: -
Personnel expenses 583,898 583,898
Financing software development 593,558 593,558
Auditors and advisors 225,143 225,143
Management fee - -
Other 233,168 233,168
Loan from stockholder 7,591,562 7,591,562
Wage tax and social securities payable 138,722 138,722
------------------ -------------------------------- ------------------
Total current liabilities 13,696,504 - 13,696,504
Long-term liabilities 327,480 327,480
------------------ -------------------------------- ------------------
Total liabilities 14,023,984 - 14,023,984
Stockholders' deficit:
Stock holders equity: Donar Enterprises, 873,521 9,290 882,811
Preferred stock- $0.001 par value. -
20.000,000 shares authorized
None issued and outstanding -
Common stock- $0.001 par value.
100,000,000 shares authorized.
9,289,647 shares issued and outstanding.
Additional paid-in capital 12,837,404 469,562 13,306,966
Subscribed capital 7,812,520
7,812,520
Accumulated deficit (33,269,428) (478,852) (33,748,280)
------------------ -------------------------------- ------------------
Total stockholders' deficit (11,745,983) - - (11,745,983)
------------------ -------------------------------- ------------------
TOTAL LIABILITIES, AND
STOCKHOLDERS' DEFICIT $ 2,278,001 $ - - $ 2,278,001
------------------ -------------------------------- ------------------
F-24
PROFORMA
CONSOLIDATION Playlogic Donar Enterprises Combined
International
(In USD, except per share data) 2004 2004 2004
unaudited unaudited unaudited
--------------------- -------------------------- -----------------------------
CONSOLIDATED STATEMENTS OF
OPERATIONS
- ---------------------------------- --------------------- -------------------------- -----------------------------
Net sales $119,982 $3,525 $123,507
Product costs 39,347 - 39,347
------------------------------------------------- -----------------------------
Gross profit 80,635 3,525 84,160
Operating expenses:
Selling and marketing 633,649 - 633,649
General and administrative 13,428,216 109,285 13,537,501
Research and development 4,965,051 - 4,965,051
Depreciation 395,384 - 395,384
Impairment goodwill 15,351 15,351
------------------------------------------------- -----------------------------
Total operating expenses 19,437,651 109,285 19,531,585
------------------------------------------------- -----------------------------
Loss from operations (19,357,016) (105,760) (19,447,425)
Interest expense (2,738,661) 82 (2,738,579)
------------------------------------------------- -----------------------------
Income before income taxes (22,095,677) (105,678) (22,186,004)
Benefit from income taxes - -
------------------------------------------------- -----------------------------
Net loss $(22,095,677) $(105,678) $(22,186,004)
------------------------------------------------- -----------------------------
F-25
CONSOLIDATED BALANCE SHEETS Playlogic Donar Enterprises Combined
International
March 31, March 31, March 31,
2005 2005 Elimination 2005
Unaudited Unaudited Unaudited Unaudited
- ------------------------------------------------------------- -------------------------------------------------
ASSETS
Current assets:
Cash $20,299 $ - $20,299
Accounts receivable, net 539,860 - 539,860
Software development 1,400,501 - 1,400,501
Prepaid royalties - - -
Loan to associated companies 145,250 - 145,250
Taxes receivables 155,046 - 155,046
Prepaid expenses and other current assets 15,612 - 15,612
Deferred tax asset 253,109 - 253,109
-------------------- -------------------------------------------------
Total current assets 2,529,677 - 2,529,678
Fixed assets, net 582,834 - 582,834
Investments in affiliates - - -
Goodwill, net - - -
Intangibles, net - - -
Other assets, net - - -
-------------------- -------------------------------------------------
TOTAL ASSETS $3,112,511 $ - $3,112,512
-------------------- -------------------------------------------------
F-26
LIABILITIES AND STOCKHOLDERS' DEFICIT Playlogic
International Donar Enterprises Combined
March 31, March 31, March 31,
2005 2005 Elimination 2005
Unaudited Unaudited Unaudited Unaudited
- ------------------------------------------------------------- -------------------------------------------------
Current liabilities:
Accounts payable $2,007,181 $ $2,007,181
Bank overdraft 703,097 - 703,097
Short term loans from third parties 194,505 - 194,505
Accrued expenses:
-
Personnel expenses 364,242 - 364,242
Financing software development 259,340 - 259,340
Other current liabilities 396,242 - 396,242
Officer compensation - -
Advance from officer/shareholder - 23,268 23,268
Loan from stockholder 9,788,505 - 9,788,505
Wage tax and social securities payable 357,016 - 357,016
-------------------- -------------------------------------------------
Total current liabilities 14,070,129 23,268 14,093,397
Long-term liabilities 301,483 - 301,483
-------------------- -------------------------------------------------
Total long-term liabilities 301,483 - 301,483
-------------------- -------------------------------------------------
Stockholders' equity:
Common stock, par value 841,787 929 842,716
Additional paid-in capital 12,540,567 477,923 13,018,490
Subscribed capital 7,525,273 - 7,525,273
Accumulated deficit (32,166,729) (502,120) (32,668,849)
-------------------- -------------------------------------------------
Total stockholders' equity (11,259,101) (23,268) - (11,282,370)
-------------------- -------------------------------------------------
TOTAL LIABILITIES, AND
STOCKHOLDERS' DEFICIT $3,112,511 $ $ $ 3,112,510
-------------------- -------------------------------------------------
F-27
CONSOLIDATED BALANCE SHEETS Playlogic International Donar Enterprises Combined
(in EUR) April 30, March 31, April 30,
2005 2005 Elimination 2005
Unaudited Unaudited Unaudited
------------------------------ -----------------------------------------------------
ASSETS
Current assets:
Cash $ 128,631 $128,631
-
Accounts receivable, net 539,486 539,486
-
Software development 1,490,234 1,490,234
-
Prepaid royalties - - -
Loan to associated companies 220,306 220,306
-
Taxes receivables 194,551 194,551
-
Prepaid expenses and other current 583,940 583,940
-
Deferred tax asset 343,548 - 343,548
------------------------------ ------------------------------------------------------
Total current assets 3,500,696 3,500,696
-
Fixed assets, net 548,189 548,189
-
Investments in affiliates
- - -
Goodwill, net
- - -
Intangibles, net - - -
Other assets, net - - -
------------------------------ ------------------------------------------------------
TOTAL ASSETS $ 4,048,885 $4,048,886
------------------------------ ---------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT Playlogic International Donar Enterprises Combined
April 30, March 31, April 30,
2005 2005 Elimination 2005
Unaudited Unaudited Unaudited
------------------------------ ------------------------------------------------------
Current liabilities:
Accounts payable $ 1,471,920 $ 1,471,920
Bank overdraft - - -
Short term loans from third parties 194,370 194,370
-
Accrued expenses:
-
Personnel expenses 388,080 388,080
-
Financing software development 259,160 259,160
-
Other current liabilities 363,449 - 363,449
-
Officer compensation - -
Advances from officer/shareholder
- 23,268 23,268
Loan from stockholder 209,764 209,764
-
Wage tax and social securities payable 460,742 460,742
------------------------------ ------------------------------------------------------
Total current liabilities 3,347,486 23,268 3,370,752
Long-term liabilities 291,555 291,555
-
Total long-term liabilities 291,555 291,555
------------------------------ ------------------------------------------------------
Stockholders' equity:
Common stock 880,077 929 881,006
9
Additional paid-in capital 14,352,460 477,923 14,830,383
Subscribed capital 17,518,760 17,518,760
-
Accumulated deficit (32,341,452) (502,120) (32,843,572)
------------------------------ ------------------------------------------------------
Total stockholders' equity 409,845 (23,268) 386,576
------------------------------- -----------------------------------------------------
TOTAL LIABILITIES, AND
STOCKHOLDERS' EQUITY $ 4,048,885 $ 4,048,883
------------------------------- -----------------------------------------------------
F-28
PRO FORMA CONSOLIDATION Playlogic Donar Enterprises Combined
International
- ---------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA Three months end, Three months end Three months end,
March 31, March 31, March 31,
2005 2005 Elimination 2005
Unaudited Unaudited Unaudited
- ---------------------------------------------------------- ---------------------------------------------------
Net sales 523,034 $ - 523,034
Product costs 120,972 - 120,972
------------------ ---------------------------------------------------
Gross profit 402,062 - 402,062
Operating expenses:
Selling and marketing 5,818 5,818
General and administrative 639,841 23,268 663,109
Research and development 356,071 356,071
Depreciation 102,287 102,287
-------------------- ---------------------------------------------------
Total operating expenses 1,104,017 23,268 1,127,285
-------------------- ---------------------------------------------------
Loss from operations (701,955) (23,268) (725,223)
Interest expense (101,562) - (101,562)
-------------------- ---------------------------------------------------
Income before income taxes (803,517) (23,268) (826,785)
Benefit from income taxes 253,108 - 253,108
-------------------- ---------------------------------------------------
Net loss (550,409) (23,268) (573,677)
-------------------- ---------------------------------------------------
F-29
PRO FORMA CONSOLIDATION Playlogic Donar Enterprises Combined
International
--------------------- ---------------------------------------------------------
Four months Three months Four months ended,
ended, ended,
STATEMENTS OF OPERATIONS DATA April 30, March 31, April 30,
2005 2005 Elimination 2005
Unaudited Unaudited Unaudited
- ------------------------------------------ --------------------- ---------------------------------------------------------
Net sales $ 641,366 - $641,366
Product costs 122,665 - 122,665
--------------------- ---------------------------------------------------------
Gross profit 518,702 - 518,701
Operating expenses:
Selling and marketing 6,201 6,201
General and administrative 849,139 23,268 872,407
Research and development 467,533 467,533
Capitalization on software development - -
Depreciation 136,456 136,456
--------------------- ---------------------------------------------------------
Total operating expenses 1,459,329 23,268 1,482,597
--------------------- ---------------------------------------------------------
Loss from operations (940,628) (23,268) (963,896)
Interest expense (149,995) - (149,995)
--------------------- ---------------------------------------------------------
Income before income taxes (1,090,623) (23,268) (1,113,891)
Benefit from income taxes 343,546 - 343,546
--------------------- ---------------------------------------------------------
Net loss $ (747,076) $ (23,268) $ (770,344)
--------------------- ---------------------------------------------------------
F-30
Consolidated balance sheet as per March 31, 2005
Playlogic International N.V.
