U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(c)
OF THE SECURITIES EXCHANGE ACT OF 1934
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14(a)-6(e)(2))
[ ] Definitive Information Statement
RESIDENTIAL RESALES, INC.
(Name of the Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No Fee Required
[ ] Fee Computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1. Title of each class of securities to which transaction applies:
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2. Aggregate number of securities to which transaction applies:
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3. Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
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4. Proposed aggregate offering price:
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5. Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1. Amount previously paid:
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2. Form, schedule, or registration statement number:
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3. Filing party:
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4. Date filed:
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Residential Resales, Inc.
1400 Technology Drive
Harrisonburg, Virginia 22802
To Our Stockholders:
The purpose of this information statement is to inform the holders of
record of shares of our common stock as of the close of business on March 19,
2004 that our board of directors has adopted, and that the holders of a majority
of our outstanding shares of common stock, par value $0.001 per share ("Common
Stock"), have indicated their intent to vote in favor of, resolutions which will
approve the merger of Residential Resales, Inc. with and into its wholly owned
subsidiary, New Media Lottery Services, Inc., thereby changing the domicile of
our company from the State of Florida to the Commonwealth of Virginia and the
company's name.
This Information Statement is being furnished to you as required by Section
14(c) of the Securities Exchange Act of 1934, as amended, and Section 607.0704
of the Florida Business Corporation Act which provides that a Florida
corporation advise all shareholders within ten days after obtaining the written
consent to corporate action of persons holding a majority of a corporation's
outstanding shares of capital stock, that the corporation afford notice of such
actions to those shareholders who have not consented in writing or who are not
entitled to vote on the action.
WE ARE NOT ASKING FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
THIS INFORMATION STATEMENT IS BEING SENT TO YOU FOR INFORMATIONAL PURPOSES ONLY.
This information statement is being mailed on or about May 17, 2004 to all
stockholders of record as of March 19, 2004.
We appreciate your continued interest in our company.
Very truly yours,
/s/ Nathan H. Miller
----------------------------------
Nathan H. Miller, President
INFORMATION STATEMENT
Residential Resales, Inc.
1400 Technology Drive
Harrisonburg, Virginia 22802
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE
REQUESTED NOT TO SEND US A PROXY
This Information Statement Proxy Statement is being furnished pursuant to
Section 14(c) of the Securities Exchange Act of 1934, as amended, and Section
607.0704 of the Florida Business Corporation Act, at the direction and on behalf
of the Board of Directors of Residential Resales, Inc., a Florida corporation
(the "Company"), to those holders of the Company's outstanding shares of common
stock, par value $0.001 per share ("Residential Resales Common Stock"), at the
close of business on March 19, 2004 ("Record Date") who were not solicited by
the Board to consent to the corporate actions described herein.
The Company's Board of Directors has unanimously adopted resolutions
approving an Agreement and Plan of Merger whereby Residential Resales, Inc. will
merge with and into its wholly owned subsidiary New Media Lottery Services,
Inc., a Virginia corporation (the "Merger"). We are taking this action in order
to affect a change of domicile of the Company from Florida to Virginia (the
"Reincorporation") and a change in the corporate name from Residential Resales,
Inc. to New Media Lottery Services, Inc. The Company is advised that the holders
of approximately 80% of the outstanding shares of Residential Resales Common
Stock will consent to the foregoing actions.
The Merger and Reincorporation will occur no earlier than June 7, 2004, a
date that is twenty days after we mail this Information Statement to
shareholders.
This Information Statement will be mailed on or about May 17, 2004. The
cost of preparing, assembling and mailing this Information Statement is being
borne by the Company.
SUMMARY
This summary highlights information that may be found in greater detail
elsewhere in this Information Statement. In this summary, the Company has
attempted to describe those matters which the Company believes will be of the
greatest importance to you in understanding the various transactions. This
summary may not, however, contain all information that is important to you. For
that reason, the Company urges you to read this document carefully in its
entirety, including the Exhibits to this document and the additional documents
we refer you to under "WHERE YOU CAN FIND MORE INFORMATION" on Page 20.
QUESTIONS AND ANSWERS ABOUT THIS INFORMATION STATEMENT
WHY AM I RECEIVING THIS INFORMATION STATEMENT?
This Information Statement provides notice to stockholders of Residential
Resales, Inc. of actions to be taken by written consent by the holders of a
majority of the outstanding shares of Residential Resales Common Stock.
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WHAT ACTION DID THE MAJORITY STOCKHOLDERS OF RESIDENTIAL RESALES APPROVE?
Holders of approximately 80% of the outstanding shares of Residential
Resales Common Stock have advised the Company that they will approve resolutions
by which Residential Resales will merge with and into its wholly owned
subsidiary, New Media Lottery Services, a Virginia corporation formed for the
sole purpose of changing the Company's domicile from Florida to Virginia. By
approving the Reincorporation, these shareholders also have authorized the
change of corporate name to New Media Lottery Services.
WHY IS THE COMPANY REINCORPORATING FROM FLORIDA TO VIRGINIA?
The Board of Directors of Residential Resales believes that changing the
Company's domicile from Florida into Virginia and concurrently changing its name
are in the best interests of the shareholders because the Company's principal
executive offices are located in Virginia and the Company currently engages in
lottery management and service operations and no longer has any interest in the
real estate industry. A description of the Company's business operations, along
with audited financial statements, is included in its report on Form 8-K as
filed with the Securities and Exchange Commission on April 8, 2004, a copy of
which is attached as Exhibit A hereto.
HOW WILL THE COMPANY REINCORPORATE FROM FLORIDA TO VIRGINIA?
Approximately twenty days after it files a Definitive Information Statement
with the Securities and Exchange Commission, Residential Resales, Inc., the
Florida corporation, and New Media Lottery Services, Inc., the Virginia
corporation, will enter into an Agreement and Plan of Merger which provides for
the merger ("Merger") of Residential Resales into New Media Lottery Services, a
copy of which is attached hereto as Exhibit B ("Merger Agreement"). Upon the
signing of the Merger Agreement and after making appropriate filings with the
State of Florida and the Commonwealth of Virginia, the separate corporate
existence of Residential Resales will cease and New Media Lottery Services will
be the surviving corporation and will have assumed all of Residential Resales'
business operations, assets and liabilities, and all of its rights and
obligations.
WHAT EFFECT WILL THE REINCORPORATION HAVE ON THE COMPANY?
