UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date Earliest Event Reported): March 19, 2004
RESIDENTIAL RESALES, INC.
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(Exact Name of Registrant as Specified in its Charter)
Florida 000-49884 7-3026967
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(State of other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization Number) File Number) Identification No.)
1400 Technology Drive, Harrisonburg, VA 22802
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (540) 437-1688
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270 NW 3rd Court, Boca Raton, Florida_33432-3720
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(Former name or former address, if changed since last report)
Item 1. Changes in Control of Registrant.
Pursuant to the terms of a Share Exchange Agreement dated March 19, 2004
(the "Share Exchange Agreement"), the registrant, Residential Resales, Inc.,
acquired approximately 99.8% of the outstanding shares of capital stock of
Lottery Network Services Ltd., an Irish corporation ("LNS"). Upon the
consummation of the transactions described in the Share Exchange Agreement, LNS
became a majority-owned subsidiary of the registrant. In consideration of the
acquisition of the capital stock of LNS, the registrant issued an aggregate of
10,000,000 shares of its common stock to the shareholders of LNS who now control
the registrant. Also in connection with the Share Exchange Agreement, all of the
registrant's directors resigned but prior thereto appointed new directors to
serve until the next annual meeting of shareholders at which directors are
elected. A more complete description of the terms of the Share Exchange
Agreement, the business of LNS and the identification of new management of the
registrant is set forth below under Item 5, Other Events and Regulation FD
Disclosure.
Item 2. Acquisition or Disposition of Assets.
Upon the acquisition of all of the capital stock of LNS as described in
Item 1, above, and Item 5, below, the registrant became the parent corporation
of LNS, the assets of which are indirectly owned by the registrant. Pro forma
consolidated financial statements of the registrant after giving effect to the
transactions affected by the Share Exchange Agreement are attached hereto under
Item 7, Financial Statements and Exhibits, below.
Item 4. Changes in Registrant's Certifying Accountant.
Upon the consummation of the Share Exchange Agreement, the Registrant
engaged Bouwhuis, Morrill & Company, 12 South Main, Suite 208, Layton, Utah
84041. Bouwhuis, Morrill & Company replaces Earl M. Cohen, CPA, PA.
Item 5. Other Events and Regulation FD Disclosure.
Set forth below is discussion of the business in which we engage after
giving effect to the share exchange described in Item 1, above.
OUR BUSINESS
INTRODUCTION
We are Residential Resales, Inc., a Florida corporation ("we", "us", or the
"Company"). Through our majority-owned (99.8%) subsidiary, Lottery Network
Systems Ltd., we design, build, implement, manage, host and support Internet and
wireless based lottery programs operated by charitable organizations outside of
the United States. Our management team is experienced in all of the
technological and operational elements of Internet and wireless lotteries,
including lottery formation, marketing, sales, prize building and game
development. We believe
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that our management possesses the knowledge and skill necessary to attract,
service and grow existing and newly established charitable lottery
organizations.
Charitable organizations that sponsor public lotteries operate throughout
the world and are more prevalent outside of the United States. These entities,
which we refer to as charitable lottery organizations or CLO's, operate their
lotteries under licenses granted by national or local governments and distribute
net proceeds generated from the sale of tickets to a specific humanitarian cause
(a veterans' hospital, for example) or sports related charity (such as a
country's national Olympic sports team). CLO's typically offer only traditional,
off-line paper lottery games and instant-ticket games. They frequently lack the
funding and infrastructure, including lottery expertise, technological support
and marketing personnel, required to maximize ticket sales and revenues.
Consequently, CLO's tend not to operate at their full potential.
We offer CLO's the opportunity to upgrade their existing off-line lottery
operations by establishing online and wireless (new media) gaming activities,
which we believe can generate far greater revenues and net proceeds than
off-line (traditional) lotteries. We also work with newly formed CLO's to design
and implement traditional lottery programs. We provide our clients with a
comprehensive range of services and products to affect this transition. We
design, implement, host and maintain lottery-game Web sites and other services
for our clients and develop marketing programs and innovative games to attract
new players, enhance ticket sales and increase prize money.
We enter into long-term agreements with our clients pursuant to which we
provide, operate and maintain the customers' lottery systems in return for a
percentage of the net lottery sales. In these agreements, the term "net lottery
sales" typically is defined as sales less prizes and other agreed upon fees.
Most costs are advanced and recouped from revenues earned, with the remainder
split between us and the CLO.
We commenced providing services to clients in August 2003. We currently
operate lottery systems for two customers and have entered into contracts with
three clients to provide services in the future. In addition, we have been
retained as a consultant to provide gaming advice with respect to a project in
Brazil.
OVERVIEW OF THE LOTTERY INDUSTRY
The discussion of and information relating to the lottery industry set
forth below has been compiled by us or derived from independent sources which we
believe to be reliable. We cannot assure you, however, that such statements are
accurate. It has been management's experience that there is less public
information available concerning the international lottery industry than the
lottery industry in the United States.
Lotteries are official, government authorized/licensed fundraising
organizations that in many cases subcontract all or part of their lottery
operation to professional lottery service providers. These providers supply
technology, product, operations, marketing and administrative support. Published
reports indicate that lotteries operate in over 150 domestic and foreign
jurisdictions throughout the world and that as of June 2003 there were more than
400 lottery licenses issued
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world-wide. Some jurisdictions operate or license multiple lotteries which may
include both government-sponsored programs and programs promoted by charitable
organizations. Many governments have authorized national lotteries primarily as
a means of generating non-tax revenues intended to support specific programs,
many of which are humanitarian. Proceeds generated by lotteries may be
designated for particular public purposes, such as education, sports,
humanitarian services and or economic development. Many jurisdictions have
become dependent on the net proceeds generated from the sale of lottery tickets
to support some of those public purposes.
Of the 400 plus lotteries world-wide, approximately 20% account for 85% of
the estimated lottery sales volume of $135 billion (as officially reported).
Many of the second tier lotteries do not have the financial wherewithal to
develop and implement the infrastructure necessary to offer games and prizes
that are attractive to players. These lotteries are limited to selling instant
tickets and preprinted lotto games offering top prizes of $50,000 - $100,000.
Most charitable lottery organizations (CLO's), including charitable sports
organizations (SPORG's), which are not serviced by professional lottery
management organizations, are considered second tier lotteries and comprise our
target clientele.
In general, lotteries can be categorized into two principal groups, online
system lotteries and off-line lotteries, each of which includes a variety of
game types. Online lotteries are conducted through a computerized lottery system
in which lottery terminals are connected to a central computer system. Online
lottery systems generally are utilized to conduct games such as lotto, keno and
numbers, and permit a player to make his own selections. Off-line lotteries
feature lottery games which are not computerized, such as traditional paper
lottery games and instant-ticket games. Generally, traditional off-line lottery
games, in which players purchase tickets which are manually processed for a
future drawing, are conducted only in international jurisdictions.
Instant-ticket games, in which players scratch-off a coating from a pre-printed
ticket to determine if it is a winning ticket, are conducted both
internationally and in the United States.
Statistics show that, typically, online lotteries generate greater revenues
than both traditional off-line lottery games and instant-ticket games. There are
several other advantages to online lotteries as compared to traditional off-line
lotteries. Unlike traditional off-line lottery games, online lottery systems
allow for wagers to be accepted and processed until minutes before a drawing,
thereby significantly increasing the lottery's revenue in cases in which a large
prize has attracted substantial wagering interest. Online lottery systems also
provide greater reliability and security, allow a wider variety of games to be
offered and automate accounting and administrative procedures which are
otherwise manually performed at potentially high cost to the sponsor.
OUR OPPORTUNITY
Lotteries operated by charitable organizations have existed for some time.
Generally, these lotteries are limited to offering traditional paper and instant
ticket games. These games offer only small prizes and do not attract large
audiences, thereby limiting the proceeds available
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to distribute to the cause for which they were founded. Their operations have
been constrained by personnel who lack operational experience, technological
limitations and adequate funding. The causes they support, such as health care,
environmental conservation and nationally sponsored athletic activities,
generally enjoy wide public appeal and to some degree have been, and continue to
be, funded by governments. However, financial pressure attributable to rising
costs for social programs and poor global economic performance over the last
several years have eroded the ability of national and local governments to fund
these important social and public projects from revenues generated from taxes.
Many national and local governments have sought to supplement funding for these
essential programs through alternative means such as issue-specific lotteries.
In many jurisdictions, governments have granted broad licenses to charitable
organizations to operate lotteries to fund these important social programs.
For the most part, the core competence of a charitable organization is to
attend to the specific cause for which it was founded. In many instances the
right to establish and operate a charitable lottery is granted by the government
to a not for profit organization which is often headed by a prominent citizen
who has devoted a great deal of time to a particular cause or who is a
celebrated athlete. Frequently, charitable lottery organizations and the people
who run them do not have the capacity to fully develop the lottery opportunity
granted to them and consequently never realize the full extent of the revenue
generating potential of their mandate. In many cases, they do not even
understand the full gaming opportunities available to them. Specifically, CLO's
do not possess the experience, know-how or technology to develop new games or
implement online and wireless games nor do they possess the marketing resources
and expertise necessary to build prizes that will attract new players. CLO's
tend not to be competitive with larger state operated lotteries because the
games and prizes they offer are not exciting to the average lottery participant.
These entities require the assistance of a professional organization to design,
implement, manage and fund the development of their opportunity to maximize net
proceeds generated from ticket sales and, in many cases, to lend credibility to
the organization's lottery.
We believe that charitable lottery organizations are under-serviced. Large
providers of lottery services and products have selectively overlooked this
market because these clients do not yield the financial return which can be
derived from servicing larger national and state run lotteries and do not
warrant the significant capital investment required to implement and operate a
traditional land-based lottery and the CLOs do not have the funding to implement
the infrastructure necessary to build a competitive operation. We believe that
our staff has the lottery experience, gaming know-how and technological
expertise and presence necessary to attract, service and grow small to mid-size
charitable lottery organizations.
EXISTING CLIENTS
We currently manage lotteries for two clients and have contracts to manage
lotteries with three other organizations. Unless otherwise noted, the discussion
below relating to each agreement under which we have been retained to establish
and operate a lottery assumes that the party with which we have contracted is a
duly authorized licensee of the government to operate a lottery. The discussion
below also assumes that we will be responsible generally for all manner of
implementation and operation of the particular lottery, including that we will:
(i) provide a variety
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games for the lottery; (ii) undertake all accounting functions; (iii) undertake
all administrative aspects of the operation of the lottery; (iv) undertake all
marketing, advertising and promotion of the lottery; (v) provide cash management
systems; (vi) distribute lottery proceeds to the lottery licensee; and (vii)
ensure compliance with all applicable laws.
