UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________________
Commission File Number 000-28381
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GAMECOM, INC.
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(Exact name of registrant as specified in its charter)
Texas 93-1207631
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
440 North Center, Arlington, Texas 76011
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(Address of principal executive offices) (Zip Code)
(817) 265-0440
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(Registrant's telephone number, including area code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
YES |X| NO |_|
As of September 30, 2001, the Registrant had outstanding 32,699,812 shares
of common stock, par value $.005 per share.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheet as of September 30, 2001
and December 31, 2000
Consolidated Statement of Operations for the three months
and nine months ended September 30, 2001 and 2000
Consolidated Statement of Changes in Stockholders' Deficit
for the nine months ended September 30, 2001
Consolidated Statement of Cash Flows for the nine months
ended September 30, 2001 and 2000
Selected Notes to Financial Statements
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GAMECOM, INC.
CONSOLIDATED BALANCE SHEET
September 30, 2001 and December 31, 2000
September 30, December 31,
2001 2000
ASSETS (Unaudited) (Note)
----------- -----------
Current assets:
Cash and cash equivalents $ -- $ 6,135
Accounts receivable, net 129,707 159,922
Deferred expenses -- 38,887
Note receivable -- 33,471
----------- -----------
Total current assets 129,707 238,415
Property and equipment, net 900,116 1,316,325
Note receivable-related party 67,885 102,782
Intangible assets, net 61,446 82,618
Other assets 74,074 --
----------- -----------
Total assets $ 1,233,228 $ 1,740,140
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of notes payable $ 1,107,059 $ 604,133
Current portion of obligations under
product financing arrangements 3,607,780 1,043,789
Book overdraft 27,027 5,574
Accounts payable, trade 915,979 737,057
Accrued interest payable 138,451 89,940
Notes payable to stockholders 630,531 533,031
Deferred revenue 43,750 88,000
----------- -----------
Total current liabilities 6,470,577 3,101,524
Notes payable, net of current maturities -- 538,667
Obligations under product financing arrangements,
net of current portion 516,663 2,330,667
----------- -----------
Total liabilities 6,987,240 5,970,858
----------- -----------
Redeemable common stock, 778,291
shares, at par $.005 per share 3,891 3,891
Stockholders' deficit:
Common stock, par value $0.005; 100,000,000
shares authorized; 32,699,812 and 30,462,380
shares issued and outstanding, respectively 163,499 152,312
Additional paid-in capital 2,172,750 1,695,533
Accumulated deficit (8,094,152) (6,082,454)
----------- -----------
Total stockholders' deficit (5,757,903) (4,234,609)
----------- -----------
Total liabilities and stockholders'
deficit $ 1,233,228 $ 1,740,140
=========== ===========
Note: The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See accompanying notes.
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GAMECOM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
for the three months and nine months ended September 30, 2001 and 2000
----------
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue:
Theme parks and arcades $ 889,622 $ 901,904 $ 1,442,679 $ 1,595,712
Custom applications and other 52,050 186,615 871,111 889,461
------------ ------------ ------------ ------------
Total revenue 941,672 1,088,519 2,313,790 2,485,173
Cost of sales and services 226,732 204,113 892,175 891,313
------------ ------------ ------------ ------------
Gross margin 714,940 884,406 1,421,615 1,593,860
General and administrative expense 855,774 774,605 2,096,240 1,676,456
Depreciation and amortization expense 151,345 146,391 454,036 421,291
------------ ------------ ------------ ------------
Loss from operations (292,179) (36,590) (1,128,661) (503,887)
Other income (expense):
Interest income -- 408 1,338 1,200
Interest expense (310,375) (241,464) (836,210) (723,660)
Finance charges (52,500) (58,695) (97,500) (82,195)
Gain on sale of assets -- -- 25,000 --
Other income 5,670 14,072 24,335 46,271
------------ ------------ ------------ ------------
Total other income (expense) (357,205) (285,679) (883,037) (758,384)
------------ ------------ ------------ ------------
Loss before extraordinary item (649,384) (322,269) (2,011,698) (1,262,271)
Extraordinary item:
Gain from extinguishment of debt -- 51,548 -- 455,149
------------ ------------ ------------ ------------
Net loss $ (649,384) $ (270,721) $ (2,011,698) $ (807,122)
============ ============ ============ ============
Basic and dilutive net loss per
common share before extraordinary
item $ (0.02) $ (0.01) $ (0.06) $ (0.04)
Extraordinary item -- 0.00 -- 0.01
------------ ------------ ------------ ------------
Basic and dilutive net loss per
common share $ (0.02) $ (0.01) $ (0.06) $ (0.03)
============ ============ ============ ============
Weighted average number of common
shares outstanding 31,791,572 29,972,161 31,414,243 29,922,358
============ ============ ============ ============
See accompanying notes.
