FORM 20-F/A (amendment #1)
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A
(Mark One)
[X] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
NET-FORCE SYSTEMS INC.
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(Name of Registrant in its charter)
ANTIGUA and BARBUDA
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(State or other jurisdiction of incorporation or organization)
Suite #10-Epicurean, Woods Centre
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Friars Hill Road
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St. John's, Antigua
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West Indies
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(Address of principal executive offices and zip code)
(268) 481-1970
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(Issuer's telephone number)
Securities to be registered under Section
12(b) of the Act:
NONE
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Securities to be registered pursuant to
Section 12(g) of the Act:
COMMON STOCK
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Title of each class to be so registered
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of The Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days: [ ] Yes [X] No
Indicate by check mark which financial statements item the registrant has
elected to follow:
ITEM 17 [X] ITEM 18 [ ]
NET-FORCE SYTEMS, INC.
Table of Contents
FORWARD LOOKING STATEMENTS...................................................3
PART I.......................................................................3
ITEM 1. DESCRIPTION OF BUSINESS..........................................3
I. BUSINESS DEVELOPMENT...........................................3
A. NET-FORCE SYSTEMS INC.......................................3
B. NET-FORCE SYSTEMS INC. CORPORATE HISTORY....................3
II. BUSINESS OF THE ISSUER.........................................4
III. BUSINESS AND MARKETING STRATEGIES..............................6
IV. INDUSTRY OVERVIEW.............................................10
A. Global Gaming Industry.....................................10
B. Internet Entertainment Industry............................12
V. COMPETITION...................................................14
VI. RISKS.........................................................14
A. RISKS RELATED TO THE BUSINESS..............................14
B. RISKS RELATED TO THE INDUSTRY..............................17
C. RISKS RELATED TO SECURITIES MARKETS........................18
VII. REGULATORY BACKGROUND.........................................19
VIII. DISCLOSURE....................................................23
ITEM 2. DESCRIPTION OF PROPERTY.......................................23
ITEM 3. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS......................23
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................24
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS
AFFECTING SECURITY HOLDERS....................................25
ITEM 7. TAXATION......................................................25
ITEM 8. SELECTED FINANCIAL DATA.......................................27
SELECTED FINANCIAL DATA.....................................................27
EASTERN CARIBBEAN AND US DOLLAR EXCHANGE RATES..............................27
DIVIDENDS...................................................................27
ITEM 9. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND PLAN OF OPERATION...............................28
I. PLAN OF OPERATIONS............................................28
A. Revenues and Financing.....................................28
B. Operations for the Next Twelve Months......................30
C. Balance Sheet Data.........................................30
D. Liquidity and Capital Resources............................30
E. Material Commitments for Capital Expenditures..............31
F. Material Commitments for Resources.........................31
G. Impact of Inflation........................................32
H. Year 2000 Risks and Compliance.............................32
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK.............................................32
I. QUANTITATIVE INFORMATION ABOUT MARKET RISK....................32
II. QUALITATIVE INFORMATION ABOUT MARKET RISK.....................32
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS...........................................32
I. DIRECTORS AND EXECUTIVE OFFICERS..............................32
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS........................35
ITEM 12. OPTIONS OT PURCHASE SECURITIES FROM REGISTRANT
OR SUBSIDIARIES...............................................35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................35
PART II.....................................................................36
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED....................36
Registration Statement Page i
NET-FORCE SYTEMS, INC.
PART IV.....................................................................36
ITEM 17. FINANCIAL STATEMENTS..........................................36
ITEM 18. FINANCIAL STATEMENTS..........................................36
NET FORCE SYSTEMS INC. UNAUDITED QUARTERLY STATEMENT
OCTOBER 31, 2001.......................................................37
NET FORCE SYSTEMS INC. AUDITED FINANCIAL STATEMENTS,
APRIL 30, 2001.........................................................50
PART III. INDEX TO EXHIBITS................................................70
SIGNATURES..................................................................70
EXHIBIT 3.1 Articles of Incorporation of Net-Force
Systems Inc............................................71
EXHIBIT 3.2 Bylaws of Net-Force Systems Inc........................74
EXHIBIT 3.3 Articles of Incorporation - Net-Force
Entertainment Inc......................................81
EXHIBIT 3.4 Bylaws of Net-Force Entertainment Inc..................84
EXHIBIT 10.1 Starnet Systems Inc. (formerly Softec
Systems Caribbean Inc), Amendment to
Software License Agreement.............................91
EXHIBIT 10.2 Government of Antigua and Barbuda
Gaming License........................................108
Registration Statement Page ii
NET-FORCE SYTEMS, INC.
FORWARD LOOKING STATEMENTS
Net-Force Systems Inc. (the "Company" or "Net-Force") cautions readers that
certain important factors (including without limitation those set forth in this
Form 20-F) may affect the Company's actual results and could cause such results
to differ materially from any forward-looking statements that may be deemed to
have been made in this Form 20-F registration statement, or that are otherwise
made by or on behalf of the Company. For this purpose, any statements contained
in the registration statement that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the generality of the
foregoing, words such as "may", "expect", believe", "anticipate", "intend",
"could", "estimate" or "continue" or the negative or other variations of
comparable terminology, are intended to identify forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
I. BUSINESS DEVELOPMENT
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A. NET-FORCE SYSTEMS INC.
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Net-Force Systems Inc. was incorporated in March 1999 under the laws of Antigua
and Barbuda as Net-Force Systems Inc. Our corporate website can be viewed on the
World Wide Web at www.netforcesystems.com. We currently sub-license online
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gaming software and provide marketing and support services for Internet gaming
website operators, through our wholly owned subsidiary, Netforce Entertainment
Inc. Netforce Entertainment licenses Internet gaming software that offers a
variety of casino-style gaming options as well as an on-line sports wagering
service, utilizing the rapidly expanding medium known as the Internet. Netforce
Entertainment Inc. acts as the operating company for all business activities
relating to the online gaming operations.