In September 2001, we entered into an agreement with Rehab Net Games
Limited (Rehab), an Irish corporation, as amended in January 2004, to develop,
manage and operate lottery games for the Internet and wireless telephones within
the Republic of Ireland for a period of 10 years. This agreement is subject to
automatic extensions for five-year periods in the event that Rehab earns certain
agreed upon minimum proceeds during the fifth through tenth years of the term of
the agreement and the eleventh through fifteenth years of the term of the
agreement. The agreement may be terminated by Rehab in the event that we fail to
pay Rehab the fees provided for in the agreement or, after the ninth year of the
agreement upon twelve months notice of a party's intention to terminate. We
completed implementation of the Internet portion of the lottery program in
August 2003 and currently are managing and operating the lottery. We are in the
process of developing various wireless opportunities and are seeking to identify
a local telephone company with which we will partner to offer the wireless
portion of the program.
Pursuant to an agreement dated December 17, 2001, we have established and
currently operate and maintain lottery programs utilizing Internet technologies
for Rehab Charities UK Limited. We commenced operation of Rehab UK lottery in
December 2003. We are responsible for all manner of operations of the Rehab UK
lottery. We have provided all funding to develop and implement the lottery for
Rehab UK. Our agreement is for a term of five years.
We are party to an agreement with Tropical Gaming, Belize which has the
right to conduct a lottery using the Internet and wireless modalities in the
Country of Belize. The agreement, dated November 27, 2001, provides for an
initial term of 10 years subject to two 5-year extensions in our sole
discretion. The agreement may be terminated by either party upon any default in
the performance of the agreement. This lottery is not currently operating; we
are analyzing our options with respect to a launch date for this lottery.
Under an agreement dated February 12, 2002, the Guatemalan Pediatric
Foundation retained us to establish and operate lottery games in Guatemala
through the Internet and wireless communications systems. The term of the
agreement is for seven years and is automatically renewable for a second
seven-year term. We have not begun to implement this lottery as of the date
hereof and have not determined when we will commence developing the system.
We are party to an agreement dated December 7, 2001 with a lottery
organization located in Russia, The Intellect Foundation, to establish and
operate a lottery for this entity. The agreement provides for a ten-year term
subject to extension in our sole discretion for two additional five-year terms.
This lottery is not yet operating and we have not decided when to undertake
development of the system.
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On February 3, 2004, we entered into an agreement with Carnegie Cooke &
Company Inc., an owner and operator of off-track betting sites and race tracks
in Brazil, to provide consulting services with respect to the implementation of
video lottery games at horse racing tracks in Brazil. Under the contract, we are
obligated to (i) provide consulting services as to the types of games to be
installed at these facilities; (ii) assist our client in obtaining government
support with respect to the gaming program; (iii) prepare presentations and
support documents which evidence the efficacy and success of similar programs
within the US and the impact on horse racing, state lotteries and economic
benefits; (iv) make presentations to government officials as required; and (v)
otherwise assist our client in preparing business plans to develop and support
their opportunity. In addition to consulting, we are discussing the possibility
of introducing other gaming products in Brazil. In consideration for the
services we will render, Carnegie Cooke & Company has agreed to issue to us an
aggregate of 600,000 shares of its common stock issuable in four installments of
150,000 shares, the first tranches of which was delivered on the execution of
the agreement, and additional tranches to be delivered every three months
thereafter. In addition, at such time as the program is implemented, if ever,
Carnegie Cooke & Company will issue to us an additional 1,000,000 shares of its
common stock.
WHAT WE DO
We offer an integrated range of products and services to develop, build and
host lotteries for charitable lottery organizations (CLO's). We have assembled a
management team that combines a strong lottery operations background, extensive
game development experience and the technological expertise required to create
and operate these lottery systems. We:
o analyze our client's operations and the gaming preferences of the
indigenous population;
o design, install, operate, host and maintain internet based lottery
systems that can support internet games, wireless games and
interactive TV games;
o design and implement marketing programs to enhance ticket sales and
increase the net proceeds an organization generates from its lottery;
and
o design innovative games to attract new players and increase prize
money.
A significant aspect of the value we add to our client's operations derives
from the credibility we contribute to the organization. Many CLO's have operated
as second tier lotteries within their host jurisdictions. An affiliation with
our organization significantly increases the CLO's technological capabilities to
operate a modern lottery program and to participate with shared technology
proven and in use worldwide. The government greatly supports these
organizations but is unable to financially support all of their needs so it
gives them extremely valuable and broad gaming licenses. We show a CLO how to
maximize the revenue generating potential of its government sanctioned gaming
opportunity.
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We believe that the services we provide and the end-product we deliver to
our clients and, ultimately, the public, can help transform these lotteries into
first class operations with the capacity to achieve their revenue goals. Our
clients benefit from access to a professional lottery organization that grants
them access to our lottery know-how and expertise, allows them to offer larger
prizes, offers them access to state-of-the-art technologies, and makes available
to them a wide variety of new gaming formats. We seek to build organizations
founded on operational and financial integrity that inspire public confidence
and allow the organization to realize its full potential.
Our business model can be replicated on varying scales in discrete
geographical areas. The fundamental elements of the lottery infrastructure,
including the Web site and game concepts we have developed, can be migrated from
client to client, allowing us to repeatedly re-brand our product for other
CLO's. This process, known as "changing the skin", allows us to simultaneously
meet the needs of numerous charities, while reducing the set-up time and
organizational costs associated with establishing each charity's
Internet/wireless presence.
We currently are investigating the possibility of developing an Internet
portal which would feature each of our clients' lotteries. Any such Internet
portal likely will require the approval of the regulatory authorities in each of
the jurisdictions in which are clients are situated and we can not be certain
that we will obtain the approvals necessary to effectuate this concept. We
anticipate that any Internet links to our clients' lotteries would send visitors
to our Internet portal as a pass-through site. The pass-through site would
identify us and each of our client's lotteries. Visitors would begin to
associate our name with technologically advanced lotteries operated with a high
degree of integrity. We believe that the appearance of our client's lotteries on
the site will lend to them additional credibility of association with a
professionally managed organization which is trusted by lottery players around
the world. The pass-through site would also serve as a branding and promotional
mechanism for our services and products.
PRODUCTS AND SERVICES
Once we have been engaged by a CLO, we analyze the local gaming
environment, including the client's existing operations, business practices and
the personal gaming preferences of the indigenous population. We consider many
factors in developing a new technology presence for our client, including the
demographic composition and sociological character of the geographic locality in
which the lottery will operate, to ascertain the types of games that will appeal
to the local population and the nature of the marketing strategy which we will
employ. We may compare one client's circumstances with successful lotteries
operating in other jurisdictions to determine the most appropriate games to
offer and the most effective marketing techniques as they relate to that
population.
Most CLO's do not possess the capital to implement a sophisticated lottery
program. If, after careful analysis, we determine that a lottery warrants our
financial assistance, we hope to be in a position to provide financing in the
form of a loan to proceed with a relationship. We propose to provide the
services and products required to implement on account and retain from the
lottery's profits all costs and expenses incurred.
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In a few jurisdictions, gaming regulations require that the lottery
managers be licensed with local gaming commissions. We seek to identify and
partner with licensed local lottery managers who have earned the highest
reputation of integrity and innovation. These entities often agree with us to
provide on-site services after installation of the lottery system. They possess
the local knowledge necessary to navigate the regulatory requirements. We work
closely with our local partners and the regulatory authorities in each of the
jurisdictions in which our clients operate to design and operate Web sites and
wireless programs that conform to all local laws. These laws may pertain to the
features of a lottery, such as the percentage of gross revenues that must be
paid back to players in prize money, the determination of the types of games
played, the price of each game and the manner in which the lottery is marketed.
In addition, the Web sites we design for clients conspicuously post all required
applicable gaming laws of that jurisdiction, such as any legal disclaimers.
We work with the client to develop a program that is profitable to the
client, efficient to manage and operate and cost effective to both the CLO and
us. Our objective is to create a comprehensive program that offers games which
appeal to the user, broaden the base of players and increase prizes. It is our
experience that as prize amounts escalate, interest in a lottery increases. This
benefits the CLO in that it draws additional attention to the charitable cause
underlying the lottery and results in greater ticket sales and more proceeds to
distribute to the cause. Growth becomes self-actuating in that as more people
play a lottery to win a larger prize, lottery proceeds increase and allow for
even larger prizes, drawing more players.
We construct robust Web sites for our clients capable of handling a high
volume of traffic. We host the Web sites on servers located in the United
Kingdom, five of which are owned by us and the balance of which we lease from an
independent third party, Alladdin Limited. Web sites are designed to ease
registration and use and to promote maximum security. To date, we have retained
the services of Alladdin to operate and maintain our servers in the United
Kingdom and to support our clients' Web sites as required in our agreements with
them on a 24/7 basis.
Visitors register to play games on our clients' Web sites in confidence,
securely deposit funds and begin playing games shortly after acknowledgement of
registration by the CLO. Financial transactions are executed behind firewalls
using encryption software and all deposits and disbursements are confirmed by
independent, internationally reputable banks.
Initially, our client lottery Web sites offer a variety of video lottery
games. We continually analyze each client's operations to devise and implement
appropriate marketing strategies and introduce new games which we believe will
be appealing and attract local players. The introduction of new games retains
loyal visitors to the site and attracts new ones in an effort to grow prize
levels. Members of our management team have extensive experience developing new
lottery game formats. In addition, we also purchase and license lottery game
formats from third parties.
An important feature of our clients' Web sites is the ability to include
advertising banners on appropriate screens. In many instances, the charity
underlying the lottery will enjoy strong public support, such as a national
Olympic organization. These Web sites may draw a wide
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range of visitors, including those who do not normally play lottery games, who
seek to support the host organization. This ability will allow us to creatively
support co-promotions with local companies. It is our intent to market
extensively with large, well-known local companies whose name will be attached
to the specific game.
With each client, we will expand distribution of various games to include
access by way of wireless devices and mobile telephones. At such time as a
lottery is operating within our expected parameters, we will commence the
process of identifying and obtaining the services of local telephone/wireless
companies and establish working protocols to provide private and secure access
to our client's lottery games via wireless devices and mobile telephones. Given
the increasing pervasiveness of these apparatus, extension of our operations to
include these modalities will allow us to tap into an as yet to be fully
exploited revenue stream. Players will have access to a wide range of games
developed specifically for these devices and will be able to play anywhere
within their service coverage area. We believe that these games will be of
particular appeal to young adult players who have integrated these technologies
into their every-day lives.
The final implementation phase encompasses expansion into land-based
operations. We will assist the lottery organization in expanding an existing
network of land-based retailers or creating a new retailer network, as required.