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GAMECOM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
for the nine months ended September 30, 2001
----------
(Unaudited)
Common Stock Additional
------------------------ Paid-In Accumulated
Shares Amount Capital Deficit Total
---------- -------- ---------- ----------- -----------
Balance at December 31,
2000 30,462,380 $152,312 $1,695,533 $(6,082,454) $(4,234,609)
Common stock issued for
services 1,068,970 5,345 237,159 -- 242,504
Common stock issued for
interest 57,000 285 13,115 -- 13,400
Common stock issued for
financing fees 255,320 1,276 58,724 -- 60,000
Common stock issued for
cash 125,000 625 24,375 -- 25,000
Common stock issued as
repayment of notes payable
to stockholders 250,000 1,250 48,750 -- 50,000
Common stock issued as
finance charges on notes
payable to stockholders 481,142 2,406 95,094 -- 97,500
Net loss -- -- -- (2,011,698) (2,011,698)
---------- -------- ---------- ----------- -----------
Balance at September 30,
2001 32,699,812 $163,499 $2,172,750 $(8,094,152) $(5,757,903)
========== ======== ========== =========== ===========
See accompanying notes.
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GAMECOM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
for the nine months ended September 30, 2001 and 2000
----------
(Unaudited)
Nine Months Ended
September 30,
-----------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net income (loss) $(2,011,698) $ (807,122)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 454,036 421,291
Bad debt expense 33,471 --
Stock issued as financing fees 157,500 82,195
Stock issued as compensation for services and
interest 255,904 --
Increase (decrease) in operating assets 29,925 (40,368)
Increase (decrease) in accounts payable and
accrued expenses 183,183 (216,491)
----------- -----------
Net cash used in operating activities (897,679) (560,495)
----------- -----------
Cash flows from investing activities:
Capital expenditures (16,656) (916,217)
----------- -----------
Net cash used in investing activities (16,656) (916,217)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 60,000 946,666
Payments on notes payable (95,741) (27,980)
Proceeds from obligations under product financing
arrangements 850,988 139,740
Payments on obligations under product financing
arrangements (101,000) (75,840)
Proceeds from notes payable to stockholders 147,500 86,000
Increase in book overdraft 21,453 --
Proceeds from issuance of common stock 25,000 16,666
----------- -----------
Net cash provided by financing activities 908,200 1,085,252
----------- -----------
Net decrease in cash and cash equivalents (6,135) (391,460)
Cash and cash equivalents at beginning of period 6,135 406,140
----------- -----------
Cash and cash equivalents at end of period $ -- $ 14,680
=========== ===========
Non-cash investing and financing activities:
Interest paid $ 568,677 $ 544,572
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
Common stock issued as repayment of notes payable
to stockholders $ 50,000 $ --
=========== ===========
See accompanying notes.
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GAMECOM, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles and the rules
of the U.S. Securities and Exchange Commission, and should be read in
conjunction with the audited financial statements and notes thereto for
the year ended December 31, 2000. They do not include all information and
footnotes required by generally accepted accounting principles for
complete financial statements. However, except as disclosed herein, there
has been no material change in the information disclosed in the notes to
the financial statements for the year ended December 31, 2000 included in
the Company's Form 10-KSB and Form DEF 14A filed with the Securities and
Exchange Commission. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of financial position and the results of operations for the
interim periods presented have been included. Operating results for the
interim periods are not necessarily indicative of the results that may be
expected for the respective full year.
Effective September 21, 2001, GameCom, Inc. merged with Ferris
Productions, Inc. by issuing 18,072,289 shares of GameCom common stock for
all of the outstanding shares of Ferris. The merger, which was initiated
prior to June 30, 2001, is accounted for as a pooling of interests in the
accompanying unaudited consolidated interim financial statements. The
pooling of interests method of accounting assumes that GameCom and Ferris
have been merged since their inception and the historical interim
consolidated financial statements for periods prior to consummation of the
merger are restated as though the companies have been combined since their
inception.
2. Notes Payable to Stockholders
During the nine months ended September 30, 2001, the Company borrowed an
additional $147,500 from certain stockholders of the Company and incurred
$97,500 of finance charges associated with the issuance of these new
loans.
During the nine months ended September 30, 2001, the Company repaid
certain notes payable to stockholders in the amount of $50,000 through the
issuance of its common stock.
Continued
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GAMECOM, INC.
NOTES TO FINANCIAL STATEMENTS
3. Income Taxes
The difference between the 34% federal statutory income tax rate and
amounts shown in the accompanying interim consolidated financial
statements is primarily attributable to an increase in the valuation
allowance applied against the tax benefit from utilization of net
operating loss carryforwards.
