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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [_]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Soliciting Material Pursuant to
[_] Confidential, For Use of the SS.240.14a-11(c) or SS.240.14a-12
Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
GAMECOM, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
________________________________________________________________________________
1) Title of each class of securities to which transaction applies:
Common stock, par value $.005 per share of GameCom, Inc.
________________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
18,072,289 shares of GameCom common stock
________________________________________________________________________________
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):
$0.41 per share based on closing price on OTCBB
________________________________________________________________________________
4) Proposed maximum aggregate value of transaction:
$7,409,638
________________________________________________________________________________
5) Total fee paid:
$1,481.93
________________________________________________________________________________
[X] 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:
________________________________________________________________________________
2) Form, Schedule or Registration Statement No.:
________________________________________________________________________________
3) Filing Party:
________________________________________________________________________________
4) Date Filed:
________________________________________________________________________________
SEC 1913 (3-99)
GAMECOM, INC.
440 North Center
Arlington, Texas 76011
August 22, 2001
To our stockholders:
You are cordially invited to attend a special meeting of stockholders of
GameCom, Inc. This meeting will be held at GameCom's headquarters at 440 North
Center, Arlington, Texas 76011 on September 14, 2001 at 4:30 p.m., CDT.
At the meeting, we will ask you to vote on a proposal to combine our company
with Ferris Productions, Inc. If the merger proposal is approved, the former
shareholders of Ferris will own 56.9 percent and you collectively will own 43.1
percent of the combined company. The percentage ownership of both groups of
stockholders may be further reduced by options to Ferris employees.
We will also ask you to
o approve an amendment to the articles of incorporation to increase our
authorized shares by an additional 50,000,000 shares of common stock,
to a total of 100,000,000 shares of authorized common stock,
o approve our incentive stock option plan with an increase in the number
of shares which may be issued under the plan to six million shares,
and
o authorize the board of directors to amend the articles of
incorporation to elect a new corporate name as may be determined by
the board within the following calendar year.
After careful consideration, our board of directors unanimously approved this
proposed merger and determined the merger to be fair and in the best interests
of GameCom and you, our stockholders. Our board of directors has approved the
issuance of shares of GameCom common stock in the merger, the increase in
authorized shares, the increase in the shares available under the incentive
stock option plan, and potentially changing the corporate name, all subject to
shareholder approval.
Our board of directors unanimously recommends a vote FOR each proposal to be
voted upon at the meeting.
A notice of the meeting and a proxy statement relating to the proposed merger is
enclosed. The proxy statement describes each proposal in detail and presents
significant related information. I urge you to read it carefully.
It is important that you use this opportunity to take part in the affairs of
GameCom by voting on the business to come before this meeting. Whether or not
you expect to attend the meeting, please complete, date, sign and promptly
return the accompanying proxy in the enclosed postage-paid envelope so that your
shares may be represented at the meeting. Your vote is very important. Returning
the proxy does not deprive you of your right to attend the meeting and to vote
your shares in person.
You will not be required to exchange your GameCom stock certificates for stock
certificates of the combined company. PLEASE DO NOT SEND YOUR STOCK
CERTIFICATES.
Sincerely,
/s/ L. Kelly Jones
L. Kelly Jones
Chairman of the Board
This document is being first sent to stockholders on or about August 22, 2001
GAMECOM, INC.
440 North Center
Arlington, TX 76011
------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS to be held September 14, 2001 at
4:30 p.m. CDT
To our stockholders:
GameCom, Inc. will hold a special meeting of its stockholders at its
headquarters at 440 North Center, Arlington, Texas on September 14, 2001 at 4:30
p.m., CDT. At the meeting, we will ask you:
1. to approve the merger with Ferris Productions, Inc.;
2. to amend GameCom's articles of incorporation to increase the authorized
number of shares of common stock to 100 million shares;
3. to approve GameCom's incentive stock option plan with an increase in
the number of shares of common stock that may be issued under the plan from
1,500,000 shares to 6,000,000; and
4. to authorize the board of directors to amend GameCom's articles of
incorporation to change its corporate name at any time within one year from the
date of the meeting.
We do not anticipate that any other matter will be presented for action at the
meeting. If any other matters are properly brought before the meeting, the
persons named in the proxies will have discretion to vote on these matters in
accordance with their respective judgments.
These proposals are more fully described in the proxy statement that accompanies
this notice. You should read this document carefully.
Only GameCom stockholders of record at the close of business on August 10, 2001
are entitled to notice of and to vote at the meeting or at any adjournment of
the meeting.
By Order of the Board of Directors of GameCom, Inc.
/s/ Kimberly Biggs
Kimberly Biggs, secretary
Arlington, Texas
August 22, 2001
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TABLE OF CONTENTS
FREQUENTLY ASKED QUESTIONS........................................................................................4
Summary...........................................................................................................7
Summary of the Transaction.......................................................................................10
The GameCom Meeting..............................................................................................10
Proposal No. 1-- Approval of the Merger..........................................................................12
Proposal No. 2-- Increase in Number of Shares Gamecom is Authorized to Issue.....................................75
Proposal No. 3-- Approval of Amendments to the Gamecom, Inc. 2000 Stock Option Plan..............................76
Proposal No. 4--Authorizing the Board of Directors to Amend the Articles of Incorporation, at
Any Time Within One Year from the Date of the Meeting, to Provide a New Corporate Name...........................79
Stockholder Proposals............................................................................................80
Forms 10-K and 10-Q Filed with the Securities and Exchange Commission............................................80
Statements Regarding Forward-Looking Information.................................................................80
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FREQUENTLY ASKED QUESTIONS
Q: What is the merger?
A: The merger is the combination of two businesses, GameCom and Ferris.
The merger will be effected by converting the outstanding shares of Ferris
common stock into shares of GameCom common stock.
For a more complete description of the merger, see the section entitled "The
Merger" on page 12.
Q: Why are GameCom and Ferris proposing to merge?
A: This merger will combine Ferris' technology in the field of interactive
virtual reality and gaming devices, as well as its installed base at major
entertainment centers, with GameCom's technology in the area of Internet-enabled
gaming devices and GameCom's status as a publicly reporting company; In
addition, we believe it will strengthen GameCom's management through the
addition of senior level executives familiar with both the technology and
business aspects of electronic entertainment systems. Overall, both GameCom and
Ferris believe that the merger will provide added value to their stockholders.
For a complete description of GameCom's and Ferris's reasons for the merger, we
encourage you to refer to page 12 of this document.
Q: If the merger is approved, what does GameCom's management see as the
future for the combined company?
A: Ferris' reputation within the gaming industry, and particularly its
relationship with theme parks across the country, gives GameCom the distribution
channels and relationships to advance the market penetration of GameCom's 'Net
GameLink(TM) entertainment system beyond neighborhood gathering places. Further,
we believe Ferris has achieved a dominant position in the budding field of
immersive virtual reality and its commercial applications. We believe there is
also a strong opportunity for significant growth in custom promotional
applications of virtual reality, similar to Ferris' recent projects for Buick,
Red Baron Pizza, and other ongoing projects.
Q: Ferris seems to have a lot of debt. Why would GameCom take on Ferris'
debt?
A: We believe that most of Ferris' debt is the result of its research and
development in the field of immersive virtual reality, and that Ferris' overall
debt is low relative to the level of opportunity it has reached. We believe that
Ferris, despite being undercapitalized, has achieved a dominant position in its
industry, and has a strong infrastructure. Third party research indicates
significant growth potential for the real and related fields of interactive
computer gaming and immersive virtual reality, and we believe, with sufficient
funding, based on Ferris' growth projections for the next few years, that this
merger will allow GameCom greatly expanded revenue with the likelihood of
significant earnings per share.
Q: What will Ferris shareholders receive in the merger?
A: As a result of the merger, Ferris shareholders will receive shares of
GameCom common stock in exchange for their shares of Ferris common stock. The
shares of GameCom common stock that they receive in the merger will represent
stock ownership in the combined company after the merger.
Specifically, each Ferris shareholder will receive 6.799 shares of GameCom
common stock for each share of Ferris common stock owned. This will result in
the Ferris shareholders owning approximately 56.9% of the shares of the combined
companies. Holders of Ferris employee stock options will automatically receive
options to purchase GameCom common stock on terms substantially the same as
their Ferris stock options, with quantity and exercise price adjusted for the
exchange ratio.
The number of shares of GameCom common stock to be issued for each share of
Ferris common stock is fixed and will not be adjusted further based upon changes
in the values of GameCom common stock. As a result, the value of the GameCom
shares the Ferris shareholders will receive in the merger will not be known
before the merger, and will go up or down as the market price of GameCom common
stock goes up or down.
Q: What will GameCom stockholders receive in the merger?
A: GameCom stockholders will not receive any new shares of GameCom common
stock as a result of the merger. GameCom stockholders before the merger will
continue to own their shares of GameCom common stock, which will represent stock
ownership in the combined company, after the merger.
Q: What will the name of the combined company be after the merger?
A: Immediately after the merger, the name of the combined company will be
GameCom, Inc. After we have had a chance to consult some marketing
professionals, we may decide to change the name of the combined company some
time in the near future. For that reason, we are asking authorization now to
make the change if and when a new name is selected.
Q: Will I recognize a taxable gain or loss as a result of the merger?
A: We expect that if the merger is completed, you will not recognize gain
or loss for income tax purposes. However, we urge you to consult your own tax
advisor to determine your particular tax consequences.
4
For a more complete description of the tax consequences, see the section
entitled "The Merger--Material United States federal income tax consequences of
the merger " on page 15.
Q: Does the board of directors recommend voting in favor of the merger?
A: Yes. After careful consideration, the GameCom board of directors
unanimously recommends that its stockholders vote in favor of the merger.
Q: Do the executive officers and directors of GameCom intend to vote their
shares in favor of the merger?
A: Yes.
Q: Are there risks I should consider in deciding whether to vote for the
merger?
A: Yes. For example, the combined company might not realize the expected
benefits of the merger. In evaluating the merger, you should carefully consider
the factors discussed in the section entitled "Other Factors to be Considered"
on page 73.
Q: Should I do anything with my GameCom stock certificates?
A: No. Your GameCom stock certificates will represent stock ownership of
the combined company after the merger.
Q: When do you expect the merger to be completed?
A: We are working toward completing the merger as quickly as possible. We
hope to complete it promptly following the GameCom shareholder meeting. However,
the merger is subject to several conditions that could affect the timing of the
completion of the merger.
For a more complete description of the conditions to the merger, see the section
entitled "The Merger Agreement--Conditions of all parties to closing the
merger," "Conditions to Ferris's Obligations," and "Conditions to GameCom's
Obligations," beginning at page 20.
Q: If my broker holds my shares in "street name", will my broker vote my
shares in favor of the merger for me?
A: No, unless you instruct your broker to do so. Your broker does not have
discretion to vote your shares on the merger. As a result, because of the vote
required for approval by GameCom's shareholders, if you fail to vote directly or
by instructing your broker to vote your shares, this will have the effect of a
vote against the merger.
For a more complete description of voting shares held in "street name," see the
sections entitled "The GameCom Meeting--Voting of proxies on page 12.
Q: Why do you need any more authorized shares?
A: Under the Articles of Incorporation, GameCom cannot issue any more than
50 million shares at the present time. There are now 13,683,978 shares
outstanding and an additional 1,500,000 shares reserved under the stock option
plan for employees and for other incentive type options. We expect to use
additional shares to raise capital under our line of credit arrangement with
Swartz. The merger agreement calls for the senior managers who will be joining
the company with the merger to get stock options, and we expect that with the
addition of additional managers and employees from Ferris more options will be
granted in the future. After issuing the shares to Ferris in the merger and
taking account of the other commitments described above, including shares we
could sell to Swartz under our line of credit, no additional shares are
available. For a more complete description of the present commitments for our
unissued shares, see "Proposal No. 2 -- Increase in Number of Shares Gamecom is
Authorized to Issue--Current Commitments for Use of Shares" at page 75. We do
not have specific plans for the additional
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shares we are asking to be authorized, but we believe management needs the
flexibility to be able to issue shares without having to hold another
shareholders' meeting to authorize them.
Q: If my broker holds my shares in "street name", will my broker vote my
shares for me in favor of increasing the number of authorized shares?
A: Yes. Brokers are entitled to vote on routine matters even if no
instructions have been received from the owner. We believe this is a routine
matter, as it doesn't adversely affect existing holders.
Q: Why do you need any more shares authorized under the incentive stock
option plan?
A So far, GameCom has been operating with a very small number of
employees. The merger will result in a major increase in the number of
employees, both at the senior management level and below. In order to keep these
valuable employees and attract additional management and other personnel, the
board of directors believes that it will be necessary to issue substantially
more options than were needed when GameCom was a "bare-bones" operation.
Q: Why are you asking shareholders to authorize a name change now?
A: Over the last several months, management's attention has been focused
on completing the merger with Ferris. We suspect that after consulting marketing
professionals and considering the overall marketing plan of the combined
company, we may want to either adopt Ferris' name as the name for the combined
companies or choose an entirely different name. A meeting to consider a specific
proposed name could be held separately, but management doesn't believe that the
time and expense required for a new proxy solicitation and shareholder meeting
is either needed or justified. We are therefore asking authorization to allow
the board of directors to choose a new name without the need for an additional
shareholder meeting.
Q: How will my shares be voted if I sign the proxy but don't provide
instructions?
A: Although all of the proposals are related to the merger, we need to
increase the number of authorized shares and approve the incentive stock option
plan even if the merger does not occur. If the merger does not occur there will
be no need to authorize a change in the corporate name. Therefore, if no
direction is indicated, then the proxies will be voted in favor of the merger
and also in favor of the proposals to increase the number of authorized shares
and approve the stock option plan (whether or not the merger is approved). If
the merger is approved, then proxies for which no instructions are provided will
also be voted in favor of the proposal to authorize a change in the corporate
name. If the merger is not approved, then the proposal to authorize a change in
the corporate name will not be made at the meeting and accordingly shares will
not be voted on that proposal.
Q: What do I need to do now?
A: Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at your shareholders' meeting.
If you return your signed proxy but do not include instructions on how to vote
it, your shares will be voted "FOR" each of the proposals.
IF YOUR SHARES ARE NOT VOTED, THIS WILL HAVE THE EFFECT OF A VOTE AGAINST THE
MERGER. For a more complete description of voting your shares, see the sections
entitled "The GameCom Meeting--Voting of proxies on page 12.
Q: Who should I call with questions?
A: GameCom stockholders should call L. Kelly Jones, the chief executive
officer, with any questions about the merger.
6
You may also obtain additional information about GameCom from documents we have
filed with the Securities and Exchange Commission by following the instructions
in the section entitled "Forms 10-K and 10-Q Filed with the Securities and
Exchange Commission" on page 80.
Summary
All four of the proposals we are asking you to approve are related to a proposed
merger of Ferris Productions, Inc., a Delaware corporation, into GameCom. In
this proxy statement "we" refers to GameCom, Inc. when speaking of the time
before the proposed merger is completed, and of the combined company created by
the merger when speaking of the time after the merger is completed.
The Companies
GameCom, Inc.
440 North Center
Arlington, Texas 76011
(817) 265-0440
GameCom's Business
Business Overview
We were organized in 1996 to operate theme concept microbrewery restaurants. In
1997, we acquired First Brewery of Dallas, Inc., which operated the former
Hubcap Brewery & Kitchen of Dallas, Texas (later renamed The Schooner
Brewery(TM) brewpub). In early 1999 we closed down our microbrewery operations.
In December of 1997, GameCom acquired all rights to 'Net GameLink(TM), 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. Since
closing its microbrewery operations, GameCom has been devoting substantially all
of its efforts to implementing the 'Net GameLink(TM) product.
In February, 2000, we changed our jurisdiction of incorporation from Nevada to
Texas.
Since early 1999 our operations have been limited to development, construction,
and beta-testing of the initial 'Net GameLink(TM) prototype system at J.
Gilligan's Bar and Grill in Arlington, Texas. We placed our former brewpub
subsidiary into bankruptcy in July of 2000. We began to receive our first
revenues from our Internet gaming business in the fourth quarter of 2000.
Industry Overview
The electronic gaming industry has experienced dramatic changes over the last
several years. Beginning with games played by a single user on his or her own
computer, electronic games have progressed from (i) play by two or more users on
a single computer, to (ii) play by many users over an intranet, to (iii)
simultaneous play by even more users from locations spread throughout the world
via the Internet. These changes have brought about a rapid increase in the
number of interactive electronic gamers.
Initial efforts to capitalize on the interactive Internet electronic games
market were based on the idea that players would be willing to pay directly to
participate in these games. Pogo.com began with this business model but was
unable to generate a large enough group of paying customers to make the model
profitable. Recent efforts in this area have instead been based on the media
model, in which users do not pay for the service, but the site operator sells
access to the users to advertisers.
Despite the success of some Internet gaming companies, an element has been lost
in the process of moving from the parlor to the individual user's screen -- the
element of direct social interaction. In response to the desire of players for
direct interaction, at least one company has constructed several large
electronic gaming centers, and has announced its intention to build many others.
Like the arcades frequently seen in suburban malls, these centers are
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intended to attract the hard-core electronic gamer who is seeking to play in a
social environment. Our product is targeted at a market similar to that of the
large electronic gaming centers, but is designed for smaller-scale and more
widespread use in a neighborhood setting. The experience of the large electronic
gaming centers has demonstrated that players are willing to pay to access
electronic games in the company of others.
'NET GAMELINK(TM) SYSTEM
Our 'Net GameLinkTM system is designed for installation at a relatively modest
cost in neighborhood arcade-like gaming centers and social bars. It consists of
computers, a networking system, and specially-designed networked kiosks that
allow our patrons to play interactive 3D games with either other users at the
same location or users at a remote location. The gamestations feature X86 (Intel
central processing unit) compatible 3D-game hardware and software. Customers pay
for their use of the system through a plastic debit card. Each card is prepaid
and is credited with a certain amount of playing time. Alternatively, customers
can use their credit cards or insert bills into the kiosk.
Interactivity:
Our system provides for interactive play among gamers at a single location via
an intranet or at widely dispersed locations via the Internet. Because our
system is intended to reach players wishing to play in a social setting, we
expect that at least initially the system's capability to allow play among
gamers at a single physical location through an intranet will be more
significant than its ability to enable play on a worldwide basis. However, it
seems likely that in the future games will be developed that permit teams of
players at one location to compete against teams located elsewhere, and the
system's Internet connection will permit this type of play without any
modification to the system.
Installed Games:
Each location will provide access to the user's choice of approximately 10 games
at any time. The games to be offered on our kiosks will not necessarily be
different from those that an electronic gamer could purchase at his or her local
computer store. Many gaming manufacturers are now offering their games in an
interactive format. To a serious gamer, the appeal of our system is likely to be
the fact that the hardware components will be faster, bigger, louder, etc. than
those he or she would have available in a home setting. We expect the novice to
find appealing the physical attributes of the system, the stylistic kiosks, the
fiber optic lighting, and the social atmosphere of playing interactive games on
a physically interactive basis through an intranet.
All locations will be accessible through our computer at our home office, so
that we can constantly monitor the popularity of the games available at a
particular location. The games installed at each location will vary to some
extent depending upon the amount of playing each receives as reported by our
centralized database. However, there will be a substantial overlap, since this
is required in order to allow interactive play between widely dispersed
locations. We believe that as we become established in multiple locations we
will be in a position to achieve a strategic alliance with one or more of the
leading games manufacturers/distributors under which we would receive payment
from the manufacturer/distributor in exchange for being a supplier of our games.