In many countries, banks, post offices and independent kiosks act as ticket
retailers and receive a per ticket fee for their services. Given the nature of
the underlying charitable causes of our clients, these entities normally are
disposed to serve as retailers of tickets. Moreover, our business model assumes
significant margins on sales of land-based lottery tickets and we will be able
to provide a real financial inducement to these entities to participate in
ticket sales. In those countries where access to the Internet use is limited,
land-based sales of lottery tickets will expand market penetration and can
provide significant additional revenues.
MARKETING OF OUR CLIENTS' LOTTERIES
As provided in our client agreements, marketing, advertising and promoting
our clients' lotteries represents an integral component of the services we
provide. We work with our clients to develop marketing programs that account for
and incorporate local cultural values. We devise marketing strategies that
encompass traditional advertising media, public relations and co-promotional
campaigns. We seek to place click-on banner advertisements on popular local Web
sites as a means of directing traffic to our clients' online lotteries. In
addition, we advertise in national and regional newspapers and special interest
magazines. We will actively pursue co-promotion programs with local companies
for added exposure. When we implement the land-based phase of a client's lottery
operations, we believe that a significant portion of the marketing can be
conducted through ticket sales agents at the point of sale.
CONTRACT PROCUREMENT
To a large degree, lottery contracts are secured on the basis of
pre-existing relationships between personnel of lottery management companies
such as ours and lottery licensees. We are dependent upon the relationships
members of our management have developed during the course
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of their respective careers. Industry knowledge, personal integrity and
credibility within the world-wide lottery community are valuable resources which
are gained after years of operational and marketing experience. Our lottery
personnel average over twenty years of experience in the industry and have
fostered and maintain the types of relationships that allow us to present our
programs to existing and newly organized lotteries. Performance is also an
important factor and our management has been successful in demonstrating the
positive results experienced by their previous clients.
We market our services to potential clients on the basis that we can
provide them with (i) lottery operations expertise, (ii) state-of-the-art
technologies and Web site design; (iii) the ability to grow and offer prizes far
larger than they have as off-line lotteries; (iv) a wide variety of new gaming
formats; (v) secure transaction processing and accurate accounting; and, perhaps
most importantly, (vi) greater credibility within their host jurisdiction
resulting from an affiliation with a professional lottery organization.
CONTRACTS WITH CLIENTS
Under a typical client agreement, we are required to develop, install,
operate and maintain an Internet lottery system for a client, while retaining
ownership of the lottery system. In addition, we are responsible for:
implementing all manner of accounting and auditing systems and maintaining
financial records; the collection of lottery monies; the selection of winners,
and the financial responsibility for the payment of prizes. Most importantly, we
are required to maintain conformity with all local gaming laws and other
applicable regulations pertaining to our operation of lotteries on behalf of our
clients. In some cases, we agree to provide the funds required to implement a
client's lottery and are repaid from lottery proceeds on terms specified in our
contract with a lottery.
Because some jurisdictions have regulations which require that lottery
managers be licensed with the local gaming commission, we retain or enter into
partnerships with duly licensed local entities and consultants with whom we
contract for representation in specific market areas. These entities are
familiar with local gaming regulations and assist developing and implementing
lottery programs and systems that comply with all local laws. These licensees
and consultants often agree with us to provide on-site services after
installation of the lottery system.
We seek to enter into long-term agreements with our clients that extend for
a period of at least five years. Our agreements usually are subject to automatic
extensions for additional 5-year periods in the event we achieve certain
negotiated benchmarks relating to the proceeds generated by a lottery and paid
to the client.
Revenues under our client agreements are generally based upon a percentage
of net lottery ticket sales. The level of lottery ticket sales within a given
jurisdiction is determined by many factors, including population density, the
types of games played and the games' design, the size and frequency of prizes,
the nature of the lottery's marketing efforts and the length of time the lottery
system has been in operation.
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Under our client agreements, we retain title to the lottery system and
typically provide our clients with the services necessary to operate and
manage the lottery system. We install and commence operations of a lottery
system after being awarded the agreement and, following the start-up of the
lottery system, we are responsible for all aspects of the system's operations.
We operate lottery systems for all of our clients through a shared central
computer system. We assign members of our staff to interface with lottery
personnel with respect to all matters of our operations, including specialists
dedicated to Web site operation, marketing, and product offerings and customer
service representatives who service and maintain the system.
OUR BUSINESS PARTNERS
A key to our success and the success of our clients is the underlying
integrity of our organization and the product we develop for them. We market our
services and products to clients on the basis that their affiliation with us
will lend needed credibility to develop and support a thriving organization with
the potential to increase lottery revenues. Toward that end, we have been highly
selective with respect to our industry partners. We work with Barclay's Bank in
the United Kingdom to handle all financial transactions between us and our
clients and visitors to our clients' Web sites. All transactions and accounting
procedures are automated to avoid human error. In addition, we, along with the
leaders of some of our client charities, have established the Global Charity
Lottery Commission (GCLC) to serve as an independent regulatory entity to
oversee and manage financial transactions of lotteries operated by CLO's. This
organization verifies transactions, identifies suspected fraud or money
laundering, maintains industry standards and conducts dispute resolution. The
board and management of this organization is comprised of management drawn from
various charities and related fields.
GAMES
We believe that an important factor in maintaining and increasing public
interest in lotteries is innovation in game design. Our games are designed to
catch the eye and interest of potential players. We work closely with lottery
regulators and our clients to design customized lottery games which are intended
to appeal to the populations in which our clients are located. We employ
principles of demographics, sociology, psychology, mathematics and computer
technology in the development of our games. The principal characteristics of
game design include frequency of drawing, size of pool, cost per play and
setting of appropriate odds. We believe that our management has acquired
expertise in game design that will enhance the marketing of our lottery systems.
We currently have a substantial number of variations of lottery games in
our software library and new games under development. We believe that our game
library and the "know how" and experience accumulated by our professionals make
it possible for us to meet the requirements of our customers for specifically
tailored games on a timely and comprehensive basis. In addition, we have engaged
third parties to provide us with specific games that we believe will attract
players to our clients' sites.
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TECHNOLOGY
We host our clients' lotteries on our servers located in the United Kingdom
and operated by a third party that we have retained to undertake some of our
operational obligations for our European clients. Our servers are designed to
provide continuous availability, a high throughput rate and maximum security.
Central computer installations include redundant computers, various peripheral
devices (such as magnetic storage devices), and various safety, environmental
control and security subsystems (including a back-up power supply). The software
we utilize is designed to provide rapid processing, a high degree of security
and redundancy to guard against unauthorized access and tampering and to ensure
continued operations without data loss.
Another critical ingredient to our success is the technological support we
offer our clients. Avoiding Web site downtime is essential both to our
reputation and to our clients' ability to maximize their revenues. We monitor
and maintain the Web sites and servers on a 24/7 basis to avoid any possibility
of downtime or loss of service.
COMPETITION
The lottery market is divided into three distinctive categories: large
government operated lotteries; small government operated lotteries; and
independently operated charity lotteries. Present lottery suppliers concentrate
their marketing efforts on the large government operated lotteries. As
government operated lotteries, these lotteries have the financial wherewithal to
install substantial dedicated lottery systems and equipment. Competition for
this clientele is competitive; however, this segment of the market is supported
by only a few known companies. Competition for small and mid-sized government
and charity operated lotteries has become more competitive over time as new
revenue avenues are explored. To date, neither the charity lottery marketplace
nor the Internet/wireless lottery marketplace has been significantly penetrated.
We have conducted an internal investigation as to those entities specifically
engaged in servicing charitable lottery organizations and have determined that
this market currently is under-serviced. We believe that by being the first
company dedicated to serving this market and given the experience and aptitude
of our management, we will be able to establish ourselves as the premier
provider of services and products to charitable lottery organizations.
Of important note is that the core business of all major lottery suppliers
is based on land based games and dedicated equipment. Substantial capital is
invested in these systems, whether they be print facilities to produce instant
"scratch" tickets, sales terminals to sell on-line lottery games, or video
lottery terminals. It is this substantial capital investment that drives these
companies to compete for the large lottery projects. Small lottery operations do
not generate the volume required to justify the capital expenditure on their
part. Their products and solutions are too expensive to be competitive in the
smaller lottery market.
The Internet-based solution we offer do not rely on the products or
services that the large lottery service organizations currently market. Entering
this market and encouraging clients to explore this technology would have to be
done at a substantial capital loss as it decreases the industry's reliance on
its current products. Additionally, Internet technology creates a client
conflict for these companies. Currently, most of their clients protect their
sales
13
boarders by offering land based games only. The development of Internet/wireless
gaming formats may adversely affect the technology hold they have on their
existing client base.
We are not reliant on these large government lotteries for success. We do
not have to make the large capital investment in equipment that would otherwise
deter us from this approach.
GOVERNMENT REGULATION
Lotteries may be lawfully conducted only in jurisdictions in which they are
expressly permitted by law and are subject to extensive government regulation.
Regulation typically includes some form of licensing of applicants and their
subsidiaries. Applicants for, or holders of, a license are subject to a broad
examination including, among other items, financial stability, integrity and
business experience. Although certain of the features of a lottery, such as the
percentage of gross revenues that must be paid back to players in prize money,
are sometimes fixed by legislation, lottery regulatory authorities generally
exercise significant discretion, including the determination of the types of
games played, the price of each wager, the manner in which the lottery is
marketed, the selection of the vendors of equipment and services and the
retailers of lottery products. Laws and regulations applicable to lotteries in
foreign jurisdictions evolve and are subject to change, and the effect of such
changes on our ongoing and potential operations cannot be predicted with
certainty.
Many jurisdictions require detailed background disclosure on a continuous
basis from, and conduct background investigations of, the provider, its
subsidiaries and affiliates and its principal shareholders. Regulators generally
conduct background investigations of the provider's employees who will be
directly responsible for the operation of the system, and most jurisdictions
reserve the right to require the removal of employees whom they deem to be
unsuitable or whose presence they believe may adversely affect the operational
security or integrity of the lottery. Certain jurisdictions also require
extensive personal and financial disclosure and background checks from persons
and entities beneficially owning a specified percentage (typically five percent
or more) of a provider's securities. The failure of beneficial owners of our
securities to submit to background checks and provide such disclosure could
jeopardize the award of a lottery contract to us or provide grounds for
termination of an existing lottery contract.
The award of lottery contracts and ongoing operations of lotteries in
international jurisdictions also are extensively regulated. Restrictions may be
imposed on foreign corporations seeking to do business in such jurisdictions
and, as a consequence, we may have to partner with local companies when seeking
foreign lottery contracts.
We believe we are currently in substantial compliance with all regulatory
requirements in the jurisdictions where we operate. Any failure to receive a
material license or the loss of a material license that we currently hold or our
failure to remain in compliance with local laws could have a material adverse
effect on our overall operations and financial condition.