Netforce Entertainment Inc. has entered into a non-exclusive master agreement to
license proprietary Internet casino software and systems from World Gaming Plc.,
a publicly traded corporation domiciled in the United Kingdom and formerly know
as Starnet Systems, Inc. Netforce Entertainment Inc. has an agreement in place
with EFS Caribbean Inc., a secure online financial transaction processor, to
collect and process revenues generated from our Internet gaming websites. We
oversee a number of Internet gaming websites under marketing agreements and we
have implemented a substantial marketing program with initial advice from World
Gaming. Headquartered in Antigua, EFS Caribbean, Inc. is a wholly owned offshore
subsidiary of World Gaming Plc. We intend to engage in additional software
agreements with other online gaming software providers with the objective of
offering a wide variety of online gaming and wagering products and services thus
reducing our reliance on any single technology provider and/or software
platform.
The Company, including our subsidiaries, employs 6 full time persons on a
contract as-needed basis. The individuals are either involved in developing and
implementing a marketing strategy for us or are providing website maintenance
and development and customer support.
B. NET-FORCE SYSTEMS INC. CORPORATE HISTORY
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In March 1999, we filed our Articles of Incorporation with the Director of
International Business Corporations, Government of Antigua and Barbuda as
Net-Force Systems Inc., in which, among other things, the Board of Directors was
elected as follows: Terry G. Bowering and Douglas N. Bolen. The authorized
capital of the Company consists of 100,000,000 Common Shares and 50,000,000
Preferred Shares. On March 15, 1999, the Directors, by way of Organizational
Consent of the Directors of the Company, accepted the stock subscriptions and
payment for the number of shares issued to the individuals referred to above at
a price of $0.001 per share. In addition, the Directors appointed Terry G.
Bowering to the office of President, CEO and Chairman of the Board, and Douglas
N. Bolen to the office of Secretary. On December 20, 1999, Mr. Dwight Lewis was
appointed to the Board of Directors.
Registration Statement Page 3
NET-FORCE SYTEMS, INC.
On March 15, 1999, we accepted subscription agreements from six entities to
acquire securities of the Company pursuant to a Rule 504 offering under
Regulation D. The Board authorized the Company to proceed with the sale of its
shares pursuant to the subscriptions received for the sale of 3,000,000 Common
Shares at a price of $0.01 per Common Share. Pacific Stock Transfer Company was
appointed as the Transfer Agent of the Common Shares of the Company.
On July 15, 1999, we signed a software licensing agreement with Softec Systems
Caribbean Inc., now known as World Gaming Plc., to launch and market a turnkey
Internet Gaming website. On July 15, 1999, we issued a promissory note to
Mountain High Management Inc. to borrow $495,000 at an interest rate of 15%.
August 5, 1999 marked the date of incorporation of Netforce Entertainment Inc.,
wholly owned subsidiary of Net-Force Systems Inc., under the laws of Antigua and
Barbuda. Netforce Entertainment Inc. acts as the operating subsidiary for the
Internet Gaming web site operations.
The Internet Gaming website www.aogaming.com was initially launched on April 7,
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2000.
On June 1, 2000, the Board of Directors resolved to authorize the redemption of
the common stock, which was issued pursuant to Rule 504 on or about March 15,
1999 and the same was effected shortly thereafter. On the same date, pursuant to
Regulation S, the Board authorized the issuance of 2,500,000 Units comprised of
one (1) $0.001 par value common stock and one (1) warrant that allows the holder
to purchase one (1) share of the Company's $0.001 par value common stock at an
exercise price of $2.00 per share, to be exercised no later than December 31,
2002 after which the warrants would become null and void. Each Unit was offered
at the price of $0.10. This offering was sold out on or about June 30, 2000.
On October 26, 2000, Douglas Bolen resigned as Director and secretary of the
Company. On August 15, 2001, Mr. Trevor Bowering was appointed to the Board of
Directors. On September 10, 2001, Mr. Derek Ferguson was appointed to the Board
of Directors.
On September 15, 2001, all long-term debt and promissory notes including related
party shareholder loan from Geneva Overseas Holdings Ltd. were converted to
equity for a total of 8,705,993 shares issued at $0.10 per share. (See Financial
Statements, Note 5 - Material Events.)
On November 15, 2001, pursuant to a Rule 506 Offering, the Board authorized the
Company to proceed with the sale of its shares pursuant to subscriptions
received at a price of $0.10 per Common share. The Company accepted subscription
agreements from U.S. residents from states including California, Arizona, and
Florida. On January 29, 2002, the offering was closed and the Board resolved to
authorize the issuance of 160,000 Common shares at $0.10 per share.
II. BUSINESS OF THE ISSUER
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Netforce Entertainment Inc. was incorporated on August 5, 1999 pursuant to the
International Business Corporations Act of Antigua and Barbuda and is based in
Antigua. Netforce Entertainment is a wholly owned subsidiary of the Company and
acts as the operating entity for our online gaming operations.
Netforce Entertainment Inc. currently maintains an international gaming website
called Antigua Online Gaming located on the World Wide Web at www.aogaming.com.
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Netforce Entertainment Inc. has entered into agreements with software vendors,
including, World Gaming, Plc. for the rights to use its proprietary Internet
gaming software, and with Electronic Financial Services Caribbean, Inc. for the
use of its electronic financial conversion system in relation to the processing
of credit cards. Electronic Financial Service Caribbean, Inc. is a wholly owned
subsidiary of World Gaming, Plc.