- --------------------------------------------------------- --------------------
CONSOLIDATED BALANCE SHEETS March 31, March 31,
(in EUR) 2005 2004
(unaudited) (unaudited)
- --------------------------------------------------------- --------------------
ASSETS
Current assets: 15,654 48,923
Cash 416,334 9,334
Software development 1,080,050 692,367
Prepaid royalties
Loan to associated companies 112,015 -
Taxes receivables 119,570 155,685
Prepaid expenses and other current
assets 12,039 223,816
Deferred tax asset 195,195 -
-------------------- --------------------
Total current assets 1,950,857 1,130,125
Fixed assets, net 449,475 673,176
Investments in affiliates - -
Goodwill, net - 9,376
Intangibles, net - -
Other assets, net - -
-------------------- --------------------
TOTAL ASSETS 2,400,332 1,812,677
-------------------- --------------------
F-31
Playlogic International N.V.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' DEFICIT March 31, March 31,
(in EUR) 2005 2004
(unaudited) (unaudited)
- --------------------------------------------------------- ---------------------
Current liabilities:
Accounts payable 1,547,915 1,113,462
Bank overdraft 542,220 363,251
Short term loans from third parties 150,000 -
Accrued expenses:
Personnel expenses 280,899 288,787
Financing software development 200,000
Other current liabilities 305,577 258,659
Loan from stockholder 7,548,782 6,622,131
Wage tax and social securities
payable 275,327 683,710
--------------------- ---------------------
Total current liabilities 10,850,720 9,330,000
Long-term liabilities 232,500 255,000
------------------------ ------------------
Total long-term liabilities 232,500 255,000
------------------------ ------------------
Stockholders' deficit:
Ordinary shares, par value EUR 0.05
per share; 649,177 319,175
30.000.000 shares authorized; issued
and outstanding
at March 31, 2004: 6,383,500;
at March 31, 2005: 12,983,530;
Preferred shares, par value EUR 0.05
per share;
issued and outstanding
at March 31, 2005; 3
at March 31, 2004; 3 - -
Additional paid-in capital 9,671,140 8,911,638
Subscribed capital 5,803,403 -
Accumulated deficit (24,806,608) (17,003,136)
------------------------ ------------------
Total stockholders' deficit (8,682,888) (7,772,323)
------------------------ ------------------
TOTAL LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' DEFICIT 2,400,332 1,812,677
F-32
Consolidated Profit and Loss account three months ended March 31, 2005
Playlogic International N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS March 31, March 31,
(in EUR) 2005 2004
(unaudited) (unaudited)
- ------------------------------------------------------------ --------------
Net sales 403,358 -
Product costs 93,292 -
------------------------ -------------
Gross profit 310,066 -
Operating expenses:
Selling and marketing 4,487 12,024
General and administrative 493,438 7,816,449
Research and development 274,598 651,756
Capitalization on software development - -
Depreciation 78,882 59,899
------------------------ ---------------
Total operating expenses 851,405 8,540,128
------------------------ ----------------
Loss from operations (541,339) (8,540,128)
Interest expense (78,324) (274,111)
----------------------- ----------------
Income before income taxes (619,663) (8,814,239)
Benefit from income taxes 195,194 -
------------------------ --------------
Net loss (424,469) (8,814,239)
------------------------ --------------
Net income (loss):
Basic (424,469) (8,814,239)
Diluted (424,469) (8,814,239)
Net income (loss) per share:
Basic (0.03) (1.38)
Diluted (0.02) (0.59)
Number of shares used in
computation:
Basic 12,983,530 6,383,500
Diluted 18,035,222 14,899,111
F-33
Consolidated Cash Flow Statement three months ended March 31, 2005
Playlogic International N.V.
CONSOLIDATED CASH FLOW March , 31 March , 31
STATEMENT 2005 2004
(In Euros) unaudited unaudited
Cash Flows from Operating activities
-------------------- -------------------
Net loss (424,469) (8,814,239)
Adjustments to reconcile net loss
to net cash provided by operating activities
Add back depreciation 78,882 59,899
Add back impairment goodwill
Add back interest accrued into loan from stock
holder
Add back one time expense for granted options 7,200,000
Increase/decrease Software development (220,001) (298,810)
Increase/decrease Accounts receivable (416,334) -
Increase/decrease prepaid royalties (47,015) -
Increase/decrease Prepaid expenses and other
current assets 68,184 (231,731)
Increase/decrease Accounts payable (786,463) 296,865
Increase/decrease Wage tax and social securities
payable 173,662 87,208
Increase/decrease Accrued expenses (412,327) (58,270)
Increase/decrease deferred income taxes (195,194) -
-------------------- -------------------
Net cash used in operating activities (2,181,075) (1,759,076)
-------------------- -------------------
Investing activities
Investment Intangibles
Investment Fixed assets - (239,739)
-------------------- -------------------
Cash Flows from investing activities 0 (239,739)
-------------------- -------------------
Cash Flows from financing activities
Increase/decrease loan from stockholder 1,985,160 1,626,984
Repayment loan from stockholder
Increase /decrease Long-term liabilities (7,500) (7,500)
Increase /decrease Short-term liabilities (6,000) -
Increase /decrease Bank overdraft (141,058) 363,251
Issuance of new shares 349,850
Subscribed capital -------------------- -------------------
Net cash provided by financing activities 2,180,452 1,982,735
-------------------- -------------------
Increase (decrease) in Cash (623) (16,083)
Cash at beginning of period 16,277 65,005
-------------------- -------------------
Cash at end of period 15,654 48,923
The net loss includes interest accrued in the period ended March 31, 2005 of
(euro)78,324 and (euro)274,111 in the period ended March 31, 2005. Over the
period ended March 31, 2005, the company paid (euro)9,000 (In 2004, the company
paid zero). Over the period ending March 31, 2005 and the period ending March
31, 2004, no income tax has been paid.
F-34
Consolidated statement of changes in Stockholders' deficit
Playlogic International N.V.
STOCKHOLDERS' DEFICIT Issued capital
Ordinary Additional Subscribed
Accumulated
Shares shares Paid-in capital capital deficit Total
par value
--------------------------------------------------------------------------------------------------
January 1, 2004 6,383,500 319,175 1,711,638 - (8,188,897) (6,158,084)
Issue of share capital 6,420,040 321,002 496,500 - - 817,502
Subscribed capital 2,290,222 5,725,555 5,725,55
One time granted option - - 7,200,000 - 7,200,000
Net loss 2004 - (16,193,242) (16,193,242)
-------------------------------------------------------------------------------------------------
At December 31, 2004 15,093,762 640,177 9,408,138 5,725,555 (24,382,139) (8,608,269)
-------------------------------------------------------------------------------------------------
January 1, 2005 15,093,762 640,177 9,408,138 5,725,555 (24,382,139) (8,608,269)
Movements 2005
Issue of share capital 130,000 9,000 263,002 - 272,002
Subscribed capital 5,396,960 -
- - - 77,848
Net loss January 1, 2005 until 0 77,848 (424,469) (424,469)
March 31, 2005 --------------- ------------- ------------------- ---------------- ----------------- ---------------
March 31, 2005 20,620,722 649,177 649, 177 9,671,140 5,803,403 (24,806,608) (8,682,888)
--------------- ------------- ------------------- ---------------- ----------------- ---------------
F-35
Playlogic International N.V.
Notes to consolidated financial statements
Note 1 Description of the business
Playlogic International N.V. (the "company") was incorporated in the Netherlands
in May 2002. The company publishes interactive entertainment software for video
game consoles, PCs and handheld and mobile devices developed by its
internal studio and by third parties.
Note 2 - General
Currency. The financial statements are prepared in Euros (the functional
currency). The applicable exchange rates of the various currencies against the
Euro were used for the conversion. Exchange differences have been included in
the financial results in the profit and loss account.
Financial Risk Management. The company's vulnerabilities, such as trade
receivables and payables, borrowings and liquid resources arise directly from
its operations. The main purpose of its financial risk management is to keep
the company's exposure at a reasonable level.
Currency and interest risk. The company is exposed to currency risks. The
company is particularly exposed to fluctuations in the exchange rate between the
U.S. dollar and the Euro, as it incurs manufacturing costs and price its systems
in Euro (the functional currency) while a portion of its revenue is denominated
in U.S. dollars. A substantial portion of the company's assets, liabilities and
operating results are denominated in Euros, and a minor portion of its assets,
liabilities and operating results are denominated in currencies other than the
Euro. The company's consolidated financial statements are expressed in Euros.
Accordingly, its results of operations are exposed to fluctuations in various
exchange rates. As of the applicable balance sheet dates, the exposure was very
limited, hence, no hedging activities were deemed necessary. In the company's
exchange rate agreements, it uses fixed interest rates.
Credit risk. From time to time distributors and retailers in the
interactive entertainment software industry have experienced significant
fluctuations in their businesses, and a number of them have failed. The
insolvency or business failure of any significant retailer or distributor of
products could materially harm the company's business and financial results. The
company typically makes sales to most of its retailers and some distributors on
unsecured credit, with terms that vary depending upon the customer's credit
history, solvency, credit limits and sales history. If necessary, a sufficient
reserve will be maintained to attempt to a avoid a detriment to the company's
business and financial results as a result of payment default. As of December
31, 2004, this reserve was zero.