Although we have had preliminary discussions for arrangements of this type with
manufacturers/distributors none have yet been completed.
Our first 'Net GameLink(TM) entertainment system was made available for public
play at Who's on First? in New York City on July 16, 1999. On November 2, 1999,
we moved this system to J. Gilligan's in Arlington, Texas to bring it closer to
our principal offices. Operations are presently limited to the initial
five-kiosk prototype system at J. Gilligan's. This system began generating
revenue in small amounts during the second quarter of 2000 when we will begin
charging patrons for play on the system. We delivered the first system to be
sold to a third party during the fourth quarter of 2000.
Sources of Revenue:
We intend to provide our interactive electronic gaming service through a
combination of Company-owned centers and through third parties such as social
bars. Third parties will purchase the system on the basis of a fixed initial fee
and a continuing royalty. In addition, we expect to sell advertising to
companies who want to reach our demographic
8
market. We expect that the cost of a system to third parties will be in the
range of $5300 to $7,500 per kiosk, including the server for each location. We
expect a royalty based on the amount spent by patrons to actually play on the
system equal to 30% of revenues and a royalty on the advertising generated by
the system at each location equal to 50% of the advertising revenue paid to the
operator.
Competition
Competition in this industry is based primarily on the ability to deliver an
exciting and realistic gaming experience beyond what the gamer would experience
on his or her home computer through such items as 3-D imaging, sound, and sense
of motion. At the present time, price is less of a factor because of the limited
number of competitors in the field. Accessibility is also a factor. We believe
our primary competition will be the large gaming centers being established by
companies such as GameWorks. GameWorks was established by Sega Enterprises,
Universal Studios, Inc. and DreamWorks SKG, and was designed under the guidance
of Steven Spielberg. GameWorks has far greater financial and technical resources
than we do and has created an entire establishment devoted to various forms of
gaming, including virtual reality games. So far as we are aware, GameWorks is
the only such competitor at the present time. We will not be able to compete
with GameWorks in technology or size of facility. Instead we intend to compete
by providing more but smaller facilities that will be readily accessible in the
gamer's immediate neighborhood, with the companionship of the gamer's neighbors,
rather than requiring substantial travel to game among strangers. Whereas
GameWorks' facilities are designed to serve as a destination in and of
themselves, our systems will be located in third-party social establishments
where the system may or may not be the main attraction for the establishment's
particular patrons. In that respect, the systems will be somewhat like the games
systems you sometimes see installed in theater lobbies, where the use is
incidental to the patron's primary reason for coming to the establishment.
Marketing
Until we are in a position to raise significant amounts of additional capital,
our capacity for producing 'Net Gamelink(TM) systems will be severely limited,
and our marketing efforts will be consistent with our production capacity. We
expect initial marketing efforts to consist of follow-ups by our vice president
of operations directed toward a limited number of individual and chain casual
restaurant/bars, some of which have learned of our system by observing it when
it was installed at Who's on First in New York or later at J. Gilligan's Bar &
Grill in Arlington, Texas. We have produced a promotional video of the system
for distribution to potential customers, and we also promote the system by means
of live streaming video on our web site, showing actual real-time use of our
system by patrons at J. Gilligan's. Longer range plans include, subject to the
availability of the necessary funds, an advertising campaign in leading
restaurant/food industry publications. We intend to add additional marketing
staff as required.
Employees
At July 31, 2001 we employed four people. We consider relations with our
employees to be satisfactory.
Trademarks
We have filed for federal registration of our "'Net GameLink(TM)" and "The
Internet Just Met Its Match" trademark, and a patent application is pending for
our network-enabled gaming kiosk. We cannot give any assurance that a patent
will issue on this application, or that if the patent is issued it will be broad
enough to provide meaningful protection. The time required to obtain a patent
depends upon a number of factors, including the extent to which the Company has
to negotiate with the patent office as to the breadth of the patent ultimately
to be issued. We expect that if the patent does issue it will not issue until
some time in 2001.
Facilities
Jones & Cannon, our chief executive officer's law firm, has been providing the
limited amount of office space we need, and clerical and other services we need
for our operations under an oral agreement currently calling for payment of
$1,500 per month.
9
Ferris Productions, Inc.
5631 South 24th Street
Phoenix, Arizona 85040
Ferris designs, develops, and distributes 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. Stimulating the senses of sight,
sound, and touch simultaneously, a VR device envelopes the user in dynamic
computer-generated imagery and allows the viewer to interact with what he or she
sees using simple controls and body motions. VR products and systems typically
employ head-mounted displays that combine high-resolution miniature image source
monitors, wide field-of-view optics, and tracking sensors in a unit small enough
and light enough to be worn on the head. They visually surround the wearer with
dynamic three-dimensional imagery, allowing the user to change perspective on
the artificial scenes by simply moving his or her head. VR devices are used
today primarily in connection with electronic games. By surrounding the player
with the sights, sounds, and smells he or she would experience in reality, play
is made far more realistic than it would be if presented in a two-dimensional
flat screen display only. VR devices are also finding increased use in training
and education applications, and as marketing tools. In early 2000, Ferris
successfully completed a VR promotional project with Buick that gave users a
virtual reality test-drive in Buick's LeSabre car line. Training and education
systems currently under development include a lethal engagement virtual reality
training simulator for use in training law enforcement officers and devices to
help patients overcome phobias such as the fear of flying.
Ferris's VR devices are designed to produce a highly realistic experience at a
significantly lower cost than traditional virtual reality technology.
Historically, the software for virtual reality games and other applications was
separately created for each application. Ferris's system makes use of Ferris's
proprietary Universal Control BoardTM. This board, which is installed in an
ordinary PC, makes it possible to quickly adapt PC games for the arcade market,
permitting easy conversion of PC games to behave as coin-operated arcade games,
and allowing the operator to change from one game to another without expensive
hardware replacement. Ferris has also developed techniques to create a
photo-realistic world by using filming techniques rather than the more expensive
and time-consuming computer programming previously used.
Ferris's virtual reality entertainment centers have been installed at 15 theme
parks, including Busch Gardens, Paramount Parks, Premier Six Flags, and Circus
Circus Casino.
Summary of the Transaction
The Merger
If the merger is completed, Ferris will be merged into GameCom, with GameCom as
the surviving corporation. Each outstanding Ferris share will be changed into
6.799 shares of GameCom, so that after the merger the former Ferris shareholders
will own 56.9% of the combined company.
This summary may not contain all of the information that is important to you.
You should read carefully this entire document and the other documents we refer
to for a more complete understanding of the merger. In particular, you should
read the annexes to this document, including the merger agreement, and the
certificate of amendment to GameCom's articles of incorporation. The merger
agreement is attached to this document as Annex A. We encourage you to read the
merger agreement carefully. For a more complete description of the merger
agreement, see the section entitled "The Merger Agreement" beginning on page 17.
The GameCom Meeting
Date, time, place and purpose of the GameCom meeting
GameCom, Inc. will hold a special meeting of its stockholders at its
headquarters at 440 North Center, Arlington, Texas on September 14, 2001 at 4:30
p.m., CDT. At the meeting, GameCom stockholders of record at the close of
business on August 10, 2001 will be asked:
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o to approve our proposed merger with Ferris Productions, Inc.;
o to adopt GameCom's amended and restated certificate of incorporation,
which will increase the authorized number of shares of common stock to
100,000,000;
o to approve GameCom's incentive stock option plan; and
o to authorize GameCom's board of directors to amend GameCom's articles
of incorporation, at any time within one year of the meeting, to
provide a new corporate name.
GameCom does not anticipate that any other matter will be presented for action
at the meeting. If any other matters are properly brought before the meeting,
the persons named in the proxies for the GameCom meeting will have discretion to
vote on these matters in accordance with their respective judgments.
Record date and outstanding shares
The record date for the GameCom stockholders' meeting is August 10, 2001. Only
holders of record of GameCom common stock at the close of business on the record
date are entitled to notice of and to vote at the meeting. As of the close of
business on the record date, there were 13,683,978 shares of GameCom common
stock outstanding and entitled to vote, held of record by approximately 100
stockholders. Each GameCom stockholder is entitled to one vote for each share of
GameCom common stock held as of the record date.
On the record date, directors, executive officers and affiliates of GameCom as a
group owned 4,553,524 shares of GameCom common stock. These shares constituted
approximately 34.3% of all of the outstanding shares of GameCom common stock as
of the record date.
Vote and quorum required
The holders of a majority of the shares of GameCom common stock entitled to vote
at the GameCom stockholders' meeting, present in person or represented by proxy,
will constitute a quorum for the purposes of the meeting. The vote of holders of
two thirds of the shares of GameCom common stock outstanding as of August 10,
2001, the record date, is required to approve the merger. The vote of holders of
a majority of the common stock present and voting at the meeting is required to
approve the proposals to
o increase GameCom's authorized common stock to 100 million common
shares,
o approve GameCom's incentive stock option, and
o authorize the board of directors to amend the articles of
incorporation to provide a new corporarte name.
Abstentions will have the same effect as votes against the merger because the
percentage required to approve the merger is based on our outstanding shares
rather than shares represented at the meeting. Abstentions will not count as
votes against the other proposals, because the percentages required to approve
those proposals are based on the number of shares present and voting. If a
broker, bank, custodian, nominee or other record holder of GameCom common stock
indicates on a proxy that it does not have discretionary authority to vote
certain shares on a particular matter, which is called a broker non-vote, those
shares will be counted for purposes of determining the presence or absence of a
quorum for the GameCom stockholders' meeting, will have the same effect as votes
against Proposal No. 1, and will not be considered present at the meeting with
respect to Proposals 2 through 4.
Expenses of proxy solicitation
GameCom and Ferris will share the expenses of soliciting proxies to be voted at
the GameCom stockholders' meeting. Following the original mailing of the proxies
and other soliciting materials, GameCom and its agents also may solicit proxies
by mail, telephone, telegraph, or in person. Following the original mailing of
the proxies and other soliciting materials, GameCom will request brokers,
custodians, nominees, and other record holders of GameCom common stock to
forward copies of the proxy and other soliciting materials to persons for whom
they
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hold shares of GameCom common stock and to request authority for the exercise of
proxies. In these cases, upon the request of the record holders, GameCom will
reimburse these holders for their reasonable expenses.
Voting of proxies
The proxy relating to the GameCom stockholders' meeting that accompanies this
document is solicited on behalf of the GameCom board of directors for use at the
GameCom stockholders' meeting. Please complete, date, and sign this accompanying
proxy and promptly return it in the enclosed envelope or otherwise mail it to
GameCom. All properly signed proxies that GameCom receives prior to the vote at
the GameCom stockholders' meeting and that are not revoked will be voted at the
meeting according to the instructions indicated on the proxies. If no direction
is indicated, then the proxies will be voted in favor of the merger and also in
favor of the proposal to increase the number of authorized shares and the
proposal to approve the incentive stock option plan. If the merger is approved,
then proxies for which no instructions are provided will also be voted in favor
of the proposal to authorize a change in the corporate name. If the merger is
not approved, then the proposal to authorize a change in the corporate name will
not be made. A GameCom stockholder may revoke his, her, or its proxy at any time
before it is exercised at the meeting by taking any of the following actions:
o delivering to the secretary of GameCom a written notice, bearing a
date later than the date of the proxy, stating that the proxy is
revoked;
o signing and delivering to the secretary of GameCom a proxy relating to
the same shares and bearing a later date prior to the vote at the
meeting; or
o attending the GameCom stockholders' meeting and voting in person,
although attendance at the meeting will not, by itself, revoke a
proxy. Please note, however, that if your shares are held of record by
a broker, bank, or other nominee, and you vote at the GameCom
stockholders' meeting, you must bring to the meeting a letter from the
broker, bank, or other nominee confirming your beneficial ownership of
the shares.
Proposal No. 1 -- Approval of the Merger
If the merger is completed, Ferris will be merged into GameCom, with GameCom as
the surviving corporation. Each outstanding Ferris share will be changed into
6.799 shares of GameCom, so that after the merger the former Ferris stockholders
will hold 56.9% of the combined company.
In addition, each option, warrant, and purchase right to acquire Ferris common
stock that is outstanding immediately before the merger will be assumed by
GameCom to be converted into an option to acquire the number of shares of
GameCom common stock that would have been issued in the merger if the option had
been exercised just before the merger. As of August 10, 2001 options, warrants,
and purchase rights to acquire approximately 350,000 shares of Ferris common
stock were outstanding.
The agreement also calls for GameCom to provide Ferris with a loan of $500,000
if the transaction has not closed by May 31, 2001. This date has been extended
to August 15, 2001. Any shares issued or issuable to raise funds for that loan
will not be counted in determining the number constituting a majority of the
outstanding GameCom shares.
The merger agreement is included as Annex A to this document.
The Merger
GameCom's reasons for the merger
Factors Considered
At a meeting held on May 23, 2001, the board of directors of GameCom concluded
that the merger was in the best interests of GameCom and its stockholders, and
determined to recommend that the GameCom stockholders approve the stockholder
proposals relating to the merger.
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In its evaluation of the merger, the GameCom board reviewed several factors,
including, but not limited to, the following:
o historical information concerning our respective businesses, financial
performance and condition, operations, technology and management,
including reports concerning results of operations;
o GameCom management's view of the financial condition, results of
operations and businesses of GameCom and Ferris, both before and after
giving effect to the merger, and the GameCom board's determination of
the merger's effect on stockholder value;
o current financial market conditions and historical market prices,
volatility and trading information; and
o the consideration Ferris shareholders will receive in the merger in
light of comparable merger transactions.
Present business and prospects
In deciding to recommend the merger, the board gave serious consideration to
GameCom's present business and the future prospects, including
o the presence of current and possible future competitors with far more
resources than we have to develop Internet-enabled gaming
technologies;
o the fact that our 'Net GameLink(TM) product is directed to only a
limited segment of the electronic gaming market;
o the limited management depth of our company as a result of the limited
amount of capital we have had to date; and
o the absence of any application for our technology outside the gaming
field.
Potential benefits
The decision of the board of directors of GameCom was based upon several
potential benefits of the merger, including the potential to:
o build on Ferris' installed base of interactive virtual reality gaming
devices at major entertainment centers;
o strengthen our management through the addition of senior level
executives familiar with both the technology and business aspects of
electronic entertainment systems;
o improve our ability to raise capital through the public market as a
result of our status as a fully reporting company and Ferris'
established revenue stream;
o combine GameCom's technology in the area of Internet-enabled gaming
devices with Ferris's strong market position in the virtual reality
entertainment market; and
o expand our potential market from neighborhood and sports bars and
recreation facilities to larger entertainment centers and newer areas
of applications such as training and education.
o combine GameCom's technology in the area of Internet-enabled gaming
devices with Ferris' strong market position in the virtual reality
entertainment market; and
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o expand our potential market from neighborhood and sports bars and
recreation facilities to larger entertainment centers and newer areas
of applications such as training and education.
Risks
The GameCom board also identified and considered several potentially negative
factors in its deliberations concerning the merger including the following:
o more working capital will be needed to support an expected major
increase in the scope of our operations;
o there is a possibility that the demand for Ferris' products may be
less than the parties expect;
o the demand for Ferris' products may be reduced as a result of cutbacks
in expansion by entertainment centers because of fear of an economic
downturn;
o larger and better-funded companies may be able to develop technology
for virtual reality systems that would be superior to that of Ferris,
or would have a lower cost;
o there is a possibility that if Ferris' business plan is successful
other companies with more resources and greater name recognition may
enter the field;
o we will have to deal with technical, operational, managerial, and
personnel-related challenges in integrating the two companies; and
o we could lose key employees as a result of the merger.
The board concluded, however, that the potential benefits to GameCom and its
stockholders of the merger outweighed the risks associated with the merger.
Please refer to the risks described in "Other Factors to be Considered" on page
73, and the sections entitled "The Merger -- GameCom's reasons for the merger"
on page 12 .
The discussion of the information and factors considered by the GameCom board is
not intended to be exhaustive. In view of the variety of factors considered in
connection with its evaluation of the merger, the GameCom board did not find it
practicable to, and did not, quantify or otherwise assign relative weight to the
specific factors considered in reaching its determination.
Structure of the merger
Ferris will be merged with and into GameCom. As a result of the merger, the
separate corporate existence of Ferris will cease and GameCom will survive the
merger as the continuing company.
Conversion of Ferris common stock
When the merger becomes effective, each outstanding share of Ferris common
stock, other than shares held by dissenting Ferris shareholders who have
complied with and established right to payment under Delaware law and have not
withdrawn demand for payment, will be converted into the right to receive 6.799
shares of fully paid and nonassessable GameCom common stock. The number of
shares of GameCom common stock issuable in the merger will be proportionately
adjusted for any stock split, stock dividend or similar event with respect to
Ferris common stock or GameCom common stock effected between the date of the
merger agreement and the closing of the merger. GameCom will not issue any
fractional shares of GameCom common stock in connection with the merger. Each
Ferris shareholder who would otherwise be entitled to receive a fractional share
of 0.5 or greater will receive a
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whole share, and each Ferris shareholder who would otherwise be entitled to
receive a fractional share of less than 0.5 will not receive an additional
GameCom share.
Exchange of Ferris stock certificates for stock certificates in the combined
company
When the merger is completed, GameCom's exchange agent will mail to Ferris
shareholders a letter of transmittal and instructions for use in surrendering
Ferris stock certificates in exchange for GameCom stock certificates. The
GameCom stock certificates will evidence ownership in the combined company after
the merger.
Ferris shareholders are not entitled to receive any dividends or other
distributions on GameCom common stock until the merger is completed and they
have surrendered their Ferris stock certificates in exchange for GameCom stock
certificates.
Conditions to closing the merger
The obligations of each of the companies to complete the merger are subject to
the prior or simultaneous satisfaction or waiver of several conditions.
The principal conditions that must be satisfied or waived before Ferris is
required to complete the merger include the following, subject to exceptions and
qualifications:
o the representations and warranties of GameCom in the merger agreement
must be true and complete in all material respects;
o the merger agreement must be adopted and approved by both the Ferris
stockholders and our stockholders;
o neither party shall have have shown losses or deterioration in its
cash position in excess of what might reasonably be expected in view
of its history of operations to date;
o we and Ferris must obtain all required government approvals and other
required consents;
o less than 5% of the Ferris Shares shall have exercised their appraisal
rights under Delaware law;
o GameCom's shareholders must have approved an increase in its
authorized capital stock to 100,000,000;
o each of the companies must comply in all material respects with our
respective agreements in the merger agreement;
Some of the conditions may be waived by GameCom and some may be waived by
Ferris. For a more complete description of the conditions to closing the merger,
see the section entitled "The Merger Agreement--Conditions of all parties to
closing the merger," "Conditions to Ferris's Obligations" and "Conditions to
GameCom's Obligations" on pages 20 and 21.
No other negotiations
Until the merger is completed or the merger agreement is terminated, both
GameCom and Ferris have agreed not to solicit or encourage the submission of, or
negotiate with respect to, an acquisition proposal from any third party unless
required to do so by court order.
The parties have agreed that if either receives an unsolicited acquisition
proposal or inquiry regarding any such proposal from a third party, the party
receiving the proposal or inquiry will promptly notify the other party and will
not discuss the proposal or inquiry without the consent of the other.
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For a more complete description of these limitations on each of our actions with
respect to an acquisition proposal, please refer to the sections entitled "The
Merger Agreement--No other negotiations," on page 19 and "--Termination of the
merger agreement" on page 21 of this document and the corresponding sections of
the merger agreement.