After the Merger:
o Residential Resales, the Florida corporation, will cease to exist;
o New Media Lottery Services, the Virginia corporation, will continue to
operate the business of Residential Resales under the name "New Media
Lottery Services, Inc.";
o the shareholders of Residential Resales will automatically become the
shareholders of New Media Lottery Services;
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o New Media Lottery Services will have the same directors and executive
officers as Residential Resales prior to the effective date of the
Merger;
o New Media Lottery Services will have the same address and telephone
number as Residential Resales prior to the effective date of the
Merger; and
o New Media Lottery Services, Inc. will assume Residential Resales'
reporting requirements under the Securities Exchange Act of 1934, as
amended.
WHAT EFFECT WILL THE MERGER AND REINCORPORATION HAVE ON MY SHARES OF COMMON
STOCK OF RESIDENTIAL RESALES, INC.?
In accordance with the Merger Agreement, each share of Residential Resales
Common Stock outstanding on the date of the Merger will automatically be changed
and converted into one fully paid and nonassessable, issued and outstanding
share of common stock of New Media Lottery Services, Inc. After the Merger:
o persons holding shares of Residential Resales Common Stock will own
the same number and percentage of shares of New Media Lottery Services
as they did in Residential Resales;
o the shareholders of Residential Resales will have rights as
shareholders of New Media Lottery Services and no longer as
shareholders of Residential Resales; and
o the rights of the company's shareholders will be governed by Virginia
law and New Media Lottery Services' Articles of Incorporation and
By-Laws, rather than by Florida law or Residential Resales Articles of
Incorporation and By-Laws.
WHAT CAN I DO IF I DO NOT AGREE WITH THE MERGER?
Under the Florida Business Corporation Law, the Merger is a type of
transaction that affords holders of Residential Resales Common Stock the right
to dissent to the transaction and exercise their appraisal rights to receive the
fair value of their shares of Residential Resales Common Stock. This Information
Statement describes the procedure by which a holder of shares of Residential
Resales Common Stock may dissent to the Merger, exercise his appraisal rights
and obtain payment of the fair value of his shares of Residential Resales Common
Stock. Please read carefully the section titled "ITEM NO. 1 REINCORPORATION IN
THE COMMONWEALTH OF VIRGINIA AND CHANGE OF CORPORATE NAME-Appraisal Rights" for
a description of the manner in which holders of Residential Resales Common Stock
may exercise their appraisal rights under Florida law.
HOW DO I OBTAIN CERTIFICATES FOR SHARES OF NEW MEDIA LOTTERY SERVICES,
INC.'S COMMON STOCK?
After the Merger becomes effective, management of New Media Lottery
Services will furnish to each shareholder appropriate forms by which they can
exchange their certificates
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representing shares of Residential Resales for certificates representing shares
of common stock of New Media Lottery Services. Persons who dissent to the Merger
and exercise their appraisal rights as to Residential Resales Common Stock under
Florida law, will not receive certificates for the shares of common stock of New
Media Lottery Services.
WHAT DO I NEED TO DO IN CONNECTION WITH THIS INFORMATION STATEMENT?
No shareholder action need be taken. This Information Statement merely
provides notice to those holders of shares of Residential Resales Common Stock
who were not solicited by the Board to consent to the corporate actions
described herein of the actions taken by the Board and to be taken by the
holders of a majority of the outstanding shares of Residential Resales Common
Stock. No vote or proxy is required, and Residential Resales is not requesting
shareholders to send proxies.
Shareholders wishing to dissent to the Merger and exercise appraisal rights
as to Residential Resales Common Stock under Florida law, will need to complete
the Appraisal Form attached hereto as Exhibit G.
Shortly after the Merger has taken place, those shareholders who did not
dissent to the Merger will receive from management transmittal forms by which
such holders may exchange their certificates representing shares of Residential
Resales Common Stock for a like number of shares of common stock of New Media
Lottery Services.
VOTING SECURITIES
On March 19, 2004, the record date for shareholders entitled to notice of
the corporate actions proposed to be taken by Residential Resales, there were
11,000,000 shares of our $0.001 par value common stock outstanding. Each share
is entitled to one vote per share on any matter that may properly come before
the shareholders and there is no cumulative voting right on any shares. All
matters voted on required an affirmative vote of a majority of the issued and
outstanding shares of the Company.
The Company is advised that holders of approximately 80% of the Residential
Resales outstanding shares of Common Stock will consent to the Merger and
Reincorporation. Pursuant to applicable Florida law, because the Company is
entering into a merger, holders of shares of Residential Resales Common Stock
will have dissenter's rights and the right of appraisal as enumerated under
Florida law, as herein described.
STOCK OWNERSHIP
At March 19, 2004, there were 11,000,000 shares of our Common Stock
outstanding. The following table sets forth information as of March 19, 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
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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%
Joseph Dresner 2,000,000 18.19%
Milton Dresner 2,000,000 18.19%
Nancy M. Bowman (4) 385,714 3.51%
Frederick Winters (5) -0- -0-
John Carson (6) 887,714 8.01%
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.
(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) 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.
(5) 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.
(6) Includes 600,000 shares of common Stock held by The John C. Carson
Revocable Trust for which Mr. Carson is the trustee.
ITEM NO. 1
CHANGE OF DOMICILE TO THE COMMONWEALTH OF VIRGINIA
AND CHANGE OF CORPORATE NAME
GENERAL
For the reasons set forth below, the Board of Directors unanimously
believes that the best interest of the Company and its shareholders will be
served by changing the Company's state of incorporation from Florida to Virginia
(the "Reincorporation") and in so doing changing the Company's name from
Residential Resales, Inc. to New Media Lottery Services, Inc. Shareholders are
urged to read carefully this Proxy Statement, including the related exhibits.
Throughout this Information Statement, the term "Residential Resales" or the
"Florida Company" refers to the existing Florida corporation, Residential
Resales, Inc., and the term
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"New Media" or the "Virginia Company" refers to New Media Lottery Services,
Inc., a Virginia corporation and a wholly-owned subsidiary of Residential
Resales formed by it for the sole purpose of the Reincorporation. The address
and telephone number of the principal executive office of the Virginia Company
are the same as those of the Florida Company, as are the Directors and Executive
Officers.
REASONS FOR THE REINCORPORATION
Residential Resales originally was incorporated in the State of Florida in
1998 under the name Media Acquisitions Group, Inc. At the time, its directors,
officers and principal shareholders were located in Florida. On September 17,
2001, the Company changed its name to Residential Resales to reflect its new
business operations in the real estate industry. On March 19, 2004, Residential
Resales acquired all of the outstanding shares of capital stock of Lottery
Network Services Ltd., an Irish corporation with executive offices in
Harrisonburg, Virginia. Since the date of the acquisition, Residential Resales
has relocated its principal offices to Virginia.