Liquidity risk. The company's management believes that the current cash on
hand and additional cash expected from operations will be sufficient order to
cover its working capital requirements through the third quarter of 2005. After
that time, it will need to obtain additional financing from third parties. If it
does obtain any necessary financing in the future, it may need to cease
operations.
Item 3 - Legal proceedings
None.
Item 4 - Accounting Policies
F-36
Basis of Presentation
The unaudited condensed consolidated financial statements of the company
have been prepared in accordance with the instructions to Regulation S-X.
Accordingly, the financial statements do not include all information and
disclosures necessary for a presentation of the company's financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles in the United States of America. In the opinion of
management, the financial statements reflect all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the company's
financial position, results of operations and cash flows. The results of
operations for any interim periods are not necessarily indicative of the results
for the full year. The unaudited financial statements should be read in
conjunction with the audited financial statements and notes thereto contained in
this prospectus.
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 the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of net sales and expenses during the
reporting periods. The most significant estimates and assumptions relate to the
recoverability of prepaid royalties, capitalized software development costs and
intangibles, inventories, realization of deferred income taxes and the adequacy
of allowances for doubtful accounts. Actual amounts could differ significantly
from these estimates.
Accounts receivable
Accounts receivable are shown after deduction of a provision for bad and
doubtful debts where appropriate.
Software Development
Capitalized software development costs include payments made to independent
software developers under development agreements, as well as direct costs
incurred for internally developed products. The company accounts for software
development costs in accordance with SFAS No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed". Software
development costs are capitalized once technological feasibility of a product is
established and such costs are determined to be recoverable.
The company utilizes both internal development teams and third-party
software developers to develop its products. It capitalizes internal software
development costs and other content costs subsequent to establishing
technological feasibility of a title. Amortization of such costs as a component
of cost of sales is recorded on a title-by-title basis based on the greater of
the proportion of current year sales to the total of current and estimated
future sales for the title or the straight-line method over the remaining
estimated useful life of the title. At each balance sheet date, the company
evaluates the recoverability of capitalized software costs based on undiscounted
future cash flows and charge to cost of sales any amounts that are deemed
unrecoverable. The company's agreements with third-party developers generally
provide it with exclusive publishing and distribution rights and require it to
make advance payments that are recouped against royalties due to the developer
based on the contractual amounts of product sales, adjusted for certain costs.
Prepaid royalties
The company capitalizes external software development costs (prepaid
royalties) and other content costs subsequent to establishing technological
feasibility of a title. Advance payments are amortized as royalties in cost of
sales on a title-by-title basis based on the greater of the proportion of
current year sales to the total of current and estimated future sales for that
title or the contractual royalty rate based on actual net product sales as
defined in the respective agreements. At each balance sheet date, the company
evaluates the recoverability of advanced development payments and unrecognized
minimum commitments not yet paid to determine the amounts unlikely to be
realized through product sales. Advance payments are charged to cost of sales in
the amount that management determines is unrecoverable in the period in which
such determination is made or if management determines that it will cancel a
development project.
F-37
Deferred tax asset
Referred tax assets are recognized for as far as the management believes
that it is more likely than not that the valued deferred tax asset will be
realized.
Fixed assets
Tangible fixed assets are stated at acquisition cost less depreciation
calculated on a straight-line basis over the estimated useful life. Acquisitions
during the year are written-off from the date of acquisition.
Goodwill
Goodwill arises from investments in subsidiaries and associated companies.
Goodwill is the difference between the purchase price and the company's share in
the amount at which the identifiable assets and liabilities of the acquired
associated company are valued at on initial recognition. Investments in
subsidiaries and associated companies are accounted for by using the equity
method, determined using the same accounting principles as in the companies
accounts. The carrying value of the goodwill will be tested annually for
impairment based on the projected cash flows for the coming years.
Impairment
Impairment is the condition that exists when the carrying amount of a long
lived asset, or group of assets, exceeds its fair value. An impairment loss
shall be recognized only if the carrying amount of the long-lived asset, or
group of assets, is not recoverable and exceeds its fair value. The carrying
amount of a long-lived asset is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual disposition
of the asset at the date. The assessment shall be based on the carrying amount
at the date it is tested for recoverability, whether in use or under
development. An impairment loss shall be measured as the amount by which the
carrying amount of a long-lived asset exceeds its fair value.
Fair value of an asset is the amount at which an asset could be bought or
sold in a current transaction between willing parties, that is, other than in a
forced or liquidation sale.
Current liabilities
Current liabilities are stated at cost.
Long-term liabilities
The long-term loans concern loans with a maturity date beyond one year.
Revenue Recognition
The company evaluates the recognition of revenue based on the criteria set
forth in SOP 97-2, "Software Revenue Recognition", as amended by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" and Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements", as revised by SAB 104, "Revenue
Recognition".
The company evaluates revenue recognition using the following basic criteria:
F-38
o Evidence of an arrangement: the company recognizes
revenue when it has evidence of an agreement with the
customer reflecting the terms and conditions to deliver
products.
o Delivery: Delivery is considered to occur when the products
are shipped and risk of loss has been transferred to the
customer.
o Fixed or determinable fee: If a portion of the arrangement
fee is not fixed or determinable, the company recognizes
that amount as revenue when the amount becomes fixed or
determinable.
o Collection is deemed probable: At the time of the
transaction, the company conducts a credit review of each
customer involved in a significant transaction to determine
the creditworthiness of the customer. Collection is deemed
probable if the company expects the customer to be able
to pay amounts under the arrangement as those amounts become
due. If the company determines that collection is not
probable, it recognizes revenue when collection becomes
probable (generally upon cash collection).
Product Revenue
Product revenue, including sales to resellers and distributors, is recognized
when the above criteria are met.
Selling and marketing
Selling and marketing expenses are expensed in the period in which the service
has been received.
Depreciation
Depreciation on fixed assets (property, plant and equipment) is calculated at
fixed percentages of cost, based on the estimated useful life of the assets.
Interest expense
Interest income (loss) relates to interest received or due from and paid or due
to third parties, stockholders, subsidiaries and associated companies.
Benefit from (provision for) income taxes
The income taxes on the profit and loss account are deferred taxes. Deferred
income tax is recognized to the extent that it is probable that future taxable
profits will be available against which deductible temporary differences can be
utilized. Deferred tax is calculated at the tax rate that is expected to apply
to the period when the asset is realized or the liability is settled.
Earnings per share
Basic EPS shall be computed by dividing net income available to ordinary
stockholders (the numerator) by the weighted-average number of ordinary
shares outstanding (the denominator) during the period. Shares issued during the
period and shares reacquired during the period shall be weighted for the portion
of the period that they were outstanding.
Stock based compensation
The company accounts for its employees stock based compensation plans in
accordance with APB 25, accounting for stock issued to employees. The company
adopts the intrinsic value method, measured at the grant date and is recognized
over the service period, which is usually the vesting period.
F-39
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" which revised Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation". This statement supersedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees". The revised statement
addresses the accounting for share-based payment transactions with employees and
other third parties, eliminates the ability to account for share-based
compensation transactions using APB 25 and requires that the compensation costs
relating to such transactions be recognized in the condensed consolidated
statement of operations. The revised statement is effective as of the first
fiscal year beginning after June 15, 2005.
Although the company is currently analyzing the method of adoption and
impact of the adoption of this standard, effective January 1, 2006, it is
expected to have an impact on the company's condensed consolidated
financial statements similar to the pro forma disclosure under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
Principles of consolidation and reporting entity.
The consolidated accounts comprise the fully consolidated financial information
for Playlogic International N.V. and its subsidiaries in which Playlogic
International N.V. has majority control. Playlogic International N.V. is
considered to control a company if it has, directly or indirectly, more than 50%
of the voting rights in that company, enabling it to influence the company's
finance and business policies and profit from its activities.
The consolidated accounts comprise the financial statements of Playlogic
International N.V. (having its registered office in Amsterdam, The Netherlands)
as head of the group and its 100%-subsidiary Playlogic Game Factory B.V. based
in Breda, The Netherlands (having its registered office in Amsterdam, The
Netherlands).
The financial statements of the parent and its subsidiaries are combined on a
line by line basis by adding together items like assets, liabilities, equity,
income and expenses. Unrealized intercompany results included in development
costs of games at balance sheet date, resulting from intercompany transactions
and intercompany balances, have been eliminated.
Investments in associated companies
If the value of the identifiable assets and liabilities of the acquired
associate was below zero, this value has been recognized for as far as the
company is obliged to satisfy obligations of the associated company which it has
guaranteed or is otherwise committed to.
Note 5 Financial position and continuity
Financial position and continuity.
F-40
The company needs additional capital to fund future operations. Without this
capital, the company will not be able to continue its operations on a stand
alone basis. Through 2005, Playlogic International N.V. secured investment of
approximately (euro) 3.8 million. These investors can be characterized as
informal. They are committed to the long term future of the company.
The company is a global publisher of interactive software games designed for
personal computers, and video game consoles and handheld platforms manufactured
by Sony, Microsoft and Nintendo. Its principal sources of revenue are derived
from publishing and distribution operations. Publishing revenues are derived
from the sale of internally developed software titles or software titles
developed by third parties. Operating margins in its publishing business are
dependent upon its ability to continually release new, commercially successful
products. Operating margins for titles based on licensed properties are affected
by the company's costs to acquire licenses.