Termination of the merger agreement
The merger agreement may be terminated under specified circumstances at any time
prior to closing the merger, as follows:
o by our mutual consent;
o by either of us, if the merger is not completed by August 1, 2001;
o by either of us, upon a breach of any of the other party's obligations
under the merger agreement if the breach is not cured within 10 days after
notice of the breach;
o by either of us if the the conditions to our obligations are not satisfied
by July 15, 2001.
Although the August 1 and July 15 deadlines have passed, both parties intend to
proceed with the merger. For a more complete description of the manner in which
the merger agreement may be terminated, see the section entitled "The Merger
Agreement--Termination of the merger agreement" on page 21.
If the merger agreement is terminated by either party for a reason other than
the other party's breach of its obligations under the agreement, neither party
will have any further obligations under the agreement. If the merger agreement
is terminated because the other party has breached the agreement, then the
non-breaching party may pursue all legal rights available to it.
Accounting treatment of the merger
Since the merger was initiated prior to June 30, 2001, we intend to account for
the merger as a pooling of interests of GameCom and Ferris for financial
reporting and accounting purposes, in accordance with generally accepted
accounting principles. The pooling of interests method of accounting assumes
that GameCom and Ferris have been merged since their inception, and the
historical consolidated financial statements for periods prior to consummation
of the merger are restated as though the companies have been combined since
their inception. Unlike purchase accounting, pooling treatment does not result
in the creation of goodwill on the balance sheet of the combined companies or
charges for amortization of that goodwill on the combined companies' income
statement.
Material United States federal income tax consequences of the merger
The following general discussion summarizes the material United States federal
income tax consequences of the merger. This discussion is based on the Internal
Revenue Code, the related regulations promulgated, and existing administrative
interpretations and court decisions, all of which are subject to change,
possibly with retroactive effect.
Based on discussions with its independent public accountants, GameCom's
management believes that the tax status of shares held by stockholders of
GameCom will not be affected by the merger and that GameCom should not recognize
gain or loss for United States federal income tax purposes as a result of the
merger. GameCom has not sought a tax ruling from the IRS or obtained a legal
opinion confirming the information below. These opinions will not bind the IRS
and will not preclude the IRS from adopting a contrary position , and no
assurance can be given that contrary positions will not be successfully asserted
by the IRS or adopted by a court if the issues are litigated. Neither GameCom
nor Ferris intends to obtain a ruling from the IRS as to the tax consequences of
the merger.
This discussion is only intended to provide you with a general summary, and it
is not intended to be a complete analysis, advice, or description of all
potential United States federal income tax consequences or any other
consequences of the merger. In addition, this discussion does not address tax
consequences which may vary with, or are contingent on, your individual
circumstances. Moreover, this discussion does not address any non-income tax or
any foreign, state, or local tax consequences of the merger. Accordingly, you
are strongly urged to consult with your
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tax advisor to determine the particular United States federal, state, local, or
foreign income or other tax consequences to you of the merger.
Restrictions on sales of shares of GameCom common stock issued in the merger
All shares of GameCom common stock received by Ferris shareholders in the merger
will be issued in reliance on exemptions from registration as a private
offering. As a result, those shares will be "restricted securities" under the
Securities Act of 1933.
Ferris holders may not sell their shares of GameCom common stock acquired in the
merger except pursuant to
o an effective registration statement under the Securities Act covering
the resale of those shares, or
o any other applicable exemption under the Securities Act.
Regulatory Approvals
No federal or state regulatory requirements or approvals are needed in
connection with the merger transaction other than filing of certificates of
merger with the appropriate state officials of Texas and Delaware.
Operations of the combined company after the merger
Following the merger, the combined company will operate under the name "GameCom,
Inc." The combined company's corporate headquarters will be in Arlington, Texas,
and its operational headquarters will be located In Phoenix, Arizona. The common
stock of the combined company will trade on the Electronic Bulletin Board under
the symbol "GAMZ"
The shareholders of Ferris will become stockholders of the combined company, and
their rights as stockholders will be governed by GameCom's amended articles of
incorporation, GameCom's amended bylaws, and the laws of the State of Texas.
Appraisal and dissenters' rights
Under Texas law, GameCom stockholders are entitled to appraisal or dissenters'
rights in the merger. A shareholder wishing to exercise his, her, or its right
to dissent is required to file with the corporation, prior to the meeting, a
written objection to the merger, stating that the shareholder's right to dissent
will be exercised if the merger is effective and giving the shareholder's
address, to which notice of the effectiveness of the merger shall be delivered
or mailed in that event. If the merger is effected and the shareholder did not
vote in favor of the merger, GameCom is required to deliver or mail to the
shareholder within ten days after the merger is effected written notice that the
merger has been effected, and the shareholder may, within ten days from the
delivery or mailing of the notice, make written demand for payment of the fair
value of his, her, or its shares. The fair value of the shares is their value as
of the day immediately preceding the meeting, excluding any appreciation or
depreciation in anticipation of the merger. The demand must state the number of
the shares owned by the shareholder and the fair value of the shares as
estimated by the shareholder. Any shareholder who does not make demand within
the ten day period will be precluded from exercising his, her, or its
dissenter's rights.
Within 20 days after receipt of a demand for payment made by a dissenting
shareholder, GameCom is required to deliver or mail to the shareholder a written
notice that it either accepts the amount claimed in the demand and agrees to pay
that amount within 90 days after the date on which the merger was effected, or
containing GameCom's estimate of the fair value of the shares, together with an
offer to pay the amount of that estimate within 90 days after the date on which
the merger was effected, upon receipt of notice within 60 days after that date
from the shareholder that the shareholder agrees to accept that amount.
If, within the period of 60 days after the merger, the shareholder and GameCom
do not agree on a fair market value, then either GameCom or the shareholder may
file a petition in any court of competent jurisdiction in the county in which
GameCom's principal is located, asking for a finding and determination of the
fair value of the shareholder's shares. With the petition, or if the petition is
served by a shareholder, within ten days after the petition is served on
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GameCom, GameCom must file in the office of the clerk of the court a list of the
names and addresses of all shareholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached. The court will then notify all the other shareholders on the list and
will schedule a hearing. Following the hearing, the court will determine which
shareholders have complied with the requirements to exercise their dissenters'
rights, and will appoint an appraiser who will report on the value of the
shares. After receiving that report, the court will determine the value of the
shares.
Restrictions on selling GameCom common stock received in the merger
All shares of GameCom common stock received by Ferris shareholders in the merger
will be "restricted securities" under the Securities Act of 1933. For a more
complete description of transfer restrictions applicable to Ferris affiliates,
see the section entitled "The Merger--Restrictions on sales of shares of
GameCom common stock issued in the merger" on page 17.
The Merger Agreement
This section of the document describes the merger agreement. While we believe
that the description covers the material terms of the merger agreement, this
summary may not contain all of the information that is important to you. The
merger agreement is attached to this document as Annex A, and we urge you to
carefully read this document in its entirety.
Representations and warranties
GameCom and Ferris each made substantially similar representations and
warranties in the merger agreement regarding aspects of our businesses,
financial condition, structure, and other facts pertinent to the merger,
including representations and warranties by each company as to:
o its corporate organization, good standing, and qualification to do
business;
o authority to enter into the merger agreement and related agreements;
o its capitalization;
o in the case of GameCom, its subsidiaries and ownership interests in
other entities;
o the accuracy and completeness of its charter, bylaws, and corporate
minute book;
o the effect of the merger on its outstanding obligations;
o changes in its business since December 31, 2000;
o its taxes;
o compliance with laws;
o required consents, waivers, and approvals;
o loan agreements;
o litigation to which it is a party;
o in the case of GameCom, the accuracy of its reports filed with the SEC
and its listing status on the Electronic Bulletin Board;
o in the case of Ferris, the accuracy of its unaudited financial
statements;
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o its agreements, contracts, and commitments;
o its title to the properties it owns and leases;
o its officers, directors and employees;
o its intellectual property, intellectual property that it uses and
infringement of other intellectual property;
o its products;
o its employee benefit plans;
o potential conflicts of interest;
o information each company is to furnish for disclosure to
stockholders of GameCom and Ferris; and
o in the case of GameCom, issues of the merger shares in compliance
with federal and state securities laws
The representations and warranties in the merger agreement are complicated and
are not easily summarized. We urge you to read the articles of the merger
agreement entitled "Representations and warranties of GameCom" and
"Representations and warranties of Ferris " carefully.
No other negotiations
Until the merger is completed or the merger agreement is terminated, GameCom and
Ferris have each have agreed not to directly or indirectly:
o solicit, initiate or encourage submission of proposals to merger with
its or acquire its stock or assets, or
o participate in any discussions or negotiations regarding any such
proposal by any other person.
If either Ferris or GameCom receives any acquisition proposal or any inquiry
regarding any such proposal from a third party, the receiving party must
promptly notify the other party of the proposal or inquiry, and may not, without
the prior written consent of the other party, discuss such acquisition proposal
or inquiry.
Actions affecting tax status
Neither of the parties is to take any action that would jeopardize qualification
of the merger as a tax-free reorganization under the Internal Revenue Code.
Operation of the business
Each of GameCom and Ferris has agreed that pending completion of the merger it
will conduct its operations only in the ordinary course of business consistent
with sound financial, operational, and regulatory practice. The following
actions are specifically prohibited without the prior written consent of the
other party
o amendment of charter documents or bylaws,
o authorizing the issuance of additional options or shares other
than those specifically identified in the agreement,
o recapitalizations, stock splits, etc.,
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o taking on debt for borrowed money, guaranteeing the obligations
or others, or making loans or investments in anyone other than a
wholly-owned subsidiary,
o amending any benefit plan, increasing employee or director
compensation outside the ordinary course of business, paying
bonuses, severance pay or other employee benefits other than
under existing plans, or amending employment, consulting, etc.
agreements with directors, officers, or employees,
o entering into contracts outside the ordinary course of business,
o liquidating or dissolving, acquiring material assets or
securities, and disposing of material amounts of assets or
securities, mergers, or changes in capitalization,
o changing material accounting or tax procedures,
o doing anything that would make the representations and warranties
made in the agreement untrue, or
o compromising, settling, or modifying claims or litigation
Other actions
Each of GameCom and Ferris has agreed
o to maintain its assets consistent with past practice,
o to try to keep available the services of its current employees
and maintain its relations with suppliers, customers, etc.,
o to pay its own expenses in connection with the transaction except
as otherwise provided,
o to continue filing its tax returns and paying required taxes,
o in the case of GameCom, to try to maintain its listing of its
common stock on the Electronic Bulletin Board, and
o to try to obtain any necessary consents or approvals necessary to
avoid state anti-takeover laws.
Directors of merged company
The size of the board of directors of the merged company after the merger
becomes effective will be increased from three to five, and Ferris is entitled
to designate three of those directors.
Conditions of all parties to closing the merger
The obligations of each of the parties to complete the merger and the other
transactions contemplated by the merger agreement are subject to the following
conditions before closing the merger:
o all required governmental approvals must have been obtained, and
o the merger agreement must have been approved by the stockholders
of both GameCom and Ferris,
Conditions to Ferris's Obligations
The obligations of Ferris to complete the merger and the other transactions
contemplated by the merger agreement are subject to the following additional
conditions before closing the merger:
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o GameCom's representations and warranties must be true;
o GameCom must have performed its other agreements in the merger
agreement in all material respects;
o GameCom must have obtained all required consents from third
parties;
o There shall not have been a material adverse change in GameCom's
business;
o GameCom must have signed the other transaction documents it is to
sign under the merger agreement;
o GameCom's board of directors must have approved the merger
agreement and other transactions can have recommended approval to
GameCom's stockholders; and
o Ferris must have received an opinion from GameCom's attorneys as
to GameCom's corporate status, qualification to do business,
authority to sign the merger agreement, authorization of the
merger agreement, absence of preemptive rights, options,
warrants, etc., receipt of necessary consents, exemption of the
issuance of the GameCom common stock from a registration under
the Securities Act, compliance of the merger agreement with
GameCom's corporate documents and applicable law, and no
violation of other GameCom contracts.
Conditions to GameCom's Obligations
The obligations of GameCom to complete the merger and the other transactions
contemplated by the merger agreement are subject to the following additional
conditions before closing the merger:
o Ferris's representations and warranties must be true;
o Ferris must have performed its other agreements in the merger
agreement in all material respects;
o Ferris must have obtained all required consents from third
parties;
o There shall not have been a material adverse change in Ferris'
business;
o Ferris must have signed the other transaction documents it is to
sign under the merger agreement;
o Ferris board of directors must have approved the merger agreement
and other transactions and have recommended approval to Ferris'
stockholders; and
o GameCom must have received an opinion from Ferris' attorneys as
to Ferris' corporate status, qualification to do business,
authority to sign the merger agreement, authorization of the
merger agreement, absence of preemptive rights, options,
warrants, etc., receipt of necessary consents, compliance of the
merger agreement with Ferris's corporate documents and applicable
law, and no violation of other Ferris contracts.
Termination of the merger agreement
The merger agreement may be terminated at any time before the merger is
completed:
o by mutual written consent of GameCom and Ferris;
o by either party if the merger is not completed by August 1, 2001,
unless the party seeking to terminate has caused the merger not
to be completed by that date;
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o by either party if a court issues and order preventing the
merger;
o by either party if the other party has breached the merger
agreement or the other party's representations are not true and
as a result the conditions to the merger will not be satisfied;
or
o by either party if the other party's stockholders do not approve
the merger.
Amendment of the merger agreement
We may amend the merger agreement before closing the merger by execution of a
written instrument signed by each of us.
Change in Board of Directors
Under the merger agreement, Ferris is to designate, before the merger is
completed, the names of three of the members of the board of directors, which
will be increased to five members upon the merger. Management for GameCom and
Ferris informs us that at the present time their intent is that immediately
after the merger, the combined company's board of directors would have the
following members:
John F. Aleckner, Jr. is a private investor. He was elected our president as of
December 14, 1999. From 1983 to 1989 Mr. Aleckner was vice-president and a
shareholder of Research Polymers International Corporation, a compounder of
specialty plastic materials which was acquired by another Company in 1987. From
1984 to 1998, he was vice-president of marketing and sales and a principal
shareholder in UVTEC, Inc., a marketer of specialty plastic compounds which was,
prior to the sale of Research Polymers, affiliated through common stock
ownership with Research Polymers, and which acted as a broker in connection with
purchases by Research Polymers and other companies. From 1971 to 1983 he was
employed by Ciba-Geigy Corporation in various sales capacities. He holds a B.S.
in chemistry from Case Institute of Technology
Bob Ferris has been the President of Ferris since he founded that company in
1993. Mr. Ferris attended the U.S. Air Force Academy with a major in Management,
and holds a degree in Systems Engineering from the University of Arizona
L. Kelly Jones, chairman has since 1980 been a member of the law firm Jones &
Cannon, a firm which he founded and which provides legal services to the
Company. Mr. Jones is certified in the area of commercial real estate law by the
Texas Board of Legal Specialization and is the author of an article, "Texas
Mechanics' and Materialmen's Lien Laws: A Guide Through the Maze," which
appeared in the Texas Bar Journal in March of 1985. Mr. Jones' areas of practice
include corporate, construction, real estate, municipal law, and commercial
litigation. Mr. Jones served from 1985 through 1989 on the Arlington City
Council, and on the Stephen F. Austin State University Board of Regents from
1987 through 1993, where he was chairman from 1991 through 1993. He holds a J.D.
from the University of Texas and a B.A. in Political Science from Stephen F.
Austin State University
Lance Loesburg is the Vice President of Business Development of Ferris, the
position he has held since 1997. From 1995 to 1997 he was North American Sales
Director for Virtuality, another virtual reality company.
Andy Wells is the principal of Strategic Securities, Inc., a Houston-based
merchant banking firm which he founded in 1997. From June 2000 until March of
2001 Mr. Wells also served on an interim basis as chief financial officer
of U.S. Operators Inc., a San Antonio based call center which was reorganizing
under Chapter 11 of the bankruptcy code. Prior to 1997 Mr. Wells was employed by
a regional NASD broker/dealer in Houston, Texas. He holds a B.S. degree from
Stephen F. Austin University and NASD licenses 7 (general securities), 63, 65
(registered investment advisor), and 24 (securities principal). He has served as
a director of Ferris for the last six years.
GameCom Market Price Information
GameCom common stock has been traded on the Electronic Buletin Board under the
symbol GAMZ since. Ferris common stock is not publicly traded.
22
Per Share Market Price Data
The following table sets forth, for the fiscal quarters indicated, the high and
low sale prices per share of GameCom common stock as reported on the Electronic
Bulletin Board:
Year Ended December 31, 1999 High Low
First Quarter 0.69 0.94
Second Quarter 1.03 0.26
Third Quarter 1.22 0.09
Fourth Quarter 0.70 0.07
Year Ended December 31, 2000
First Quarter 1.38 0.27
Second Quarter 1.13 0.31
Third Quarter 0.63 0.31
Fourth Quarter 0.47 0.15
Year Ending December 31, 2001
First Quarter 0.69 0.21
Second Quarter 0.51 0.17
Third Quarter (through August 10)
The closing prices per share of GameCom common stock as reported on the
Electronic Bulletin Board on April 17, 2001, the business day preceding public
announcement that GameCom and Ferris had entered into the merger agreement was
$0.37. On August 10, 2001, the last full trading day for which closing prices
were available at the time of the printing of this document, the closing price
of the GameCom common stock was $ .
GameCom and Ferris have never paid cash dividends on their respective shares of
capital stock. Under the merger agreement, each of GameCom and Ferris has agreed
not to pay cash dividends before the closing of the merger without the written
consent of the other. GameCom presently intends to retain future earnings, if
any, for use in its business and has no present intention to pay cash dividends
before or after the merger.
23
Financial Information
INDEX TO FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
GameCom Management's Discussion and Analysis Fiscal Years Ended December 31, 2000 and 1999 and
Three Months Ended March 31, 2001 and 2000.......................................................................25
GameCom Audited Financial Statements for Fiscal Years Ended December 31, 2000 and 1999...........................29
GameCom Unaudited Financial Statements for Three Month Periods Ended March 31, 2001 and 2000.....................41
Ferris Audited Financial Statements for Fiscal Years Ended December 31, 2000 and 1999 ...........................45
Ferris Unaudited Condensed Financial Statements for Three Months Ended March 31, 2001............................61
Unaudited Pro Forma Condensed Combined Financial Statements......................................................64
24
Gamecom Management's Discussion and Analysis of Fiscal Years Ended December 31,
2000 and 1999 and Three Months Ended March 31, 2001 and 2000
Year Ended December 31, 2000 compared to Year ended December 31 1999
The following discussion contains certain forward-looking statements that are
subject to business and economic risks and uncertainties, and the Company's
actual results could differ materially from those forward-looking statements.
The following discussion regarding the financial statements of the Company
should be read in conjunction with the financial statements and notes thereto.
Overview. The Company was capitalized in 1996 to develop, own, and operate theme
brewpub/microbrewery restaurants. In July of 1997 the Company began operating
the former Hubcap Brewery & Kitchen in Dallas, Texas.
In January, 1999, the Company terminated its brewpub/microbrewery restaurant
operations. Future revenues and profits will depend upon various factors,
including market acceptance of 'Net GameLink(TM) and, assuming the acquisition
of Ferris as described below is completed, on the success of Ferris' product
lines and on general economic conditions. The Company's present sole source of
revenue is the future sale of 'Net GameLink(TM) systems and revenue from
associated royalties. The Company has to date received only nominal revenue from
its beta-test system installed at J. Gilligan's in Arlington.