The Company's current operations entail designing, implementing, managing
and supporting Internet and wireless based lottery programs outside of the
United States from its principal offices located in Virginia. The Company no
longer engages in any business in the State of Florida nor in the real estate
industry. Accordingly, there is no nexus between the Company and its state of
incorporation or its corporate name.
If the Company were to remain a Florida corporation with operations in
Virginia, it would have to file documents and pay a fee to qualify as a foreign
corporation in Virginia. Further, each year, it would have to file an annual
report and pay annual taxes to Virginia based upon its corporate earnings, in
addition to the taxes it pays to Florida as a corporation organized under that
State's laws. By changing the Company's domicile to Virginia, the Company would
not, after the reincorporation, be required to pay any tax to Florida other than
if it does business in said State.
Given the Company's new business focus and the relocation of its principal
executive offices to Virginia, the Board of Directors believes that the best
interest of the Company and its shareholders will be served by affecting the
reincorporation into the Commonwealth of Virginia and changing its corporate
name.
PROCEDURE FOR CHANGING DOMICILE
A change in corporate domicile normally is affected by one company merging
with a separate company, typically a wholly owned subsidiary, organized under
the laws of the state in which it wishes to reincorporate. In furtherance of
this end, Residential Resales has incorporated a new company in the Commonwealth
of Virginia named "New Media Lottery Services, Inc." New Media Lottery Services
was incorporated with 50,000,000 shares of common stock, par value $0.001 per
share, the same number of shares of common stock and par value per share
authorized by Residential Resales' charter documents. All 1,000 of New Media's
outstanding shares of common stock are owned by Residential Resales. A copy of
New Media's articles of
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incorporation is annexed hereto as Exhibit C ("Virginia Company Articles") and a
copy of its by-laws is annexed hereto as Exhibit D ("Virginia Company By-Laws").
The Reincorporation will be affected by merging Residential Resales into
New Media (the "Merger"), in accordance with the terms of an Agreement and Plan
of Merger (the "Merger Agreement"), a copy of which is attached hereto as
Exhibit B. Shareholders are encouraged to review the Agreement and Plan of
Merger in connection with the information contained herein.
After the execution of the Merger Agreement, the Florida Company will file
Articles of Merger with the Secretaries of State of each of Florida and
Virginia. Upon acceptance of filing of the Articles of Merger by each state,
which will be the Effective Date of the Merger, the companies would be merged
and New Media, as the Virginia corporation, would be the surviving entity.
No action will be taken on the Merger until a date that is at least twenty
days after Residential Resales files a Definitive Information Statement with the
Securities and Exchange Commission.
SUMMARY OF TERMS OF MERGER AGREEMENT
On April 19, 2004, the board of directors of Residential Resales adopted
resolutions wherein it (i) approved a change of domicile from Florida to
Virginia, (ii) approved the incorporation of New Media in the Commonwealth of
Virginia and (iii) recommended that Residential Resales merge with and into New
Media pursuant to an Agreement and Plan of Merger between the corporations.
Several members of the board of directors and other affiliates of Residential
Resales who together own more than a majority of the outstanding shares of
Residential Resales Common Stock advised the board of directors that they would
consent in writing to the resolutions approved by the board of directors. Set
forth below is a summary of material terms of the Merger Agreement which is
qualified in its entirety by contents of the Merger Agreement:
Merger. The merger would be pursuant to the applicable provisions of the
laws of Florida and Virginia with respect to mergers and in accordance with
the Merger Agreement.
Articles of Incorporation and By-Laws. The Virginia Company Articles and
Virginia Company By-Laws of would be the articles of incorporation and
by-laws of the surviving entity following the Merger.
Directors and Officers. The directors and officers of the Virginia
corporation would be the directors and officers of the surviving entity
following the Merger.
Conversion of Shares. Each issued and outstanding share of Residential
Resales Common Stock, par value $0.001 per share, would be converted into
and become one new fully paid and nonassessable share of common stock, par
value $0.001 per share, of the surviving entity.
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Termination. The Merger Agreement may be terminated for any reason at any
time before the filing of Articles of Merger with the Secretaries of State
of Florida and Virginia, by resolution of the Board of Directors of the
merging corporations.
Amendment. The Merger Agreement may be amended for any reason, at any time
before the filing of Articles of Merger with the Secretaries of State of
Florida and Virginia, by resolution of the Board of Directors of the
merging corporations, notwithstanding approval by the shareholders of the
Florida Company, provided, however, that any amendment made subsequent to
the adoption of the Merger Agreement by the Florida Company shareholders
does not: (i) alter or change the amount or kind of shares, securities,
cash, property and/or rights to be received in exchange for or upon
conversion of any shares of any class or series of the Florida Company;
(ii) alter or change any of the terms of the Virginia Company Articles; or
(iii) alter or change any of the terms or conditions of this Merger
Agreement if such alteration or change would adversely affect the holders
of any shares of any class or series of the Florida Company.
EFFECT OF REINCORPORATION
The Reincorporation will not result in any changes in the physical
location, business, management, assets, liabilities or net worth of the Florida
Company. The directors and officers of the Florida Company immediately prior to
the Reincorporation will serve as the directors and officers of the Virginia
Company following the Reincorporation.
Upon the Effective Date of the Merger, (i) the Florida Company will cease
to exist, (ii) the Virginia Company will continue to operate the business of the
Florida Company under the name "New Media Lottery Services, Inc.", (iii) the
shareholders of the Florida Company will automatically become the shareholders
of the Virginia Company, and (iv) the shareholders of the Florida Company will
have rights as shareholders of the Virginia Company and no longer as
shareholders of the Florida Company, and such rights will be governed by
Virginia law, the Virginia Company Articles and Virginia Company By-Laws rather
than by Florida law, the Florida Company's Articles of Incorporation or By-Laws.
After the Reincorporation, the Virginia Company will continue to be subject
to the reporting requirements of the Securities Exchange Act of 1934, as
amended, and will file with the Securities and Exchange Commission and provide
to its shareholders the same type of information that the Florida Company has
previously filed and provided to shareholders.