The company pursues a growth strategy by capitalizing on the widespread market
acceptance of video game consoles, as well as the growing popularity of
innovative action games that appeal to mature audiences. The company has
established a portfolio of successful proprietary software content for the major
hardware platforms. It expects to continue to become the leader in the mature,
action product category by leveraging its existing franchises and developing new
brands. The company currently anticipates that the release of World Racing 2,
Knights of the Temple 2 and Gene Troopers will generate significant cash flow
from its publishing business in fiscal 2005.
Subsequent Event
On June 30, 2005, the company and its shareholders completed a share exchange
transaction with Donar Enterprises, Inc. ("Donar"), a US company that is listed
on the OTC BB. Following the share exchange transaction, the company became a
wholly-owned subsidiary of Donar and represented all of Donar's operations. The
company's shareholders exchanged all of their shares for shares of Donar in the
share exchange, and the company's former shareholders owned approximately 91% of
the outstanding Donar common stock after the completion of the share exchange.
The share exchange creates the possibility for the company to obtain new capital
through equity financing in the US public market.
The consolidated financial statements have been prepared assuming that the
company will continue as a going concern. The company has experienced losses
from operations, and has a working capital deficiency and accumulated deficit
that raised substantial doubt at year end 2004 about its ability to continue as
a going concern. However, in 2005 all loans granted by stockholders are
redeemed. The redemption was used as payment on shares to be issued. By doing
so, the company entered into the share exchange without any material loans.
Further, new stock has been issued. Nevertheless new capital needs to be raised.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Notes to the consolidated balance sheet as per March 31, 2005
Note 6 Accounts receivable
The accounts receivable as per March 31, 2005 are (euro)416,334. An allowance
for doubtful accounts was not necessary. The accounts receivable as per March
31, 2004 were (euro)9,334.
Note 7 Software development
At the direction of Playlogic International N.V., Playlogic Game
Factory B.V. has developed games. Research and
development costs, which consist primarily of game development costs, are
generally expensed as incurred. Accounting for the cost of games to be sold,
leased or otherwise marketed, provides for the capitalization of certain game
development costs incurred after certain requirements are met. The company
capitalizes internal software development costs and other content costs
subsequent to establishing technological feasibility of a title.
The expenditures underlying the development costs of games were entered on the
basis of project related records and assessed at the directly related costs of
personnel (including salaries, taxes, social securities and other personnel
related costs, machinery and equipement used in R&D, and costs of facilities,
and other directly related costs to R&D activities). The attribution of directly
related costs of personnel is based on the relative share of capitalized working
hours versus the total amount of working hours. Indirect hours are excluded from
the capitalization.
Movements in the development costs of games are:
2005 2004
Balance at January 1 (euro) 860,049 393,557
Capitalized during the year 220,001 298,810
------------ --------------
Balance at March 31 (euro) 1,080,050 692,367
========= =========
It is the expectation that the capitalized games will lead to revenue within one
year and will be recognized as product costs in relation to net sales. The
increase in capitalization is accounted for under the research and development
costs.
Note 8 - Loan to associated companies
2005 2004
Balance at January 1 (euro) 65,000 0
Capitalized during the year 47,01 0
--------------- --------------
Balance at March 31 (euro) 112,015 0
========= ========
F-41
The associated companies are game developers. The company capitalizes external
software development costs (prepaid royalties) and other content costs
subsequent to establishing technological feasibility of a title. The future
royalties payable to the game developer will be set off against the prepaid
royalties for the game they concern. Repayment will only take place as far as
the royalties to be paid to the developer are sufficient to repay the prepaid
royalties. The financing of the games to associated companies have been expensed
to research and development costs as long as they do not meet the requirements
for capitalization.
The games currently under development by the associated companies are
expected to be brought to the market in 2005 or 2006. It is expected that the
future royalties will be more than sufficient to repay the loan.
Note 9 - Deferred tax asset
At March 31, 2005 the taxable loss amounts approximately (euro)18 million. The
deferred income taxes were calculated using the Dutch nominal tax rate of 31.5%,
which is to be applied in the future, as per current Dutch law. Recognition of
the deferred tax asset was caused by the company's entering into contracts to
purchase finished products and for distribution of these games.
Taxable losses
2002 (euro) 2,096,984
2003 (euro) 4,474,764
2004 (euro) 10,610,391
2005 (euro) 619,663
Total (euro) 17,801,802
The total deferred tax asset is (euro)5,607,567 for which valuation allowance is
made of (euro)5,412,374. There are no tax liabilities.
Notes to Consolidated statement of changes in stock holders equity
Note 10 Issued capital
The authorized capital of the company amounts (euro)1,500,000 and is divided
into 29,999,997 ordinary shares and 3 priority shares with a par value of
(euro)0.05.
During 2004, 6,420,040 ordinary shares were issued, leading to a total of
12,803,540 ordinary shares and 3 priority shares at December 31, 2004.
During the first four months of 2005, three transactions were executed with a
total issuance of 130,000 shares, leading to a total of 12,983,530 ordinary
shares and 3 priority shares at March 31, 2005.
In 2004, Sloterhof Investments N.V. and Castilla Investments B.V. have been
granted a stock option right for in total 8,609,189 shares with an exercise
price at par value. The intrinsic value of this option right is recognized as an
expense in 2004.
The priority shares are 6% preferred shares.
The holders of the priority shares (Sloterhof Investments N.V. holds 2 and
Castilla Investments N.V. holds 1) have the following rights:
- The right of approval of transfers of ordinary shares;
- The right to decide about the size of the executive board
and the supervisory board;
- The right to make an obligatory nomination for members of
the executive board and the supervisory board;
- The right to decide about discharge, suspension and
remuneration of members of the management board;
- To make propositions to the general meeting of stockholders
to authorize another board of the company than the general
meeting of stockholders to issue shares.
F-42
The general meeting of stockholders has resolved that the management board of
Playlogic International N.V. shall be the body authorized to issue shares and to
exclude or limit the pre-emptive rights of existing stockholders. This
arrangement will last until 16 July 2007 and is non-revocable, unless the
general meeting of stockholders, at the proposal of the meeting of priority
stockholders, dissolves otherwise.
Note 11 Additional paid in capital
The additional paid in capital concerns the difference between issue price
(after deduction of the issue costs) and the par value of issued shares.
Note 12 Subscribed capital
The subscribed capital, to be carried out in 2005, is included in the
stockholders' equity at March 31, 2005. For an amount of (euro)5,725,555 this
regards an agreement by contract, dated December 31, 2004 that the loans granted
by stock holders have been redeemed at December 31, 2004 and that the concerning
redeemed amount ((euro)5,725,55) has been paid on the subscribed capital for
share issuance to be carried out in 2005. The cash was received but the shares
had not been issued pending only notary approval. For an amount of (euro)77,848
the subscribed capital regards payments received in cash for share issuance to
be carried out in 2005. In 2004 certain stock holders have been granted a stock
option right for in total 8,609,189 shares ((euro)7,200,000) with an exercise
price at par value. The intrinsic value of this option right is recognized as an
expense over the first three months of 2004.
Note 13 Net sales
The increase in net sales is attributable to growth in the company's
publishing business. The increase in revenues was primarily attributable to
sales of Alpha Black Zero and Airborne Troops (PS2), which were released in
October 2004 and January 2005.
F-43
Segmentation of net sales
The net sales could be segmented as follows:
European market: (euro)139,358 (In 2004, they were (euro)0)
US market: (euro)264,000 (In 2004, they were (euro)0)
The products have been delivered to game distributors only. The concerning
games are valued at zero as per March 31, 2005 and March 31, 2004.
Note 14 Product cost
Once software development projects reach technological feasibility a
substantial portion of the company's research and development costs are
capitalized and subsequently amortized as cost of goods sold based on estimated
lifetime product sales.
Note 15 General and administrative
This decrease in general and administrative expenses is primarily the result of
granted options to directors ((euro)7,200,000) over 2004. The expense related to
this option is a non-recurring event.
Note 16 Research and development
Research and development increases are primarily due to the procurement of
development studios, as well as increased personnel costs. Once software
development projects reach technological feasibility, a substantial portion of
the company's research and development costs are capitalized and subsequently
amortized as cost of goods sold based on estimated lifetime product sales.
Part of the research and development consists of game development that meets the
requirements of capitalization. Research and development costs, which consist
primarily of game development costs, are generally expensed as incurred.
Accounting for the cost of games to be sold, leased or otherwise marketed,
provides for the capitalization of certain game development costs incurred after
certain requirements are met. Establishing technological feasibility of the game
and future economic benefit are some of the requirements.
March 31, 2005 March 31, 2004
Research and development 494,599 950,566
Capitalized part software development (220,001) (298,810)
---------------------------------
Net research and development costs (euro) 274,598 (euro) 651,756
The company capitalizes internal software development costs and other content
costs subsequent to establishing technological feasibility of a title.
Amortization of such costs as a component of cost of sales is recorded on a
title-by-title basis based on the greater of the proportion of current year
sales to the total of current and estimated future sales for the title or the
straight-line method over the remaining estimated useful life of the title. At
each balance sheet date, the company evaluates the recoverability of capitalized
software costs based on undiscounted future cash flows and charge to cost of
sales any amounts that are deemed unrecoverable.
Note 17 Benefit from income taxes
The Dutch nominal tax rate is 31.5%. A benefit from income taxes has been
recognized over the taxable amount of the profit and loss account over the first
three months of 2005.
Note 18 Other notes
Security agreement
F-44
Playlogic Game Factory B.V. has signed on August 31, 2004 a security agreement
in favor of the Dutch Tax Authorities for the amount (euro)81,547 concerning
Engine Software B.V.
Transactions with related parties
In 2004 Sloterhof Investments N.V. and Castilla Investments B.V. have been
granted a stock option right for in total 8,609,189 shares with an exercise
price at par value. The intrinsic value of this option right is recognized as an
expense in 2004.