4. Litigation
The Company is a defendant in a lawsuit brought by Entertainment
Technologies & Programs, Inc. ("ETPI") in the 215th Judicial District
Court of Harris County, Texas. ETPI and Ferris had entered into a letter
of intent relating to a proposed acquisition of Ferris by ETPI. Ferris
terminated that letter of intent and entered into a letter of intent with
the Company under which Ferris would merge with the Company. ETPI claims
that Ferris' termination of the letter of intent was a breach of contract
and that the Company tortiously interfered with ETPI's letter of intent.
ETPI is asking for damages of $10 million. Management believes that the
suit is entirely without merit and intends to vigorously defend it.
-8-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The statements contained in this Report that are not historical are
forward-looking statements, including statements regarding the Company's
expectations, intentions, beliefs or strategies regarding the future.
Forward-looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability and anticipated expense levels. All
forward-looking statements included in this Report are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward-looking statements. The following discussion and analysis should be read
in conjunction with the financial statements and notes thereto appearing
elsewhere in this Report.
Overview
Effective September, 2001, GameCom completed the acquisition of Ferris
Industries, Inc., a leading developer and operator of virtual reality devices.
Ferris designed, developed, and distributed technically-advanced products for
the entertainment, simulation, promotion, and education markets. Its virtual
reality ("VR") devices are computer-based and allow people to view and
manipulate graphical representations of physical reality. The acquisition
provided the Company with a wider array of products within the Company's
industry, an experienced management team, an existing revenue stream, and
established distribution channels. Until it acquired Ferris, GameCom had devoted
substantially all of its efforts to implementing its `Net GameLink (TM),
product, an interactive entertainment system designed to allow a number of
players to compete with one another in a game via an intranet or the Internet.
It intends to continue development and deployment of that entertainment system
while at the same time expanding Ferris' business. Post-merger, the anticipated
deployment of the Company's existing virtual reality technology is anticipated
to be highly profitable.
The Ferris acquisition was accounted for as a pooling of interests. Ferris was
much larger than GameCom in terms of assets, and had substantial revenues
whereas GameCom had essentially no revenues at the time of the acquisition. As a
result, the discussion below relates in major part to the Ferris operations
rather than GameCom's.
Future revenues and profits will depend upon various factors, including market
acceptance of `Net GameLink (TM) and, more importantly, on the success of
Ferris' product lines, as well as on general economic conditions.
There can be no assurances that the Company will successfully implement its
expansion plans, including the `Net GameLink (TM) entertainment concept and the
hoped-for expansion of Ferris' operations. The Company faces all of the risks,
expenses, and difficulties frequently encountered in connection with the
expansion and development of the business, difficulties in maintaining delivery
schedules if and when volume increases, the need to develop support arrangements
for systems at widely dispersed physical locations, and the need to control
operating and general and administrative expenses. While the Ferris acquisition
provided an established stream of revenues and historically favorable gross
margins, Ferris had not yet generated a profit, and substantial additional
capital, or major highly-profitable custom applications, will be needed if those
operations are to become profitable.
-9-
Results of Operations
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Two major factors affect the Company's results of operations for the three
months ended September 30, 2001 compared to the corresponding period of 2000.
First, revenues declined. Second, interest expense increased.
Revenues from both of the Company's accounting virtual reality product lines --
theme parks and arcades and custom applications -- are somewhat unpredictable.
Theme park and arcade revenues are affected by both the overall traffic at
facilities of this type and by the extent to which the Company is able to
provide new and attractive content to attract more users and increase repeat
business. Custom applications tend to consist of a few large projects at any
time, and the stage of completion of any particular project can significantly
affect revenue. The Company had revenue of $941,672 for the three months ended
September 30, 2001 compared to $1,088,519 for the corresponding three months of
2000. Revenue from theme parks and arcades declined primarily because the
Company did not substantially update the content of its virtual reality systems
at these facilities during 2001. Revenue from custom applications and other
sources also declined, reflecting the fact that the Company completed several
major projects in the first two quarters of 2001 and revenues from new projects
in this area had not yet begun. Cost of sales and services increased despite the
reduced sales because of promotional initiatives into new and more lucrative
markets for the Company's products. General and administrative costs of $855,774
for the three months ended September 30, 2001, compared to $774,605 for the
three months ended September 30, 2000, reflect primarily costs associated with
the negotiation and completion of the merger between GameCom and Ferris
completed in September of 2001.