World Gaming, Plc., a United Kingdom, publicly-traded corporation with operating
subsidiaries in Antigua is in the business of licensing complete, customized
Internet gaming systems to third-party offshore gaming license holders. World
Gaming currently supports in excess of 20 such licensees operating worldwide and
has endorsed Net-Force Entertainment as a master licensee. World Gaming provides
customized software, website development and management on its network, custom
database systems to manage player accounts, and technical support. Netforce
Registration Statement Page 4
NET-FORCE SYTEMS, INC.
Entertainment Inc., has entered into a software licensing agreement with World
Gaming (See Exhibit 6.1) whereby World Gaming licenses certain Internet casino
software to Netforce Entertainment Inc. and has developed the graphical front
end of the gaming site in exchange for a one-time payment and an on-going
percentage of the gross revenues from our website. (See Exhibit 6.1).
World Gaming hosts our offshore subsidiary's websites. World Gaming also
provides and maintains all hardware necessary for the operation of the websites
and provides a complete transaction processing system that allows players to
deposit funds for use of the games. The hardware is maintained in World Gaming's
offices and co-location facilities located in Antigua.
To ensure the security of funds transfers over the Internet, Netforce
Entertainment, Inc. utilizes the services of Electronic Financial Services
Caribbean, Inc. Electronic Financial Services Caribbean, Inc., also an Antigua
corporation and wholly owned subsidiary of World Gaming, is in the business of
securely converting electronic funds between financial institutions and other
companies. Through alignments with major banks, Electronic Financial Service
Caribbean processes conversions of worldwide currencies into "e-cash."
Electronic Financial Service Caribbean utilizes World Gaming's proprietary
STAR-MX encoding and processing technology to process tens of thousands of
Internet credit card transactions per month.
The World Gaming software license agreement allows us to pursue our objective of
establishing ourselves as one of the leading providers of Internet gaming and
sports wagering services. Through our subsidiary, Netforce Entertainment, Inc.
we currently offer via the Internet up to 25 casino-style gaming opportunities,
including baccarat, Japanese Pachinko, Chinese Pai Gow Poker, Blackjack and
Video Poker as well as a variety of live betting lines on all of the world's
major sporting events. The initial term of the master license is one year,
renewable indefinitely unless we give the licensor written notice of termination
of the license at least 45 days prior to the end of any one-year period.
On August 5, 1999, Netforce Entertainment Inc. was approved for and received an
official gaming license from the Antigua and Barbuda Free Trade and Processing
Zone enabling us to legally conduct Virtual Casino and Sports Wagering
operations. Antigua is a jurisdiction that has clearly defined Internet Gaming
legislation in place that licenses and regulates Internet Gaming Operators.
Antigua charges license holders an annual license fee to maintain the gaming
license in good standing.
The International Press recognizes Antigua and Barbuda as the leader in the
regulation of the Internet Gaming industry. At a time when the issue of
regulation is being focused upon by the US media, a reputation of this kind is
of great importance to the Company and most especially to the Internet gambler.
Antigua and Barbuda is an independent country that has deemed Internet Gaming to
be a legitimate and legal business activity protected and supported under
enacted legislation on that Caribbean island nation. Of vital importance, Cable
and Wireless (West Indies) Telecommunications Company has established Antigua as
a primary hub to facilitate the Internet Gaming industry for its regional
network of submarine fiber-optic cables laid across the Atlantic and Caribbean
enabling Antigua to offer diversified high quality Internet connections into
North America.
Net-Force Entertainment Inc. is fully licensed and regulated by the Antigua and
Barbuda Free Trade & Processing Zone under clearly defined legislation in that
sovereign nation. Netforce Entertainment Inc. has the added distinction of
having acquired the "preferential seal of approval" status from the Antigua and
Barbuda Free Trade and Processing Zone. We display this seal on the Gaming
websites with an associated link to the Antigua and Barbuda Free Trade &
Processing Zone website so that consumers (players) will be able to contact the
Antigua regulatory authorities with any concerns, complaints and/or inquiries.
This distinction further signifies that we have consented to and successfully
undergone intense scrutiny under the legislated due diligence requirements in
Antigua. This mechanism provides the consumer (player) recourse to register any
complaints with the Antigua regulatory body and instills credibility and
confidence in the operator and the industry as a whole in that particular
jurisdiction. Netforce Entertainment's primary casino and sportsbook gaming
website is appropriately named Antigua Online Gaming, capitalizing on the
recognized brand identity that Antigua has established as a result of becoming
the hub of the Internet Gaming Industry. The websites' URLs can be found on the
World Wide Web at www.aogaming.com, www.aocasino.com, and www.aosportsbook.com.
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Registration Statement Page 5
NET-FORCE SYTEMS, INC.
Our policy for the gaming websites we oversee is to accept subscriptions only
from persons over the age of 18 years and believed to reside in jurisdictions
that are not explicitly known to expressly prohibit Internet gaming.
To date, our activities have included the market analysis, website development,
acquisition of a gaming license, obtaining the software license from World
Gaming and developing the general infrastructure necessary to fulfill our
business objectives. The development of our primary gaming website,
www.aogaming.com, was initially completed and launched on April 7, 2000.
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Through the software license acquired from World Gaming, we offer up to 25
virtual casino games and live sportsbook wagering on most of the world's major
sporting events. We also intend to offer twenty-four hour live simulcast and/or
pari-mutuel betting on horse and dog racing tracks in North America and abroad
by the end of 2002. Included with the software license is the procurement of an
initial Internet gaming license, concept development and design of the Web based
casino(s), all odds-making rules and regulations, complete graphical user
interface with sophisticated visual and sound effects to create a total gaming
experience, real time wagering, complete secure electronic funds transfer,
retention and analysis of all gaming data, including win/loss, game preferences
and monitoring of player activities, administration and complete 24 hour per
day, 7 days per week customer support services, ongoing customization of the
websites, the monitoring of all funds flow, the hosting of server software,
customization and server integration, the provision of credit card processing
and other banking services, discussion, liaison and co-operation with testing
agencies, regulatory boards, governing bodies and governments and marketing
consulting.