14
EMPLOYEES
As of March 1, 2004, we had approximately 12 full-time employees, including
our management. Our employees are not represented by any labor union. We believe
that our relationship with our employees is satisfactory.
DESCRIPTION OF PROPERTY
Our principal executive offices are located at 1400 Technology Drive,
Harrisonburg, Virginia, where we lease approximately 1,850 square feet of office
space. We have leased this space through September 2004 and have the right to
extend the term on a month-to-month basis, assuming that we are not in default
under the lease. The monthly rent for this space is $3,000.
We also lease approximately 2,200 square feet of office space at Hillsboro
Tower, 1800 - 4th Street S.W., Calgary, Alberta, Canada. We lease this space
through December 31, 2004 at a monthly rent of $2,790 (Canadian). Our software
and game developers operate from this facility.
We have not determined our future requirements for office space but expect
that adequate space will be available on acceptable terms and conditions as
necessary.
RISK FACTORS
An investment in our securities is speculative and involves a high degree
of risk. Potential investors should carefully consider the risks described below
and elsewhere herein, including the financial statements and related notes
before purchasing our securities. The risks set forth below are not the only
ones our Company will face. Additional risks and uncertainties may also
adversely impair our business operations. If any of these risks actually occur,
our business, financial condition, and/or results of operations would likely
suffer significantly.
WE ARE A YOUNG COMPANY WITH A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES
AND HAVE NOT GENERATED ANY REVENUES FROM OPERATIONS.
To date, our operations have consisted primarily of conducting an analysis
of our industry and developing our business model. In addition, we have entered
into agreements with six clients, two of which currently are operating
lotteries. Accordingly, we have only a limited operating history on which you
can base an investment decision in our securities. Since our inception, we have
not generated any revenues from operations and have not achieved profitability
and expect to continue to incur operating losses for the foreseeable future. For
the nine months ended December 31, 2003, our operating subsidiary incurred net
losses of $885,414. Specifically, to be profitable, we must identify more
clients and implement our lottery systems.
We cannot assure you that we will be able to execute our business model on
a wide-scale basis or that we ever will achieve profitability. The likelihood of
our success must be considered
15
in light of the problems, expenses and complications frequently encountered in
connection with the development of a new business and the competitive
environment in which we operate.
WE WILL REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND WITHOUT IT WE
WILL NOT BE ABLE TO CONTINUE OPERATIONS.
At January 31, 2004, we had a working capital deficit of $1,567,404. The
independent auditors' report to our financial statements for the year ended
March 31, 2003, includes an explanatory paragraph to their audit opinion stating
that our recurring losses from operations, negative cash flows from operations
and working capital deficiency raise substantial doubt about our ability to
continue as a going concern. The financial statements do not include adjustments
as a result of that uncertainty.
We do not currently have sufficient financial resources to fund our
operations. We will require significant additional capital to fund our future
operations. To date, we have not generated any revenues from operations. We will
require significant additional capital to fully implement our business,
operating and development plans, including capital to stabilize our balance
sheet to satisfy the requirements of regulatory authorities that may review our
financial condition in connection with approving us to provide services to a CLO
and to finance certain operations of our clients until they are in a position to
repay us for services rendered and costs and expenses incurred on their behalf.
In addition, we are party to three contracts to provide services and products to
clients but have been unable to execute our obligations under these agreements
because we lack the capital therefor. While we have no liability under these
agreements if we are unable to perform, our inability to initiate the provision
of services under these agreements will negatively impact our financial
condition and adversely reflect on our reputation, which may materially harm our
business.
Our ability to raise additional financing depends on many factors beyond
our control, including the state of capital markets, the market price of our
common stock and the development or prospects for development of competitive
technology by others. The necessary additional financing may not be available to
us or may be available only on terms that would result in further dilution to
the current owners of our common stock. If we are unable to raise additional
funds when we need them, we may have to curtail or discontinue our operations.
GOVERNMENT REGULATIONS AND OTHER ACTIONS AFFECTING THE LOTTERY INDUSTRY COULD
HAVE A NEGATIVE EFFECT ON OUR BUSINESS.
In many of the jurisdictions where we currently operate or seek to do
business, lotteries are not permitted unless expressly authorized by law. The
successful implementation of our growth strategy and our business could be
materially adversely affected if jurisdictions that currently authorize
lotteries do not continue to permit such activities or otherwise change existing
laws which negatively impact our operations and growth plans.
The operations of ongoing lotteries and lottery operators are typically
subject to extensive and evolving regulation. While we generally work with local
partners who are specifically licensed and authorized to provide services by the
lottery commission in each of the jurisdictions
16
in which we service clients, regulatory authorities that oversee lotteries may
desire to conduct an intensive investigation of us and our employees prior to
and after the award of a lottery contract. Lottery authorities may require the
removal of any of our employees deemed to be unsuitable and are generally
empowered to disqualify us from receiving a lottery contract or operating a
lottery system as a result of any such investigation. Some jurisdictions may
seek to conduct extensive personal and financial disclosure and background
checks on persons and entities beneficially owning a specified percentage
(typically five percent or more) of our securities. The failure of these
beneficial owners to submit to such background checks and provide required
disclosure could jeopardize the award of a lottery contract to us or provide
grounds for termination of an existing lottery contract.
Because our reputation for integrity is an important factor in our business
dealings with lottery and other governmental agencies, a governmental allegation
or a finding of improper conduct on our part or attributable to us in any manner
could have a material adverse effect on our business, including our ability to
retain existing contracts or to obtain new or renewal contracts. In addition,
continuing adverse publicity resulting from these investigations and related
matters could have a material adverse effect on our reputation and business.
Moreover, proceeds generated by lotteries are dependent upon decisions made
by lottery authorities over which we have no control with respect to the
operation of these games, such as matters relating to the marketing and prize
payout features of these lottery games. Because we are typically compensated in
whole or in part based on a gross lottery sales, lower than anticipated sales
due to these factors could have a material adverse effect on our revenues.
OUR PROFITABILITY WILL BE DEPENDENT ON OUR ABILITY TO RETAIN AND EXTEND OUR
EXISTING CONTRACTS AND WIN NEW CONTRACTS.
We derive our revenues and generate cash flow from contracts to operate
lotteries. Upon the expiration of a contract, lottery authorities may award new
contracts through a competitive procurement process. In addition, our lottery
contracts typically permit a lottery authority to terminate the contract at any
time for failure to perform and for other specified reasons, and future
contracts may permit the lottery authority to terminate the contract at will
with limited notice and may not specify the compensation, if any, to which we
would be entitled were such termination to occur.
The termination of or failure to renew or extend one or more lottery
contracts, the renewal or extension of one or more lottery contracts on
materially altered terms or the loss of our assets without compensation could,
depending upon the circumstances, have a material adverse effect on our
business, financial condition, results and prospects.
SLOW GROWTH OR DECLINES IN SALES OF INTERNET/WIRELESS LOTTERY GOODS AND SERVICES
COULD ADVERSELY AFFECT OUR FUTURE REVENUES AND PROFITABILITY.
Our success will be predicated, in part, on the success of the lottery
industry, as a whole, in attracting and retaining players in the face of
increased competition for the consumers' entertainment dollar (which competition
may well increase further in the future), as well as our
17
own success in developing innovative products and systems to achieve this goal.
Our failure to achieve these goals could have a material adverse effect on our
business, financial condition and results and prospects.
WE HAVE SIGNIFICANT FOREIGN CURRENCY EXPOSURE.
All of our business is international and our consolidated financial results
are significantly affected by foreign currency exchange rate fluctuations.
Foreign currency exchange rate exposures arise from current transactions and
anticipated transactions denominated in currencies other than United States
dollars and from the translation of foreign currency balance sheet accounts into
United States dollar balance sheet accounts. We are exposed to currency exchange
rate fluctuations because all of our revenues are denominated in currencies
other than the United States dollar. Exchange rate fluctuations may adversely
affect our operating results and our results of operations.
WE ARE SUBJECT TO THE ECONOMIC, POLITICAL AND SOCIAL INSTABILITY RISKS OF DOING
BUSINESS IN FOREIGN JURISDICTIONS.
We expect to derive all of our revenues from operations outside the United
States. Accordingly, we are exposed to all of the risks of international
operations, including increased governmental regulation of the lottery industry
in the markets where we operate; exchange controls or other currency
restrictions; and significant political instability. The occurrence of any of
these events in the markets where we operate could jeopardize or limit our
ability to transact business in those markets in the manner we expect and could
have a material adverse effect on our business, financial condition, results and
prospects.
WE PRESENTLY RELY ON TWO CUSTOMERS AND THE LOSS OF EITHER OF THESE CUSTOMERS
COULD HARM OUR RESULTS.
We have implemented lotteries for only two clients. If we were to lose
these clients, or if they experience slow lottery ticket sales our business,
financial condition, results and prospects could suffer.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
We expect to experience significant fluctuations in our operating results
from quarter to quarter due to such factors as the amount and timing of product
sales, the occurrence of large jackpots in lotteries (which increase the amount
wagered and our revenue) and expenses incurred in connection with lottery
start-ups. Fluctuations in our operating results from quarter to quarter may
cause our operating results to be below the expectations of securities analysts
and investors.
18
WE OPERATE IN A COMPETITIVE ENVIRONMENT.
New competition could adversely affect our ability to win renewals of
contracts from our existing customers or to win contract awards from other
lottery authorities. In addition, awards of contracts to us can be, from time to
time, challenged by our competitors. Increased competition also may have a
material adverse effect on the profitability of contracts which we do obtain.
WE MAY BE SUBJECT TO SUBSTANTIAL PENALTIES FOR FAILURE TO PERFORM UNDER OUR
CONTRACTS.
Our lottery contracts typically permit termination of the contract at any
time for failure by us to perform and for other specified reasons and may
contain demanding implementation and performance schedules. Failure to perform
under these contracts may result in substantial monetary liquidated damages, as
well as contract termination. These provisions in our lottery contracts present
an ongoing potential for substantial expense.
WE MAY NOT BE ABLE TO DELIVER GAMES THAT ARE APPEALING TO PLAYERS WHICH MAY
CAUSE THEM TO SEEK ALTERNATIVES TO THE LOTTERIES OPERATED BY OUR CLIENTS, WHICH
WOULD NEGATIVELY IMPACT OUR BUSINESS, FINANCIAL CONDITION, RESULTS AND
PROSPECTS.
We develop or acquire games that we believe will be appealing to the local
population in which our clients operate. To the extent that we are not able to
offer games that players find appealing and they seek out other lottery games at
the expense of our clients, our revenues and results of operations will
materially suffer.
OUR BUSINESS PROSPECTS AND FUTURE SUCCESS DEPEND UPON OUR ABILITY TO ATTRACT AND
RETAIN QUALIFIED EMPLOYEES.