On January 10, 2001, the Company executed a letter of intent to acquire Virtual
Technologies, Inc. d/b/a Global VR, in a stock-for-stock transaction under which
Global VR's shareholders would acquire controlling interest in the Company. No
definitive contract was executed, and the letter of intent was terminated on
April 6, 2001.
On April 18, 2001, the Company executed a letter of intent to acquire Ferris
Productions, Inc., in a stock-for-stock transaction under which Ferris'
shareholders would acquire controlling interest in the Company. The acquisition
would provide 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. A definitive contract between the Company and
Ferris was executed on May 3, 2001. There can be no assurance that the
acquisition will in fact be consummated, as the transaction is contingent upon
approval of the transaction by the shareholders of both the Company and Ferris.
A proxy statement will be prepared and filed with the Securities and Exchange
Commission, and subsequently submitted to the companies' shareholders. It is
expected that the proxy statement will be forwarded to the shareholders in July
of 2001, but there is no assurance that this timetable will hold. There can be
no assurances that the Company will successfully implement its expansion plans,
including the 'Net GameLink(TM) entertainment concept. The Company faces all of
the risks, expenses, and difficulties frequently encountered in connection with
the expansion and development of a new business. These include limited working
capital and the need to devote a substantial amount of management's time to
raising capital rather than 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, the
need to control operating and general and administrative expenses and the need
to spend substantial amounts of resources on initial advertising to develop an
awareness of the Company and its products. In addition, the Company's chief
executive officer is a practicing attorney with no training or prior experience
in managing or overseeing a public company.
Results of Operations.
Fiscal year ended December 31, 2000 compared to fiscal year ended December 31,
1999.
The fiscal year ended December 31, 1999 reflects a redirection of the Company's
efforts from its discontinued brewpub business to the development of its 'Net
GameLink(TM) System. For the fiscal year ended December 31, 1999 the Company had
essentially no revenues. For the fiscal year ended December 31, 2000 the Company
received only nominal revenues as a result late in the year of beginning to
charge royalties for the Company's testing system installed at J. Gilligan's.
Administrative costs of $396,835 for the fiscal year ended December 31, 2000
compared to $409,999 for the fiscal year ended December 31, 1999 reflect
primarily additional costs incurred during 1999 in connection with registration
of the Company's securities under the Securities and Exchange Act of 1934. The
increase in interest charges from $16,065 for the fiscal year ended December 31,
1999 to $29,399 for the fiscal year ended December 31, 2000 reflects an increase
in the level of the Company's bank borrowings from $20,000 as of December 31,
1999 to $215,000 as of December 31, 2000. These bank borrowings were guaranteed
by officers and
25
directors of the Company, who received common stock in payment for their
guaranties. The value of such common stock ($55,200 for the year ended December
31, 1999 and $198,695 for the year ended December 31, 2000) is shown as finance
charges for the applicable periods. The increase in depreciation and
amortization from $5,356 in the year ended December 31, 1999 to $20,896 in the
year ended December 31, 2000 is a result of increased investment in computer
equipment. During the year ended December 31, 2000 the Company eliminated
$455,149 in debt from its consolidated balance sheet (consisting primarily of
trade payables) as a result of placing its First Brewery of Dallas, Inc.
subsidiary into voluntary liquidation under Chapter 7 of the Bankruptcy Act.
Connect Computer, the firm which has been largely responsible for development of
the Company's kiosk and computer systems, performed its development work on the
basis of an oral understanding or "gentleman's agreement" with the Company's
chief executive officer that if the Company is successful in marketing the
product, Connect Computer would be issued a significant equity position in the
Company. On February 1, 2001, the Company satisfied this obligation by issuing
75,000 shares of its common stock to Connect Computer.
At the time the operations of First Brewery of Dallas, Inc. were terminated, all
of that subsidiary's assets were pledged to secure indebtedness to SecurityBank
of Arlington, Texas. That indebtedness had been personally guaranteed by the
Company's directors and by another individual. Upon termination of the
brewpub/microbrewery operations the guarantors were required to repay that
indebtedness to the bank, and upon such payment the bank assigned the Company's
notes and the related security to the guarantors. The guarantors accepted the
security in full satisfaction of the debt and subsequently disposed of the
assets securing the indebtedness to third parties at a loss. The effect of these
transactions is included in the $143,781 gain on sale of assets for the year
ended December 31, 1999.
Quarter ended March 31, 2001 compared to Quarter ended March 31, 2000.
For the quarter ended March 31, 2001 the Company received only nominal revenues
as a result late in the year of beginning to charge royalties for the Company's
testing system installed at J. Gilligan's. It had no revenue for the quarter
ended March 31, 2000. Administrative costs of $150,505 for the quarter ended
March 31, 2001 compared to $65,113 for the quarter ended March 31, 2000 reflect
primarily additional costs incurred during 2001 in connection with due diligence
investigation of Global VR and other activities relating to that proposed
acquisition, which did not occur, and fees paid in stock to consultants. The
increase in interest charges from $4,795 for the quarter ended March 31, 2000 to
$14,556 for the quarter ended March 31, 2001 reflects an increase in the level
of the Company's bank borrowings. These bank borrowings were guaranteed by
officers and directors of the Company, who received common stock in payment for
their guaranties. The value of such common stock ($17,500 for the quarter ended
March 31, 2000 and $60,000 for the quarter ended March 31, 2001) is shown as
finance charges for the applicable periods. The decrease in depreciation and
amortization from $7,027 in the quarter ended March 31, 2000 to $5,224 in the
quarter ended March 31, 2001 is a result of adjustment of accounting estimates.
Connect Computer Group, Inc., the firm which has been largely responsible for
development of the Company's kiosk and computer systems ("Connect Computer"),
performed its development work on the basis of an oral understanding or
"gentleman's agreement" with the Company's chief executive officer that if the
Company is successful in marketing the product, Connect Computer would be issued
a significant equity position in the Company. On February 1, 2001, the Company
satisfied this obligation by issuing 75,000 shares of its common stock to
Connect Computer.
Liquidity and Capital Resources.
As of March 31, 2001 the Company's liquidity position was extremely precarious.
The Company had current liabilities of $1,088,302, including $387,617 in trade
payables, most of which were overdue, short-term notes payable of $635,500, all
of which were either demand indebtedness or were payable at an earlier date and
were in default, and related accrued interest on the notes. Current assets
available to meet those liabilities were only $5,844. On June 5, 2000, the
Company announced that it had entered into a subscription agreement for up to a
$15,000,000 sale of common stock and warrants under a private equity line
contract with Swartz Private Equity, L.L.C. ("Swartz"), an institutional private
equity fund. This financing allows the Company to issue common stock and
warrants at the Company's discretion as often as monthly as funds are needed in
amounts based upon certain market conditions. The pricing of each common stock
sale is based upon current market prices at the time of each draw, and the
Company may set a floor price for the shares each month at the Company's
discretion. The Company's SB-2
26
registration statement for the Swartz private equity line became effective with
the Securities and Exchange Commission on August 10, 2000. The Company made its
first draw on the Swartz equity line during the month of October, 2000. However,
it has not made any draws under that line since January 2001, because the price
and volume of trading in the Company's shares has been too low to make that
source of financing attractive. To date the Company has met its capital
requirements through capital contributions, loans from principal shareholders
and officers, bank borrowings, and certain private placement offerings. For the
fiscal year ended December 31, 2000, the net loss from operations was $230,172.
After taking account of the non-cash items included in that loss, the Company's
cash requirements were $85,291. To cover these cash requirements, the Company
issued additional shares of its common stock to investors for approximately
$31,000, increased its bank borrowings by $35,000, and increased its borrowing
from shareholders by $25,000.
Plan of Operations
The opinions 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. Based on the unaudited results and the projected results
furnished to the Company by Ferris, we anticipate that if the acquisition is
completed, and if our due diligence confirms the information we have been
furnished, we should achieve profitability within the next 12 months. It should
be noted, however, that to achieve those results we will need to obtain
additional financing for retirement of debt, working capital, and other
purposes. If the proposed acquisition is not completed the outlook is much less
favorable. In that case, until such time as the Company is able to draw upon the
Swartz equity line in a significant manner or obtain additional financing, it
plans to limit its operations by conducting marketing efforts primarily on the
basis of person-to-person contact with those who have previously expressed an
interest in its system and limiting expansion of its operations to delivery of
systems as permitted by internally-generated cash flow. This may require that
the Company accept orders for new systems only on the basis of a down payment
sufficient to cover the costs of manufacture of the system, which may in turn
make it difficult to market additional systems. Further, the expression of
uncertainty as to the Company's ability to continue as a going concern might
itself adversely affect the Company's liquidity and cash flow, since vendors who
might otherwise have been willing to extend credit may instead insist upon
pre-payment or payment on a C.O.D basis.
The Company began to receive limited revenue from its beta-test system at J.
Gilligan's during the early portion of the third quarter of 2000. However, these
revenues are not expected to be sufficient to carry out any substantial
advertising and marketing. If the proposed acquisition is not completed the
Company will be unable to carry out substantial advertising and marketing until
the Swartz private equity line becomes available to the Company in significant
amounts through increases in the price and/or volume of trading in its shares,
and until the Company begins to receive significant revenue from the sale of its
'Net GameLink(TM) systems.
The Company will need to have in place in the near future a qualified chief
operating officer. Although the Ferris acquisition would bring the Company an
experienced management team, there is no assurance that the Ferris acquisition
will be consummated. The Company does not presently intend to hire other
salaried key management personnel during the next 12 months, although additional
employees may become necessary. All of the Company's non-executive employees are
presently being compensated at market rates. However, the Company's senior
management (CEO, president, vice president, and secretary) are serving without
compensation, and the Company expects this will continue to be the case
indefinitely until the Company's interest-bearing debt has been substantially
reduced. If the Company is not able to raise the necessary funds to expand sales
beyond those that may be generated by person-to-person contact, it will be
forced to terminate its operations entirely.
Liquidity and Capital Resources.
As of December 31, 2000 the Company's liquidity position was extremely
precarious. The Company had current liabilities of $1,049,145, including
$361,617 in trade payables, most of which were overdue, short-term notes payable
of $410,500, all of which were either demand indebtedness or were payable at an
earlier date and were in default, and related accrued interest on the notes.
Current assets available to meet those liabilities were only $6,135. On June 5,
2000, the Company announced that it had entered into a subscription agreement
for up to a $15,000,000.00 sale of common stock and warrants under a private
equity line contract with Swartz Private Equity, L.L.C. ("Swartz"), an
institutional private equity fund. This financing allows the Company to issue
common stock and warrants at the Company's discretion as often as monthly as
funds are needed in amounts based upon certain
27
market conditions. The pricing of each common stock sale is based upon current
market prices at the time of each draw, and the Company may set a floor price
for the shares each month at the Company's discretion. The Company's SB-2
registration statement for the Swartz private equity line became effective with
the Securities and Exchange Commission on August 10, 2000. The Company made its
first draw on the Swartz equity line during the month of October, 2000.
However, it has not made any draws under that line since January of 2001,
because the price and volume of trading in the Company's shares has been too low
to make that source of financing attractive. To date the Company has met its
capital requirements through capital contributions, loans from principal
shareholders and officers, bank borrowings, and certain private placement
offerings. For the fiscal year ended December 31, 2000, the net loss from
operations was $190,266. After taking account of the non-cash items included in
that loss, the Company's cash requirements were $300,297 for operating
activities and $18,979 for capital expenditures, or a total of $319,276. To
cover most of these cash requirements, the Company issued additional shares of
its common stock to investors for approximately $65,000, increased its bank
borrowings by $215,000, and borrowed an additional $30,000 from stockholders.
The remaining cash requirement was met by drawing down cash on hand.
28
INDEPENDENT AUDITOR'S REPORT
Thomas O. Bailey
and Associates, PC
Certified Public Accountants
Report of Independent Public Accountants
To the Shareholders of GameCom, Inc.
We have audited the accompanying balance sheet of GameCom, Inc. as of December
31, 2000 and 1999 and the related statements of operations, changes in
stockholders' equity, and cash flows for the years then ended. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit 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 audit provides 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 GameCom, Inc. as of December
31, 2000, and 1999 and the results of its operations and cash flows in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. During the year ended December 31,
2000, the Company incurred a net loss of $199,266 and a loss of $361,880 for the
year ended December 31, 1999. Future working capital requirements are dependent
on the Company's ability to restore and maintain profitable operations, to
restructure it's financing arrangements, and to continue it's present short-term
financing, or obtain alternative financing as required. It is not possible to
predict the outcome of future operations or whether the necessary alternative
financing may be arranged, if needed. Those conditions raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Thomas O. Bailey and Associates, P.C.
Dallas, Texas
March 30, 2001
29
GAMECOM, INC.
(Fomerly The Schooner Brewery Incorporated)
Consolidated Balance Sheet
December 31, 2000 and December 31, 1999
December 31
-----------
2000 1999
----------- -----------
ASSETS
Current assets
Cash $ 6,135 $ 15,564
Accounts receivable -- 180
----------- -----------
Total current assets 6,135 15,744
Property and equipment
Equipment, furniture and fixtures 113,464 94,485
Accumulated depreciation (28,828) (7,932)
----------- -----------
Net property and equipment 84,636 86,553
----------- -----------
Other assets -- 8,989
----------- -----------
Total assets $ 90,771 $ 111,286
----------- ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade payables $ 361,617 $ 728,849
Accrued interest 62,028 49,839
Notes payable to shareholders 410,500 380,500
Short-term notes payable to bank 215,000 --
----------- -----------
Total current liabilities 1,049,145 1,159,188
Redeemable common stock
Common stock to redeem, 1,505,399 shares
at par $.005 3,891 7,527
Shareholders' equity
Capital stock 50,000,000 shares authorized
par value $.005; 10,041,751
issued and outstanding, 61,951 51,583
Paid-in capital 1,503,521 1,230,459
Retained earnings (2,527,737) (2,337,471)
----------- -----------
Total shareholders' equity (962,265) (1,055,429)
----------- -----------
Total liabilities and shareholder equity $ 90,771 $ 111,286
=========== ===========
The accompanying notes are an integral part of this financial statement.
30
GAMECOM, INC.
(Formerly The Schooner Brewery Incorporated)
Consolidated Statement of Operations
For the Years Ended December 31, 2000 and 1999
December 31
-----------
2000 1999
------------ ------------
Revenues
Restaurant sales -- 5,431
Game royalties 410 --
------------ ------------
Total revenues 410 5,431
Cost of sales
Salaries and labor -- 24,472
------------ ------------
Total cost of sales -- 24,472
------------ ------------
Gross profit 410 (19,041)
General and administrative expense
Administrative cost 396,835 409,999
Interest 29,399 16,065
Financing charges 198,695 55,200
Depreciation and amortization 20,896 5,356
Gain on sale of assets -- (143,781)
------------ ------------
645,825 342,839
------------ ------------
Loss before extraordinary item 645,825 $ (361,880)
------------ ------------
Extraordinary item:
Gain from extinguishment of debt 455,149 --
------------ ------------
Net gain/(loss) $ (190,266) $ (361,880)
============ ============
Per share amounts:
Net loss per share $ (0.015) $ (0.033)
============ ============
Average outstanding shares 12,328,360 10,838,550
============ ============
The accompanying notes are an integral part of this financial statement.
31
GAMECOM, INC.
(Formerly The Schooner Brewery Incorporated)
Consolidated Statement of Stockholders' Equity
For the Periods From December 31, 1998 through December 31, 2000
Shares of Additional Total
Common Common Paid-in Accumulated Stockholders'
Stock Stock Capital Deficit Equity
------------ ------------ ------------ ------------ ------------
Balance December 31, 1998 8,282,703 $ 41,413 $ 989,179 $ (1,975,591) $ (944,999)
------------ ------------ ------------ ------------ ------------
Stock issued as incentive for loans 240,000 1,200 54,000 -- 55,200
Stock issued in compensation for services 125,000 625 4,375 -- 5,000
Sales of stock 1,369,048 6,845 128,155 -- 135,000
Contribution of capital for services -- -- 18,750 -- 18,750
Exercise of stock options 300,000 1,500 36,000 -- 37,500
Loss for the year ended December 31, 1999 -- -- -- (361,880) (361,880)
------------ ------------ ------------ ------------ ------------
Balance December 31, 1999 10,316,751 $ 51,583 $ 1,230,459 $(21,337,471) $ (1,055,429)
============ ============ ============ ============ ============
Stock issued as incentive for loans 1,133,967 5,671 193,025 -- 198,696
Stock issued in compensation of services and
interest 84,571 423 15,828 -- 16,251
Sales of stock 127,694 638 64,209 -- 64,847
Expiration of redeemable shares 727,108 3,636 -- -- 3,636
Loss for the year ended December 31, 2000 -- -- -- (190,266) (190,266)
------------ ------------ ------------ ------------ ------------
12,390,091 $ 61,951 $ 1,503,521 $ (2,527,737) $ (962,265)
============ ============ ============ ============ ============
The accompanying notes are an integral part of this financial statement.
32
GAMECOM, INC.
(Formerly The Schooner Brewery Incorporated)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2000 and 1999
December 31,
2000 1999
--------- ---------
Cash flows from operating activities
Net loss $(190,266) $(361,880)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 20,896 5,356
Gain on sale of assets -- (143,781)
Services and fees paid with stock 16,251 23,750
Financing fees 198,696 55,200
Stock options issued as compensation -- --
(Increase) decrease in:
Accounts receivable-trade 180 1,367
Prepaid and other assets 8,989 3,044
Increase (decrease) in:
Accounts payable and accrued expense (355,043) 247,530
--------- ---------
Net cash provided by operating activities (300,297) (169,414)
Cash flows from investing activities
Capital expenditures (18,979) (41,237)
--------- ---------
Net cash used by investing activities (18,979) (41,237)
Cash flow from financing activities
Increase in capital stock and paid-in capital 64,847 135,000
Short-term notes payable 245,000 85,547
--------- ---------
Net cash provided by financing activities 309,847 220,547
Net increase in cash and cash equivalents (9,429) 9,896
--------- ---------
Cash and cash equivalents beginning of period 15,564 5,666
--------- ---------
Cash and cash equivalents end of period $ 6,135 $ 15,562
========= =========
Interest paid during the period $ 7,899 $ 9,040
========= =========
Income taxes paid during the year $ -- $ --
========= =========
The accompanying notes are an integral part of this financial statement.
33
GameCom, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Principal Business Activity
GameCom, Inc. (the "Company") conducts business in the interactive on-line
internet gaming industry. The Company formerly operated, through its wholly
owned subsidiary, a restaurant and brewpub. That business has been discontinued.
Principals of Consolidation
The accompanying consolidated financial statements include the accounts of the
parent company, GameCom, Inc. and its subsidiary after elimination of
significant intercompany accounts and transactions.
Concentration of Credit Risk
The Company maintains deposits within federally insured limits. Statement of
Financial Accounting Standards No. 105 identifies these items as concentration
of credit risk requiring disclosure, regardless of the degree of risk. The risk
is managed by maintaining all deposits in high quality financial institutions.
Use of Estimates in Preparation of Financial Statements
The preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that directly affect the results of reported assets,
liabilities, revenues and expenses. Actual results may differ from these
estimates.
Fair Value of Financial Instruments
The fair value of all reported assets and liabilities which represent financial
instruments (none of which are held for trading purposes) approximate the
carrying value of such amounts.
Cash Flow Presentation
For purposes of the Statement of Cash Flows, cash equivalents include time
deposits, certificates of deposits and all liquid debt instruments with original
maturaties of three months or less.