The shareholders' consent to the Reincorporation constitutes their approval
of all of the provisions of the Virginia Company Articles and Virginia Company
By-Laws, including those provisions relating to the limitation of director
liability and indemnification of directors, officers and key employees under
Virginia law, and including those provisions having "anti-takeover"
implications, which may be significant to the Virginia Company and its
shareholders in the future. The governance of the Virginia Company by Virginia
law, the Virginia Company Articles and Virginia Company By-Laws may or will in
the future alter certain rights of the shareholders.
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CONVERSION AND EXCHANGE OF STOCK CERTIFICATES
Pursuant to the Merger Agreement, each outstanding share of Florida Company
Common Stock, $0.001 par value, automatically will be converted into one share
of the Virginia Company Common Stock, $0.001 par value, upon the filing of
Articles of Merger with the Secretaries of State of Florida and Virginia. Each
stock certificate representing issued and outstanding shares of Florida Company
Common Stock will continue to represent the same number of shares of Virginia
Company Common Stock. After the Merger has been approved by Florida and
Virginia, management of the Virginia Company will furnish each holder of
certificates representing shares of Florida Company Common Stock with forms by
which these holders may exchange their certificates for certificates
representing a like number of shares of Virginia Company Common Stock. The
exchange will be subject to normal stock transfer requirements including proper
endorsement, signature guarantee, if required, but the Virginia Company will pay
all applicable fees in connection therewith. Even if a holder of certificates
representing shares of Florida Common Stock does not, for whatever reason,
exchange these certificates for certificates representing shares of Virginia
Company Common Stock, such person will nonetheless be a shareholder of the
Virginia Company, though such person may be required to exchange certificates
upon any transfer of their shares.
THIS MEANS THAT, BEGINNING ON THE EFFECTIVE DATE OF THE MERGER, EACH FLORIDA
COMPANY STOCK CERTIFICATE WHICH WAS OUTSTANDING JUST BEFORE THE REINCORPORATION
WILL AUTOMATICALLY REPRESENT THE SAME NUMBER OF VIRGINIA COMPANY SHARES.
STOCKHOLDERS IN THE FLORIDA COMPANY WILL BE REQUIRED TO SURRENDER THEIR CURRENT
CERTIFICATES REPRESENTING THE COMMON STOCK OF THE FLORIDA COMPANY IN EXCHANGE
FOR CERTIFICATES REPRESENTING A LIKE NUMBER OF SHARES OF THE COMMON STOCK OF THE
VIRGINIA COMPANY. APPROPRIATE TRANSMITTAL FORMS WILL BE SENT TO STOCKHOLDERS FOR
THIS PURPOSE.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the federal income tax considerations that
may be relevant to holders of Florida Company Common Stock, who will receive
Virginia Company Common Stock in exchange for their Florida Company Common
Stock. The discussion does not address all of the tax consequences of the
Reincorporation that may be relevant to particular Florida Company shareholders.
Furthermore, no foreign, state or local tax considerations are addressed herein.
In view of the varying nature of such tax consequences, each shareholder is
urged to consult his or her own tax advisor as to the specific tax consequences
of the proposed reincorporation, including the applicability of federal, state,
local or foreign tax laws. This discussion is based on the Internal Revenue Code
of 1986, as amended (the "Code"), the applicable Treasury Regulations
promulgated thereunder, judicial authority and current administrative rulings
and practices in effect on the date of this Information Statement.
The Reincorporation is expected to qualify as a reorganization within the
meaning of Section 368(a) of the Code, with the following tax consequences:
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o No gain or loss will be recognized by holders of Florida Company
Common Stock upon receipt of the Virginia Company Common Stock
pursuant to the Agreement and Plan of Merger;
o The aggregate tax basis of the Virginia Company Common Stock received
by each shareholder in the reincorporation will equal the aggregate
tax basis of Florida Company Common Stock surrendered in exchange
therefore;
o The holding period of the Virginia Company Common Stock received by
each shareholder of the Florida Company will include the period during
which such shareholder held the Florida Company Common Stock
surrendered in exchange therefore; provided that such Florida Company
Common Stock was held by the shareholder as a capital asset at the
time of the reincorporation; and
o No gain or loss will be recognized by the Florida Company or the
Virginia Company in connection with the reincorporation.
Management of the Florida Company knows of no reason why the Internal
Revenue Service (the "IRS") would challenge the described income tax
consequences of the reincorporation. However, a successful IRS challenge to the
reorganization status of the Reincorporation could result in a shareholder
recognizing gain or loss with respect to each share of Florida Company Common
Stock exchanged in the reincorporation equal to the difference between the
shareholder's basis in such share and the fair market value, as of the time of
the reincorporation, of the Virginia Company Common Stock received in exchange
therefore. In such event, a shareholder's aggregate basis in the shares of
Florida Company Common Stock received in the exchange would equal their fair
market value on such date, and the shareholder's holding period for such shares
would not include the period during which the shareholder held Florida Company
Common Stock.
ACCOUNTING TREATMENT OF THE MERGER
In accordance with generally accepted accounting principles, the Florida
Company expects that the Merger and Reincorporation will be accounted for as a
reorganization of entities under common control at historical cost.
REGULATORY APPROVAL
The consummation of the Merger is conditioned upon the Florida Company
obtaining all required consents of governmental authorities including the
Secretary of State of Florida and the Commonwealth of Virginia.
DISSENTER RIGHTS
Under the Florida Business Corporation Act, or Florida Law, a holder of
shares of Florida Company Common Stock who does not consent to the Merger will
have appraisal rights as defined in Section 67.1302 of the corporation laws of
the State of Florida. Appraisal rights afford the holder of shares of capital
stock of a Florida corporation the right to dissent to the
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taking of a certain corporate action, such as a merger or consolidation, and to
receive for their shares of common stock an amount in cash equal to the fair
value for such shares.
Set forth below is a description of the process by which a shareholder who
dissents to the Merger may exercise his appraisal rights. In order for a
shareholder to exercise his appraisal rights under the Florida Law, he must
adhere to the steps that are summarized below. The following description of the
appraisal rights under Florida Law as it applies to the Merger does not purport
to be complete and is subject to, and qualified in its entirety Sections 1301
through 1333 of the Florida Law, copies of which are attached hereto as Exhibit
E:
1. There must be a merger or share exchange (as such terms are defined
under the Florida Law) of the corporation in which the dissenter is a
shareholder. In the Florida Company's case, the Merger qualifies as a corporate
action giving rise to appraisal rights.