To some extent, our business is built upon relationships developed by our
management with lottery officials around the world. Our business prospects and
future success depend, in part, upon our ability to retain and to attract
qualified managerial, marketing and technical employees. Competition for such
employees is sometimes intense, and we may not succeed in hiring and retaining
the executives and other employees that we need. If we are not able to retain
and attract qualified technical and management personnel, we will suffer
diminished chances of future success.
OUR REPUTATION AND, CONSEQUENTLY, OUR BUSINESS PROSPECTS ARE DEPENDENT ON THE
INTEGRITY OF OUR PERSONNEL AND THE SECURITY OF OUR SYSTEMS.
The integrity of a lottery, both real and perceived, is critical to its
ability to attract players. We seek to maintain the highest standards of
personal integrity for our personnel and system security for the Web sites we
host for our clients. Allegations or findings of impropriety by any of our
personnel or actual or alleged security defects or failures attributable to us,
could have a material adverse effect upon our business, financial condition,
results and prospects, including our ability to retain existing contracts or
obtain new or renewal contracts.
19
OUR INTELLECTUAL PROPERTY IS NOT PROTECTED BY PATENTS AND WE DO NOT INTEND TO
SEEK PATENT PROTECTION FOR SUCH PROPERTY. TO THE EXTENT THAT OTHERS ARE ABLE TO
OBTAIN ACCESS TO OUR PROPRIETARY INFORMATION, OUR BUSINESS MAY BE MATERIALLY
HARMED.
We have not sought patent protection for any of our proprietary property.
We rely on trade secrets, proprietary know-how and technology which we seek to
protect, in part, by confidentiality agreements with our prospective working
partners and collaborators, employees and consultants. We can not assure you
that these agreements will not be breached, that we would have adequate remedies
for any breach of these agreements, or that the trade secrets and proprietary
know-how embodied in the technologies in which we have an interest will not
otherwise become known or be independently discovered by others.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS.
As permitted by the corporate laws of the State of Florida, we have
included in our Articles of Incorporation a provision to eliminate the personal
liability of its directors for monetary damages for breach or alleged breach of
their fiduciary duties as directors, subject to certain exceptions. In addition,
our By-Laws provide that we are required to indemnify our officers and directors
under certain circumstances, including those circumstances in which
indemnification would otherwise be discretionary, and we will be required to
advance expenses to our officers and directors as incurred in connection with
proceedings against them for which they may be indemnified.
WE HAVE NO INTENTION OF PAYING DIVIDENDS ON OUR COMMON STOCK IN THE NEAR FUTURE
AND HOLDERS OF OUR COMMON STOCK WILL HAVE TO RELY ON THE APPRECIATION THEREOF TO
REALIZE ANY MONIES FROM HOLDING THESE SECURITIES.
We have not paid any dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future. Management intends to retain
any earnings to finance the growth of its business. Management cannot assure you
that the company will ever pay cash dividends. Accordingly, holders of our
common stock will have to rely on the appreciation thereof to realize any monies
from holding these securities.
YOU MAY NOT BE ABLE TO SELL YOUR SHARES OF COMMON STOCK DUE TO THE ABSENCE OF A
TRADING MARKET AND THUS YOU MAY NEVER REALIZE ANY MONIES FROM HOLDING THESE
SECURITIES.
There is currently no public trading market for our common stock. As of the
date hereof, the only manner in which to dispose of our common stock is in a
private transaction. If no active trading market develops for our common stock,
holders of our common stock will have to rely on the appreciation thereof to
realize any monies from holding these securities.
MANAGEMENT AND AFFILIATES OWN ENOUGH SHARES TO CONTROL SHAREHOLDER VOTE AND
MAINTAIN MANAGEMENT AND CONTROL OVER THE COMPANY, EVEN IF THEY ARE UNSUCCESSFUL.
Our directors, officers, affiliates and certain entities controlled by them
own approximately 72.78% of the outstanding shares of our common stock. As a
result, these persons
20
will control all matters that require stockholder approval, such as the election
of directors, approval of a corporate merger, increasing or decreasing the
number of outstanding shares, amending our articles of incorporation and
effecting stock splits.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth our officers and directors as of March 31,
2004:
Name Age Title
- ---- --- -----
Nathan Miller 61 President, Chief Executive Officer
and Director
Michael Shroyer 62 Executive Vice President
Randolph H. Brownell, III 36 Vice President of Corporate
Development and Acquisition
John Carson 49 Director, Lottery Network Services Ltd.
Joseph Dresner 79 Director
Milton Dresner 79 Director
Nancy Bowman 62 Director
Frederick Winters 48 Director
All directors hold office until the next annual meeting of stockholders and
until their successors have been elected and qualified. The Board of Directors
elects the officers annually.
We presently do not compensate our directors.
Nathan Miller has been a director of our Company since March 19, 2004. He
has been involved with the start-up management and funding of Lottery Network
Services, Ltd. since its inception. Mr. Miller's undergraduate degree is a B.A.
in Economics and he holds a Juris Doctorate degree from the University of
Richmond Law School. Mr. Miller has been a practicing attorney for over thirty
(30) years with a focus in business and corporate law. He is a former member of
the Virginia House of Delegates and Virginia Senate and has broad experience in
business start-up development and management. Currently, he is involved in the
operation, management and funding of over twenty (20) business entities with a
range of business activities including real estate, manufacturing and technology
development. Mr. Miller is a director of TreasureTrivia, an entity from which we
purchased certain assets.
21
Michael J. Shroyer has been our Executive Vice President since March 2004.
Mr. Shroyer became semi-retired in 2001 after a 37-year career in manufacturing
related positions. Educated as a Mechanical Engineer, Mr. Shroyer functioned as
General Manager for Dunham-Bush, Inc. a manufacturer of industrial air
conditioning products. He has operated in several U.S. Dunham-Bush facilities as
well as in Malaysia, Australia and China. During his last ten years with
Dunham-Bush, he was responsible for the expansion of the business in Asia to
include the project management of new factory facilities, marketing, sales,
service and general management of these new facilities. Mr. Shroyer was also
affiliated with The Howden Fan Company. During his three-year tenure with that
company, he performed project management duties which included the product
consolidation of a new plant facility in South Carolina. Mr. Shroyer managed the
product consolidation from other Howden facilities in Scotland, South Africa,
Australia, Malaysia and China to the new South Carolina facility. In 2002, Mr.
Shroyer joined the Virginia Technology Incubator, an affiliate of our Company,
as a consultant to the various concerns under VTI business umbrella.
Randolph H. Brownell, III has served as our Vice President of Development
and Acquisitions since March 2004. Since 1996, he has served as president of
Virginia Business Planning and Investments LLC. Until 2002, he was active in the
operational management of Virginia Business Planning and Investments LLC and
conducted all day to day operating activities, created business and marketing
plans for various clients, structured and closed financings of up to $5 million,
provided business oversight for clients, helped to liquidate companies,
evaluated business opportunities and handled international travel and management
for numerous clients. Since 2002, Mr. Brownell has served as a director of
Lottery Network Services Ltd. and was responsible for overseeing all company
employees, co-developing business and strategic planning and preparing and
managing that company's budgets and investment activities. In addition, Mr.
Brownell made presentations to potential investors and worked to develop joint
ventures, managed and made presentations to other companies in a lead business
development role and managed the filings and all corporate documents in Ireland
and served as the chair on all board meetings. Mr. Brownell is the president and
a director of TreasureTrivia, an entity from which we purchased certain assets.
John Carson has been a director of Lottery Network Services Ltd. since
2001. He has been an innovator in the lottery industry, having introduced new
lottery program delivery models and game formats. During his seventeen years in
the industry, he has been responsible for all aspects of the operation of
lottery companies, including obtaining financing, and increasing profits in each
the ventures in which he previously has been involved. From 1993 to 2000, he was
the president and chief executive officer of C.G.I. Inc. where oversaw all
sales, operational and administrative functions of the corporation and managed
all international sales efforts, securing contracts in 16 countries. From 1988
to 1993, Mr. Carson was an officer at Webcraft Technologies, Inc., as president
of the lottery division during 1990 through 1993, as vice president of
international sales from 1988 to 1990 and as director of financial planning and
business development from 1987 to 1988. At Webcraft, he was responsible
developing new markets, securing financing for a number of international joint
ventures and developing new products, including the introduction of licensed
entertainment products to the lottery industry. During 1986 and 1987, he served
as a senior account executive at Columbia Pictures where he
22
launched seven first run projects and sold first run television shows throughout
the Midwest region.
Joseph Dresner has been a director of our company since March 18, 2004. Mr.
Dresner has been private investor during the last five years, seeking out
emerging companies in high growth industries. Mr. Dresner is the brother of
Milton Dresner, a director of the Company.
Milton Dresner has been a director of our company since March 18, 2004. For
the past 40 years, Mr. Dresner has been co-owner of Highland Management,
Highland Construction, Highland Industrial Development, Highland Manufactured
Home Properties, and Highland Motel Properties. Together, these five interacting
organizations were involved in every facet of land development, construction,
management and leasing. The Highland Companies have developed, constructed and
managed industrial complexes, multi-family units, manufactured home communities,
motels and residential subdivisions. He is also a partner in several investment
banking firms in New York. Mr. Dresner is a life-long entrepreneur and respected
businessman, Mr. Dresner has nearly 50 years of experience in a variety of
industries including real estate, equities and retail. Additionally, Mr. Dresner
holds dozens of corporate positions ranging from director, partner and co-owner,
to stockholder and investor. Mr. Dresner is the brother of Joseph Dresner, a
director of the Company.
Ms. Bowman has been a director of our company since March 2004. Ms. Bowman
serves as an officer and director of several private companies to which she
devotes her time as required. She has acquired significant administrative
experience and understands the organizational mechanisms of corporate
management. Ms. Bowman serves as the Secretary and Treasurer of
TreasureTrivia.com Ltd., an entity from which we acquired certain software and
which is owned in part, by holders of our Common Stock. Nancy Bowman, one of our
directors, is the secretary and treasurer of TreasureTrivia, an entity from
which we purchased certain assets.
Frederick Winters has been a member of our Board of directors since March
18, 2004, the date on which we closed the Share Exchange Agreement. Since 2002,
Mr. Winters has served as the chief executive officer, vice president-business
development and a director of NuPOW'R LLC, a company engaged in the development
of electric power systems. During 2001 and 2002, he served as the vice president
of Brighton Exchange Group, a business development company. From 2000 to 2001,
he was the chief executive officer of Televend, Inc., a telephony based mobile
commerce company. From 1978 to 2001 Mr. Winters served in the Untied States
Marine Corp., achieving the rank of Lieutenant Colonel. Mr. Winters was
appointed to the Board as representative of the holders of our company's stock
prior to the date of the Share Exchange Agreement. There are no agreements to
retain Mr. Winters on the board after the next annual meeting at which directors
are elected.