Earnings Per Share
Primary earnings per share amounts are computed based upon the weighted average
number of shares actually outstanding. The number of shares used in the
computation was 12,328,360 and 10,838,550 for December 31, 2000 and 1999
respectively.
34
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property, Equipment and Depreciation
Property and equipment are valued at cost. Maintenance and repair costs are
charged to expenses as incurred. Gains and losses on disposition of property and
equipment are reflected in income. Depreciation is computed on the straight-line
method for financial reporting purposes, based on the estimated useful lives of
the assets which is three to five years.
Revenue Recognition and Accounts Receivable
Sales are made for cash or they are charged to credit cards. The credit card
sales are recorded as accounts receivable and collected within the following
two-week period. Revenues are recognized at the point sales are made.
Common Stock Issued for Services
The Company has in the past issued stock for service of non-employees on a
negotiated basis where the value of the services is recorded and stock issued
based upon the agreed number of shares issued for the value of the services
performed. The measurement date for determining such value is the date an
agreement is reached for issuance of the shares.
Common Stock Issued as Incentive for Loans
From time to time the Company has obtained non-interest bearing loans or
guaranties of bank loans from individuals. As incentive for these loans the
Company issued some of its common stock and recorded as expense the price of the
stock based upon the restricted provisions of the stock. These issuance were as
follows:
Market Value
Date Amount Lent Shares Issued of Shares
---- ----------- ------------- ---------
1998 $173,000 613,000 $ 153,000
1999 $ 88,500 240,000 $ 55,200
2000 $215,000 1,133,967 $ 198,696
NOTE 2 GOING CONCERN
As shown in the accompanying financial statements the Company has incurred
losses from operations and has a deficit working capital. The Company's current
net operating revenues are not sufficient to provide adequate cash flow required
to pay all of the Company's administrative expenses. For this reason the Company
must rely on short-term borrowing and equity financing. The Company's subsidiary
ceased operations of its business on January 10, 1999 the effect of which
eliminated sources of cash flow from operations. Because the subsidiary was
generating negative cash flow Management closed those operations to mitigate
further deterioration. Until the new operations increase the Company must rely
on public and private funding to meet any of its cash flow requirements.
Management has begun a new line of business. On June 5, 2000, the Company
announced that it had entered into a subscription agreement for up to a
$15,000,000.00 sale of common stock and warrants under a private equity line
contract with Swartz Private Equity, L.L.C. ("Swartz"), an institutional private
equity fund. This financing allows the Company to issue common stock and
warrants at the Company's discretion as often as monthly as funds are needed in
amounts based upon
35
certain market conditions. The pricing of each common stock sale is based upon
current market prices at the time of each draw, and the Company may set a floor
price for the shares each month at the Company's discretion. The Company's SB-2
registration statement for the Swartz private equity line was filed on July 12,
2000, and became effective with the Securities and Exchange Commission on August
10, 2000. The Company made its first draw on the Swartz equity line during the
month of October, 2000.
NOTE 3 NOTES PAYABLE
Notes payable at December 31, 2000 consisted of the following:
Note payable to bank due December 21, 2001 with interest at 9.5% $ 50,000
Note payable to bank due May 6, 2001 with interest at 9.5% 30,000
Note payable to bank due March 20, 2001 with interest at 10.5% 25,000
Note payable to bank due October 14, 2001 with interest at 9.0% 25,000
Note payable to bank due May 15, 2001 with interest at 10.5% 25,000
Note payable to bank due March 11, 2001 with interest at 9.5% 60,000
----------
Due to banks $ 215,000
Note payable to stockholder due on demand with interest at 8% $ 20,000
Note payable to stockholder due on demand with interest at 8% 15,000
Notes payable to stockholders due June 10, 1998, interest at 12% 100,000
Notes payable to stockholders due from August 1 through
December 2, 1998 with no interest 162,000
Notes payable to stockholders due in February and March 1999
Without interest 63,500
Note payable to stockholder with installments due through
February 2000 50,000
---------
Due to stockholders $ 410,000
All notes due to stockholders were in default as of December 31, 2000. Notes
payable to stockholders in the amount of $100,000 were issued by the Company in
increments of $10,000 having a maturity date of May 10, 1998. The holder of each
of these Convertible Promissory Notes has a non-assignable option to purchase
7,500 shares of Common Stock at par value. Alternately, each holder has the
right to convert their Convertible Promissory Note to equity in the form of
12,500 shares of Common Stock. None of the notes have been converted.
Of the $235,000 notes payable without interest as described above, $103,500 in
principal amount provides for a per diem issuance of common stock as penalty for
late payments. As of December 31, 2000, the per diem issuance would be in excess
of 5,800,000 shares of the Company's common stock. The Company has received an
opinion from counsel that the penalty provisions are unenforceable as illegal
usury under applicable Texas law. However, there has not been any litigation
between the Company and the holder of the note as to this issue, and in the
absence of a court decision directly applicable to the parties, there remains at
least some risk that the opinion of counsel could be wrong. Should the holder of
the note prevail in any such litigation, the shares issuable under the penalty
provisions would result in this holder's becoming the Company's largest single
shareholder. Further, depending upon how long it took to resolve the issue, an
adverse decision could result in such holder's becoming a controlling
shareholder of the Company. According to legal counsel there is no likelihood of
a sustainable assessment of the per diem late penalty. Therefore, in accordance
with SFAS No. 5, no provision for such charges has been provided.
NOTE 4 STOCKHOLDERS' EQUITY
Common Stock
The Company's authorized number of common shares that can be issued is
50,000,000 shares with a par value of $.005. The number of shares outstanding at
December 31, 2000 and 1999 was 12,390,091 and 10,316,600
36
respectively. There
were common shares redeemable at December 31, 2000 and 1999 in the total share
amounts of 778,291in the amount of $3,891 and 1,505,399 shares and the total
amount of $7,527 respectively. The Company's board of directors adopted a
resolution on December 12, 1997 to redeem 1,505,399 shares of the common stock
from certain shareholders to be redeemed from the proceeds of a subsequent stock
offering no later than March 31, 1998. At December 31, 2000 none of the stock
has been redeemed.
Redeemable Common Stock
In December 1997, the ten former shareholders of First Brewery of Dallas, Inc.,
acquired by the Company in April, 1997, collectively agreed with the Company's
Board of Directors that a dilution of their collective equity interest was in
the best interest of the Company. Therefore, the Company adopted a resolution on
December 12, 1997 to redeem 1,505,399 shares of the Common Stock from the ten
shareholders, at par value, $.005, with the consideration for such redemption to
be paid pro rata to such shareholders no later that March 31, 1998, presumably
out of the proceeds of a future equity offering. On February 3, 2000, the
Company adopted a resolution releasing 727,108 shares from the redemption,
leaving 778,291 to be redeemed. None of the shares have been redeemed but can be
redeemed at the shareholders' option. The total number of shares and the
redemption liability is reflected in the balance sheet under, "Redeemable Common
Stock."
NOTE 5 INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires an asset and liability approach
for accounting for income taxes. Deferred income taxes arise from temporary
differences between financial and tax basis of certain assets and liabilities. A
valuation allowance has been established in the amount of $365,000 It is not
likely that the allowance will be realized consequently the allowance has been
fully reserved. The Company's net operating loss carryforward is $2,284,000.
NOTE 6 LEASES
The Company leased its restaurant space under a lease agreement, which expired
October 1, 1999. During the year ended December 31, 2000, the Company
surrendered $10,673 of deposits under the lease agreement. Currently the Company
rents office space on a month-to-month basis at $1,500 per month from a firm
associated with the chief executive officer. To date no payments have been made.
NOTE 7 OFFICER AND DIRECTOR COMPENSATION
No director receives or has received any compensation from the Company for
service as a member of the board of directors. None of the officers have
received any compensation for service from the Company. However, based on the
time spent by one officer, expense was recorded based on the estimated
compensation and that amount was credited to paid-in captial as a contribution
to capital.
NOTE 8 RELATED PARTY TRANSACTIONS
On December 12, 1997, by unanimous consent, the board of directors approved
borrowing up to $100,000 from certain stockholders. The promissory notes provide
that the notes be secured by the `Net Game LinkTM system to be installed at the
Company's restaurant. The holders of said notes shall, for each $10,000 of
notes, in addition to the payment of principal and interest, be entitled to
7,500 shares of the Company's common stock at par value at maturity. Prior to
maturity, the holders of the promissory notes shall have the right to convert
their notes to equity in the amount of 12,500 shares of the Company's restricted
common stock. Thereafter, by unanimous consent, the board of directors approved
additional borrowings from certain shareholders, in the aggregate sum of
$162,000. In lieu of interest, the Company issued to such shareholders
restricted shares of the Company's common stock.
In addition the Company rents office space from a firm associated with the chief
executive officer, see Note 6 above.
37
NOTE 9 STOCK OPTION PLANS
In 1995 the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 is effective for fiscal years beginning after
December 31, 1995 and requires companies to use recognized option pricing to
estimate the fair value of stock-based compensation, including stock options.
The statement requires additional disclosure based on the fair value based
method of accounting for an employee stock option and encourages, but does not
require, companies to recognize the value of these option grants as additional
compensation using methodology of SFAS No. 123. The Company has elected to
continue recognizing expense as prescribed by APB Opinion No.25, "Accounting for
Stock Issued to Employees," as allowed under FASB No. 123 rather than
recognizing compensation expense as calculated under SFAS No. 123.
Incentive Stock Options [Non-Compensation]
These options, incentive in nature, provide that Mr. Jones may purchase (i)
111,000 shares at par value subject to the condition precedent that the
Company's shares are trading at $1.50 per share, (ii) 361,000 shares at par
value subject to the condition precedent that the Company's shares are trading
at $3.00 per share, (iii) 111,000 shares at par value subject to the condition
precedent that the Company's shares are publicly trading at $4.50 per share, and
(iv) the balance of 250,000 shares at par value subject to the condition
precedent that the Company's shares are publicly trading at $5.00 per share.
These incentive stock options were granted to Mr. Jones by the Company's board
of directors (Mr. Jones abstaining) on December 12, 1997 and on December 14,
1998.
Messrs. Poynter and Aleckner each hold an option for 333,000 shares in the
Company's common stock.These options, incentive in nature, provide that Messrs.
Poynter and Aleckner may purchase (i) 111,000 shares at par value subject to the
condition precedent that the Company's shares are trading at $1.50 per share,
(ii) 111,000 shares at par value subject to the condition precedent that the
Company's shares are trading at $3.00 per share, and (iii) the balance of
111,000 shares at par value subject to the condition precedent that the
Company's shares are publicly trading at $4.50 per share. These incentive stock
options were granted to Messrs. Poynter and Aleckner by the Company's board of
directors (Messrs.Poynter and Aleckner abstaining on the grant of their stock
option) on December 14, 1998.
Outstanding options were 1,499,000 and 750,000 respectively at December 31 1998
and 1997. Accounting for the measurement date of these options occurs when the
various stock prices are realized.
Stock Based compensation Plan
The Company has one stock-based compensation plan as noted below. With regard to
its stock option plan, the Company applies APB No. 25 in accounting for such
plans and accordingly no compensation cost has been recognized. Had compensation
expense been determined based on fair value at the grant date for stock options
consistent with SFAS No. 123 the Company's net income and net income per common
share would not have changed for 1998 because no grants were made in 1998. On
December 12, 1997, by unanimous consent of the board of directors, restricted
options to purchase 50,000 shares of the Company's common stock were issued to
certain key personnel of the Company at an exercise price of $.005 per share
conditioned upon the continued employment of the employee the share price at the
measurement date, December 12, 1997 was $.125 based on the restricted nature of
the stock. The Company recorded compensation expense in the amount of $6,250 in
their revised 1997 financial statements. The shares are non-transferable and may
be redeemed at $.005 per share by the Company in the event the holder shall
cease for any reason to be employed by the Company.
38
2000 1999
---- ----
Options beginning of year 1,199,000 1,499,000
Number of options granted - -
--------- ---------
Options exercised during year - 300,000
Options forfeited during year - -
--------- ---------
Options outstanding end of year 1,199,000 1,199,000
========= =========
Options exercisable at end of year - -
========= =========
Weighted average exercise price per share
outstanding and exercisable $ .005 $ .005
========= =========
Weighted average grant date fair value $ - $ -
====== ======
Had compensation expense been determined based on the fair value at the grant
dates for the stock option grants consistent with the method of SFAS No.123, the
Company's net income per common share would have been reduced to the pro forma
amounts indicated below:
Net loss: 2000 1999 1998
---- ---- ----
As reported $ 190,266 $ 361,880 $ 1,203,643
Pro forma $ 190,266 $ 361,880 $ 1,203,643
Net loss per common share:
As reported $ .015 $ .033 $ .143
Pro forma $ .015 $ .033 $ .143
Calculated in accordance with the Black-Scholes option pricing model, using the
following assumptions; expected volatility computed using as of the date of the
grant the prior years average of the common stock which averaged 5%; expected
dividend yield of 0%; expected option term of two years and risk free rate of
6%. The Company believes that there is no significant income tax effect.
NOTE 10 LEGAL PROCEEDINGS
The Company's legal counsel advises that there is no pending significant legal
proceedings or action concerning the Company.
NOTE 11 SUBSEQUENT EVENTS
On January 10, 2001, the Company executed a letter of intent to acquire Virtual
Technologies, Inc. d/b/a Global VR, in a stock-for-stock transaction under which
Global VR's shareholders would acquire a controlling interest in the Company. No
definitive agreement was executed, and the letter of intent was terminated on
April 6, 2001.
On April 18, 2001, the Company executed a letter of intent to acquire Ferris
Productions, Inc., in a stock-for-stock transaction under which Ferris'
shareholders would acquire controlling interest in the Company. A definitive
contract between the Company and Ferris was executed on May 3, 2001. Both
companies announced on May 23,
39
2001, that the due diligence phase of the contract was successfully completed;
however, there can be no assurance that the acquisition will in fact be
consummated, as the transaction is contingent upon approval of the transaction
by the shareholders of both the Company and Ferris. It is expected that a proxy
statement for approval of the merger will be forwarded to the shareholders in
August of 2001, but there is no assurance that this timetable will hold.
40
GAMECOM, INC.
Consolidated Balance Sheet
March 31, 2001 (Unaudited)
ASSETS
Current assets
Cash $ 5,844
Property and equipment
Equipment, furniture and fixtures 113,464
Accumulated depreciation (34,052)
-----------
Net property and equipment 79,412
-----------
Total assets $ 85,256
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade payables $ 387,617
Accrued interest 65,185
Notes payable to shareholders 360,500
Short-term notes payable to bank 275,000
-----------
Total current liabilities 1,088,302
Redeemable common stock
Common stock to redeem, 778,291 shares
at par $.005
3,891
Shareholders' equity
Capital stock 50,000,000 shares authorized
par value $.005; 11,772,997 and 10,316,600
issued and outstanding respectively 66,407
Paid-in capital 1,684,565
Retained earnings (2,757,909)
-----------
Total shareholders' equity (1,006,937)
-----------
Total liabilities and shareholder equity $ 85,256
===========
The accompanying notes are an integral part of this financial statement
41
GAMECOM, INC.
Consolidated Statement of Operations
For the Quarters Ended March 31, 2001 and 2000
(Unaudited)
2001 2000
----------- -----------
Revenues
Game royalties 113 --
General and administrative expense
Administrative cost 150,505 65,113
Interest 14,556 4,795
Financing charges 60,000 17,500
Depreciation and amortization 5,224 7,027
----------- -----------
230,285 94,435
----------- -----------
Net loss (230,172) (94,435
=========== ===========
Per share amounts:
Net loss per share $ (0.017) $ (0.008)
=========== ===========
Average outstanding shares 13,444,234 11,922,150
=========== ===========
The accompanying notes are an integral part of this financial statement
42
GAMECOM, INC.
Consolidated Statements of Cash Flows
For the Quarters Ended March 31, 2001 and 2000
(Unaudited)
2001 2000
--------- ---------
Cash flows from operating activities
Net loss $(230,172) $ (94,435)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 5,224 7,027
Financing fees 60,000 17,500
Stock issued as compensation 50,500 --
(Increase) decrease in:
Prepaid and other assets -- 8,989
Increase (decrease) in:
Accounts payable and accrued expense (29,157) 49,293
--------- ---------
Net cash provided by operating activities (85,291) (11,626)
Cash flows from investing activities
Capital expenditures -- (1,512)
--------- ---------
Net cash used by investing activities -- (1,512)
Cash flow from financing activities
Short-term notes payable 60,000 --
Increase in capital stock and paid-in capital 25,000 --
--------- ---------
Net cash provided by financing activities 85,000 --
Net increase in cash and cash equivalents (291) (13,138)
Cash and cash equivalents beginning of period 6,135 15,564
--------- ---------
Cash and cash equivalents end of period $ 5,844 $ 2,426
========= =========
Interest paid during the quarter $ 3,400 $ 431
========= =========
Income taxes paid during the quarter $ -- $ --
========= =========
The accompanying notes are an integral part of this financial statement
43
GAMECOM, INC.
Notes to Financial Statements
For the Quarters Ended March 31, 2001 and 2000
Note 1 Reference to Notes to Financial Statements dated December 31, 2000
The notes to the Financial Statements dated December 31, 2000 should be read in
conjunction with these financial statements. These financial statements include
all adjustments that are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods.
44
FERRIS PRODUCTIONS, INC.
----------
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
for the years ended December 31, 2000 and 1999
45
FERRIS PRODUCTIONS, INC.
TABLE OF CONTENTS
----------
Page(s)
Report of Independent Accountants.................................... 47
Financial Statements:
Balance Sheet as of December 31, 2000
and 1999......................................................... 48
Statement of Operations for the years
ended December 31, 2000 and 1999................................. 49
Statement of Cash Flows for the years
ended December 31, 2000 and 1999................................. 50
Statement of Stockholders' Deficit for
the years ended December 31, 2000 and 1999....................... 51
Notes to Financial Statements........................................ 52
46
Report of Independent Accountants
To the Board of Directors and Stockholders of
Ferris Productions, Inc.
We have audited the accompanying balance sheet of Ferris Productions, Inc. (the
"Company") as of December 31, 2000 and 1999, and the related statements of
operations, stockholders' deficit and cash flows for the years then ended. 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 generally accepted auditing
standards. 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 Ferris Productions, Inc. as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has suffered recurring losses from operations and at
December 31, 2000 is in a negative working capital position and a stockholders'
deficit position. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Ham, Langston & Brezina, L.L.P.
Houston, Texas
April 30, 2001
47
FERRIS PRODUCTIONS, INC.
BALANCE SHEET
December 31, 2000 and 1999
----------
ASSETS 2000 1999
----------- -----------
Current assets:
Cash and cash equivalents $ -- $ 390,576
Accounts receivable 159,922 --
Deferred expenses 38,887 25,000
Note receivable 33,471 125,000
----------- -----------
Total current assets 232,280 540,576
Property and equipment, net 1,231,689 827,467
Note receivable-related party 102,782 --
Intangible assets, net 82,618 88,456
----------- -----------
Total assets $ 1,649,369 $ 1,456,499
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of notes payable $ 389,133 $ --
Current portion of obligations under product
financing arrangements 1,043,789 --
Accounts payable 375,440 21,079
Book overdraft 5,574 --
Accrued interest payable 27,912 19,806
Deferred revenue 88,000 220,400
Note payable-related party 122,531 36,531
----------- -----------
Total current liabilities 2,052,379 297,816
Notes payable, net of current maturities 538,667 250,000
Obligations under product financing arrangements,
net of current portion 2,330,667 3,019,422
----------- -----------
Total liabilities 4,921,713 3,567,238
----------- -----------
Commitments and contingencies
Stockholders' deficit:
Common stock, $.001 par value, 10,000,000
shares authorized, 2,658,000 shares issued and
outstanding at December 31, 2000 and 1999 2,658 2,658
Additional paid-in capital 279,715 279,715
Accumulated deficit (3,554,717) (2,393,112)
----------- -----------
Total stockholders' deficit (3,272,344) (2,110,739)
----------- -----------
Total liabilities and stockholders'
deficit $ 1,649,369 $ 1,456,499
=========== ===========
See accompanying notes to financial statements.