F-45
Consolidated balance sheet as per April 30 2005
Playlogic International N.V.
CONSOLIDATED BALANCE SHEETS April 30, April 30,
(in EUR) 2005 2004
(unaudited) (unaudited)
-------------------- -----------------------
ASSETS
Current assets:
Cash 99,268 48,949
Accounts receivable, net 416,334 9,334
Software development 1,150,050 735,546
Prepaid royalties
Loan to associated companies 170,015 -
Taxes receivables 150,140 186,984
Prepaid expenses and other current assets 450,640 131,150
Deferred tax asset 265,124 -
-------------------- -----------------------
Total current assets 2,701,571 1,111,963
Fixed assets, net 423,051 662,351
Investments in affiliates - -
Goodwill, net - 11,250
-
Intangibles, net - -
Other assets, net - -
-------------------- -----------------------
TOTAL ASSETS 3,124,622 1,785,564
-------------------- -----------------------
F-46
Playlogic International N.V.
CONSOLIDATED BALANCE SHEET
LIABILITIES, AND STOCKHOLDERS' EQUITY April 30, April 30,
(in EUR) 2005 2004
(unaudited) (unaudited)
-----------------------------------------------
Current liabilities:
Accounts payable 1,135,916 1,200,049
Bank overdraft - 434,136
- -
Short term loans from third parties 150,000 -
Accrued expenses:
Personnel expenses 299,491 408,305
Financing software development 200,000
Other current liabilities 280,482 184,625
Loan from stockholder 161,880 6,731,877
Wage tax and social securities payable 355,566 763,392
-----------------------------------------------
Total current liabilities 2,583,335 9,722,384
Long-term liabilities 225,000 255,000
-----------------------------------------------
Total long-term liabilities 255,000 225,000
-----------------------------------------------
Stockholders' equity:
Ordinary shares, par value EUR 0.05 per share; 679,177 319,175
30.000.000 shares authorized; issued and outstanding
at April 30, 2005; 13,583,537;
at April 30, 2004; 6,383,497;
Preferred shares, par value EUR 0.05 per share;
issued and outstanding
at April 30, 2005; 3
at April 30, 2004; 3 - -
Additional paid-in capital 11,076,138 8,911,638
Subscribed capital 13,519,648 -
Accumulated deficit (24,958,676) (17,422,633)
-----------------------------------------------
Total stockholders' equity 316,287 (8,191,820)
-----------------------------------------------
TOTAL LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY 3,124,622 1,785,564
Consolidated Profit and Loss account four months ended April 30, 2005
Playlogic International N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS April 30, April 30,
(in EUR) 2005 2004
(unaudited) (unaudited)
- ------------------------------------------------------------------------------ ---------------------
Net sales 494,958 -
Product costs 94,663 -
--------------------------- ---------------------
Gross profit 400,295 -
Operating expenses:
Selling and marketing 4,785 21,576
General and administrative 655,302 8,000,178
Research and development 360,807 820,931
Capitalization on software development - -
Depreciation 105,306 82,517
--------------------------- ---------------------
Total operating expenses 1,126,200 8,925,202
--------------------------- ---------------------
Loss from operations (725,905) (8,925,202)
Interest expense (115,755) (308,534)
--------------------------- ---------------------
Income before income taxes (841,660) (9,233,736)
Benefit from income taxes 265,123 -
--------------------------- ---------------------
Net loss (576,537) (9,233,736)
--------------------------- ---------------------
Net income (loss) per share:
Basic (0.04) (1.45)
(0.03) (0.62)
Number of shares used in
computation:
Basic 13,583,530 6,383,500
Diluted 18,462,576 14,922,122
F-47
Consolidated Cash Flow Statement four months ended April 30, 2005
Playlogic International N.V.
CONSOLIDATED CASH FLOW April 30, April 30,
STATEMENT 2005 2004
Cash Flows from Operating activities
------------------ ----------------------
Net loss (576,537) (9,233,736)
Adjustments to reconcile net loss
to net cash provided by operating activities
Add back depreciation 105,306 82,517
Add back impairment goodwill
Add back interest accrued into loan from stock holder
Add back one time expense for granted options 7,200,000
Increase/decrease Software development (290,001) (341,989)
Increase/decrease Accounts receivable (416,334) -
Increase/decrease prepaid royalties (105,015) -
Increase/decrease Prepaid expenses and other current
assets (400,986) (170,363)
Increase/decrease Accounts payable (1,198,462) 383,453
Increase/decrease Wage tax and social securities payable 253,901 166,890
Increase/decrease Accrued expenses (418,830) (12,786)
Increase/decrease deferred income taxes (265,124) -
------------------ ----------------------
Net cash used in operating activities (3,312,082) (1,926,014)
------------------ ----------------------
Investing activities
Investment Intangibles -
Investment Fixed assets - (253,407)
------------------ ------------------
Cash Flows from investing activities 0 (253,407)
------------------ ----------------------
Cash Flows from financing activities
Increase/decrease loan from stockholder (5,401,742) 1,736,729
Repayment loan from stockholder
Increase /decrease Long-term liabilities (15,000) (7,500)
Increase /decrease Short-term liabilities (6,000) -
Increase /decrease Bank overdraft (683,278) 434,136
Issuance of new shares 1,707,000 -
Subscribed capital 7,794,093
---------------------------------------------
Net cash provided by financing activities 3,395,073 2,163,365
---------------------------------------------
Increase (decrease) in Cash 82,991 (16,056)
Cash at beginning of period 16,277 65,005
------------------ ----------------------
Cash at end of period 99,268 48,949
The net loss includes interest accrued over the period ended April 30, 2005 of
(euro)115,755 and (euro)308,534 accrued over the period ended April 30, 2005.
Over the period ended April 30, 2005 the company paid (euro)12,000 (for the
period ending April 30, 2004, the company paid zero). Over the period ending
April 30, 2005 and the period ending April 30, 2004, no income tax has been
paid.
F-48
Consolidated statement of changes in Stockholders' equity
Playlogic International N.V.
STOCKHOLDERS' EQUITY
Issued capital
Ordinary Additional Subscribed
Accumulated
Shares shares Paid-in capital capital deficit Total
par value
--------------------------------------------------------------------------------------------------
January 1, 2004 6,383,500 319,175 1,711,638 - (8,188,897) (6,158,084)
-
Issue of share capital 6,420,040 321,002 496,500 - - 817,502
Subscribed capital 2,290,222 - - 5,725,555 - 5,725,555
One time granted option - 7,200,000 7,200,000
Net loss 2004 - (16,193,242) (16,193,242)
-------------------------------------------------------------------------------------------------
At December 31 2004 15,093,762 640,177 9,408,138 5,725,555 (24,382,139) (8,608,269
--------------------------------------------------------------------------------------------------
January 1, 2005 15,093,762 640,177 9,408,138 5,725,555 (24,382,139) (8,608,269)
Movements 2005
Issue of share capital 780,000 39,000 1,668,000 - - 1,707,000
Subscribed capital 9,754,892 - - 7,794,093 - 7,794,093
Net loss January 1, 2005 until 0 - - - (576,537) (576,537)
April 1, 2005
--------------------------------------------------------------------------------------------------
At April 30, 2005 25,628,654 679,177 11,076,138 13,519,648 (24,958,676) 316,287
---------------------------------------------------------------------------------------------------
F-49
Playlogic International N.V.
Notes to consolidated financial statements
Note 1 Description of the business
Playlogic International N.V. (the "company") was incorporated in the Netherlands
in May 2002. The company publishes interactive entertainment software for video
game consoles, PCs and handheld and mobile devices developed by its
internal studio and by third parties.
Note 2 - General
Currency. The financial statements are prepared in Euros (the functional
currency). The applicable exchange rates of the various currencies against the
Euro were used for the conversion. Exchange differences have been included in
the financial results in the profit and loss account.
Financial Risk Management. The company's vulnerabilities, such as trade
receivables and payables, borrowings and liquid resources arise directly from
its operations. The main purpose of its financial risk management is to keep
the company's exposure at a reasonable level.
Currency and interest risk. The company is exposed to currency risks. The
company is particularly exposed to fluctuations in the exchange rate between the
U.S. dollar and the Euro, as it incurs manufacturing costs and price its systems
in Euro (the functional currency) while a portion of its revenue is
denominated in U.S. dollars. A substantial portion of the company's assets,
liabilities and operating results are denominated in Euros, and a minor portion
of its assets, liabilities and operating results are denominated in currencies
other than the Euro. The company's consolidated financial statements are
expressed in Euros. Accordingly, its results of operations are exposed to
fluctuations in various exchange rates. As of the applicable balance sheet
dates, the exposure was very limited, hence, no hedging activities were deemed
necessary. In the company's exchange rate agreements it uses fixed interest
rates.
Credit risk. From time to time distributors and retailers in the interactive
entertainment software industry have experienced significant fluctuations in
their businesses, and a number of them have failed. The insolvency or business
failure of any significant retailer or distributor of products could
materially harm the company's business and financial results. The company
typically makes sales to most of its retailers and some distributors on
unsecured credit, with terms that vary depending upon the customer's credit
history, solvency, credit limits and sales history. If necessary, a sufficient
reserve will be maintained to attempt to a avoid a detrimentof to
the company's business and financial results as a result of payment default. As
of per December 31, 2004 this reserve was zero.
Liquidity risk. The company's management believes that the current cash on
hand and additional cash expected from operations will be sufficient order to
cover its working capital requirements through the third quarter of 2005. After
that time, it will need to obtain additional financing from third parties. If it
does obtain any necessary financing in the future, it may need to cease
operations.
Item 3 - Legal proceedings
None.
Item 4 - Accounting Policies
F-50
Basis of Presentation
The unaudited condensed consolidated financial statements of the company
have been prepared in accordance with the instructions to Regulation S-X.