EXECUTIVE COMPENSATION
The following table sets forth the information regarding compensation paid
to the Chief Executive Officer and any other person who received in excess of
$100,000 in annual compensation during the last two fiscal years.
23
Summary Compensation Table
Name and Principle Position Year Salary
- --------------------------- ----- ------
Nathan H. Miller,
President and CEO 2004 $1.00
2003 $1.00
Randolph H. Brownell, III,
Vice President (1) 2004 $109,000
(1) Mr. Brownell agreed to defer $35,000 of his salary for the period ended
March 31, 2004 until such time as the Company is financially capable of making
such payment.
STOCK OPTION PLANS
We have not yet adopted any stock option plans and there are no options or
other convertible securities issued or outstanding as of the date of this
report.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
At March 30, 2004, there were 11,000,000 shares of our Common Stock
outstanding. The following table sets forth information as of March 30, 2004,
regarding the beneficial ownership of Common Stock of (1) each person or group
known by us to beneficially own 5% or more of the outstanding shares of Common
Stock, (2) each director and officer and (3) all executive officers and
directors as a group. Unless otherwise noted, the persons named below have sole
voting and investment power with respect to the shares shown as beneficially
owned by them.
Amount of
Name of Beneficial Percent of Outstanding
Beneficial Owner (1) Ownership Shares of Class Owned
- -------------------- --------- ---------------------
Nathan Miller (2) 3,345,715 27.28%
Michael Shroyer -0- -0-
Randolph H. Brownell, III (3) 274,286 2.49%
John Carson (4) 887,714 8.01%
Joseph Dresner 2,000,000 18.19%
Milton Dresner 2,000,000 18.19%
Nancy M. Bowman (5) 385,714 3.51%
Frederick Winters (6) -0- -0-
All officers and directors
as a group (7 persons) 8,005,715 72.78%
- ----------
(1) The address for each of the persons identified in the foregoing table is
care of the company.
(2) Includes 354,715 shares over which Mr. Miller exercises beneficial control
which are registered in the names of entities in which Mr. Miller is a part
owner along with Randolph Brownell, III and Nancy Bowman.
24
(3) Does not include an aggregate of 354,715 shares of Common Stock held by two
corporations which are owned jointly by Mr. Brownell and in one case Nathan
Miller and, in the other, Mr. Miller and Nancy Bowman, directors of the
Company.
(4) Includes 600,000 shares of common Stock held by The John C. Carson
Revocable Trust for which Mr. Carson is the trustee.
(5) Mrs. Bowman's husband, Kenneth Bowman, owns 385,714 shares of our common
stock. Mrs. Bowman disclaims any beneficial ownership of, or dispositive
power over, the shares of Common Stock owned by Mr. Bowman.
(6) Mr. Winters was appointed to serve as a director of our Company in
accordance with the provisions of the Share Exchange Agreement between
Lottery Network Services, Ltd. and Residential Resales, Inc.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During March 2004, Nathan Miller, one of our directors, converted an
aggregate of $419,515 of debt of Lottery Network Services Ltd. into 9,000
ordinary shares of that company. The debt was converted at premiums above the
par value per Lottery Network Services ordinary share at prices ranging from
$23.60 per share to $141.73 per share. Pursuant to the Share Exchange Agreement,
Mr. Miller converted all of his shares of Lottery Network Services into
3,000,000 shares of our Common Stock. At March 31, 2004, Lottery Network
Services was indebted to Mr. Miller in the amount of $166,340, which is
repayable on terms to be determined.
During March 2004, Joseph Dresner, a director of the Company and the
brother of Milton Dresner, (i) converted the amounts due under Secured
Convertible Loan Stock agreements with Lottery Network Services Ltd., our Irish
subsidiary, dated April 3, 2003 and May 1, 2003 in the aggregate amount of
$200,000 into 3,000 ordinary shares Network Lottery Services at a premium of
$66.65 per share above the par value thereof and (ii) converted all amounts due
under a Cumulative Redeemable Unsecured Loan Stock agreement dated June 27, 2003
into 1,412 ordinary shares of Lottery Network Services at a premium of $70.83
per share above the par value thereof. Pursuant to the Share Exchange Agreement,
Mr. Dresner converted all of his shares of Lottery Network Services into
2,000,000 shares of our Common Stock. At December 31, 2003, Lottery Network
Services was indebted to Mr. Dresner in the amount of $448,726, which is
repayable on terms to be determined.
During March 2004, Milton Dresner, a director of the Company and the
brother of Joseph Dresner, (i) converted the amounts due under Secured
Convertible Loan Stock agreements with Lottery Network Services Ltd., our Irish
subsidiary, dated April 3, 2003 and May 1, 2003 in the aggregate amount of
$200,000 into 3,000 ordinary shares Network Lottery Services at a premium of
$66.65 per share above the par value thereof and (ii) converted all amounts due
under a Cumulative Redeemable Unsecured Loan Stock agreement dated June 27, 2003
into 1,412 ordinary shares of Lottery Network Services at a premium of $70.83
per share above the par value thereof. Pursuant to the Share Exchange Agreement,
Mr. Dresner converted all of his shares of Lottery Network Services into
2,000,000 shares of our Common Stock. At December 31, 2003, Lottery Network
Services was indebted to Mr. Dresner in the amount of $437,026, which is
repayable on terms to be determined.
We lease our offices in Harrisonburg, Virginia from Virginia Technology
Incubator, LLC, a company owned, in part, by Nathan Miller, Nancy Bowman and
Randolph Brownell, who are officers and/or directors of our company. We have
leased these offices through September 2004 at a cost of $3,000 per month,
though we believe we can extend this lease and
25
increase or decrease the amount of space we lease as necessary to suit our
requirements. During the fiscal year ended March 31, 2003, we paid aggregate
rent to Virginia Technology Institute for said year in the amount of $12,146.
The lease agreement was negotiated on terms no better than we could have
obtained from an unaffiliated third party.
One of our directors, Nathan Miller, is a partner of the law firm of Miller
& Earle, PLLC. This firm has provided certain legal services to us during the
last two years. During fiscal 2003 and fiscal 2002, we paid Miller & Earle and
aggregate of $0 and $7,500, respectively, for legal services rendered. We
believe that the services were rendered on terms and fees no different than we
could have obtained from an independent third party.
Pursuant to an agreement dated April 2, 2003, our company acquired an
Internet and wireless instant lottery gaming system for maintaining, managing
and administering an electronic lottery and certain programming specifications,
development tools and other intellectual property rights in connection with such
gaming system from TreasureTrivia.com Ltd. We purchased the gaming system and
intellectual property for a price of $2,000 and granted to TreasureTrivia a
continuing royalty until April 2, 2010 equal to 8% of the net monthly wins (as
defined below) generated from the sale of certain scratch or raffle tickets in
behalf of our clients that are based upon the system and the intellectual
property. In addition, we have agreed to pay to TreasureTrivia a royalty until
April, 2010 equal to 1.75% of the net monthly wins generated from the sale of
tickets on our Internet portal, upon the introduction thereof. For purposes of
our agreement with TreasureTrivia, the term "net monthly wins" means ticket
prices less prizes reasonably anticipated to be paid after deduction of website
fees, bank credit card merchant fees, foreign currency exchange charges, bad
debts, chargebacks and other bank charges. Prior to our acquisition of
TreasureTrivia, a number of our shareholders funded the development of the
lottery systems it developed. Members of our management team also are associated
with TreasureTrivia in the following capacities: Nathan Miller is the president
and a director, Randolph Brownell is a director and Nancy Bowman is the
secretary and treasurer of TreasureTrivia.
LEGAL PROCEEDINGS
We are not currently party to any legal proceedings.
Item 7. Financial Statements and Exhibits.
(a) We submit with this report the financial statements and related
information listed in the Index to Financial Statements on page F-1 following
this report's signature page.
26
(b) There are filed herewith the following Exhibits:
Exhibit No. Exhibit Title
2.1 Share Exchange Agreement dated March 19, 2004 by and among the
Registrant and Lottery Network Services Ltd.
3(i)(e) Articles of Association of Lottery Network Services Ltd.
3(i)(f) Memorandum of Association of Lottery Network Services Ltd.
10.1 Agreement dated September 13, 2001, as amended as of January 26,
2004 by and between Lottery Network Services Ltd. and Rehab Net
Games Limited.
10.2 Agreement dated December 12, 2001 by and between Lottery Network
Services Ltd. and Rehab Charities UK Limited.
10.3 Agreement dated November 27, 2001 by and between Lottery Network
Services Ltd. and Tropical Gaming Ltd., Belize.
10.4 Agreement dated February 12, 2002 by and between Lottery Network
Services Ltd. and Guatemalan Pediatric Foundation.
10.5 Agreement dated December 7, 2001 by and between Lottery Network
Services Ltd. and Intellect Foundation.
10.6 Agreement dated February 3, 2004 by and between Lottery Network
Services Ltd. and Carnegie Cooke & Company Inc.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RESIDENTIAL RESALES, INC.