2. Within ten days after the Merger has occurred, the Virginia Company
shall mail to each shareholder who has not consented to the Merger an appraisal
notice ("Appraisal Notice"), a copy of which is attached as Exhibit F, and an
appraisal form, a description of which is set forth below ("Appraisal Form"), a
copy of which is attached as Exhibit G.
(a) The Appraisal Notice shall state:
(i) that the Merger has taken place;
(ii) that the shareholder is entitled to appraisal rights and to
obtain payment of the fair value of that shareholder's shares;
(iii) the estimate of the fair value of the Florida Company
Common Stock and offer to pay the dissenting shareholder such amount;
(iv) that in order to exercise his appraisal rights, the
dissenting shareholder must complete, execute and return to the
Virginia Company the Appraisal Form by a date that is not less than 40
nor more than 60 days after the date the Appraisal Form is sent to
persons entitled to appraisal rights under Florida Law; and
(v) that, if requested in writing, the Virginia Company will
provide to a dissenting shareholder so requesting, no later than 10
days after it receives the completed and executed Appraisal Form from
the dissenting shareholder, information as to the number of
shareholders who are exercising their appraisal rights and the total
number of shares owned by them.
(b) The Appraisal Form shall advise the dissenting shareholder where
to deposit the certificates representing his shares of Florida Company
Common Stock and provide space for each dissenting shareholder to include
the following information:
(i) the shareholder's name and address;
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(ii) the number of shares of Florida Company Common Stock as to
which the shareholder is asserting appraisal rights;
(iii) an indication that the shareholder did not vote for the
Merger;
(iv) whether the shareholder accepts the Virginia Company's offer
as to the fair value of the Florida Company Common Stock;
(v) if the offer is not accepted, the dissenting shareholder's
estimated fair value of the shares and a demand for payment of the
shareholder's estimated value plus interest.
(b) Dissenting shareholders wishing to exercise appraisal rights must
return the Appraisal Form to the Virginia Company within twenty days after
receiving the Appraisal Notice.
A DISSENTING SHAREHOLDER WHO FAILS TO NOTIFY THE COMPANY IN WRITING OF HIS
DEMAND TO BE PAID HIS STATED ESTIMATE OF THE FAIR VALUE FOR HIS FLORIDA COMPANY
COMMON STOCK PLUS INTEREST WITHIN TWENTY DAYS AFTER RECEIVING THE APPRAISAL
NOTICE WAIVES THE RIGHT TO DEMAND PAYMENT UNDER THE FLORIDA LAW AND SHALL BE
ENTITLED ONLY TO THE PAYMENT OFFERED BY THE COMPANY IN THE APPRAISAL NOTICE.
3. If the dissenting shareholder states on the Appraisal Form that such
shareholder accepts the offer of the Virginia Company to pay the Company's
estimated fair value for the shares of Florida Company Common Stock as stated in
the Appraisal Notice, the Virginia Company shall make such payment to the
shareholder within 90 days after it receives the Appraisal Form from a
dissenting shareholder. Upon payment of the agreed value, the shareholder shall
cease to have any interest in the shares for which it has been paid.
4. If the dissenting shareholder is not satisfied with the Virginia
Company's offer for the shares of Florida Company Common Stock, the shareholder
may commence an appraisal proceeding in the State of Florida at which the Court
will make a determination as to the fair value of the shares and assess the
costs against the Company or the dissenting shareholder(s), if it finds that
such shareholder(s) acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by the Florida Law.
5. A dissenting shareholder who has returned his completed Appraisal Form
and deposited his shares of Florida Company Common Stock as described in the
Appraisal Notice, may withdraw from the appraisal process by notifying the
Company, in writing, within 20 days after the date on which the Company receives
a completed, executed Appraisal Form from a shareholder. A dissenting
shareholder who fails to withdraw from the appraisal process in the manner
described above may not thereafter withdraw without the Company's written
consent.
13
6. A SHAREHOLDER WHO DOES NOT SATISFY THE REQUIREMENTS DESCRIBED IN THE
APPRAISAL NOTICE AND APPRAISAL FORM SHALL NOT BE ENTITLED TO PAYMENT UNDER THE
FLORIDA LAW.
7. THE RIGHT OF A DISSENTING SHAREHOLDER TO BE PAID THE FAIR VALUE OF HIS
OR HER OR ITS SHARES AS PROVIDED IN THE APPRAISAL NOTICE AND APPRAISAL FORM
SHALL CEASE IF AND WHEN THE CORPORATION SHALL ABANDON THE MERGER OR
CONSOLIDATION.
8. All inquiries or notices to the Company as outlined above, should be
made to: Nathan H. Miller, President, New Media Lottery Services, Inc., 1400
Technology Drive, Harrisonburg, Virginia 22802, (540) 437-1688.
SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF FLORIDA AND VIRGINIA
The Reincorporation will affect numerous changes in the rights of
shareholders as a result of differences between the Florida Business Corporation
Act (the "Florida Law"), the Articles of Incorporation and the By-Laws of the
Florida Company (the "Florida Company Articles" and the "Florida Company
By-Laws," respectively, and collectively the "Florida Company Charter
Documents") and the Virginia Stock Corporation Act (the "Virginia Law"), the
Virginia Company Articles and the Virginia Company By-Laws (collectively the
"Virginia Charter Documents"). The provisions of Florida Law and the Virginia
Law differ in many respects. Summarized below are certain of the principal
differences between Florida Law and Virginia Law and the Florida Charter
Documents and the Virginia Charter Documents affecting the rights of
shareholders. This summary does not purport to be a complete statement of the
differences affecting shareholders' rights under the Florida Law and Florida
Company Charter Documents and the Virginia Law and the Virginia Company Charter
Documents, and is subject to, and qualified in its entirety by reference to, all
the provisions of these statutes and charter documents.
DIFFERENCES IN RIGHTS OF SHAREHOLDERS
Descriptions of the Florida Company's capital stock and the Virginia
Company's capital stock are contained herein under the headings "- Description
of Florida Company Capital Stock" and "- Description of Virginia Company Capital
Stock," respectively.
Capital Stock. The Virginia Company Articles authorize the issuance of 50
million shares of common stock without further shareholder approval. Currently,
the Florida Company Articles likewise authorizes the issuance of 50 million
shares of Florida Company Common Stock without further shareholder approval.
Voting Rights. Neither the Virginia Company Articles nor the Florida
Company Articles provide that shareholders have cumulative voting rights in the
election of directors. The absence of cumulative voting allows holders of a
majority of the outstanding shares of voting stock to elect the entire Board of
Directors.