Accordingly, the financial statements do not include all information and
disclosures necessary for a presentation of the company's financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles in the United States of America. In the opinion of
management, the financial statements reflect all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the company's
financial position, results of operations and cash flows. The results of
operations for any interim periods are not necessarily indicative of the results
for the full year. The unaudited financial statements should be read in
conjunction with the audited financial statements and notes thereto contained in
this prospectus.
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 the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of net sales and expenses during the
reporting periods. The most significant estimates and assumptions relate to the
recoverability of prepaid royalties, capitalized software development costs and
intangibles, inventories, realization of deferred income taxes and the adequacy
of allowances for doubtful accounts. Actual amounts could differ significantly
from these estimates.
Accounts receivable
Accounts receivable are shown after deduction of a provision for bad and
doubtful debts where appropriate.
Software Development
Capitalized software development costs include payments made to independent
software developers under development agreements, as well as direct costs
incurred for internally developed products. The company accounts for software
development costs in accordance with SFAS No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed". Software
development costs are capitalized once technological feasibility of a product is
established and such costs are determined to be recoverable.
The company utilizes both internal development teams and third-party software
developers to develop our its products. It capitalizes internal software
development costs and other content costs subsequent to establishing
technological feasibility of a title. Amortization of such costs as a component
of cost of sales is recorded on a title-by-title basis based on the greater of
the proportion of current year sales to the total of current and estimated
future sales for the title or the straight-line method over the remaining
estimated useful life of the title. At each balance sheet date, the company
evaluates the recoverability of capitalized software costs based on undiscounted
future cash flows and charge to cost of sales any amounts that are deemed
unrecoverable. Our The company's agreements with third-party developers
generally provide us it with exclusive publishing and distribution rights and
require it to make advance payments that are recouped against royalties due
to the developer based on the contractual amounts of product sales, adjusted for
certain costs.
Prepaid royalties
The company capitalizes external software development costs (prepaid royalties)
and other content costs subsequent to establishing technological feasibility of
a title. Advance payments are amortized as royalties in cost of sales on a
title-by-title basis based on the greater of the proportion of current year
sales to the total of current and estimated future sales for that title or the
contractual royalty rate based on actual net product sales as defined in the
respective agreements. At each balance sheet date, the company evaluates the
recoverability of advanced development payments and unrecognized minimum
commitments not yet paid to determine the amounts unlikely to be realized
through product sales. Advance payments are charged to cost of sales in the
amount that management determines is unrecoverable in the period in which such
determination is made or if management determines that it will cancel a
development project.
F-51
Deferred tax asset
Referred tax assets are recognized for as far as the management believes that it
is more likely than not that the valued deferred tax asset will be realized.
Fixed assets
Tangible fixed assets are stated at acquisition cost less depreciation
calculated on a straight-line basis over the estimated useful life. Acquisitions
during the year are written-off from the date of acquisition.
Goodwill
Goodwill arises from investments in subsidiaries and associated companies.
Goodwill is the difference between the purchase price and the company's share in
the amount at which the identifiable assets and liabilities of the acquired
associated company are valued at on initial recognition. Investments in
subsidiaries and associated companies are accounted for by using the equity
method, determined using the same accounting principles as in the companies
accounts. The carrying value of the goodwill will be tested annually for
impairment based on the projected cash flows for the coming years.
Impairment
Impairment is the condition that exists when the carrying amount of a long lived
asset, or group of assets, exceeds its fair value. An impairment loss shall be
recognized only if the carrying amount of the long-lived asset, or group of
assets, is not recoverable and exceeds its fair value. The carrying amount of a
long-lived asset is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the asset
at the date. The assessment shall be based on the carrying amount at the date it
is tested for recoverability, whether in use or under development. An impairment
loss shall be measured as the amount by which the carrying amount of a
long-lived asset exceeds its fair value.
Fair value of an asset is the amount at which an asset could be bought or sold
in a current transaction between willing parties, that is, other than in a
forced or liquidation sale.
Current liabilities
Current liabilities are stated at cost.
Long-term liabilities
The long-term loans concern loans with a maturity date beyond one year.
Revenue Recognition
The company evaluates the recognition of revenue based on the criteria set
forth in SOP 97-2, "Software Revenue Recognition", as amended by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" and Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements", as revised by SAB 104, "Revenue
Recognition".
The company evaluates revenue recognition using the following basic criteria:
F-52
o Evidence of an arrangement: the company recognizes
revenue when it has evidence of an agreement with the
customer reflecting the terms and conditions to deliver
products.
o Delivery: Delivery is considered to occur when the products
are shipped and risk of loss has been transferred to the
customer.
o Fixed or determinable fee: If a portion of the arrangement
fee is not fixed or determinable, the company recognizes
that amount as revenue when the amount becomes fixed or
determinable.
o Collection is deemed probable: At the time of the
transaction, the company conducts a credit review of each
customer involved in a significant transaction to determine
the creditworthiness of the customer. Collection is deemed
probable if the company expects the customer to be able
to pay amounts under the arrangement as those amounts become
due. If the company determines that collection is not
probable, it recognizes revenue when collection becomes
probable (generally upon cash collection).
Product Revenue
Product revenue, including sales to resellers and distributors, is recognized
when the above criteria are met.
Selling and marketing
Selling and marketing expenses are expensed in the period in which the service
has been received.
Depreciation
Depreciation on fixed assets (property, plant and equipment) is calculated at
fixed percentages of cost, based on the estimated useful life of the assets.
Interest expense
Interest income (loss) relates to interest received or due from and paid or due
to third parties, stockholders, subsidiaries and associated companies.
Benefit from (provision for) income taxes
The income taxes on the profit and loss account are deferred taxes. Deferred
income tax is recognized to the extent that it is probable that future taxable
profits will be available against which deductible temporary differences can be
utilized. Deferred tax is calculated at the tax rate that is expected to apply
to the period when the asset is realized or the liability is settled.
Earnings per share
Basic EPS shall be computed by dividing net income available to ordinary
stockholders (the numerator) by the weighted-average number of ordinary
shares outstanding (the denominator) during the period. Shares issued during the
period and shares reacquired during the period shall be weighted for the portion
of the period that they were outstanding.
Stock based compensation
The company accounts for its employees stock based compensation plans in
accordance with APB 25, accounting for stock issued to employees. The company
adopts the intrinsic value method, measured at the grant date and is recognized
over the service period, which is usually the vesting period.
F-53
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" which revised Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation". This statement supersedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees". The revised statement
addresses the accounting for share-based payment transactions with employees and
other third parties, eliminates the ability to account for share-based
compensation transactions using APB 25 and requires that the compensation costs
relating to such transactions be recognized in the condensed consolidated
statement of operations. The revised statement is effective as of the first
fiscal year beginning after June 15, 2005.
Although the company is currently analyzing the method of adoption and
impact of the adoption of this standard, effective January 1, 2006, it is
expected to have an impact on the company's condensed consolidated
financial statements similar to the pro forma disclosure under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
Principles of consolidation and reporting entity.
The consolidated accounts comprise the fully consolidated financial information
for Playlogic International N.V. and its subsidiaries in which Playlogic
International N.V. has majority control. Playlogic International N.V. is
considered to control a company if it has, directly or indirectly, more than 50%
of the voting rights in that company, enabling it to influence the company's
finance and business policies and profit from its activities.
The consolidated accounts comprise the financial statements of Playlogic
International N.V. (having its registered office in Amsterdam, The Netherlands)
as head of the group and its 100%-subsidiary Playlogic Game Factory B.V. based
in Breda, The Netherlands (having its registered office in Amsterdam, The
Netherlands).
The financial statements of the parent and its subsidiaries are combined on a
line by line basis by adding together items like assets, liabilities, equity,
income and expenses. Unrealized intercompany results included in development
costs of games at balance sheet date, resulting from intercompany transactions
and intercompany balances, have been eliminated.
Investments in associated companies
If the value of the identifiable assets and liabilities of the acquired
associate was below zero, this value has been recognized for as far as the
company is obliged to satisfy obligations of the associated company which it has
guaranteed or is otherwise committed to.
Note 5 Financial position and continuity
F-54
Financial position and continuity.
The company needs additional capital to fund future operations. Without this
capital, the company will not be able to continue its operations on a stand
alone basis. Through 2005, Playlogic International N.V. secured investment of
approximately (euro) 3.8 million. These investors can be characterized as
informal. They are committed to the long term future of the company.
The company is a global publisher of interactive software games designed for
personal computers, and video game consoles and handheld platforms manufactured
by Sony, Microsoft and Nintendo. Its principal sources of revenue are derived
from publishing and distribution operations. Publishing revenues are derived
from the sale of internally developed software titles or software titles
developed by third parties. Operating margins in its publishing business are
dependent upon its ability to continually release new, commercially successful
products. Operating margins for titles based on licensed properties are affected
by the company's costs to acquire licenses.
The company pursues a growth strategy by capitalizing on the widespread market
acceptance of video game consoles, as well as the growing popularity of
innovative action games that appeal to mature audiences. The company has
established a portfolio of successful proprietary software content for the major
hardware platforms. It expects to continue to become the leader in the mature,
action product category by leveraging its existing franchises and developing new
brands. The company currently anticipates that the release of World Racing 2,
Knights of the Temple 2 and Gene Troopers will generate significant cash flow
from its publishing business in fiscal 2005.
Subsequent Event
On June 30, 2005, the company and its shareholders completed a share exchange
transaction with Donar Enterprises, Inc. ("Donar"), a US company that is listed
on the OTC BB. Following the share exchange transaction, the company became a
wholly-owned subsidiary of Donar and represented all of Donar's operations. The
company's shareholders exchanged all of their shares for shares of Donar in the
share exchange, and the company's former shareholders owned approximately 91% of
the outstanding Donar common stock after the completion of the share exchange.