48
FERRIS PRODUCTIONS, INC.
STATEMENT OF OPERATIONS
for the years ended December 31, 2000 and 1999
----------
2000 1999
----------- -----------
Revenue:
Theme parks and arcades $ 2,173,025 $ 165,441
Custom applications and other 1,185,691 71,573
----------- -----------
Total revenue 3,358,716 237,014
Cost of sales and services 1,188,418 110,623
----------- -----------
Gross margin 2,170,298 126,391
General and administrative expenses 1,875,320 814,923
Depreciation and amortization expense 535,805 136,694
----------- -----------
Loss from operations (240,827) (825,226)
----------- -----------
Other income (expenses):
Interest income 1,415 19,203
Interest expense (945,056) (509,361)
Loss on impaired assets -- (672,060)
Other income 22,863 15,327
----------- -----------
Total other income (expenses) (920,778) (1,146,891)
----------- -----------
Net loss $(1,161,605) $(1,972,117)
=========== ===========
Weighted average shares outstanding 2,658,000 2,598,700
=========== ===========
Basic and diluted net loss per common
share $ (0.44) $ (0.76)
=========== ===========
See accompanying notes to financial statements.
49
FERRIS PRODUCTIONS, INC.
STATEMENT OF CASH FLOWS
for the years ended December 31, 2000 and 1999
----------
2000 1999
----------- -----------
Cash flows from operating activities:
Net loss $(1,161,605) $(1,972,117)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 535,805 136,694
Amortization of debt issuance costs 210,854 128,122
Loss on impairment of assets -- 627,060
Common stock issued for commissions -- 30,299
Common stock issued for interest expense -- 5,636
Changes in operating assets and liabilities:
Accounts receivable (159,922) 210
Deferred expenses (13,887) (25,000)
Accounts payable 354,361 (2,162)
Accrued interest payable 8,106 16,153
Deferred revenue (132,400) 220,400
----------- -----------
Net cash used in operating activities (358,688) (834,705)
----------- -----------
Cash flows from investing activities:
Capital expenditures (911,797) (1,500,632)
Increase in intangible asset (22,392) (59,668)
Issuance of note receivable -- (125,000)
Issuance of note receivable-related party (102,782) --
Payment received on note receivable 91,529 --
----------- -----------
Net cash used in investing activities (945,442) (1,685,300)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable 840,000 180,000
Proceeds from issuance of notes payable-
related party 86,000 --
Proceeds from obligations under product
financing arrangements 234,240 2,749,200
Payments on notes payable (162,200) (44,000)
Payments on obligations under product
financing arrangements (90,060) (104,280)
Increase in book overdraft 5,574 --
----------- -----------
Net cash provided by financing activities 913,554 2,780,920
----------- -----------
Increase (decrease) in cash and cash equivalents (390,576) 260,915
Cash and cash equivalents, beginning of year 390,576 129,661
----------- -----------
Cash and cash equivalents, end of year $ -- $ 390,576
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 726,096 $ 365,086
=========== ===========
Cash paid for income taxes $ -- $ --
=========== ===========
See accompanying notes to financial statements.
50
FERRIS PRODUCTIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
for the years ended December 31, 2000 and 1999
----------
Common Additional
Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
-------- -------- --------- --------- --------
Balance at December 31, 1998 2,302,200 $ 2,302 $244,136 $(420,995) $(174,557)
Issuance of common stock in con-
nection with the funding of
convertible debentures 355,800 356 35,579 - 35,935
Net loss -- -- -- (1,972,117) (1,972,117)
--------- ------- -------- ----------- -----------
Balance at December 31, 1999 2,658,000 2,658 279,715 (2,393,112) (2,110,739)
Net loss -- -- -- (1,161,605) (1,161,605)
--------- ------- -------- ----------- -----------
Balance at December 31, 2000 2,658,000 $ 2,658 $279,715 $(3,554,717) $(3,272,344)
========= ======= ======== =========== ===========
See accompanying notes to financial statements.
51
FERRIS PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
----------
1. Background and Summary of Significant Accounting Policies
Background
Ferris Productions, Inc. ("the Company"), a Delaware corporation, was
founded in 1993 and is currently headquartered in Phoenix, Arizona, with
a branch sales office in Dallas, Texas. The Company develops,
manufactures and operates technically advanced personal computer and
non-personal computer based products including virtual reality ("VR")
entertainment products for the entertainment, simulation, promotion and
education industries.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual
results could differ from those estimates.
Revenue Recognition
Revenue is recognized at the time services are performed or when products
are shipped.
Deferred Revenue and Expenses
Deferred revenue represents advanced billings on custom application
projects and is recognized as revenue in the year the work is performed.
Deferred expenses represent expenses incurred related to custom
application projects not recognized until the work commences.
Concentrations of Credit Risk
Financial instruments which subject the Company to concentrations of
credit risk include cash and cash equivalents and accounts receivable.
The Company maintains its cash in well known banks selected based upon
management's assessment of the banks' financial stability. Balances
periodically exceed the $100,000 federal depository insurance limit;
however, the Company has not experienced any losses on deposits.
Accounts receivable generally arise from sales of equipment and services
to various companies throughout the world and from revenue sharing
arrangements with certain theme parks located throughout the United
States. Collateral is generally not required for credit granted. During
the year ended December 31, 2000 the Company had one customer
representing 52% of its total theme park revenue and one customer
representing 53% of total custom application and other revenue.
Cash Equivalents
For purposes of reporting cash flows, the Company considers all
short-term investments with an original maturity of three months or less
to be cash equivalents.
Continued
52
FERRIS PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
1. Background and Summary of Significant Accounting Policies, continued
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of the assets,
which range from three to seven years. Expenditures for major renewals
and betterments that extend the original estimated economic useful lives
of the applicable assets are capitalized. Expenditures for normal repairs
and maintenance are charged to expense as incurred. The cost and related
accumulated depreciation of assets sold or otherwise disposed of are
removed from the accounts, and any gain or loss is included in
operations.
Intangible Assets
Intangible assets consist of direct costs incurred in developing
proprietary technology exclusively used in its entertainment products and
costs incurred in obtaining a patent on such technology. The intangible
assets are being amortized on a straight-line basis over a three year
period. As of December 31, 2000 and 1999, accumulated amortization of
these intangible assets is $38,330 and $10,100, respectively. During the
years ended December 31, 2000 and 1999, the Company recorded amortization
expense of $28,230 and $10,100, respectively.
Debt Issuance Costs
Debt issuance costs are deferred and recognized, using the interest
method, over the term of the related debt.
Income Taxes
The Company uses the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded to reflect the tax
consequences on future years of temporary differences between the tax
basis of assets and liabilities and their financial amounts at year-end.
The Company provides a valuation allowance to reduce deferred tax assets
to their net realizable value.
Loss Per Share
Basic and diluted loss per share is computed on the basis of the weighted
average number of shares of common stock outstanding during each period.
Common equivalent shares from common stock options and warrants are
excluded from the computation as their effect would dilute the loss per
share for all periods presented.
Stock-Based Compensation
The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board ("APB") No. 25 "Accounting for
Stock Issued to Employees". The Company provides disclosure in accordance
with the disclosure-only provisions of Statement of Financial Accounting
Standard ("SFAS") No. 123 "Accounting for Stock-Based Compensation".
Continued
53
FERRIS PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
1. Background and Summary of Significant Accounting Policies, continued
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the carrying
value of a long-lived asset, including associated intangibles, may be
impaired, an evaluation of recoverability is performed by comparing the
estimated future undiscounted cash flows associated with the asset or the
asset's estimated fair value to the asset's carrying amount to determine
if a write-down to market value or discounted cash flow is required.
Fair Value of Financial Instruments
The Company includes fair value information in the notes to financial
statements when the fair value of its financial instruments is different
from the book value. When the book value approximates fair value, no
additional disclosure is made.
Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income".
Comprehensive income includes such items as unrealized gains or losses on
certain investment securities and certain foreign currency translation
adjustments. The Company's financial statements include none of the
additional elements that affect comprehensive income. Accordingly,
comprehensive income and net income are identical.
Segment Information
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise". Under the
new standard, the Company is required to use the management approach to
reporting its segments. The management approach designates that the
internal organization that is used by management for making operating
decisions and assessing performance as the source of the Company's
segments. The accounting policies of the segments are the same as those
described elsewhere in Note 1.
2. Going Concern Considerations
During the years ended December 31, 2000 and 1999, the Company has
experienced negative financial results as follows:
2000 1999
-------- --------
Net loss $(1,161,605) $(1,972,117)
Negative cash flows from
operations (358,688) (834,705)
Negative working capital (1,820,099) -
Accumulated deficit (3,554,717) (2,393,112)
Stockholders' deficit (3,272,344) (2,110,739)
Continued
54
FERRIS PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
2. Going Concern Considerations, continued
Management has developed specific current and long-term plans to address
its viability as a going concern as follows:
o The Company has signed a letter of intent to be acquired by
GameCom, Inc. In connection with this transaction, the combined
companies are attempting to raise funds through debt and/or
equity offerings. If successful, these additional funds would be
used to pay down debt and for working capital purposes.
o In the long-term, the Company believes that cash flows from
continued growth in its operations will provide the resources
for continued operations.
There can be no assurance that the Company's debt reduction plans will
be successful or that the Company will have the ability to implement its
business plan and ultimately attain profitability. The Company's
long-term viability as a going concern is dependent upon three key
factors, as follows:
o The Company's ability to obtain adequate sources of debt or
equity funding to meet current commitments and fund the
continuation of its business operations in the near term.
o The ability of the Company to control costs and expand revenues
from existing or new businesses.
o The ability of the Company to ultimately achieve adequate
profitability and cash flows from operations to sustain its
operations.
3. Accounts Receivable
Accounts receivable consist primarily of amounts due from certain
companies for the purchase of equipment and services. An allowance for
doubtful accounts is provided, when appropriate, based on past experience
and other factors which, in management's judgment, deserve current
recognition in estimating probable bad debts. Such factors include
circumstances with respect to specific accounts receivable, growth and
composition of accounts receivable, the relationship of the allowance for
doubtful accounts to accounts receivable and current economic conditions.
Accounts receivable at both December 31, 2000 and 1999 are stated net of
an allowance for doubtful accounts of $-0-.
4. Property and Equipment
Property and equipment consisted of the following at December 31, 2000
and 1999:
2000 1999
---------- --------
Arcade equipment $1,703,456 $856,340
Furniture and equipment 169,144 104,461
---------- --------
1,872,600 960,801
Less: accumulated depreciation (640,911) (133,334)
---------- --------
Property and equipment, net $1,231,689 $827,467
========== ========
Continued
55
FERRIS PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
4. Property and Equipment, continued
Depreciation expense for the years ended December 31, 2000 and 1999 was
$507,575 and $126,594, respectively.
5. Notes Payable
Notes payable consist of the following at December 31, 2000 and 1999:
2000 1999
---------- ---------
Notes payable to a bank, bearing interest ranging from the prime rate
(9.5% at December 31, 2000) to the prime rate plus 2% per year and
due in average monthly payments of approximately $31,000, including
interest, through November 2002. These notes are collateralized by
certain equipment, licensing rights and by the personal guarantee of
an officer/stockholder of the Company. $ 677,800 $ -
Notes payable to third party entities and individuals bearing interest
at a stated rate of 10% payable semi-annually with principal due
three years after issuance of the note, which ranges from October
2001 to March 2002. These notes are not collateralized. In connection
with the funding of these notes, the Company issued a total of
412,500 shares of its common stock as equity attachments to the note
holders and to pay debt issuance costs. Accordingly, the actual
weighted average interest rate on these notes, including the effect
of the issuance of common stock and the payment of debt issuance
costs, was approximately 16%. 250,000 250,000
Note payable to a stockholder, due on demand, bearing interest at 10% per
year. This note is not collateralized. 122,531 36,531
---------- ---------
Total notes payable 1,050,331 286,531
Less: current portion (511,664) (36,531)
---------- ---------
$ 538,667 $ 250,000
========== =========
Continued
56
FERRIS PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
5. Notes Payable, continued
The notes payable to a bank contain various financial and non-financial
covenants, which require the Company, among other things, to maintain
certain levels of stockholders' equity and to comply with certain
financial ratios. The Company is in violation of these covenants as of
December 31, 2000. However, the Company has received a waiver through
2001 from the bank for these covenant violations.
Future annual maturities of notes payable at December 31, 2000 is as
follows:
2001 $ 511,664
2002 538,667
----------
$1,050,331
==========
6. Obligations Under Product Financing Arrangements
In financing the production of its arcade equipment, the Company has
entered into agreements whereby an entity or individual advances funds to
the Company to produce specific arcade equipment. Under this arrangement,
the Company has agreed to repay these advances at a specified price three
years from the origination date as specified in the agreement. Although
these obligations mature three years from the origination date, the
entity or individual advancing the funds has the right to exercise a
buy-out whereby the Company has 180 days to repay the obligation upon
exercise of the buy-out. Interest is paid monthly at an annual rate of
approximately 16%.
In connection with these financing arrangements, the Company has incurred
debt issuance costs of approximately 21% of the total obligation. These
costs are being amortized over a three year period using the interest
method resulting in an effective annual interest rate of approximately
29% on these obligations.
Obligations under these product financing arrangements consist of the
following at December 31, 2000 and 1999:
2000 1999
---------- ----------
Contractual balance $3,866,000 $3,659,000
Less: unamortized debt issuance costs (491,544) (639,578)
---------- ----------
Total obligation $3,374,456 $3,019,422
========== ==========
Future annual maturities of these obligations as of December 31, 2000 are
as follows:
2001 $1,043,789
2002 2,096,427
2003 234,240
----------
$3,374,456
==========
Continued
57
FERRIS PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
7. Income Taxes
The Company has incurred losses since its inception and, therefore, has
not been subject to federal income taxes. As of December 31, 2000, the
Company had net operating loss ("NOL") carryforwards for income tax
purposes of approximately $3,700,000 which expire in various tax years
through 2021. Under the provisions of Section 382 of the Internal Revenue
Code the ownership change in the Company that could result from the
possible merger or acquisition of the Company could severely limit the
Company's ability to utilize its NOL carryforward to reduce future
taxable income and related tax liabilities. Additionally, because United
States tax laws limit the time during which NOL carryforwards may be
applied against future taxable income, the Company may be unable to take
full advantage of its NOL for federal income tax purposes should the
Company generate taxable income.
The composition of deferred tax assets and liabilities and the related
tax effects at December 31, 2000 and 1999 are as follows:
2000 1999
----------- -----------
Deferred tax assets:
Net operating losses $ 1,263,670 $ 828,563
Intangible assets 4,110 --
Valuation allowance (1,172,396) (770,437)
----------- -----------
Total deferred tax assets 95,384 58,126
----------- -----------
Deferred tax liabilities:
Property and equipment (95,384) (58,126)
----------- -----------
Total deferred tax liability (95,384) (58,126)
----------- -----------
Net deferred tax asset (liability) $ -- $ --
=========== ===========
The difference between the income tax benefit in the accompanying
statement of operations and the amount that would result if the U.S.
Federal statutory rate of 34% were applied to pre-tax loss for the years
ended December 31, 2000 and 1999 is as follows:
2000 1999
Amount % Amount %
--------- ---- --------- ----
Benefit for income tax at
federal statutory rate $(394,946) (34.0) $(670,520) (34.0)
Other (7,013) (0.0) 1,909 0.0
Increase in valuation
allowance 401,959 34.0 668,611 34.0
--------- ---- --------- ----
$ -- 0.0% $ -- 0.0%
========= ===== ========= ====
Continued
58
FERRIS PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
8. Stock Options
The Company periodically issues incentive stock options to key employees,
officers, directors and outside consultants to provide additional
incentives to promote the success of the Company's business and to
enhance the ability to attract and retain the services of qualified
persons.
On January 1, 2000 the Company granted options to certain employees and
non-employees to purchase 350,000 shares of the Company's common stock at
$1 per share. The options are fully vested and exercisable at the date of
grant and expire on January 1, 2003. The Company deemed the value of the
options to be immaterial at the date of grant.
9. Commitments and Contingencies
Lease Obligations
On August 4, 2000 the Company entered into a long-term operating lease
for its office and manufacturing facility, which is owned by a
stockholder of the Company. The monthly lease cost to the Company is
equal to all expenses related to the building, including, but not limited
to, mortgage, taxes, fees, maintenance and improvements. The minimum
monthly cost is approximately $9,000.
Minimum lease payments due under leases with remaining lease terms of
greater than one year are as follows:
2001 $107,410
2002 107,410
2003 107,410
2004 107,410
2005 and thereafter 2,325,160
---------
$2,754,800
==========
Litigation
The Company is currently a party to certain litigation arising in the
normal course of business. Management believes that such litigation will
not have a material impact on the Company's financial position, results
of operations or cash flows.
10. Business Segments
During the year ended December 31, 2000 and 1999, the Company operated
primarily in two strategic business units that offer different products
and services: revenue sharing arrangements with theme parks and arcades
and custom applications utilizing its virtual reality concept. Financial
information regarding these business segments is as follows:
Continued
59
FERRIS PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
10. Business Segments, continued
Theme Parks Custom
and Arcades Applications Other Total
(Amounts in
thousands)
Year ended December 31,
2000:
Revenues $2,173,025 $739,251 $446,440 $3,358,716
Income (loss) from op-
erations (509,407) 268,580 - (240,827)
Total assets 1,423,721 56,504 169,144 1,649,369
Interest expense 848,140 - 96,916 945,056
Depreciation expense 467,552 - 40,023 507,575
Capital expenditures 847,114 - 64,683 911,797
Year ended December 31,
1999:
Revenues $165,441 $ - $ 71,573 $237,014
Income (loss) from oper-
ations (825,226) - - (825,226)
Total assets 1,327,038 25,000 104,461 1,456,499
Interest expense 472,191 - 37,170 509,361
Depreciation expense 114,859 - 11,735 126,594
Capital expenditures 1,431,645 - 68,987 1,500,632
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based on operating earnings of the respective business units.
11. Related Party Transactions
Included in the December 31, 2000 balance sheet is a note receivable from
a stockholder of the Company. This note originated when the Company made
a down payment of $102,782 on behalf of the stockholder who purchased the
building which the Company currently leases (See Note 10). The note is
non-interest bearing and is due on demand.
Included in accrued interest payable in the December 31, 2000 and 1999
balance sheet is $15,412 and $7,306, respectively, of interest due to a
stockholder of the Company.
60
FERRIS PRODUCTIONS, INC.
----------
UNAUDITED CONDENSED FINANCIAL INFORMATION
March 31, 2001
61
FERRIS PRODUCTIONS, INC.