III. BUSINESS AND MARKETING STRATEGIES
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One of the most lucrative and fastest growing commercial sectors on the Internet
is on-line wagering. We intend to capitalize on the evolving opportunities on
the Internet by developing and marketing Internet casinos and sports wagering
websites to small and medium sized third-party operators at a reduced initial
investment. To capitalize on this lucrative opportunity, Netforce Entertainment
Inc., a wholly owned subsidiary of Netforce Systems Inc., and based in Antigua
West Indies, was established. Netforce Entertainment Inc.'s corporate mission is
to deliver efficient and entertaining online gaming services to a global market
of end user customers. Netforce Entertainment Inc. will provide online gaming
software licensing through third-party marketing agreements. Netforce
Entertainment Inc. will also provide marketing, support, and web-site design
capabilities for online gaming operators. Netforce Entertainment Inc. will
utilize the Internet to deliver these products in a cost-effective, efficient
and profitable manner. Netforce Entertainment Inc. aims to accomplish its
objectives by applying the following Business strategy:
1. Netforce Entertainment Inc. will only enter into primary master
software license agreements with the world's premiere online gaming
software systems providers.
2. To enhance the Company's reach on the Internet and to accelerate
market penetration on the Internet, Netforce Entertainment Inc. will
enter into agreements to market the gaming software technology to
third party operators. Netforce Entertainment Inc. intends to
establish a sales department solely responsible for marketing its
turnkey Internet Casino and gaming systems packages to potential
third-party sub-licensee operators. NE will target small to
medium-sized operators and entrepreneurs and high-traffic web-site
operators (`webmasters') that have experience in Internet commerce,
hence increasing their odds of successfully adding to the company's
customer base and income stream. This complete system will include a
custom-designed themed graphic user interface and gaming Web-site,
access to a legitimate Gaming License, transaction processing and
accounting system, customer service support, marketing consultation,
and offshore administrative services. In exchange for this package,
Netforce Entertainment Inc. intends to receive an up-front fee and a
percentage of ongoing revenues.
3. Accelerated growth through acquisition. The offshore online gaming
industry is currently fragmented and made up of a number of
predominantly smaller private companies offering a variety of gaming
services to a growing global customer base. Expected future industry
consolidation provides an opportunity for Netforce to execute a
strategy of actively seeking acquisitions of these small to
medium-size established Internet gaming websites and operations, and
therefore continually adding to the company's database of active
Registration Statement Page 6
NET-FORCE SYTEMS, INC.
customers at an accelerated pace. Netforce Entertainment Inc. will
seek to acquire operations that present an opportunity for value
creation through enhanced marketing and operational initiatives and
synergies. This will further enhance the value of the Company's
portfolio of Internet properties.
4. Offer superior 24/7 customer support services to all of the playing
customers that fall under the umbrella of Netforce Entertainment
Inc.'s web site operations. This is essential to maintain and grow the
customer database and to differentiate the Company's product offering
in the market place. Customer service support for the websites is
provided by World Gaming through Electronic Financial Services
Caribbean Inc. as a condition of the software agreement. Customer
support representatives deliver 24-hour customer and technical support
to deal with casino games problems, deposit and payment inquiries,
system downtime problems, and general questions. Netforce
Entertainment Inc. provides secondary customer support via e-mail
dealing with marketing, special promotions, and customer retention
programs. Customers cannot place wagers over the telephone with either
of the above customer service options.
Our business strategy is designed to promote the Net-Force brands and strive for
the industry leadership position by focusing on gaming, providing an innovative
and easy to use concept, acquiring players on an efficient basis, maximizing
player retention and expanding and leveraging our player base through multiple
marketing channels and third-party operators. We believe that this strategy
enables us to reduce reliance on any one source of players, maximize brand
awareness and lower average player acquisition costs. By combining expertise in
marketing, sophisticated computer software systems and a focus on excellent
customer service, we believe that we will be able to deliver an entertaining
online gaming experience for players. With our mandate of providing a gaming
experience with unmatched options and technology allowing for three-dimensional
displays and a wide gaming selection, Management believes players will be
provided with a product unparalleled in the marketplace. Management believes
that the Internet is a well-suited medium for the provision of entertainment
products and services, especially those related to user-friendly, innovative
casino-style games and sports wagering services.
The Company's Services and Products
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We have established websites, located on the Internet at www.aogaming.com,
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www.aocasino.com and www.aosportsbook.com, that offer a comprehensive
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interactive gaming service including a virtual casino and live online sportsbook
wagering service. A pari-mutuel wagering service for horse and dog racing is in
the planning stages and is anticipated to be added to the product line in late
2002. The websites are accessible to the general public, however only
established customers or players are permitted to play the gaming opportunities
offered for money.
Our websites are accessible by a minimum hardware configuration consisting of a
486 personal computer with Windows 95 or greater, with 16 Mega Bites RAM, 20
Mega Bites free hard disk space, a 14,400 modem and a direct PPP Internet
connection. All games are provided in a Windows-based, menu driven format with
"point and click" interactivity. Players who wish to conduct gaming operations
at the websites are able to subscribe over the Internet by completing an
application appearing on the websites. Part of the application process requires
that the subscriber open an account and make a minimum deposit with the company
of $20.