14
The holders of Florida Company Common Stock have the right to vote on
certain business combinations to which the Florida Company is a party or any
proposed sale, lease, exchange or other disposition of all or substantially all
of the property of the Florida Company. Holders of Virginia Company Common Stock
have the similar rights with respect to business combinations and any such asset
sales to which the Virginia Company is a party. See "- Mergers, Consolidations
and Sales of Assets" below.
Payment of Dividends. Under the Florida Law, a corporation may pay
dividends out of its surplus or, if there is no surplus, out of its net profits
for the fiscal year in which the dividend is declared and/or the preceding
fiscal year. If the capital of the corporation, however, has been diminished by
depreciation in the value of its property, or by losses, to an amount that is
less than the aggregate amount of the capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets, the directors of the corporation cannot declare and pay out of the net
profits any dividends on any shares of any classes of its capital stock until
the deficiency in the amount of capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets has been repaired.
Under Virginia Law, a corporation may pay dividends only if, after giving
effect to the distribution, (i) the corporation is still able to pay its debts
as they become due in the usual course of business, or (ii) the corporation's
total assets are greater than or equal to the sum of its total liabilities plus
(unless the corporation's articles of incorporation permit otherwise) the amount
that would be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights, upon the dissolution, of
shareholders whose referential rights are superior to those receiving the
distribution.
Directors. The Florida Company By-Laws and the Virginia Company By-Laws
each provide that the Board of Directors shall consist of up to 7 members. There
are currently 5 directors of the Florida Company and there will be 7 directors
of the Virginia Company.
Filling Vacancies on the Board. Under both the Florida Law and the Virginia
Law, vacancies on the Board of Directors of the corporation, including a vacancy
resulting from an increase in the number of directors, can be filled only by the
Board.
Removal of Directors. Both the Florida Company Articles and the Virginia
Company Articles provide that directors may be removed from office, with or
without cause, by the affirmative vote of holders of a majority of the shares
entitled to vote at an election of directors.
Liability and Indemnification of Directors, Officers and Employees. Under
the Virginia Company Articles, the liability of officers and directors to the
Virginia Company is eliminated to the fullest extent permitted by Virginia law.
Under Virginia law, the liability of an officer or director cannot be limited or
eliminated if the officer or director engages in willful misconduct or a knowing
violation of the criminal law or of any federal or state securities law,
including, without limitation, any claim of unlawful insider trading or
manipulation of the market for any security.
15
Under the Florida Company Articles, the liability of directors to the
Florida Company is eliminated to the fullest extent permitted by Florida Law.
Under Florida law, the liability of a director cannot be limited or eliminated
if the director engages in any breach of the duty of loyalty, acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, willful or negligent misconduct in the unlawful payment of dividends or
repurchase of stock, or any transaction from which the director derives an
improper personal benefit.
To the fullest extent permitted by Virginia law, the Virginia Company
Articles require it to indemnify any director or officer who is made a party to
any proceeding because he or she was or is a director or officer of the Virginia
Company against any liability, including reasonable expenses and legal fees,
incurred in the proceeding. Under the Virginia Company Articles, "proceeding" is
broadly defined to include pending, threatened or completed actions of all
types, including actions by or in the right of the Virginia Company. Similarly,
"liability" is defined to include not only judgments, but also settlements,
penalties, fines and certain excise taxes. The Virginia Company Articles also
provide that it may, but is not obligated to, indemnify its other employees or
agents. The Virginia Company must indemnify any person who is or was serving at
the written request of the Virginia Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, to the fullest extent provided by Virginia law. The indemnification
provisions also require the Virginia Company to pay reasonable expenses incurred
by a director or officer of the Virginia Company in a proceeding in advance of
the final disposition of any such proceeding, provided that the indemnified
person undertakes to repay the Virginia Company if it is ultimately determined
that such person was not entitled to indemnification. Virginia law does not
permit indemnification against willful misconduct or a knowing violation of the
criminal law.
The Florida Company Articles provide for indemnification of officers and
directors to the fullest extent permitted by Florida law. Under the Florida Law,
a Florida corporation may indemnify any officer or director for reasonable
expenses incurred in any legal proceeding if the officer or director acted in
good faith and in a manner that the officer or director reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful.
The rights of indemnification provided in the Virginia Company Articles are
not exclusive of any other rights which may be available under any insurance or
other agreement, by vote of shareholders or disinterested directors or
otherwise. In addition, the Virginia Company Articles authorize the purchase and
maintenance of insurance on behalf of any person who is or was a director,
officer, employee or agent of the Virginia Company, whether or not the Virginia
Company would have the power to provide indemnification to such person, to
protect any such person against any liability arising from his or her service to
the corporation or any other legal entity at the request of the corporation.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Virginia
Company pursuant to the foregoing provisions, the Florida Company and the
Virginia Company have been informed that in the
16
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933, as amended,
and is therefore unenforceable.
Special Meetings of Shareholders. Under the Florida Charter Documents, a
special meeting of shareholders may be called by the Board of Directors, the
Executive Committee of the Board, the Chairman of the Board or the President.
The provision of the Virginia Company By-Laws that addresses special meetings of
shareholders is consistent with the Florida Charter Documents.
Amendment of Governing Instruments. Under Florida Law, the Florida Company
Articles may be amended only if the amendment is approved by the holders of a
majority of the issued and outstanding shares of stock entitled to vote. The
Virginia Company Articles also may be amended upon the affirmative vote of
holders of a majority of the issued and outstanding shares of each class of
outstanding shares of the Virginia Company entitled to vote.
The Florida Company By-Laws and the Virginia Company By-Laws generally may
be amended by either the Board of Directors or the shareholders by a majority
vote.
APPROVAL OF THE AGREEMENT AND PLAN OF REINCORPORATION BY THE SHAREHOLDERS
OF THE COMPANY WILL BE DEEMED TO BE APPROVAL OF THE ARTICLES OF INCORPORATION
AND THE BYLAWS OF NEW MEDIA LOTTERY SERVICES, INC. BY THE SHAREHOLDERS.
Mergers, Consolidations and Sales of Assets. Under the Florida Law and the
Florida Company Articles, a plan of merger or a direct or indirect sale, lease,
exchange or other disposition of all or substantially all of the property of the
Florida Company must be approved by holders of a majority of the outstanding
shares of each class of stock entitled to vote. Under Virginia Law and the
Virginia Company Articles, such transactions and any share exchange in which
shares of the Virginia Company stock are acquired by another corporation must be
approved by holders of a majority of the issued and outstanding shares of each
voting group entitled to vote. Additionally, consistent with Virginia Law, the
Board of Directors of the Virginia Company may condition its submission of such
plan of merger or share exchange or such a sale or disposition of assets to the
shareholders on any basis, including the requirement of a greater vote than the
required vote described above.