UNAUDITED CONDENSED BALANCE SHEET
March 31, 2001
----------
ASSETS
Current assets:
Cash and cash equivalents $ 33,073
Accounts receivable, net 56,253
----------
Total current assets 89,326
Property and equipment, net 1,093,039
Note receivable-related party 102,782
Intangible assets, net 75,566
----------
Total assets $1,360,713
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of notes payable $389,133
Current portion of obligations under product
financing arrangements 1,223,906
Accounts payable 285,661
Accrued interest payable 37,225
Notes payable to stockholders 122,531
----------
Total current liabilities 2,058,456
Notes payable, net of current maturities 538,667
Obligations under product financing arrangements,
net of current portion 2,528,100
----------
Total liabilities 5,125,223
Stockholders' deficit:
Common stock 2,658
Additional paid-in capital 279,715
Accumulated deficit (4,046,883)
----------
Total stockholders' deficit (3,764,510)
----------
Total liabilities and stockholders'
deficit $1,360,713
==========
62
FERRIS PRODUCTIONS, INC.
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
for the three months ended March 31, 2001 and 2000
----------
March 31, March 31,
2001 2000
----------- -----------
Revenue:
Theme parks and arcades $ 175,506 $ 146,018
Custom applications and other 356,089 477,849
----------- -----------
Total revenue 531,595 623,867
Cost of sales and services 185,431 292,453
----------- -----------
Gross margin 346,164 331,414
General and administrative expenses 433,963 390,360
Depreciation and amortization expense 138,833 126,467
----------- -----------
Loss from operations (226,632) (185,413)
Other income (expenses):
Interest income 741 1,415
Interest expense (266,142) (221,000)
Other income 150 --
----------- -----------
Total other income (expenses) (265,251) (219,585)
----------- -----------
Net loss $ (491,883) $ (404,998)
=========== ===========
Weighted average shares outstanding 2,658,000 2,598,700
=========== ===========
Basic and diluted net loss per common share $ (0.19) $ (0.16)
=========== ===========
63
FERRIS PRODUCTIONS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL INFORMATION
----------
1. Reference to Notes to Financial Statements Dated December 31, 2000
The notes to the financial statements dated December 31, 2000 should be
read in conjunction with these unaudited condensed financial statements.
These financial statements include all adjustments that are, in the
opinion of management, necessary for a fair presentation of the results
for the interim periods.
64
PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements give
effect to the merger, pursuant to which Ferris will be merged into GameCom, to
be accounted for as a pooling of interests. The pooling of interests method of
accounting assumes that GameCom and Ferris have been merged since their
inception and the historical consolidated financial statements for periods prior
to consummation of the merger are restated as though the companies have been
combined since their inception. The unaudited pro forma combined balance sheet
represents the combined financial position of GameCom and Ferris as of December
31, 2000 and March 31, 2001, assuming that the proposed merger had occurred on
that date. The unaudited pro forma condensed combined statements of operations
give effect to the proposed merger of GameCom and Ferris by combining the
results of operations of GameCom for the years ended December 31, 2000 and 1999,
and for the three-month periods ended March 31, 2001, and 2000 with the results
of Ferris for those same periods.
The unaudited pro forma condensed combined financial statements are based on the
estimates and assumptions set forth in the notes to these financial statements,
which are preliminary and have been made solely for purposes of developing this
pro forma information. The unaudited pro forma condensed combined financial
statements are presented for illustrative purposes only. The pro forma
adjustments are based upon available information and assumptions that management
believes are reasonable. The unaudited pro forma condensed combined financial
statements are not necessarily an indication of the results that would have been
achieved had such transactions been consummated as of the dates indicated or
that may be achieved in the future.
These unaudited pro forma condensed combined financial statements should be read
in conjunction with the historical financial statements and related notes of
GameCom and Ferris, appearing elsewhere in this proxy statement.
65
GAMECOM/FERRIS
UNAUDITED PROFORMA CONDENSED COMBINED BALANCE SHEET
December 31, 2000
----------
ASSETS GameCom Ferris Pro-Forma Pro-Forma
------- ------ Adjustments Combined
----------- --------
Current assets:
Cash and cash equivalents $ 6,135 $ -- $ -- $ 6,135
Accounts receivable -- 159,922 -- 159,922
Deferred expenses -- 38,887 -- 38,887
Note receivable -- 33,471 -- 33,471
----------- ----------- ------------ -----------
Total current assets 6,135 232,280 -- 238,415
Property and equipment, net 84,636 1,231,689 -- 1,316,325
Note receivable-related party -- 102,782 -- 102,782
Intangible assets, net -- 82,618 -- 82,618
----------- ----------- ------------ -----------
Total assets $ 90,771 $ 1,649,369 $ -- $ 1,740,140
=========== =========== ============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of notes
payable $ 215,000 $ 389,133 $ -- $ 604,133
Current portion of obliga-
tions under product finan-
cing arrangements -- 1,043,789 -- 1,043,789
Accounts payable 361,617 375,440 -- 737,057
Book overdraft -- 5,574 -- 5,574
Accrued interest payable 62,028 27,912 -- 89,940
Deferred revenue -- 88,000 -- 88,000
Notes payable to stockholders 410,500 122,531 -- 533,031
----------- ----------- ------------ -----------
Total current liabilities 1,049,145 2,052,379 -- 3,101,524
Notes payable, net of current
maturities -- 538,667 -- 538,667
Obligations under product finan-
cing arrangements, net of
current portion -- 2,330,667 -- 2,330,667
----------- ----------- ------------ -----------
Total liabilities 1,049,145 4,921,713 -- 5,970,858
Redeemable common stock 3,891 -- -- 3,891
Stockholders' deficit:
Common stock 61,951 2,658 87,703 152,312
Additional paid-in capital 1,503,521 279,715 (87,703) 1,695,533
Accumulated deficit (2,527,737) (3,554,717) -- (6,082,454)
----------- ----------- ------------ -----------
Total stockholders'
deficit (962,265) (3,272,344) -- (4,234,609)
----------- ----------- ------------ -----------
Total liabilities and
stockholders' deficit $ 90,771 $ 1,649,369 $ -- $ 1,740,140
=========== =========== ============ ===========
66
GAMECOM/FERRIS
UNAUDITED PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
for the year ended December 31, 2000
----------
Pro-Forma Pro-Forma
GameCom Ferris Adjustments Combined
------------ ------------ ------------ ------------
Revenue:
Theme parks and arcades $ -- $ 2,173,025 $ 2,173,025
Custom applications and
other 410 1,185,691 1,186,101
------------ ------------ ------------
Total revenue 410 3,358,716 3,359,126
Cost of sales and services -- 1,188,418 1,188,418
------------ ------------ ------------
Gross margin 410 2,170,298 2,170,708
General and administrative
expenses 396,835 1,875,320 2,272,155
Depreciation and amortization
expense 20,896 535,805 556,701
------------ ------------ ------------
Loss from operations (417,321) (240,827) (658,148)
Other income (expenses):
Interest income -- 1,415 1,415
Interest expense (228,094) (945,056) (1,173,150)
Other income -- 22,863 22,863
------------ ------------ ------------
Total other income
(expenses) (228,094) (920,778) (1,148,872)
------------ ------------ ------------
Net loss from continuing
operations $ (645,415) $ (1,161,605) $ -- $ (1,807,020)
============ ============ ============ ============
Weighted average shares
outstanding 12,328,360 2,658,000 15,414,289 30,400,649
============ ============ ============ ============
Basic and diluted net loss
from continuing operations
per common share $ (0.05) $ (0.44) $ -- $ (0.06)
============ ============ ============ ============
67
GAMECOM/FERRIS
UNAUDITED PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
for the year ended December 31, 1999
----------
Pro-Forma Pro-Forma
GameCom Ferris Adjustments Combined
------------ ------------ ------------ ------------
Revenue:
Theme parks and arcades $ -- $ 165,441 $ 165,441
Custom applications and
other 5,431 71,573 77,004
------------ ------------ ------------ ------------
Total revenue 5,431 237,014 242,445
Cost of sales and services 24,472 110,623 135,095
------------ ------------ ------------ ------------
Gross margin (19,041) 126,391 107,350
General and administrative
expenses 409,999 814,923 1,224,922
Depreciation and amortization
expense 5,356 136,694 142,050
------------ ------------ ------------ ------------
Loss from operations (434,396) (825,226) (1,259,622)
Other income (expenses):
Interest income -- 19,203 19,203
Interest expense (71,265) (509,361) (580,626)
Other income -- 15,327 15,327
------------ ------------ ------------ ------------
Total other income
(expenses) (71,265) (474,831) (546,096)
------------ ------------ ------------ ------------
Net loss from continuing
operations $ (505,661) $ (1,300,057) $ -- $ (1,805,718)
============ ============ ============ ============
Weighted average shares
outstanding 10,838,550 2,598,700 15,473,589 28,910,839
============ ============ ============ ============
Basic and diluted net loss
from continuing operations
per common share $ (0.05) $ (0.50) $ -- $ (0.06)
============ ============ ============ ============
68
GAMECOM/FERRIS
UNAUDITED PROFORMA CONDENSED COMBINED BALANCE SHEET
March 31, 2001
----------
Pro-Forma Pro-Forma
ASSETS GameCom Ferris Adjustments Combined
----------- ----------- ----------- -----------
Current assets:
Cash and cash equivalents $ 5,844 $ 33,073 $ -- $ 38,917
Accounts receivable, net -- 56,253 -- 56,253
Note receivable, net -- -- -- --
----------- ----------- ----------- -----------
Total current assets 5,844 89,326 -- 95,170
Property and equipment, net 79,412 1,093,039 -- 1,172,451
Note receivable-related party -- 102,782 -- 102,782
Intangible assets, net -- 75,566 -- 75,566
----------- ----------- ----------- -----------
Total assets $ 85,256 $ 1,360,713 $ -- $ 1,445,969
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of notes
payable $ 275,000 $ 389,133 $ -- $ 664,133
Current portion of obliga-
tions under product finan-
cing arrangements -- 1,223,906 -- 1,223,906
Accounts payable 387,617 285,661 -- 673,278
Accrued interest payable 65,185 37,225 -- 102,410
Notes payable to stockholders 360,500 122,531 -- 483,031
----------- ----------- ----------- -----------
Total current liabilities 1,088,302 2,058,456 -- 3,146,758
Notes payable, net of current
maturities -- 538,667 -- 538,667
Obligations under product finan-
cing arrangements, net of
current portion -- 2,528,100 -- 2,528,100
----------- ----------- ----------- -----------
Total liabilities 1,088,302 5,125,223 -- 6,213,525
Redeemable common stock 3,891 -- -- 3,891
Stockholders' deficit:
Common stock 66,407 2,658 87,703 156,768
Additional paid-in capital 1,684,565 279,715 (87,703) 1,876,577
Accumulated deficit (2,757,909) (4,046,883) -- (6,804,792)
----------- ----------- ----------- -----------
Total stockholders'
deficit (1,006,937) (3,764,510) -- (4,771,447)
----------- ----------- ----------- -----------
Total liabilities and
stockholders' deficit $ 85,256 $ 1,360,713 $ -- $ 1,445,969
=========== =========== =========== ===========
69
GAMECOM/FERRIS
UNAUDITED PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
for the three months ended March 31, 2001
----------
Pro-Forma Pro-Forma
GameCom Ferris Adjustments Combined
------------ ------------ ------------ ------------
Revenue:
Theme parks and arcades $ -- $ 175,506 $ -- $ 175,506
Custom applications and
other 113 356,089 -- 356,202
------------ ------------ ------------ ------------
Total revenue 113 531,595 -- 531,708
Cost of sales and services -- 185,431 -- 185,431
------------ ------------ ------------ ------------
Gross margin 113 346,164 -- 346,277
General and administrative
expenses 150,505 433,963 -- 584,468
Depreciation and amortization
expense 5,224 138,833 -- 144,057
------------ ------------ ------------ ------------
Loss from operations (155,616) (226,632) -- (382,248)
Other income (expenses):
Interest income -- 741 -- 741
Interest expense (74,556) (266,142) -- (340,698)
Other income -- 150 -- 150
------------ ------------ ------------ ------------
Total other income
(expenses) (74,556) (265,251) -- (339,807)
------------ ------------ ------------ ------------
Net loss from continuing
operations $ (230,172) $ (491,883) $ -- $ (722,055)
============ ============ ============ ============
Weighted average shares
outstanding 13,444,234 2,658,000 15,414,289 31,516,523
============ ============ ============ ============
Basic and diluted net loss
per common share $ (0.02) $ (0.19) $ -- $ (0.02)
============ ============ ============ ============
70
GAMECOM/FERRIS
UNAUDITED PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
for the three months ended March 31, 2000
----------
Pro-Forma Pro-Forma
GameCom Ferris Adjustments Combined
------------ ------------ ------------ ------------
Revenue:
Theme parks and arcades $ -- $ 146,018 $ $ 146,018
Custom applications and
other -- 477,849 477,849
------------ ------------ ------------ ------------
Total revenue -- 623,867 623,867
Cost of sales and services -- 292,453 292,453
------------ ------------ ------------ ------------
Gross margin -- 331,414 331,414
General and administrative
expenses 65,113 390,360 455,473
Depreciation and amortization
expense 7,027 126,467 133,494
------------ ------------ ------------ ------------
Loss from operations (72,140) (185,413) (257,553)
Other income (expenses):
Interest income -- 1,415 1,415
Interest expense (22,295) (221,000) (243,295)
Other income -- -- --
------------ ------------ ------------ ------------
Total other income
(expenses) (22,295) (219,585) (241,880)
------------ ------------ ------------ ------------
Net loss from continuing
operations $ (94,435) $ (404,998) $ -- $ (499,433)
============ ============ ============ ============
Weighted average shares
outstanding 11,922,150 2,598,700 15,473,589 29,994,439
============ ============ ============ ============
Basic and diluted net loss
from continuing operations
per common share $ (0.01) $ (0.16) $ -- $ (0.02)
============ ============ ============ ============
71
GAMECOM/FERRIS
NOTES TO UNAUDITED PROFORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. The proforma combined per share amounts are based on the combined
weighted average of GameCom common shares and Ferris common shares for
all periods presented based on Ferris shareholders receiving 18,072,289
shares of GameCom common shares for all of the Ferris common shares
outstanding.
2. There were no material transactions between GameCom and Ferris during
any of the periods presented.
3. Total transactions costs to be incurred by GameCom and Ferris in
connection with the merger are estimated to be approximately $30,000.
These costs, related to legal, printing, accounting, financial advisory
services and other related expense, will be charged against income upon
consummation of the merger. A restructuring charge to operations by the
combined company may occur subsequent to the merger to reflect the
combination of the two companies. The effects of these costs have not
been reflected in this proforma combined financial information.
4. During the year ended December 31, 2000 GameCom recorded a non-recurring
$455,149 gain from the extinguishment of debt as an extraordinary item.
GameCom's historical statement of operations presented in these
unaudited proforma condensed combined financial statements exclude this
non-recurring gain.
5. During the year ended December 31, 1999 GameCom recorded a non-recurring
$143,781 gain on the disposal of assets. GameCom's historical statement
of operations presented in these unaudited proforma condensed combined
financial statements exclude this non-recurring gain.
6. During the year ended December 31, 1999 Ferris recorded a non-recurring
$672,060 loss on the write-down of specific assets to their estimated
fair values. Ferris' historical statement of operations presented in
these unaudited proforma condensed combined financial statements exclude
this non-recurring loss.
72
Other Factors to be Considered
If the merger-related proposals are approved at your meeting, they will result
in shareholders of Ferris becoming stockholders of GameCom and the business of
Ferris combining with the business of GameCom. In evaluating these proposals,
please carefully consider the information presented throughout this document,
and in particular the following factors. Some of those factors relate to the
merger itself, and the balance relate to the business of the combined company
after the merger.
Risks Relating to the Proposed Merger
The integration of our two companies may be difficult.
Merging our two companies involves technological, operational, and personnel-
related risks. The integration process will be complex, time-consuming, and
expensive, and will disrupt the business of the combined company after the
merger if not completed in a timely and efficient manner. If the merger is
approved, the combined company will use common information and communication
systems, facilities, operating procedures, financial controls, and human
resources practices. We may lose key employees that we do not anticipate losing,
and the attention of our management team may be diverted from other ongoing
business concerns more than we anticipate.
Failure to complete the merger could harm our stock price and future business
and operations.
Both GameCom and Ferris face a number of special risks if the merger is not
completed, including the following:
o costs related to the merger, such as legal and accounting fees and
financial advisor fees, must be paid even if the merger is not
completed.
o Current and prospective GameCom employees may experience uncertainty
about their future roles with the combined company, which may hurt
each company's ability to attract and retain key management,
marketing, technical, and administrative personnel. This may impede
subsequent integration of the two companies, and if the merger is
not completed it may harm GameCom in particular.
o If the merger is terminated and GameCom's board of directors
determines to seek another business combination, GameCom cannot
assure you that it will be able to find a party willing to combine
with it on equivalent or more attractive terms.
Risks Related to the Business of the Combined Company After the Merger
The demand for Ferris's products may be less than the parties expect, and may be
affected to a greater degree than GameCom's by an economic downturn.
Based on experience to date, Ferris believes there is a substantial demand for
its virtual reality products. However, this conclusion is based on installations
at a limited number of very popular destination entertainment centers, and the
results may not necessarily be representative of other locations where its
products may be installed. In addition, an economic downturn may have a greater
impact on Ferris's installations, which are located in major destination tourist
entertainment centers, as compared with GameCom's targeted locations.
If Ferris's business plan is successful, other companies with more resources and
greater name recognition may make competition so intense that the proposed
business will not be profitable.
Although Ferris has a patent pending covering some of its virtual reality
technology, that patent, even if granted, will provide only limited protection.
It will not prevent other companies from developing virtual reality products
similar to that of Ferris using other methods. If Ferris is successful a number
of other companies with far more money and greater name recognition may compete
with it. This competition could both reduce the number of entertainment centers
which select Ferris for virtual reality products and create downward pressure on
the amount Ferris could charge for the product, such that Ferris would not have
enough revenue to generate a profit.
Our operating results may fluctuate significantly and may be difficult to
predict.
GameCom's operating results have negligible in the past, and the operating
results of the combined company will likely fluctuate in the future due to a
number of factors, many of which will be outside our control. These factors
include:
73
o pricing competition;
o seasonal fluctuations affecting the overall volume of visitors to
entertainment centers where Ferris' products are located;
o the announcement or introduction of new virtual reality products and
games by us or our competitors; and
o the amount and timing of costs relating to expansion of our
operations.
Due to these factors, factors discussed elsewhere in this document, or
unforeseen factors in some future quarter, our operating results may not meet
the expectations of securities analysts and investors, and if this happens, the
trading price of the common stock of the combined company may decline.
We cannot predict our future capital needs and we may not be able to secure
additional financing.
To fully implement Ferris' current business plan, we will likely need to raise
additional funds within the next 12 months in order to fund the operations of
the combined companies. We expect that a substantial part of these funds will
come from the sale of additional shares under our equity line arrangement with
Swartz. However, for this to happen there must be a substantial increase in the
volume of trading of our shares, since the amount we can draw under that line is
directly related to our share price and volume. If we are unable to draw a
sufficient amount under our arrangement with Swartz, we will need to seek
financing from other sources. Whether we raise funds through our line of credit
or other sources, you may experience significant dilution of your ownership
interest, and these securities may have rights senior to the rights of common
stockholders. If additional financing is not available when required or is not
available on acceptable terms, we may be unable to fund continuing operations,
develop our products, or take advantage of business opportunities or respond to
competitive pressures, any of which could harm our business.
We expect our stock price to be volatile.