Our websites are designed to invite the players to sign up and apply for a
casino and sports book wagering membership. After a player's membership
application is received and reviewed by us, it is either accepted or rejected
based on criterion including, but not limited to, age and geographic location of
the player. Upon accessing our Websites, every new customer must review and
accept our online terms and conditions agreement which state that only players
over the age of 18 will be accepted and proof of age and identification will be
required. Our policy is to accept subscriptions only from players over the age
of 18 years and believed to reside in jurisdictions that are not known to
expressly prohibit Internet gaming. The online financial transaction processor
for our Websites, EFS Caribbean Inc., administers a policy of reserving the
right to require personal identification of each customer who deposits funds
using a credit card. This typically includes a faxed photocopy of front and back
of the credit card used for the account, a photocopy of both a driver's license
and/or a utility bill, as proof of both identity and address. Upon acceptance,
the approved player is allowed to download the gaming software over the Internet
for installation on their personal computer. We then provides the player with a
Registration Statement Page 7
NET-FORCE SYTEMS, INC.
username and password through which the player is able to access the computer
servers on which the software is hosted, over the Internet through their
Internet service provider.
World Gaming's Internet gaming software currently allows for acceptance of
account applications from all countries except Canada. It is our policy that in
the event that we become aware that any country or jurisdiction by law expressly
prohibits gaming activities over the Internet, we will block our services from
being offered to such countries and/or jurisdictions.
Our website allows the player to review all the terms, rules and conditions
applicable to gaming and other uses at the websites. All gaming winnings and
losses are debited and credited to the player's account on a real-time basis.
All games are conducted pursuant to house rules and advantages that are
published at the websites and which are at least favorable or more favorable
than those used by the major casinos in Las Vegas, Nevada.
We completed the process of designing the interfaces between the players and the
World Gaming software for Antigua Online Casino and Sportsbook by March 2000. We
have beta tested the website for ease of use, clarity and accuracy prior to
officially launching the same on April 7, 2000. The gaming opportunities offered
at the website have been designed, in conjunction with World Gaming, to evoke
sights and sounds similar to a Las Vegas style casino. Computer graphics present
the "lobby" of the casino, and consist of several menu items that the player can
choose to enter. We include in these menu choices the various gaming rooms,
including black jack, baccarat, slot machines, roulette and video poker. In
addition, the player has the option to use the sports betting option to place
bets on sports events taking place around the world. The players use the Windows
format of commands to carry out the gaming activities. The websites also include
special effects such as three-dimensional displays, sounds of cards shuffling,
coins falling from virtual machines and other generally familiar background
casino sounds. In addition to English, we also intend to offer players the
ability to engage in the proposed gaming activities in such languages as
Spanish, German, Japanese and Chinese or in whatever languages and/or ethnic
identities as Management deems practical in order to facilitate worldwide
expansion of its player base.
We intend to conduct continuing development of its websites (and such additional
websites as we deem appropriate with varying themes and languages) and the
products offered thereat in accordance with our players' demonstrated
preferences, demographics, and the evolution of new technologies. Our goal is to
utilize the World Gaming software and such other software, which may be
identified by us as useful in order to provide the players with gaming services,
which is competitive, innovative and easy to use in the Internet gaming
industry.
Marketing
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We have implemented a comprehensive marketing program in conjunction with our
software provider. We have customized various facets of the marketing program
for specific cultures including prospective Asian, European, South African,
South American and Indian players. World Gaming combines Internet broadcasting
capabilities with a fully equipped multimedia production studio to create an
advanced Internet production facility.
We believe that international markets will represent a significant portion of
our revenues in the near future since many of the products and services intended
to be offered are not currently available in these markets. Our websites are
intended to contain translations of account registration forms and playing
instructions and the proposed customer service representatives are intended to
be fluent in all languages offered at the websites.
We have established our offices in St. John's, Antigua, British West Indies at
Suite #10, Woods Centre Friars Hill Road, PO Box W-645, St. John's, Antigua,
British West Indies. From these offices, the Company conducts all head office
administrative activities. Also, from these offices, Netforce Entertainment Inc.
conducts all marketing and customer support activities for the Internet Gaming
sites that we oversee. The marketing program incorporates the following
strategies to target its players:
Strategic Alliances with Major Content and Service Providers. We intend to seek
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to enter into strategic alliances with major Internet content and service
providers in order to enhance our new customer acquisition efforts, increase
purchases by current customers and expand brand recognition. We are striving to
enter into alliances with Internet search engines services that provide for us
to be the premier online gaming provider on certain of their sites with the
Registration Statement Page 8
NET-FORCE SYTEMS, INC.
exclusive right to place gaming banner advertisements and integrated links to
the Net-Force sites on certain gaming-related Web pages. To date, no such
alliances have been identified or entered into by us.
On-Line and Traditional Advertising. We promote our brands through an aggressive
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marketing campaign using a combination of on-line and traditional advertising.
We advertise on the websites of major Internet content and service providers,
and targeted gaming-related websites. Our traditional advertising efforts
include print advertising in major magazines and gaming related publications,
and may also include radio advertising and television advertising.
Direct Marketing. We use direct marketing techniques to target new and existing
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players with communications and promotions. We send a personalized e-mail
newsletter to registered players that includes, recommendations based on
demonstrated player preferences and prior usage.