The share exchange creates the possibility for the company to obtain new capital
through equity financing in the US public market. The consolidated financial
statements have been prepared assuming that the company will continue as a going
concern. The company has experienced losses from operations, and has a working
capital deficiency and accumulated deficit that raised substantial doubt at year
end 2004 about its ability to continue as a going concern. However, in 2005 all
loans granted by stockholders are redeemed. The redemption was used as payment
on shares to be issued. By doing so, the company entered into the share exchange
without any material loans. Further, new stock has been issued. Nevertheless new
capital needs to be raised. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Note 6 - Software Development
At the direction of Playlogic International N.V., Playlogic Game
Factory B.V. has developed games. Research and
development costs, which consist primarily of game development costs, are
generally expensed as incurred. Accounting for the cost of games to be sold,
leased or otherwise marketed, provides for the capitalization of certain game
development costs incurred after certain requirements are met. The company
capitalizes internal software development costs and other content costs
subsequent to establishing technological feasibility of a title.
The expenditures underlying the development costs of games were entered on the
basis of project related records and assessed at the directly related costs of
personnel (including salaries, taxes, social securities and other personnel
related costs, machinery and equipement used in R&D, and costs of facilities,
and other directly related costs to R&D activities). The attribution of directly
related costs of personnel is based on the relative share of capitalized working
hours versus the total amount of working hours. Indirect hours are excluded from
the capitalization.
Movements in the development costs of games are:
2005 2004
Balance at 1 January (euro) 860,049 (euro) 393,557
Capitalized during the year 290,001 341,989
----------- ------------
Balance at 30 April (euro)1,150 (euro) 735,546
======== ========
It is the expectation that the capitalized games will lead to revenue within one
year and will be recognized as product costs in relation to net sales. The
increase in capitalization is accounted for under the research and development
costs.
Note 7 Loan to associated companies
2005 2004
Balance at 1 January (euro) 65,000 (euro) 0
Capitalized during the year 105,015 0
------------ ------------
Balance at April 30 (euro)170,015 (euro) 0
======== ========
F-55
The associated companies are game developers. The company capitalizes external
software development costs (prepaid royalties) and other content costs
subsequent to establishing technological feasibility of a title. The future
royalties payable to the game developer will be set off against the prepaid
royalties for the game they concern. Repayment will only take place as far as
the royalties to be paid to the developer are sufficient to repay the prepaid
royalties. The financing of the games to associated companies have been expensed
to research and development costs as long as they do not meet the requirements
for capitalization.
The games currently under development by the associated companies are expected
to be brought to the market in 2005. It is expected that the future royalties
will be more than sufficient to repay the loan.
Note 8 - Deferred tax asset
The taxable loss at April 30, 2005 amounts approximately (euro)18 million. The
deferred income taxes were calculated using the Dutch nominal tax rate of 31.5%,
which is to be applied in the future, as per current Dutch law. Recognition of
the deferred tax asset was caused by the company's entering into contracts to
purchase finished products and for distribution of these games.
Taxable losses
2002 (euro) 2,096,984
2003 (euro) 4,474,764
2004 (euro) 10,610,391
2005 (euro) 841,660
Total (euro) 18,023,799
The total deferred tax asset is (euro)5,677,496 for which valuation allowance is
made of (euro)5,412,374. There are no tax liabilities.
April 30, 2005 April 30, 2004
Note 9 Loan from stockholder (euro) 161,880 (euro) 6,731,877
As per April 30, 2005 the loans have been redeemed. The remaining amount
concerns the current account of a stockholder.
Note 10 Issued capital
The authorized capital of the company amounts (euro)1,500,000 and is divided
into 29,999,997 ordinary shares and 3 priority shares with a par value of
(euro)0.05.
During 2004 6,420,040 ordinary shares were issued, leading to a total of
12,803,540 ordinary shares and 3 priority shares at December 31, 2004.
During the first four months of 2005 four transactions were executed with a
total issuance of 780,000 shares, leading to a total of 13,583,537 ordinary
shares and 3 priority shares at April 30, 2005.
In 2004 Sloterhof Investments N.V. and Castilla Investments B.V. have been
granted a stock option right for in total 8,609,189 shares with an exercise
price at par value. The intrinsic value of this option right is recognized as an
expense in 2004.
The priority shares are 6% preferred shares.
The holders of the priority shares (Sloterhof Investments N.V. holds 2 and
Castilla Investments B.V. holds 1) have the following rights:
- The right of approval of transfers of ordinary shares;
- The right to decide about the size of the executive board
and the supervisory board;
- The right to make an obligatory nomination for members of
the executive board and the supervisory board;
- The right to decide about discharge, suspension and
remuneration of members of the management board;
- To make propositions to the general meeting of stockholders
to authorize another board of the company than the general
meeting of stockholders to issue shares.
The general meeting of stockholders has resolved that the management board of
Playlogic International N.V. shall be the body authorized to issue shares and to
exclude or limit the pre-emptive rights of existing stockholders. This
arrangement will last until 16 July 2007 and is non-revocable, unless the
general meeting of stockholders, at the proposal of the meeting of priority
stockholders, dissolves otherwise.
F-56
Note 11 Additional paid in capital
The additional paid in capital concerns the difference between issue price
(after deduction of the issue costs) and the par value of issued shares.
Note 12 Subscribed capital
The subscribed capital, to be carried out in 2005, is included in the
stockholders' equity at April 30, 2005. It has been agreed by contract, dated
December 31, 2004, and April 29, 2005 that the loans granted by stock holders
have been redeemed at respectively December 31, 2004 and April 29, 2005 and that
the concerning redeemed amount ((euro) 13,519,648) have been paid on the
subscribed capital for share issuance to be carried out in 2005. The cash was
received but the shares had not been issued pending only notary approval. In
lieu for the payment of (euro)13,519,648, a number of 12,045,114 ordinary shares
are to be issued in 2005.
In 2004 certain stock holders have been granted a stock option right for in
total 8,609,189 shares ((euro)7,200,000) with an exercise price at par value.
The intrinsic value of this option right is recognized as an expense over the
first four months of 2004. This was a one-time expense.
Note 13 Net sales
The increase in net sales is attributable to growth in the company's publishing
business. The increase in revenues was primarily attributable to sales of Alpha
Black Zero and Airborne Troops (PS2), which were released in October 2004 and
January 2005.
Segmentation of net sales
The net sales could be segmented as follows:
European market: (euro)230,958 (2004: (euro)0)
US market: (euro)264,000 (2004: (euro)0)
The products have been delivered to game distributors only. The concerning games
are valued at zero as per April 30, 2005 and April 30, 2004.
Note 14 Product cost
Once software development projects reach technological feasibility a substantial
portion of our research and development costs are capitalized and subsequently
amortized as cost of goods sold based on estimated lifetime product sales.
Note 15 General and administrative
This decrease in general and administrative expenses is primarily the result of
granted options to directors ((euro)7,200,000) over 2004. The expense related to
this option is a non-recurring event.
Note 16 - Research and development
Research and development increases primarily due to the procurement of
development studios, as well as increased personnel costs. Once software
development projects reach technological feasibility, a substantial portion of
the company's research and development costs are capitalized and subsequently
amortized as cost of goods sold based on estimated lifetime product sales.
Part of the research and development consists of game development that meets the
requirements of capitalization. Research and development costs, which consist
primarily of game development costs, are generally expensed as incurred.
Accounting for the cost of games to be sold, leased or otherwise marketed,
provides for the capitalization of certain game development costs incurred after
certain requirements are met. Establishing technological feasibility of the game
and future economic benefit are some of the requirements.
April 30, 2005 April 30, 2004
Research and development 650,808 1,162,920
Capitalized part software development (290,001) (341,989)
------------------------------------
Net research and development costs (euro) 360,807 (euro) 820,931
The company capitalizes internal software development costs and other content
costs subsequent to establishing technological feasibility of a title.
Amortization of such costs as a component of cost of sales is recorded on a
title-by-title basis based on the greater of the proportion of current year
sales to the total of current and estimated future sales for the title or the
straight-line method over the remaining estimated useful life of the title. At
each balance sheet date, we evaluate the recoverability of capitalized software
costs based on undiscounted future cash flows and charge to cost of sales any
amounts that are deemed unrecoverable.
F-57
Note 17 Benefit from income taxes
The Dutch nominal tax rate is 31.5%. A benefit from income taxes has been
recognized over the taxable amount of the profit and loss account over the first
four months of 2005.
Note 18 Other notes
Security agreement
On August 31, 2004, Playlogic Game Factory B.V. signed a security agreement in
favor of the Dutch Tax Authorities for the amount (euro)81,547 concerning Engine
Software B.V.
Transactions with related parties
In 2004 Sloterhof Investments N.V. and Castilla Investments B.V. have been
granted a stock option right for in total 8,609,189 shares with an exercise
price at par value. The intrinsic value of this option right is recognized as an
expense in 2004.
F-58
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. Indemnification of Directors and Officers
The registrant has the power to indemnify its officers and directors
against liability for certain acts pursuant to Section 145 of the General
Corporation Law of the State of Delaware.
In addition, Article XI of the registrant's Bylaws provides as follows:
" Section"Section 1. (a) RIGHT TO INDEMNIFICATION. Each person who was or
is made a party or is threatened to be made a party or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or
she, or a person of whom he or she is the legal representative, is or was a
director or officer, of the Corporation or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement) reasonably incurred or suffered by such person
in connection therewith and such indemnification shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of his or her heirs, executors and administrators; provided,
however, that, except as provided in paragraph (b) hereof, the Corporation shall
indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such proceeding
(or part thereof) was authorized by the Board of Directors of the Corporation.