The market price of the shares of the common stock of GameCom has been, and the
market price of the shares of common stock of the combined company is likely to
be, subject to wide fluctuations in response to several factors, such as:
o actual or anticipated variations in our results of operations;
o announcements of technological innovations;
o new services or product introductions by us or our competitors;
o changes in financial estimates by securities analysts; and
o conditions and trends in the Internet and electronic commerce
industries.
The stock markets generally, and the Electronic Bulletin Board in particular,
have experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology companies,
and that often have been unrelated or disproportionate to the operating
performance of those companies. These market fluctuations, as well as general
economic, political, and market conditions such as recessions, interest rates or
international currency fluctuations, may adversely affect the market price of
the common stock of the combined company.
There is a pending lawsuit that could delay or prevent the merger, or require us
to pay damages.
Just before beginning discussions with GameCom, Ferris was discussing a possible
merger with Entertainment Technologies & Programs, Inc. ("ETPI"), another public
company, and had executed a letter of intent in that regard. ETPI has brought a
lawsuit against both GameCom and Ferris claiming that the letter of intent for
the ETPI/Ferris transaction included a binding agreement not to negotiate with
anyone else for a specified period of time. ETPI has requested the court to
prevent the merger between GameCom and Ferris, and to require Ferris to continue
negotiations for a merger with ETPI. The lawsuit also seeks damages against both
companies. ETPI has not set its
74
request for a temporary injunction for hearing. Both GameCom's and Ferris'
counsel are of the opinion that management for both companies have acted
properly and in accord with all contractual obligations, and that these
allegations are frivolous. Both GameCom and Ferris intend to vigorously address
the lawsuit, and have sought appropriate sanctions against both ETPI and its
counsel. However, we cannot give any assurance that ETPI will not be able to
stop or delay the merger.
Vote required to approve the merger
The vote of holders of two thirds of the shares of GameCom common stock
outstanding as of August 10, 2001, the record date, is required to approve the
merger.
Recommendation of Management on Proposal 2
GAMECOM'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE MERGER.
Proposal No. 2-- Increase in Number of Shares Gamecom is
Authorized to Issue
GameCom's certificate of incorporation currently authorizes the issuance of
50,000,000 shares of common stock, par value $.005 per share. On July 31, 2001,
GameCom's board of directors adopted GameCom's amended and restated certificate
of incorporation, subject to stockholder approval. This new certificate of
incorporation will increase the authorized number of shares of common stock to
100,000,000.
The proposed certificate of amendment to GameCom's articles of incorporation is
included as Annex B to this document.
Current Commitments for Use of Shares
As of August 10, 2001, GameCom had:
o 13,683,978 shares of common stock outstanding; and
o 1,500,000 shares reserved for future issuance under employee
incentive stock options, of which no shares were subject to issuance
upon the exercise of currently outstanding options.
o 1,499,000 shares reserved for issuance upon exercise of
non-statutory options; and
o 34,089,747 shares reserved for issuance under our line of credit
with Swartz, including common stock we may sell under the line of
credit and warrants issued in connection with that line.
Based upon these numbers, GameCom has no shares of common stock remaining
available for other purposes and, in fact, could not sell all of the shares that
might otherwise be sold under the arrangement with Swartz. Therefore, without
amending its certificate of incorporation to authorize additional shares of
common stock, GameCom would not have any shares to issue in the merger.
GameCom's board of directors recommends a vote for the proposal to amend the
articles of incorporation to increase the authorized shares.
Purpose of changes to authorized stock.
GameCom's board believes that it is in GameCom's best interest to increase the
number of shares of common stock that it is authorized to issue in order to give
GameCom the number of shares required to effect the merger with Ferris and
obtain the financing from Swartz.
GameCom's board also believes that the availability of additional authorized
shares will provide GameCom with the flexibility to issue securities for other
proper corporate purposes which may be identified in the future, such as to
raise equity capital, to adopt additional employee benefit plans, or reserve
additional shares for issuance under such plans, and to acquire other companies.
No additional action or authorization by the stockholders of the combined
75
company would be necessary prior to the issuance of these additional shares,
unless required by applicable law or the rules of any stock exchange or national
securities association trading system on which the common stock of the combined
company is then listed or quoted.
Dilutive effect of potential new stock issuances.
GameCom's stockholders generally do not have preemptive rights with respect to
its common stock. Should the board of directors of the combined company elect to
issue additional shares of common stock, existing stockholders would not have
any preferential rights to purchase these shares. Therefore, additional
issuances of common stock by the combined company could dilute the earnings per
share, voting power, and share holdings of current stockholders.
Anti-takeover effect of increase in authorized common stock.
The proposed increase in the authorized number of shares of common stock of the
combined company could, under some circumstances, have an anti-takeover effect,
although this is not the intention of this proposal. For example, in the event
of a hostile attempt to take over control of the combined company, it may be
possible for the combined company to seek to impede the attempt by issuing
shares of its common stock, which could dilute the voting power of the other
outstanding shares and increase the potential cost to acquire control of the
combined company. Therefore, the increase in authorized shares may have the
effect of discouraging unsolicited takeover attempts. By potentially
discouraging unsolicited takeover attempts, the increase may limit the
opportunity for the stockholders of the combined company to dispose of their
shares at the higher price generally available in takeover attempts or that may
be available under a merger or acquisition proposal. The increase may also have
the effect of permitting the combined company's management, including its board
of directors, to retain its position, and place it in a better position to
resist changes that stockholders may wish to make if they are dissatisfied with
the conduct of the business of the combined company. However, GameCom's board of
directors is not aware of any attempt to take control of GameCom and has not
presented this proposal with the intent that it be used as an anti-takeover
device.
Vote required to approve increase in authorized capital
The vote of holders of a majority of the common stock present and voting at the
meeting is required to approve the proposals to increase GameCom's authorized
common stock to 100 million shares
Recommendation of Management on Proposal 2
GAMECOM'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO ADOPT
GAMECOM'S AMENDED ARTICLES OF INCORPORATION.
Proposal No. 3 -- Approval of Amendments to the Gamecom, Inc.
2000 Stock Option Plan
The Board of Directors has approved amendments to the 2000 Stock Option Plan
which will increase the number of shares of common stock available for issuance
under the stock option plan and to 6 million;
The Board of Directors has directed that the plan, with these amendments be
submitted to the shareholders for approval.
76
Executive Compensation
The Summary Compensation Table below shows compensation information for services
rendered in all capacities during each of the prior three (3) fiscal years. No
bonuses or stock options were granted and no additional compensation was paid or
deferred.
Securities
Other Annual Restricted Underlying
Name and Principal Position Year Salary Bonus Compensation Stock Awards Options/SARs
- --------------------------- ---- ------ ----- ------------ ------------ ------------
L. Kelly Jones, Chief Executive
Officer and Chairman of the Board
of Directors 2000 - - - - -
1999 - - - - -
1998 - - - - 833,000(1)
John F. Aleckner, Jr., President
and Director 2000 - - - - -
1999 - - - - -
1998 - - - - 333,000 (2)
W. James Poynter, Vice-President
and Director 2000 - - - - -
1999 - - - - -
1998 - - - - 333,000 (2)
Kimberly Biggs, Secretary and
Treasurer 2000 - - - - -
1999 - - - - -
1998 - - - - -
(1) These options, incentive in nature, provide that Mr. Jones may purchase (i)
111,000 shares at par value but only if our shares are trading at $1.50 per
share, (ii) 361,000 shares at par value but only if our shares are trading at
$3.00 per share, (iii) 111,000 shares at par value but only if our shares are
publicly trading at $4.50 per share, and (iv) the balance of 250,000 shares at
par value but only if our shares are publicly trading at $5.00 per share. These
incentive stock options were granted to Mr. Jones by our board of directors (Mr.
Jones abstaining) on December 12, 1997 and on December 14, 1998.
(2) Messrs. Poynter and Aleckner each holds an option for 333,000 shares in our
Common Stock. These options, incentive in nature, provide that Messrs. Poynter
and Aleckner may purchaser (i) 111,000 shares at par value but only if our
shares are trading at $1.50 per share, (ii) 111,000 shares at par value but only
if our shares are trading at $3.00 per share, and (iii) the balance of 111,000
shares at par value but only if our shares are publicly trading at $4.50 per
share. These incentive stock options were granted to Messrs. Poynter and
Aleckner by our board of directors (Messrs. Poynter and Aleckner abstaining on
the grant of their stock option) on December 14, 1998.
2000 Incentive Stock Option Plan
Section 162(m) of the Internal Revenue Code limits the deductibility of
compensation paid to specified executive officers to $1,000,000 per officer in
any one year. Compensation which qualifies as "performance-based compensation"
is not taken into account for the purposes of this limit. The board of directors
has determined that options issued under the plan are with an exercise price at
least equal to the fair market value of our common stock on the date of grant,
if awarded by a compensation committee comprised of outside directors, should
qualify as "performance-based compensation."
In February, 2000, the board of directors adopted, and a majority of the
stockholders approved, our 2000 Incentive Stock Option Plan, subject to approval
of stockholders at the next annual meeting. Please note that this plan is
intended to comply with IRS requirements for an incentive stock option plan. It
is not related to options that have been granted to Mr. Jones and two other
officers, and that are described in the footnotes to the financial statements
and elsewhere as being "incentive in nature."
77
Description of plan
The following description of the stock option plans is qualified in its entirety
by reference to the full text of the Amended 2000 Stock Option Plan. A copy of
the plan, as it would be amended by this proposal, is attached as Appendix "A"
to this proxy statement. In the discussion that follows, options that are issued
under the plan but not intended to comply with IRS requirements for incentive
stock options are called "non-statutory options."
Purpose. The purpose of the plan is to allow us to attract, retain and motivate
key employees who are important to the success and growth of our business, and
to create a long-term mutuality of interest between our stockholders and those
key employees by granting them options to purchase our common stock. Options
granted under the plan may be either incentive stock options or non-statutory
options. The Board of Directors administers the plan, either directly or by a
committee consisting of two or more outside directors.
Option price and exercisability. Under the plan, options may be granted to our
key employees. The option price is to be fixed by the committee at the time the
option is granted. If the option is intended to to be an incentive stock option,
the purchase price is to be not less than 100% of the fair market value of the
common stock at the time the option is granted, or, if the person to whom the
option is granted is the owner of 10% or more of our common stock, 110% of that
fair market value. The committee is to specify when and on what terms the
options granted to key employees are to become exercisable. However, no option
may be exercisable after more than 10 years from the date it was granted or five
years from the date it was granted if it was granted to a holder of 10% or more
of our common stock.
Maximum dollar amounts. For incentive stock options, the aggregate fair market
value of the shares for which the options are exercisable for the first time
during any calendar year may not exceed $100,000 unless this limitation has
ceased to be in effect under the applicable section of the Internal Revenue
Code.
Special provisions on exercisability. If there is a change of control of the
company, all outstanding options become immediately exercisable in full. If an
employee dies, or if he or she retires at or after age 65 or before age 65 with
the consent of the committee, the option holder may exercise the options for a
period of one year from the date he or she dies or retires. If the employee's
employment terminates for reasons other than death or retirement, the options
remain exercisable for three months after employment terminated unless
termination was for cause. If the termination was for cause, all outstanding
options are immediately canceled.
Number of options available. 1,500,000 shares of Common Stock were initially
authorized for issuance under the plan. Following approval of the merger
agreement with Ferris, the board voted to increase this number to 6,000,000.
However, no eligible individuals may be granted options for more than 500,000
shares in any calendar year. The option price and number of shares covered by an
option will be adjusted proportionately in the event of a stock split, stock
dividend, etc., and the committee is authorized to make other adjustments to
take into consideration any other event which it determines to be appropriate to
avoid distortion of the operation of the plan. If there is a merger or
consolidation, option holders will be entitled to acquire the number and class
of shares of the surviving corporation which they would have been entitled to
receive after the merger or consolidation if they had been the holders of the
number of shares covered by the options. If the Company is not the surviving
entity in a merger and consolidation, the committee may in its discretion
terminate all outstanding options, and in that event option holders will have 20
days from the time they received notice of termination to exercise all their
outstanding options.
Term of plan and use of proceeds. The plan terminates 10 years from its
effective date unless terminated earlier by the board of directors or the
shareholders. Proceeds of the sale of shares subject to options under the plan
are to be added to our general funds and used for our general corporate
purposes. The Company has not granted any options under the Plan.
Reason for increase. In the opinion of the board of directors, it is appropriate
to amend the to stock option plan to increase in the number of shares in
available for issuance because the merger with Ferris will result in a
significant increase in the number of employees the combined company has, and
more options will be needed to ensure that we will be able to attract and retain
skilled employees, consultants and directors.
Federal Tax Consequences. The grant of incentive options to an employee does not
result in any income tax consequences. The exercise of an incentive option
generally does not result in any income tax consequences to an
78
employee if (i) the incentive options is exercised by the employee during his
employment with GameCom or a subsidiary of, or within a specified period after
termination of employment, and (ii) the employee does not dispose of shares
acquired by exercising an incentive option within two years from the date of
grant or one year after exercise, whichever is later. This time period is
referred to as the holding period. However, the excess of the fair market value
of the shares in of common stock as of the date of exercise over the option
exercise price is includable in an employee's alternative minimum taxable income
in the year of exercise.
An employee who disposes of his incentive option shares before the end of the
holding period described in the preceding paragraph, generally will recognize
ordinary income in the year of sale in an amount equal to the excess, if any, of
(a) the lesser of (i) the fair market value of the shares on the date of
exercise or (ii) the amount realized on the sale, over (b) the incentive option
price. Any additional amount realized on an early disposition should be treated
as capital gain to the employee, short or long term, depending on the employee's
holding period for the shares.
GameCom will not be entitled to a deduction as a result of the grant of an
incentive option, the exercise of an the incentive option, or the sale of he
incentive option shares after the holding period. If an employee disposes of
incentive option shares in an early disposition, GameCom would be entitled to
deduct the amount of ordinary income recognized by the employee.
The grant of non-statutory options will not result in the recognition of any
taxable income by the optionee. An option name will recognize ordinary income on
the date of exercise of a non-statutory option equal to the excess, if any, of
(i) the fair market value of the shares acquired as of the exercise date, over
(ii) the exercise price. The income reportable on exercise of a non-statutory
option is subject to federal income and employment tax withholding. Generally,
GameCom will be entitled to a deduction for its taxable year within which the
optionee recognizes compensation income in a corresponding amount.
Vote required to increase increase in shares authorized under the plan
The vote of holders of a majority of the common stock present and voting at the
meeting is required to approve GameCom's incentive stock option plan.
Recommendation of Management on Proposal No. 3
The Board of Directors Recommends That You Vote For The Amendments to the 2000
Stock Option Plan
Proposal No. 4--Authorizing the Board of Directors to Amend the Articles
of Incorporation, at Any Time Within One Year from the Date of
the Meeting, to Provide a New Corporate Name.
The boards of directors of both GameCom and Ferris are of the opinion that a new
corporate name might be advantageous in order to more fully represent the
product capabilities and marketing strategy for the combined company. However,
both boards recommend obtaining professional marketing assistance to determine
whether a corporate name other than "GameCom" is advantageous, and if so, what
the new corporate name should be. This proposal would grant the shareholders'
prior consent for the board of directors, at any time prior to the anniversary
of the meeting, to amend GameCom's articles of amendment to provide a new
corporate name.
Vote required to authorize change of name
The vote of holders of a majority of the common stock present and voting at the
meeting is required to authorize GameCom's board if directors to amend the
articles of incorporation to change the Company's name.
Recommendation of Management on Proposal No. 4
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE AUTHORIZATION TO ALLOW
THE BOARD OF DIRECTORS TO CHANGE THE COMPANY'S CORPORATE NAME.
79
Stockholder Proposals
Under Rule 14a-8 of the Exchange Act, a GameCom stockholder may present one
proposal for inclusion in GameCom's proxy statement and for consideration at a
special meeting of the GameCom stockholders if the stockholder is eligible under
Rule 14a-8 and if that stockholder complies with the procedural requirements of
Rule 14a-8. Generally, to be eligible, a stockholder must have held at least
$2,000 in market value of GameCom common stock for at least one year before the
date the stockholder submits the proposal and must establish proof of ownership
of these securities. The proposal must clearly state the proposed course of
action the stockholder believes GameCom should adopt, but may not exceed 500
words in length. The proposal must be submitted to GameCom a reasonable time
before GameCom begins to print and mail its proxy materials.
The preceding paragraphs merely summarize portions of Rule 14a-8. If you are
considering submitting a stockholder proposal at the GameCom stockholders'
meeting, you should refer to Rule 14a-8.
Forms 10-K and 10-Q Filed with the Securities and Exchange Commission
Copies of our annual report on Form 10-KSB for the year ended December 31, 2000,
and our quarterly report on Form 10-Q for the quarter ended March 31, 2001, as
filed with the Securities and Exchange Commission and any amendments thereto,
are available to stockholders free of charge by writing to:
GAMECOM, INC.
440 North Center
Arlington, Texas 76011
Attn: Kimberly Biggs, secretary
Statements Regarding Forward-Looking Information
This document and the documents incorporated in this document by reference
contain forward-looking statements within the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 with respect to our financial
condition, results of operations and business, and on the expected impact of the
merger on GameCom's financial performance. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions identify forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject to certain
risks and uncertainties that could cause actual results to differ materially
from the results contemplated by the forward-looking statements. Forward-looking
statements are based on our current expectations and involve a number of
uncertainties, including those described in the "Other Factors to be Considered"
section above, elsewhere in this document and in documents incorporated into
this document by reference. Actual results could differ materially from what is
expected.
80
GAMECOM, INC.
PROXY
This proxy solicited by the board of directors for the special meeting on
September 14, 2001
The undersigned hereby appoints L. Kelly Jones and John F. Aleckner, Jr., and
each of them, with full power of substitution, as the attorneys and proxies of
the undersigned to attend the special meeting of stockholders of GameCom, Inc.
to be held on September 14, 2001 at 4:30 P.M. CDT, and at any adjournment or
adjournments thereof, hereby revoking any proxies heretofore given, to vote all
shares of stock of GameCom, Inc. held or owned by the undersigned as indicated
on the proposals as more fully set forth in the proxy statement, and in their
discretion upon such other matters as may come before the meeting.
The board of directors recommends a vote FOR all four proposals.
1. Proposal to approve the issuance of shares of GameCom, Inc.'s common stock in
connection with our proposed merger with Ferris Productions, Inc.
FOR |_| AGAINST |_| ABSTAIN |_|
2. Proposal to adopt GameCom's amended articles of incorporation, which will
increase the authorized number of shares of common stock to 100,000,000.
FOR |_| AGAINST |_| ABSTAIN |_|
3. Proposal to approve GameCom's incentive stock option plan.
FOR |_| AGAINST |_| ABSTAIN |_|
4. Proposal to authorize the combined company's board of directors to amend
GameCom's articles of incorporation within one year from the date of the special
meeting to adopt a new corporate name.
FOR |_| AGAINST |_| ABSTAIN |_|
The board of directors recommends a vote FOR all four proposals
The shares represented by this proxy will be voted as directed or, if no
direction is indicated, will be voted FOR all four proposals. As to any other
matter, said proxies shall vote in accordance with their best judgment.
The undersigned hereby acknowledges receipt of the Notice of and Proxy Statement
for the aforesaid special meeting.
Date and sign exactly as name appears hereon. Each joint tenant must sign. When
signed as attorney, executor, trustee, etc. give full title. If signer is
corporation, sign in full corporate name by authorized officer.
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(Date)
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(Signature of Stockholder)
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(Signature of Stockholder)
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