Banner Advertisements. Banner advertisements are rectangular graphical/text
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images that can be positioned in various strategic places on Web pages and
search engines on the Internet. When a potential player clicks on the banner
advertisement, the player's Web Browser points the player to the advertiser's
home page. We pay for such banner advertisements on a variety of Web pages and
search engines, and participate in a banner exchange program. Examples of sites
where the company has placed banners for the casino sites it oversees including
www.football.com, www.basketball.com, www.tsn.com, www.rotonews.com,
- ---------------- ------------------ ----------- ----------------
www.rgtonline.com, casino and sports categories on www.about.com,
- ----------------- -------------
www.gambling.net, as well as other gaming portal sites such as Wager Talk,
- ----------------
Wagerline, and Talk Sports. We also intend to enter into agreements with
Webmasters in which Webmasters agree to place our banner advertisements on their
Web pages in exchange for a commission for each unique player who clicks through
banners to our home page or for a percentage of the profits generated by the
Webmaster.
Submissions to Search Engines. Potential players often learn about websites on
- -----------------------------
the Internet from listings on search engines. We have submitted its URL's and a
brief description of its Internet casino gaming and sports wagering websites to
various search engines so that our information is available to potential players
who use search engines to locate Internet gaming sites. Examples of the search
engines that the company's URLs have been submitted to include: www.yahoo.com,
-------------
www.altavista.com , www.lycos.com, www.dmoz.com, www.directhit.com,
- ----------------- ------------- ------------ -----------------
www.euroseek.com , www.google.com , www.excite.com, www.looksmart.com,
- ---------------- -------------- -------------- -----------------
www.hotbot.com . The websites have also been submitted to the following Internet
- --------------
casino directories including but not limited to www.gamblingregistry.com,
------------------------
www.casinolocator.com, www.casinoseek.com, www.gambling.com, and
- --------------------- ------------------ ----------------
www.top100casinos.com. These Directories are centralized search tools for
- ---------------------
locating Web sites in a particular industry.
Player Incentive Programs. In order to attract new players, we have instituted
- -------------------------
an initial balance credit promotion. This program is designed to attract new
players by offering a credit to new player accounts in amounts based on a
percentage of the amount of the initial deposit by the player. To attract repeat
players to the website, we institute periodic prizes, cash draws, special jack
pots, competitions and/or a frequent player program where the player would be
rewarded based on the frequency and dollar amount of play.
Development of Related Websites. We may design related websites such as a site
- -------------------------------
containing tips on how to play certain casino games or a site providing
interesting gaming news. We intend to design, develop, and promote a sports
information portal site which will feature up-to-date sports information content
including scores, statistics, news, headlines, and odds on all of the world's
major sporting events. This site will be linked to the online sportsbook to
generate traffic with the intention of enhancing revenues. Banner advertisements
would then be placed on all pages of each related website to attract players to
our Internet gaming and sports wagering websites.
Celebrity Endorsements. We intend to seek out a number of celebrities ranging
- ----------------------
from film and television to sports professionals to endorse a website developed
by us. The result of such celebrity endorsement would be to entice new players
to establish accounts based on the endorsement of the chosen celebrity. To date,
no such celebrity endorsements have been confirmed by us.
Distribution of a CD-ROM. We have, in conjunction with World Gaming, produced a
- ------------------------
CD-ROM on which our casino games are contained. When an individual obtains the
CD-ROM, they are able to play all our casino games without the necessity of
wagering real money. This promotional idea is intended to give us the ability to
Registration Statement Page 9
NET-FORCE SYTEMS, INC.
distribute, to a large number and variety of potential players, quality examples
of the services and products offered at its websites. Once a potential player
plays the games offered for fun, we hope that the potential player may make an
application on our websites and eventually play the same games for money. We
intend to distribute such CD-ROM's by direct mail-outs, insertions in magazines,
distributions through Internet Service Providers to their subscribers and
distributions at tradeshows.
IV. INDUSTRY OVERVIEW
-----------------
A. Global Gaming Industry
----------------------
United States of America
- ------------------------
In the U.S., Americans legally wager over $500 billion per year. This level of
legalized gambling is the result of rapid expansion in the industry over the
past decade. Since 1988, the number of states allowing casino gambling has
increased from two, Nevada and New Jersey, to 24, (including those with Native
American Casinos) with all but three states having some form of legalized
gambling. U.S. casino revenues were projected to be about $24 billion in 1998,
reflecting an expected 6% growth from 1997, lower than the double-digit
increases earlier in the decade. Gambling in the U.S. has many forms, including
casinos, horse and dog racing, government run lotteries, riverboat casinos and
Jai Alai, all of which are highly regulated. At the present time, there is no
existing regulation of Internet gambling in the U.S. In July 1998, the U.S.
Congress defeated a proposed bill (the "Kyl" bill) that would prohibit gambling
over the Internet, but exempted certain forms, such as horse and dog racing, and
lotteries. In May 1999, the Kyl bill was re-introduced, in a less stringent form
(See VII "Government Regulation").
Geographic growth prospects have remained relatively flat over the past two
years. With more people employed and improved economic conditions in various
parts of the United States, states and localities have fewer incentives to
encourage gaming development as a prospective source of taxes, tourism and jobs.
Additionally, economic downturns in Asia, and to a lesser extent, South America,
have led to significant decreases in "high roller" traffic to North American
gaming locations, such as Las Vegas and Atlantic City. In response to the
downturn in travelers from this section of its revenue base, the traditional
gaming companies in Las Vegas have continued their rapid growth campaign to
transform the city from a gaming community into a world wide family resort
destination. In recent months Las Vegas in particular has made strides in trying
to upgrade the entertainment it offers. Major U.S. casino destinations are
competing more for resort and vacation population than the average gambling
client.
Pari-mutuel, Lottery and Video Gaming
- -------------------------------------
Pari-mutuel wagering is currently authorized in 43 states in the United States,
all provinces in Canada, and approximately 100 other countries around the world.
The 117 racetracks in 35 states in North America have revenues of $4 billion
dollars from their racing alone.