MATERIAL VIRGINIA LAWS
The Virginia statutes described below under "Affiliated Transactions" and
"Control Share Acquisitions" have the general purpose of deterring certain
corporate takeovers.
Affiliated Transactions. The Virginia Law contains provisions governing
"Affiliated Transactions". Affiliated Transactions include certain mergers and
share exchanges, certain material dispositions of corporate assets not in the
ordinary course of business, any dissolution of a corporation proposed by or on
behalf of an Interested Shareholder (as defined below), and reclassifications,
including reverse stock splits, recapitalizations or mergers of a corporation
with its subsidiaries, or distributions or other transactions which have the
effect of increasing the
17
percentage of voting shares beneficially owned by an Interested Shareholder by
more than 5%. For purposes of the Virginia Law, an Interested Shareholder is
defined as any beneficial owner of more than 10% of any class of the voting
securities of a Virginia corporation.
Subject to certain exceptions discussed below, the provisions governing
Affiliated Transactions require that, for three years following the date upon
which any shareholder becomes an Interested Shareholder, any Affiliated
Transaction must be approved by the affirmative vote of holders of two-thirds of
the outstanding shares of the corporation entitled to vote, other than the
shares beneficially owned by the Interested Shareholder, and by a majority (but
not less than two) of the Disinterested Directors (as defined). A Disinterested
Director is defined in the Virginia Law as a member of a corporation's board of
directors who (i) was a member before the later of January 1, 1988 or the date
on which an Interested Shareholder became an Interested Shareholder or (ii) was
recommended for election by, or was elected to fill a vacancy and received the
affirmative vote of, a majority of the Disinterested Directors then on the
corporation's board of directors. At the expiration of the three year period
after a shareholder becomes an Interested Shareholder, these provisions require
approval of the Affiliated Transaction by the affirmative vote of the holders of
two-thirds of the outstanding shares of the corporation entitled to vote, other
than those beneficially owned by the Interested Shareholder.
The principal exceptions to the special voting requirement apply to
Affiliated Transactions occurring after the three year period has expired and
require either that the transaction be approved by a majority of the
corporation's Disinterested Directors or that the transaction satisfy certain
fair price requirements of the statute. In general, the fair price requirements
provide that the shareholders must receive the higher of the highest per share
price for their shares as was paid by the Interested Shareholder for his or its
shares, or the fair market value of the shares. The fair price requirements also
require that, during the three years preceding the announcement of the proposed
Affiliated Transaction, all required dividends have been paid and no special
financial accommodations have been accorded the Interested Shareholder, unless
approved by a majority of the Disinterested Directors.
None of the foregoing limitations and special voting requirements applies
to a transaction with an Interested Shareholder who has been an Interested
Shareholder continuously since the effective date of the statute (January 26,
1988) or who became an Interested Shareholder by gift or inheritance from such a
person or whose acquisition of shares making such person an Interested
Shareholder was approved by a majority of the Disinterested Directors of the
corporation.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the Virginia Act provides that, by affirmative vote
of a majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation may adopt, by meeting certain voting requirements, an
amendment to its articles of incorporation or bylaws providing that the
Affiliated Transactions provisions shall not apply to the corporation. The
Virginia Company has not adopted such an amendment.
Control Share Acquisitions. The Virginia Control Share Acquisitions statute
also is designed to afford shareholders of a public company incorporated in
Virginia protection against
18
certain types of non-negotiated acquisitions in which a person, entity, or group
("Acquiring Person") seeks to gain voting control of that corporation. With
certain enumerated exceptions, the statute applies to acquisitions of shares of
a corporation which would result in an Acquiring Person's ownership of the
corporation's shares entitled to vote in the election of directors falling
within any one of the following ranges: 20% to 33-1/3%, 33-1/3% to 50% or more
than 50% (a "Control Share Acquisition"). Shares that are the subject of a
Control Share Acquisition ("Control Shares") will not be entitled to voting
rights unless the holders of a majority of the "Disinterested Shares" vote at an
annual or special meeting of shareholders of the corporation to endow the
Control Shares with voting rights. Disinterested Shares do not include shares
owned by the Acquiring Person or by officers and inside directors of the target
company. Under certain circumstances, the statute permits an Acquiring Person to
call a special shareholders' meeting for the purpose of considering granting
voting rights to the holders of the Control Shares. As a condition to having
this matter considered at either an annual or special meeting, the Acquiring
Person must provide shareholders with detailed disclosures about his identity,
the method and financing of the Control Share Acquisition and any plans to
engage in certain transactions with, or to make fundamental changes to, the
corporation, its management or business. Under certain circumstances, the
statute grants dissenters' rights to shareholders who vote against granting
voting rights to the Control Shares. The Virginia Control Share Acquisitions
statute also enables a corporation to make provision for redemption of Control
Shares with no voting rights. A corporation may opt-out of the statute by so
providing in its Bylaws. The Virginia Company has not adopted such a provision.
Among the acquisitions specifically excluded from the statute are acquisitions
to which the corporation is a party and which, in the case of mergers or share
exchanges, have been approved by the corporation's shareholders under other
provisions of the Virginia Law.
DESCRIPTION OF FLORIDA COMPANY CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Company Common Stock, par value $0.001 per share ("Florida Company Common
Stock").
Florida Company Common Stock. Holders of Florida Company Common Stock are
entitled to one vote per share on all matters to be voted upon by the
shareholders. Holders of Florida Company Common Stock do not have cumulative
voting rights, and therefore holders of a majority of the shares voting for the
election of directors can elect all of the directors. In such event, the holders
of the remaining shares will not be able to elect any directors. Holders of
Florida Company Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. In the event of the liquidation, dissolution or winding up
of the Florida Company, the holders of Florida Company Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities. The
Florida Company Common Stock has no preemptive or conversion rights and is not
subject to further calls or assessments by the Florida Company. The Florida
Company Common Stock currently outstanding is validly issued, fully paid and
nonassessable. The Florida Company acts as its own transfer agent and registrar
for the Florida Company Common Stock.
19
DESCRIPTION OF VIRGINIA COMPANY CAPITAL STOCK
The authorized capital stock of the Virginia Company consists of 50,000,000
shares of common stock. Except as discussed herein, the rights of the holders of
such capital stock are identical in all material respects to those of the
holders of Company capital stock.