Interest expense increased to $310,375 for the three months ended September 30,
2001 compared to $241,464 for the corresponding period of 2000 largely because
the Company acquired a substantial number of additional virtual reality and
arcade systems for deployment at theme parks and arcades. These items were
acquired under non-cancelable leasing arrangements with the bulk of the lease
payments accounted for as interest. The three months ended September 30, 2000
also included an extraordinary item for gain from the extinguishment of debt, as
a result of placing the Company's former Schooner Brewery subsidiary into
bankruptcy.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
The Company had revenue of $2,313,790 for the nine months ended September 30,
2001, compared to $2,485,173 for the corresponding nine months of 2000. Revenue
from theme parks and arcades declined primarily because of the absence of new
content of its virtual reality systems at theme parks and arcades as described
above. Revenue from custom applications and other sources also declined, but
only slightly, from $889,461 to $871,111, reflecting the winding down of major
projects in the first two quarters of 2001, and because revenue from new
projects in this area had not yet begun. Cost of sales and services increased
despite the reduced sales because of promotional initiatives into new and more
lucrative markets for the Company's products. General and administrative costs
of $2,096,240 for the nine months ended September 30, 2001, compared to
$1,676,456 for the three months ended September 30, 2000, reflect in substantial
part costs associated with the negotiation and completion of the merger between
GameCom and Ferris.
The increase in interest expense to $836,210 for the nine months ended September
30, 2001, compared to $723,660 for the corresponding period of 2000, reflects
the acquisition
-10-
of additional virtual reality and arcade systems as described above. The
extraordinary item for extinguishment of debt during the nine months ended
September 30, 2000 is the result of placing the Company's former Schooner
Brewery subsidiary into bankruptcy.
Liquidity and Capital Resources
As of September 30, 2001 the Company's liquidity position was extremely
precarious. The Company had current liabilities of $6,470,577, including
$3,607,780 in obligations under the lease financing for its virtual reality
systems, and short-term notes payable of $1,107,059, some of which were either
demand indebtedness or were payable at an earlier date and were in default, and
related accrued interest on the notes. As of September 30, 2001 there were only
$129,707 in current assets available to meet those liabilities.
The Company has not made any draws under its equity line of credit since March
2001, because the price and volume of trading in the Company's shares have been
too low to make that source of financing attractive. To date the Company has met
its capital requirements by acquiring needed equipment under non-cancelable
leasing arrangements, through capital contributions, loans from principal
shareholders and officers, and certain private placement offerings. For the nine
months ended September 30, 2001, the net loss from operations was $(2,011,698).
After taking into account the non-cash items included in that loss, the
Company's cash requirements were approximately $913,000. To cover these cash
requirements, the Company issued additional shares of its common stock to
investors for approximately $25,000, acquired equipment on its non-cancelable
leasing arrangements in the amount of approximately $750,000 (net of
repayments), increased its borrowings from shareholders by $147,500, drew down
its remaining cash of approximately $6,100, and incurred a bank overdraft of
approximately $21,500.
Plan of Operations
The opinion of the Company's independent auditor for each of the last two fiscal
years expressed substantial doubt as to the Company's ability to continue as a
going concern. The Company will need substantial additional capital or new
lucrative custom application projects to become profitable. Assuming that
capital becomes available, or the Company is successful in achieving major
custom application projects, the Company expects to achieve profitability within
the next 12 months. As of September 15, 2001 the Company entered into a
debenture purchase agreement calling for Olympic Holdings, L.L.C. to purchase
$1,000,000 in principal amount of the Company's convertible subordinated
debentures at various times from September 15 through November 15, 2001. The
debentures are convertible into restricted shares of the Company's common stock,
at no discount to market price. That funding is critical in order to cure
defaults under the Company's lease obligations, to satisfy certain bank
indebtedness, and to expand the Company's theme park operations. Olympic has
only partially, to date, performed on that contract, but has given the Company
repeated oral assurances that the entire $1,000,000 amount will be funded by the
end of November. If the required funding is not forthcoming, the Company will
find it difficult to continue in operation. The Company will need additional
financing beyond the $1,000,000, or to acquire major custom application projects
currently under negotiation, to carry out its expansion plans. The Company has
not obtained any commitments for that financing, and the Company may not bring
certain negotiations for major custom applications to contract fruition.
-11-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
N/A
Item 4. Submission of Matters to a Vote of Security Holders
At a special meeting of shareholders on September 21, 2001, the Company's
shareholders voted to approve GameCom's merger with Ferris Productions,
Inc., to adopt GameCom's amended and restated certificate of
incorporation, which increased the authorized number of shares of common
stock to 100,000,000, to approve certain amendments to GameCom's incentive
stock option plan, and to authorize GameCom's board of directors to amend
GameCom's articles of incorporation, at any time within one year of the
meeting, to adopt a new corporate name. In accordance with the merger
agreement with Ferris, Bob Ferris, Lance Loesberg, and Andy Wells joined
the Company's Board of Directors. L. Kelly Jones and John F. Aleckner Jr.
continued as directors of the Company.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10. Debenture Purchase Agreement dated September 15, 2001 between the
Company and Olympic Holdings LLC
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GAMECOM, INC.
Date: November 14, 2001 /s/ L. Kelly Jones
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L. Kelly Jones
Chief Executive Officer and Chief
Financial Officer
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