Video and slot machine gaming constituted one of the fastest-growing sectors in
the gaming industry in the 1990s. The installed video slot machine equipment
inventory base has expanded from approximately 153,000 devices in 1990 to over
500,000 terminals today. Broadly, the market can be divided between the
government systems market (video lottery gaming or VLT) and the casino market
(includes traditional land-based facilities, riverboats and Native American
Class III properties). The video gaming market is different from the devices
used in the traditional casino market. Most video lottery terminals are located
in bars, restaurants and convenience stores where gaming is not the principal
attraction. The stakes on the devices typically range from $0.25 - $2.50 per
play, and payoffs are usually capped between $150 - $1,000 per day. In addition,
some venues distribute the payout from these devices in a ticket form, which is
redeemable for cash from the operator. There are currently slots or video gaming
devices operating in racetracks, bars and restaurants in the following states:
Delaware, Louisiana, Iowa, Rhode Island, West Virginia, New Mexico, Montana,
Oregon and South Carolina and are widely dispersed in Canada.
Although there are no large public gaming operators with significant exposure in
track or ambient VLT operations except for Caesars (now owned by Park Place
Entertainment) - equipment manufacturers, such as IGT, Alliance Gaming, and
Powerhouse Technologies, continues to hold a stake in this potentially growing
Registration Statement Page 10
NET-FORCE SYTEMS, INC.
market niche. In addition, competition posed by track and ambient VLT operations
could affect casino operations in several key markets, including, Atlantic City.
In its most recent report on the worldwide lottery industry, International
Gaming and Wagering Business reported that total global lottery sales were up
significantly (4.5%) in 1998, compared to 1997. For most lotteries, the increase
stemmed from a combination of increased sales and the rebounding of local
currencies versus the U.S. dollar. In general, most states' lotteries
experienced record setting years, in most cases erasing 1997's declines.
(International Gaming & Wagering Business, Vol. 20, Num. 5, May 1999). The only
region reporting continued declines from 1997 was Asia, which is attributable to
the continued weakness in Asian currencies. However, some smaller Asian markets,
such as China's Social Welfare Lottery saw sales virtually double, in most cases
due to the increase in instant ticket sales. Instant tickets and spiel games
(those which Net-Force intends to deliver to its players) once again experienced
an increase in market share. Lotto and spiel games exceeded 40% of all lottery
sales in 1998. International sales of state lotteries in jurisdictions such as
Liechtenstein and South Africa begin promotions revolving around the millennium.
While little focus has been made on the Internet market, the AILE/Intertoto
recently addressed the issue at a conference held in Washington, D.C. (See
www.aile.com). The conference members agreed that a wait and see strategy was
the best approach at the present time, with the AILE/Intertoto maintaining a
watchful eye to ensure that the Internet industry develop an international legal
framework that mirrors that of the current successful system of national laws.
International Gaming Markets
- ----------------------------
Gaming outside of the U.S. and Canada is a mixture of active markets, large and
small resort destinations, and strictly regulated, often state-run, operations.
Asia and South Africa provide the most dynamic markets and opportunities for
growth, with Latin America and the Caribbean also active in the gaming industry.
Western Europe consists mostly of mature, state-controlled markets. The
following is an overview of selected foreign markets:
Europe
- ------
There were a total of 531 European Casinos generating gross Revenues of
$5,336,971,600 US as of February 1999 (International Gaming and Wagering
Business, 1999 European Casino Report, February 1999).
The European Commission last reviewed the issue of gambling in 1991 and found no
need for EU-wide regulation. This position has remained in accordance with the
many of the EU's member states' positions that gaming, including Internet
gambling, should remain an issue for the sovereign state (Cabot, Anthony, THE
INTERNET GAMBLING REPORT III, "European Overview," by Steven Philippsohn, (Trace
Publications, Las Vegas), 1999, P.211-216). Among the member nations of the EU,
views on Internet gambling vary widely. Some states are slowly accepting the
idea of interactive gaming. For example, the Dutch government recently allowed
telephone betting, while certain European states, notably Finland and Sweden,
are allowing providers to offer Internet gambling, but only to their own
respective residents. Conversely, the German position on Internet gaming
reflects the view taken on traditional forms of gambling. That is, games of
chance are morally corrupting and should only be allowed in connection with
charitable purposes.
Countries such as France, Italy, Spain, England and Portugal are merely
monitoring Internet gambling development to see if it becomes a problem. This is
consistent with these nations' actions toward e-commerce in general, of which,
they have no immediate plans to introduce new legislation.
Prospects for growth in Europe are brightest in Scandinavia, Spain and Eastern
Europe. Sweden is setting up its regulatory system for its new casino market,
and state-sanctioned monopolies are being challenged in Norway and Finland in
the casino and machine markets. In Spain, a more relaxed regulatory climate is
emerging, and new casino operations are coming on line. Three Spanish firms
dominate this market: Cirsa/Unidesa, Recreativos Franco and Sega.
Eastern Europe continues to grow and refine is regulatory structures.
Uncertainty and prohibitions against foreign investment, however, hamper
participation by international operators. Casino Austria is a major player,
although its activity there is shrinking.
Registration Statement Page 11
NET-FORCE SYTEMS, INC.
The path, which European regulation of Internet gambling is taking is more akin
to that which the Australian states are taking. The cultural differences between
European countries, however, are more marked than between the Australian states.
The consequent diversity in attitudes to gambling may slow down the process
(Steven Philippsohn, Internet Gambling, European Overview," 1998, p.215).
Asia
- ----
Large capital projects and debt levels in Australia left many casinos highly
exposed to the Asian economic crisis. Stung by a US$150 million drop in revenues
from international players, stock prices for Australia's leading casinos are now
a fraction of previous levels. The domestic market remains solid, however, and
long-term prospects are optimistic. The next year should bring the beginning of
a recovery and a more realistic assessment of the international market.