Dated: March 31, 2004
By: /s/ Nathan Miller
--------------------------------
Nathan Miller, President
28
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report.................................................F-2
Balance Sheets...............................................................F-3
Statements of Operations.....................................................F-4
Statements of Stockholders' Deficit..........................................F-5
Statements of Cash Flows.....................................................F-6
Notes to the Financial Statements............................................F-7
F-1
Bouwhuis, Morrill & Company, LLC 12 South Main, Suite 208
- -------------------------------- Layton, Utah 84041
Certified Public Accountants 801-546-1357 Tel
801-546-1348 Fax
INDEPENDENT AUDITORS' REPORT
Board of Directors
Lottery Network Services Limited
(A Development Stage Company)
Harrisonburg, Virginia
We have audited the accompanying balance sheets of Lottery Network Services
Limited (a development stage company) as of March 31, 2003 and 2002 and the
related statements of operations, stockholders' deficit and cash flows for the
years ended March 31, 2003 and 2002 and for the period from inception on July
11, 2000 through March 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lottery Network Services
Limited (a development stage company) as of March 31, 2003 and 2002 and the
results of its operations and its cash flows for the years ended March 31, 2003
and 2002 and for the period from inception on July 11, 2000 through March 31,
2003 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 6 to the
financial statements, the Company has negative working capital, negative cash
flows from operations and recurring operating losses which raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 6. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Bouwhuis, Morrill & Company, LLC
Bouwhuis, Morrill & Company, LLC
Layton, Utah
March 31, 2004
F-2
LOTTERY NETWORK SERVICES LIMITED
(A Development Stage Company)
Balance Sheets
ASSETS
MARCH 31,
DECEMBER 31, -----------------------
2003 2003 2002
--------------- ---------- ----------
CURRENT ASSETS (UNAUDITED)
Cash and cash equivalents (Note 2) $ 36,885 $ 17,765 $ -
Prepaid assets 1,000 - -
--------------- ---------- ----------
Total Current Assets 37,885 17,765 -
--------------- ---------- ----------
PROPERTY AND EQUIPMENT, NET (Note 2) 3,474 14,502 -
--------------- ---------- ----------
TOTAL ASSETS $ 41,359 $ 32,267 $ -
=============== ========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Bank overdraft $ - $ - $ 23,345
Accounts payable and accrued expenses 28,898 33,842 3,411
Due to related parties 82,985 78,103 35,789
Note payable, current portion - 14,787 -
Notes payable - related parties, current portion 1,486,745 572,500 180,000
--------------- ---------- ----------
Total Current Liabilities 1,598,628 699,232 242,545
--------------- ---------- ----------
STOCKHOLDERS' DEFICIT
Common stock, (eurodollar)0.01 par value; 99,990,100 shares
authorized, 12,000, 12,000 and 200 shares issued
and outstanding, respectively 107 107 2
Common stock "A", (eurodollar)0.01 par value; 9,900 shares
authorized, 9,900 shares issued and outstanding 94 94 94
Additional paid-in capital 907,094 907,094 99,999
Stock subscriptions receivable (Note 4) (95) (95) (95)
Accumulated deficit (2,464,469) (1,574,165) (342,545)
--------------- ---------- ----------
Total Stockholders' Deficit (1,557,269) (666,965) (242,545)
--------------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 41,359 $ 32,267 $ -
=============== ========== ==========
F-3
LOTTERY NETWORK SERVICES LIMITED
(A Development Stage Company)
Statements of Operations
FOR THE
NINE MONTHS FOR THE YEARS ENDED FROM INCEPTION
ENDED MARCH 31, THROUGH
DECEMBER, 31 ---------------------------- DECEMBER 31,
2003 2003 2002 2003
--------------- ----------- ----------- ---------------
(UNAUDITED) (UNAUDITED)
NET REVENUES $ - $ - $ - $ -
--------------- ----------- ----------- ---------------
OPERATING EXPENSES
Consulting fees 68,172 441,982 141,553 651,707
Depreciation expense 600 3,448 - 4,048
Foreign gaming fees 90,000 - - 90,000
General and administrative 104,140 63,526 38,106 205,772
Management fees 208,988 254,700 19,000 482,688
Professional fees 27,996 79,364 37,200 144,560
Programming fees 317,114 333,590 99,636 750,340
Rent expense 36,000 12,146 - 48,146
Website expense 32,404 41,598 7,050 81,052
--------------- ----------- ----------- ---------------
Total Operating Expenses 885,414 1,230,354 342,545 2,458,313
--------------- ----------- ----------- ---------------
LOSS FROM OPERATIONS (885,414) (1,230,354) (342,545) (2,458,313)
--------------- ----------- ----------- ---------------
OTHER EXPENSES
Interest expense (4,890) (1,266) - (6,156)
--------------- ----------- ----------- ---------------
Total Other Expenses (4,890) (1,266) - (6,156)
--------------- ----------- ----------- ---------------
NET LOSS BEFORE INCOME TAXES (890,304) (1,231,620) (342,545) (2,464,469)
PROVISION FOR INCOME TAXES - - - -
--------------- ----------- ----------- ---------------
NET LOSS $ (890,304) $(1,231,620) $ (342,545) $(2,464,469)
=============== =========== =========== ===============
BASIC NET LOSS PER SHARE $ (74) $ (108) $ (3,201)
=============== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 12,000 11,418 107
=============== =========== ===========
F-4
LOTTERY NETWORK SERVICES LIMITED
(A Development Stage Company)
Statements of Stockholders' Deficit
COMMON STOCK COMMON STOCK "A" STOCK ADDITIONAL
----------------------- ----------------------- SUBSCRIPTION PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL DEFICIT
---------- --------- ---------- --------- ------------ ---------- -----------
Balance at inception
on July 11, 2000 - $ - - $ - $ - $ - $ -
Common stock issued to
the incorporators of the
Company on July 12, 2000 100 1 9,900 94 (95) - -
Net loss for the period from
inception to March 31, 2001 - - - - - - -
---------- --------- ---------- --------- ------------ ---------- -----------
Balance, March 31, 2001 100 1 9,900 94 (95) - -
Common stock issued for
cash at $1,000 per share
on March 7, 2002 100 1 - - - 99,999 -
Net loss for the year ended
March 31, 2002 - - - - - - (342,545)
---------- --------- ---------- --------- ------------ ---------- -----------
Balance, March 31, 2002 200 2 9,900 94 (95) 99,999 (342,545)
Common stock issued for
cash at $1,000 per share
on April 18, 2002 150 1 - - - 149,999 -
Common stock issued for
services valued at $50 per
share on April 18, 2002 11,040 98 - - - 551,902 -
Common stock issued for
a related party loan at $62
per share on April 18, 2002 610 5 - - - 37,595 -
Capital contributed by
shareholders - - - - - 67,600 -
Net loss for the year ended
March 31, 2003 - - - - - - (1,231,620)
---------- --------- ---------- --------- ------------ ---------- -----------
Balance, March 31, 2003 12,000 107 9,900 94 (95) 907,094 (1,574,165)
Net loss for the nine months
ended December 31, 2003
(unaudited) - - - - - - (890,304)
---------- --------- ---------- --------- ------------ ---------- -----------
Balance, December 31, 2003
(unaudited) 12,000 $ 107 9,900 $ 94 $ (95) $ 907,094 $(2,464,469)
========== ========= ========== ========= ============ ========== ===========
F-5
LOTTERY NETWORK SERVICES LIMITED
(A Development Stage Company)
Statements of Cash Flows
FOR THE
NINE MONTHS FOR THE YEARS ENDED FROM INCEPTION
ENDED MARCH 31, THROUGH
DECEMBER, 31 -------------------------------- DECEMBER 31,
2003 2003 2002 2003
------------- ------------- ------------ --------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (890,304) $ (1,231,620) $ (342,545) $ (2,464,469)
Adjustments to reconcile net loss to
net cash used by operating activities:
Common stock issued for services - 552,000 - 552,000
Depreciation expense 600 3,448 - 4,048
Gain on sale of property and equipment (4,359) (4,359)
Change in operating assets and liabilities:
Prepaid assets (1,000) - - (1,000)
Accounts payable and accrued expenses (4,945) 30,432 3,411 28,898
Due to related parties 4,883 42,313 35,789 82,985
Bank overdraft - (23,345) 23,345 -
------------- ------------- ------------ --------------
Net Cash Used by Operating Activities (895,125) (626,772) (280,000) (1,801,897)
------------- ------------- ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment - (17,950) - (17,950)
------------- ------------- ------------ --------------
Net Cash Used by Investing Activities - (17,950) - (17,950)
------------- ------------- ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock - 150,000 100,000 250,000
Capital contributed by shareholders - 67,600 - 67,600
Proceeds from issuance of notes payable - 17,950 - 17,950
Proceeds from issuance of notes
payable, related parties 914,245 430,100 180,000 1,524,345
Payments on notes payable - (3,163) - (3,163)
------------- ------------- ------------ --------------
Net Cash Provided by Financing Activities 914,245 662,487 280,000 1,856,732
------------- ------------- ------------ --------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 19,120 17,765 - 36,885
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 17,765 - - -
------------- ------------- ------------ --------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 36,885 $ 17,765 $ - $ 36,885
============= ============= ============ ==============
F-6
LOTTERY NETWORK SERVICES LIMITED
(A Development Stage Company)
Statements of Cash Flows (Continued)
FOR THE
NINE MONTHS FOR THE YEARS ENDED FROM INCEPTION
ENDED MARCH 31, THROUGH
DECEMBER, 31 ------------------------------- DECEMBER 31,
2003 2003 2002 2003
------------ ----------- ----------- --------------
(UNAUDITED) (UNAUDITED)
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 7 $ 572 $ - $ 579
Cash paid for income taxes $ - $ - $ - $ -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock subscription receivable issued $ - $ - $ 95 $ 95
for common stock
Common stock issued for services $ - $ 552,000 $ - $ 552,000
Common stock issued for note payable $ - $ 37,600 $ - $ 37,600
Assumption of note payable by a shareholder
in exchange for a vehicle $ 14,787 $ - $ - $ 14,787
F-7
LOTTERY NETWORK SERVICES LIMITED
(A Development Stage Company)
Notes to the Financial Statements
March 31, 2003 and 2002
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Lottery Network Services Limited (the "Company") was organized under
the laws of the Republic of Ireland on July 11, 2000. The Company is
currently in the business of designing, building, implementing,
managing, hosting and supporting internet and wireless based lottery
programs.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is
presented to assist in understanding the Company's financial
statements. The financial statements and notes are representations of
the Company's management who are responsible for their integrity and
objectivity. These accounting policies conform to accounting
principles generally accepted in the United States of America and have
been consistently applied in the preparation of the financial
statements. The following policies are considered to be significant:
a. Accounting Method
The Company recognizes income and expenses based on the accrual method
of accounting. The Company has elected a March 31 year-end.
b. Cash and Cash Equivalents
Cash equivalents are generally comprised of certain highly liquid
investments with original maturities of less than three months.
c. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
d. Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives:
Vehicles 5 Years
Computer Equipment 4 Years
e. Basic Net Loss per Share of Common Stock
In accordance with Financial Accounting Standards No. 128, "Earnings
per Share," basic net loss per common share is based on the weighted
average number of shares outstanding during the periods presented.
Diluted earnings per share is computed using weighted average number
of common shares plus dilutive common share equivalents outstanding
during the period. There are no common stock equivalents as of March
31, 2003 and 2002.
F-8
LOTTERY NETWORK SERVICES LIMITED
(A Development Stage Company)
Notes to the Financial Statements
March 31, 2003 and 2002
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
f. Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board issued
Statement No. 145 ("SFAS 145"), "Rescission of FASB Statements Nos. 4,
44, and 64 and Amendment of FASB Statement No. 13." SFAS 145 addresses
the presentation for losses on early retirements of debt in the
statement of operations. The Company has adopted SFAS 145 and will not
present losses on early retirements of debt as an extraordinary item.