Virginia Company Common Stock. Holders of the Virginia Company Common Stock
are entitled to one vote per share on all matters to be voted upon by the
shareholders. Holders of the Virginia Company Common Stock do not have
cumulative voting rights, and therefore holders of a majority of the shares
voting for the election of directors can elect all of the directors. In such
event, the holders of the remaining shares will not be able to elect any
directors. Holders of the Virginia Company Common Stock are entitled to receive
such dividends as may be declared from time to time by the Board of Directors
out of funds legally available therefor, after payment of dividends required to
be paid on any outstanding shares of preferred stock, if any ever are
authorized. In the event of the liquidation, dissolution or winding up of the
Virginia Company, the holders of Virginia Company Common Stock are entitled to
share ratably in all assets remaining after payment of liabilities, subject to
prior distribution rights of any outstanding shares of Virginia Company
preferred stock. The Virginia Company Common Stock has no preemptive or
conversion rights and is not subject to further calls or assessments by the
Virginia Company. The Virginia Company Common Stock which would be issued in
connection with the Reincorporation will be validly issued, fully paid and
nonassessable.
ABANDONMENT OF MERGER
The Board of Directors will have the absolute right to abandon the Merger
Agreement and take no further action towards reincorporating the Company in
Virginia at any time before the Reincorporation becomes effective, even after
shareholder approval, if for any reason the Board of Directors determines that
it is not advisable to proceed with the Reincorporation.
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission. You can read
and copy any materials that the Company files with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549; the SEC's
regional offices located at Seven World Trade Center, New York, New York 10048,
and at 500 West Madison Street, Chicago, Illinois 60661. You can obtain
information about the operation of the SEC's Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC also maintains a Web site that contains
information we file electronically with the SEC, which you can access over the
internet at http://www.sec.gov. Copies of these materials may also be obtained
by mail from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
20
DOCUMENTS INCORPORATED BY REFERENCE
This Proxy Statement incorporates by reference documents relating to
Residential Resales, Inc. which are not included in these proxy materials.
Documents relating to Residential Resales (other than exhibits to such documents
unless such exhibits are specifically incorporated by reference) are available
to any person, including any beneficial owner, to whom this Proxy Statement is
delivered, on written or oral request, without charge, from Residential Resales,
Inc., 1400 Technology Drive, Harrisonburg, Virginia 22802, Attention: Randolph
Brownell, III, Telephone (540) 437-1688. In order to ensure timely delivery of
the documents, any such request should be made by May 30, 2004. Copies of
documents so requested will be sent by first class mail, postage paid within one
business day of the receipt of such request.
The following documents of Residential Resales, Inc. are incorporated by
reference herein:
1. Amendment No. 1 to Current Report on Form 8-K dated April 8, 2004.
2. Current Report on Form 8-K dated April 2, 2004.
3. Annual report on Form 10-KSB for the year ended April 30, 2003 (copy
enclosed);
4. Quarterly report on Form 10-Q for the three months ended January 31,
2004.
All documents filed by Residential Resales, Inc. with the Commission
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the
date hereof and prior to the consummation of the Reincorporation shall be deemed
to be incorporated by reference herein and shall be a part hereof from the date
of filing of such documents. Any statements contained in a document incorporated
by reference herein or contained in this Proxy Statement shall be deemed to be
modified or superseded for purposes hereof to the extent that a statement
contained herein (or in any other subsequently filed document which also is
incorporated by reference herein) modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed to constitute a part
hereof except as so modified or superseded.
By order of the Board of Directors,
May 4, 2004
21
EXHIBIT INDEX
Exhibit Title
- ------- -----
Exhibit A Residential Resales, Inc. Current Report on Form 8-K
Exhibit B Agreement and Plan of Merger by and between Residential Resales,
Inc., a Florida corporation, and New Media Lottery Services,
Inc., a Virginia corporation
Exhibit C New Media Lottery Services, Inc. Articles of Incorporation
Exhibit D New Media Lottery Services, Inc. By-Laws
Exhibit E Copies of Sections 607.1301-607.1333 of the Florida Business
Corporation Act
Exhibit F Form of Appraisal Form under the Florida Business Corporation
Act
Exhibit G Form of Appraisal Notice under the Florida Business Corporation
Act
Exhibit A
Residential Resales, Inc. Current Report on Form 8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
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.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Florida 000-49884 7-3026967
- -------------- --------- ---------
(State of other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization Number) File Number) Identification No.)
1400 Technology Drive, Harrisonburg, VA 22802
- --------------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (540) 437-1688
--------------
270 NW 3rd Court, Boca Raton, Florida_33432-3720
------------------------------------- ----------
(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.
On March 20, 2004, the Registrant (i) retained the services of Bouwhuis,
Morrill & Company to serve as its principal independent accountant and (ii)
dismissed Earl M. Cohen, CPA, PA, the Registrant's independent accountant for
the prior two fiscal years. The board of directors of the Registrant recommended
and approved the change of certifying accountant because Bouwhuis, Morrill &
Company has the ability to audit the financial statements of its Irish
subsidiary under United States generally accepted accounting principles and
prepare the reports required in connection therewith.
Prior to its engagement, the Registrant had not consulted with Bouwhuis,
Morrill & Company regarding the application of accounting principles to a
specific completed or contemplated transaction, or the type of audit opinion
that would be rendered on the Registrant's financial statements. Moreover, the
Registrant did not seek, and Bouwhuis, Morrill & Company did not furnish,
written or oral advice on any matter that the Registrant considered an important
factor in reaching a decision as to an accounting, auditing or financial
reporting issue.
The reports on the financial statements of the Registrant which were
prepared by Mr. Cohen, the Registrant's previous accountant, did not contain any
adverse opinion or disclaimer of opinion, nor were any of his reports modified
as to uncertainty, audit scope or accounting principles. Further, there were
never any disagreements between the Registrant and Mr. Cohen as to any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope of procedure.
Bouwhuis, Morrill & Company's offices are located at 12 South Main, Suite
208, Layton, Utah 84041.
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
2
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
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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.
16 Letter of Earl M. Cohen, CPA, PA on change in certifying
accountant.
* Previously filed with current report on Form 8-K dated March 31, 2004 as
filed with the Securities and Exchange Commission on April 2, 2004.
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: April 8, 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)
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$ -
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Reclassification of RRI's accumulated deficit.
P-4