The right to indemnification conferred in this Section shall be a contract right
and shall include the right to be paid by the Corporation the expenses incurred
in defending any such proceeding in advance of its final disposition: provided,
however, that, if the Delaware General Corporation Law requires, the payment of
such expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Section or otherwise. The
Corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
(b) RIGHT OF CLAIMANT TO BRING SUIT: If a claim under paragraph (a) of this
Section is not paid in full by the Corporation within thirty days after a
written claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if successful in whole or in part, the claimant shall be entitled
to be paid also the expense of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the Delaware General Corporation law for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard or conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard or conduct.
II-1
(c) Notwithstanding any limitation to the contrary contained in
sub-paragraphs (a) and 8 (b) of this section, the corporation shall, to the
fullest extent permitted by Section 145 of the General Corporation Law of the
State of Delaware, as the same may be amended and supplemented, indemnify any
and all persons whom it shall have power to indemnify under said section from
and against any and all of the expenses, liabilities or other matters referred
to in or covered by said section, and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those indemnified may
be entitled under any By-law, agreement, vote of stockholders or disinterested
Directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be director, officer, employee or agent and shall inure
to the benefit of the heirs, executors and administrators of such a person.
(d) INSURANCE: The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability or
loss under the Delaware General Corporation Law."
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered. All of the amounts
shown are estimates except the Securities and Exchange Commission registration
fee.
Securities and Exchange Commission $3,302
Registration Fee................................ 943
Legal fees and expenses............................ $30,000
Printing and engraving expenses.................... $
Accounting fees and expenses.......................$150,000
Miscellaneous ..................................... $16,698
TOTAL: .................................. $200,000
Item 26. Recent Sales of Unregistered Securities
Each issuance set forth below was made in reliance upon the exemptions from
registration requirements of the Securities Act of 1933, as amended, contained
in Section 4(2) on the basis that such transactions did not involve a public
offering. When appropriate, we determined that the purchasers of securities
described below were sophisticated investors who had the financial ability to
assume the risk of their investment in our securities and acquired such
securities for their own account and not with a view to any distribution thereof
to the public. Where required by applicable law, the certificates evidencing the
securities bear legends stating that the securities are not to be offered, sold
or transferred other than pursuant to an effective registration statement under
the Securities Act or an exemption from such registration requirements.
------------------------------- -------------- -----------------------
NAME SHARES DATE
------------------------------- -------------- -----------------------
------------------------------- -------------- -----------------------
U.S. Capital Partners, Inc. 200,000 January 3, 2003
------------------------------- -------------- -----------------------
------------------------------- -------------- -----------------------
William Tay 1,416,667 June 27, 2003
------------------------------- -------------- -----------------------
------------------------------- -------------- -----------------------
Michael Tay 320,800 March 10, 2004
------------------------------- -------------- -----------------------
------------------------------- -------------- -----------------------
William Tay 1,846,180 April 22, 2004
------------------------------- -------------- -----------------------
------------------------------- -------------- -----------------------
Timothy P. Halter 1,000,000 December 15, 2004
------------------------------- -------------- -----------------------
------------------------------- -------------- -----------------------
Johannes W. M. Kluijtmans 162,100 June 29, 2005
------------------------------- -------------- -----------------------
------------------------------- -------------- -----------------------
C.J.W.A. Komen 36,000 July 1, 2005
------------------------------- -------------- -----------------------
II-2
We issued the 200,000 restricted shares of our common stock to U.S. Capital
Partners, Inc., a financial services company that provides investment banking
and brokerage services, as compensation for financial services that were to be
provided by U.S. Capital Partners, Inc. to us. We estimated the value of these
services at $10,000.
We issued the 1,416,667 restricted shares of our common stock to William Tay,
our president at that time, for past services rendered aggregating $70,833.33
(or $0.05 per share).
We issued the 320,800 restricted shares of our common stock to Michael Tay, the
father of William Tay, for a total of $16,040 in consulting services rendered
(or $0.05 per share).
We issued the 1,846,180 restricted shares of our common stock to William Tay,
our president at that time, for past services rendered aggregating $92,309 (or
$0.05 per share).
We issued to Timothy P. Halter warrants convertible into 1,000,000 shares of our
common stock at a price of $0.06 per share as consideration for Mr. Halter's
agreement to serve as an officer and director. We sold the 162,100 restricted
shares to Johannes W. M. Kluijtmans at a price of $3.75 per share for a total of
$607,875.
We sold the 162,100 restricted shares to C.J.W.A. Komen at a price of $3.75 per
share for a total of $135,000.
Item 27. Exhibits
Exhibit Description
2.1 Share Exchange Agreement, dated June 30, 20005 between the
Registrant and the Shareholders of Playlogic International
N.V. (incorporated by reference to the Registrant's Form 8-K
filed July 1, 2005)
3.1 Certificate of Incorporation of the Registrant, as filed with
the Secretary of State of the State of Delaware (incorporated
by reference to the Registrant's form SB-2/A filed September
5, 2001)
3.2 Amendment to the Certificate of Incorporation of the
Registrant, as filed with the Secretary of State of the State
of Delaware (incorporated by reference to the Registrant's
Form 8-K dated April 15, 2005)
3.3 Bylaws of the Registrant (incorporated by reference to the
Registrant's form SB-2/A filed September 5, 2001)
5 Opinion of Heller, Ehrman LLP*
10.1 Lease for Office Space between Kantoren Fonds Nederland B.V.,
as the Lessor, and Playlogic Game Factory B.V. as the Lessee
dated March 11, 2002
10.2 Lease for Office Accommodation between Fortis Vastgoed B.V.,
as the Landlord, and Playlogic International N.V. as the
Tenant dated April 25, 2005
II-3
10.3 Lease for Office Space between Pr. Dr. D. Valerio, as the
Lessor, and Mr. W.M. Smit company director, , handling in the
function of president of the company Playlogic International
N.V., as the Lessee dated March 12, 2002
10.4 Lease for Office Space between Mr. Endstra, as the Lessor, and
Playlogic Game Factory B.V. as the Lessee dated April 23, 2003
10.5 Employment Contract between Playlogic International, N.V. and
Stefan Layer dated January 12, 2005
10.6 Employment Contract between Playlogic International, N.V. and
Leo van de Voort dated April 4, 2005
10.7 Employment Contract between Playlogic International, N.V. and
Rogier Smit dated July 1, 2005
16.1 Letter from S.W. Hatfield CPA dated June 30, 2005
(incorporated by reference to the Registrant's Form 8-K filed
July 1, 2005)
21.1 Subsidiaries of the Registrant
23.1 Consent of Heller, Ehrman LLP (filed as part of Exhibit 5)*
23.2 Consent of BDO CampsObers, Independent Auditors
- -------------------------------------------------------------------------------
* To be filed by amendment.
II-4
Item 28. Undertakings
A The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement, and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs A(1)(i) and A(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
B Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, in the City of Amsterdam, the
Netherlands, on this 20th day of July, 2005.
DONAR ENTERPRISES, INC.
By: /s/ Willem M. Smit
Willem M. Smit
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Willem M. Smit, as her or his attorney in
fact, to sign any supplements or amendments to this Registration Statement
(including post-effective amendments), and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/Willem M. Smit Director, President, Chief Executive Officer July 20, 2005
Willem M. Smit and Principal Executive Officer
/s/ Leo van de Chief Financial Officer and Principal July 20, 2005
Voort Accounting Officer
Leo van de Voort
II-6
DONAR ENTERPRISES, INC.
Index to Exhibits
Exhibit Description
2.1 Share Exchange Agreement, dated June 30, 20005 between the
Registrant and the Shareholders of Playlogic International
N.V. (incorporated by reference to the Registrant's Form 8-K
filed July 1, 2005)
3.1 Certificate of Incorporation of the Registrant, as filed with
the Secretary of State of the State of Delaware (incorporated
by reference to the Registrant's form SB-2/A filed September
5, 2001)
3.2 Amendment to the Certificate of Incorporation of the
Registrant, as filed with the Secretary of State of the State
of Delaware (incorporated by reference to the Registrant's
Form 8-K dated April 15, 2005)
3.3 Bylaws of the Registrant (incorporated by reference to the
Registrant's form SB-2/A filed September 5, 2001)
5 Opinion of Heller, Ehrman LLP*
10.1 Lease for Office Space between Kantoren Fonds Nederland B.V.,
as the Lessor, and Playlogic Game Factory B.V. as the Lessee
dated March 11, 2002
10.2 Lease for Office Accommodation between Fortis Vastgoed B.V.,
as the Landlord, and Playlogic International N.V. as the
Tenant dated April 25, 2005
10.3 Lease for Office Space between Pr. Dr. D. Valerio, as the
Lessor, and Mr. W.M. Smit company director, , handling in the
function of president of the company Playlogic International
N.V., as the Lessee dated March 12, 2002
10.4 Lease for Office Space between Mr. Endstra, as the Lessor, and
Playlogic Game Factory B.V. as the Lessee dated April 23, 2003
10.5 Employment Contract between Playlogic International, N.V. and
Stefan Layer dated January 12, 2005
10.6 Employment Contract between Playlogic International, N.V. and
Leo van de Voort dated April 4, 2005
10.7 Employment Contract between Playlogic International, N.V. and
Rogier Smit dated July 1, 2005
16.1 Letter from S.W. Hatfield CPA dated June 30, 2005
(incorporated by reference to the Registrant's Form 8-K filed
July 1, 2005)
II-7
21.1 Subsidiaries of the Registrant
23.1 Consent of Heller, Ehrman LLP (filed as part of Exhibit 5)*
23.2 Consent of BDO CampsObers, Independent Auditors
* To be filed by amendment.
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II-8