In June 2002, the Financial Accounting Standards Board issued
Statement No. 146 ("SFAS 146"), "Accounting for Costs Associated with
Exit or Disposal Activities." The provisions of SFAS 146 become
effective for exit or disposal activities commenced subsequent to
December 31, 2002. The adoption of SFAS 146 had no impact on the
Company's financial position, results of operations or cash flows.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others." This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees
that it has issued. It also clarifies (for guarantees issued after
January 1, 2003) that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligations undertaken in issuing the guarantee. At December 31, 2003,
the Company does not have any outstanding guarantees and accordingly
does not expect the adoption of FIN 45 to have any impact on its
financial position, results of operations or cash flows.
g. Income Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes, using the liability method. The estimated future tax
effect of differences between the basis in assets and liabilities for
tax and accounting purposes is accounted for as deferred taxes. In
accordance with the provisions of SFAS No. 109, a valuation allowance
would be established to reduce deferred tax assets if it were more
likely than not that all, or some portion, of such deferred tax assets
would not be realized. A full allowance against deferred tax assets
was provided as of March 31, 2003.
At March 31, 2003, the Company had net operating loss carryforwards of
approximately $1,900,000 that may be offset against future taxable
income through 2023. No tax benefits have been reported in the
financial statements, because the potential tax benefits of the net
operating loss carry forwards are offset by a valuation allowance of
the same amount.
Due to the change in ownership provisions of the Tax Reform Act of
1986, net operating loss carryforwards for Federal income tax
reporting purposes are subject to annual limitations. Should a change
in ownership occur, net operating loss carryforwards may be limited as
to use in the future.
F-9
LOTTERY NETWORK SERVICES LIMITED
(A Development Stage Company)
Notes to the Financial Statements
March 31, 2003 and 2002
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company has been dependent upon certain individuals, officers,
stockholders and other related parties to provide capital, management
services, assistance in finding new sources for debt and equity
financing, and guidance in the development of the Company's business.
The related parties have generally provided services and incurred
expenses on behalf of the Company in exchange for shares of the
Company's common stock or have provided the necessary operating
capital to continue pursuing its business.
Office Space
The Company leases office space from Virginia Technology Incubator,
LLC (VTI). Some of the Company's major shareholders are the majority
owners of VTI. The Company paid rents to VTI in the amount of $12,146
and $-0- during the fiscal years ended March 31, 2003 and 2002,
respectively. During the nine months ended December 31, 2003, the
Company paid VTI rent of $27,000.
Notes Payable, Relate Parties
The Company has been relying to a great extent on certain related
parties for operating capital. There have been no significant
repayments made on these advances. Due to these transactions the
Company has considerable notes payable due to related parties of
$1,486,475, $572,500 and $180,000 at December 31, 2003, March 31, 2003
and March 31, 2002, respectively.
NOTE 4 - EQUITY TRANSACTIONS
Effective July 12, 2000, the Company issued 100 shares of common stock
and 9,900 shares of common stock "A" shares to the incorporators of
the Company at the nominal price of par in exchange for a stock
subscription receivable $95. The common stock "A" shares are
non-voting, non-participating shares.
Effective March 7, 2002, the Company sold 100 shares of its common
stock to a company for cash of $100,000. Shortly thereafter on April
18, 2002, the Company sold an additional 150 shares of its common
stock to the same company for cash of $150,000.
Effective April 18, 2002, the Company issued 11,040 shares of its
common stock for various services rendered valued at $50 per share.
Effective April 18, 2002, the Company issued 610 shares of its common
stock to convert a related party loan in the amount of $37,600.
NOTE 5 - FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS 107),
"Disclosures about Fair Value of Financial Instruments" requires
disclosure of the fair value of financial instruments held by the
Company. SFAS 107 defines the fair value of a financial instrument as
the amount at which the instrument could be exchanged in a current
transaction between willing parties. The following methods and
assumptions were used to estimate fair value:
The carrying amount of cash equivalents and accounts payable
approximate fair value due to their short-term nature.
F-10
LOTTERY NETWORK SERVICES LIMITED
(A Development Stage Company)
Notes to the Financial Statements
March 31, 2003 and 2002
NOTE 6 - GOING CONCERN CONSIDERATIONS
As reported in the financial statements, the Company has incurred
losses of approximately $1,575,000 from inception of the Company
through March 31, 2003. The Company's stockholders' deficit at March
31, 2003 was $666,965 and its current liabilities exceeded its current
assets by $681,467. Management's plans to address and alleviate these
concerns are as follows:
The Company's management has developed a strategy of exploring all
options available to it so that it can develop successful operations.
As a part of this plan, management is currently striving to expand its
player base and is in negotiations with key players. In addition,
management is in the process of contracting with an investment banking
firm in order to raise additional operating capital. In the meantime,
key shareholders of the Company have committed to the continued
funding of the Company via loans, equity and contributed capital.
The ability of the Company to continue as a going concern is dependent
upon its ability to successfully accomplish the plans described in the
preceding paragraph and eventually attain profitable operations. The
accompanying financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going
concern.
NOTE 7 - SUBSEQUENT EVENTS
On March 18, 2004, the Company effected a merger with Residential
Resales, Inc. (f/k/a Media Acquisitions Group, Inc.) ("RRI"), a
publicly traded company. The merger will be accounted for as a
recapitalization. Pursuant to the terms of the share exchange
agreement RRI issued 10,000,000 shares of its common stock for all of
the issued and outstanding shares of the Company as of the date of the
merger. As part of the merger agreement RRI will change its name to
New Media Lottery Services, Inc.
F-11
INDEX TO PRO FORMA FINANCIAL STATEMENTS
Condensed Combined Pro Forma Balance Sheet.................................. P-2
Condensed Combined Pro Forma Statement of Operations........................ P-3
Summary of Assumptions and Disclosures...................................... P-4
P-1
RESIDENTIAL RESALES, INC. AND SUBSIDIARY
(A Development Stage Company)
Condensed Combined Pro Forma Balance Sheet
ASSETS
LOTTERY
NETWORK
RESIDENTIAL SERVICES PRO FORMA
RESALES, INC. LIMITED ADJUSTMENTS
JANUARY 31, DECEMBER 31, INCREASE PRO FORMA
2004 2003 (DECREASE) COMBINED
------------- ------------ ------------ ------------
CURRENT ASSETS (UNAUDITED) (UNAUDITED) (UNAUDITED)
Cash and cash equivalents $ - $ 36,885 $ - $ 36,885
Prepaid assets - 1,000 - 1,000
------------- ------------ ------------ ------------
Total Current Assets - 37,885 - 37,885
------------- ------------ ------------ ------------
PROPERTY AND EQUIPMENT, NET - 3,474 - 3,474
------------- ------------ ------------ ------------
TOTAL ASSETS $ - $ 41,359 $ - $ 41,359
============= ============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ - $ 28,898 $ - $ 28,898
Due to related parties 10,135 82,985 - 93,120
Notes payable, related parties, current portion - 1,486,745 - 1,486,745
------------- ------------ ------------ ------------
Total Current Liabilities 10,135 1,598,628 - 1,608,763
------------- ------------ ------------ ------------
STOCKHOLDERS' DEFICIT
Common stock 3,000 107 10,000 1 13,000
(107) 2
Common stock "A" - 94 (94) 2 -
Additional paid-in capital 6,500 907,094 (10,000) 1 884,160
201 2
(19,635) 3
Stock subscriptions receivable - (95) - (95)
Accumulated deficit (19,635) (2,464,469) 19,635 3 (2,464,469)
------------- ------------ ------------ ------------
Total Stockholders' Deficit (10,135) (1,557,269) - (1,567,404)
------------- ------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ - $ 41,359 $ - $ 41,359
============= ============ ============ ============
P-2
RESIDENTIAL RESALES, INC. AND SUBSIDIARY
(A Development Stage Company)
Condensed Combined Pro Forma Statements of Operations
For the Nine Months Ended
LOTTERY
NETWORK
RESIDENTIAL SERVICES PRO FORMA
RESALES, INC. LIMITED ADJUSTMENTS
JANUARY 31, DECEMBER 31, INCREASE PRO FORMA
2004 2003 (DECREASE) COMBINED
----------- ------------ ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
NET REVENUE $ - $ - $ - $ -
----------- ------------ ------------ -----------
Consulting fees - 68,172 - 68,172
Depreciation expense - 600 - 600
Foreign gaming fees - 90,000 - 90,000
General and administrative 962 104,140 - 105,102
Management fees - 208,988 - 208,988
Professional fees - 27,996 - 27,996
Programming fees - 317,114 - 317,114
Rent expense - 36,000 - 36,000
Website expense - 32,404 - 32,404
----------- ------------ ------------ -----------
Total Operating Expenses 962 885,414 - 886,376
----------- ------------ ------------ -----------
LOSS FROM OPERATIONS (962) (885,414) - (886,376)
----------- ------------ ------------ -----------
OTHER EXPENSES
Interest expense - (4,890) - (4,890)
----------- ------------ ------------ -----------
Total Other Expenses - (4,890) - (4,890)
----------- ------------ ------------ -----------
NET LOSS BEFORE INCOME TAXES (962) (890,304) - (891,266)
PROVISION FOR INCOME TAXES - - - -
----------- ------------ ------------ -----------
NET LOSS $ (962) $ (890,304) $ - $ (891,266)
=========== ============ ============ ===========
P-3
RESIDENTIAL RESALES, INC. AND SUBSIDIARY
Summary of Assumptions and Disclosures
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Business Organization
The accompanying pro forma financial statements are prepared to
present the acquisition of Lottery Network Services Limited (LNS)
by Residential Resales, Inc. (RRI) to aid the user in
understanding the acquisition. The proforma balance sheet is
presented as though the acquisition took place on January 31,
2004 and the statement of operations as though the acquisition
took place April 1, 2003. On March 18, 2004, RRI entered into a
merger agreement to acquire approximately 99.8% of the
outstanding stock of LNS by issuing 10,000,000 shares of common
stock. In addition, the acquired shares of LNS will be entirely
canceled, leaving RRI as the surviving entity.
RRI was incorporated under the laws of the State of Florida on
June 29, 1998.
Lottery Network Services Limited was organized under the
Companies Acts 1963 to 2001 of the Republic of Ireland on July
11, 2000. The Company is involved in the development of internet
gaming and lottery technologies to be marketed to foreign
charitable lottery organizations and the management thereof, and
is currently in the development stage.
b. Pro Forma Adjustments
The pro forma financial statements have been prepared as though
the acquisition of Lottery Network Services Limited by
Residential Resales, Inc. occurred on April 1, 2003.
1) Common stock (RRI) $ 10,000
Additional paid-in capital (10,000)
------------------
$ -
==================
To record the acquisition of Lottery Network Services Limited
through the issuance of 10,000,000 shares of common stock.
2) Additional paid-in capital $ 201
Common stock (LNS) (107)
Common stock "A" (LNS) (94)
------------------
$ -
==================
Reclassification of LNS stock to additional paid-in capital.
3) Accumulated deficit (RRI) $ 19,635
Additional paid-in capital (19,635)
------------------
$ -
==================
Reclassification of RRI's accumulated deficit.
P-4