Despite the economic crisis, the casino industry in the Philippines is
experiencing the strongest expansion in the region, with three new operations
having opened in recent years and another scheduled to open in 1999. The Manila
market is being reorganized and partially privatized, providing the opportunity
for change and market growth. Three publicly traded companies are active in the
Philippines casino market: Starwood Hotels & Resorts, Malaysian-based Metroplex
and Manila-based Belle Bay Corporation. Taiwan offers the most interesting
potential for change. The government took another step toward legislation in
1998 by commissioning a report recommending a tightly regulated industry of
casinos in recreational areas. Foreign investment would be permitted up to 40%.
Africa and the Middle East
- --------------------------
The most significant activity is occurring at opposite ends of the region. South
Africa is progressing with the transformation of its casino industry and the
opening of a route market for gaming devices. The current estimated size of this
market is US$1.5 billion, with the majority of revenues coming from casino
gaming operations (US$935 million). The Middle East market is growing in
response to the closing of gaming operations in Turkey and limited choices in
Northern Europe. With gaming illegal in Israel, further growth in border areas
is expected. New operations are expected to grow quickly in Palestine-controlled
Jericho to support public demand. In Egypt, across the border from Eilat, major
project development is underway in the Taba Heights. Additional operations have
also opened recently in North Africa, with more than the planning stages.
Latin America
- -------------
Gaming in Latin America remains decentralized and difficult for operators.
However, for patient companies with deep pockets, the market potential in the
region is large, especially in countries such as Argentina and Peru. The level
of optimism has been raised in Brazil and Mexico for gaming legislation in the
near future. Legislation in Brazil, the most populous country in Latin America,
would affect regional markets that target Brazilian players, notable Argentina,
Uruguay and Paraguay.
Sodak Gaming, International Thunderbird, Starwood, Hilton Hotels (Conrad
International), IGT and also very active, especially Recreativos Franco,
Cirsa/Unidesa and Leisure & Gaming.
Caribbean
- ---------
Although dominated by small hotel and resort-based casino operations, gaming in
the Caribbean is expanding into new areas, as well as growing in established
markets. The Bahamas offers the most substantial casinos in the region, followed
by Puerto Rico and Aruba. Casinos can also be found on other islands such as St.
Maarten, Curacao, and Antigua.
B. Internet Entertainment Industry
-------------------------------
Internet gambling offers people the opportunity to play virtual sports,
horseracing, slot machines and other casino games without the inconvenience of
leaving their home. While Internet gambling provides some amount of competition
Registration Statement Page 12
NET-FORCE SYTEMS, INC.
for existing casinos, it is not a substantial threat to the traditional gaming
industry. The social aspect of gaming - the primary reason for the
transformation of the Las Vegas gaming market into a destination leisure market
- - - cannot be replicated in the artificial environment of the Internet. Most
visitors to casinos are motivated by the ambiance of the casinos, not just the
opportunity to gamble. Small markets, however, may incur negative impacts
associated with Internet gambling as these markets have been established
themselves as leisure destinations.
The popularity of gaming has transcended beyond the physical boundaries of the
casinos to the borderless and unregulated realm of the Internet. Gambling
websites, offering computer users the opportunity to wager on such games as
bingo, sports and horse wagering, poker and roulette, are beginning to thrive on
the Internet. To participate as one of these websites, the player needs only to
set up an account, typically supplying credit card information, wire transfers
or E-cash. With a click of the mouse, the player is now able to gamble. Losses
are typically deducted from the players' credit cards or established credit
line, and winnings, upon the request of the player, can be electronically
transferred or mailed to the person. Modern technology has eliminated the
physical requirement of visiting a casino or racetrack before engaging in such
games as slot machines, black jack, roulette and thoroughbred or harness racing.
With Internet gambling, patrons need not leave the comfort of their homes or
offices.
ESTIMATED WORLD WIDE INTERNET GAMBLING REVENUES ($ MILLIONS)
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
# of home users (in millions) 46 81 121 145 159
% users conducting online transactions 15% 18% 21% 24% 27%
Potential Internet Gamblers (in millions) 6.9 14.5 25.4 34.8 43
Per-capita expenditure $146 $154 $155 $160 $160
Potential Internet gambling market $1,009 $2,182 $3,933 $5,555 $7,080
Estimated actual Internet Gambling revenues $300 $651 $811 $1,520 $2,330
Penetration rate 30% 30% 21% 27% 33%
- ----------------
Source: Christian/Cummings Associates, Inc.
The popularity of Internet gambling is increasing as illustrated by the growth
of gaming-related websites. Currently, it is estimated that more than 2,000
gambling websites are offered on the Internet, which Management estimates are
owned by approximately 500 operators. With the current licensing of gambling
websites by foreign governments and increased usage of Internet services, this
market will continue to grow. It is estimated that almost 300 million people
will have used the Internet as of the year 2000. With casino gambling garnering
public acceptance as a form of entertainment and Internet usage increasing,
every personal home computer now has the capacity to become a "cybercasino."
Current market size estimates for Internet gambling are $650 million in 1999,
growing to more than $10.0 billion by 2002 according to Datamonitor.
INTERNATIONAL OUTLOOK ON INTERNET GAMING
While the U.S. is debating whether to prohibit Internet gaming or create
legislation to severely regulate the industry, other countries are viewing it as
a revenue generator. Most Internet gambling websites are located in the
Caribbean and South America, along with other sites in Australia, South Africa,
the Netherlands and New Zealand. The Caribbean governments charge Internet
"casino" operators up to $100,000 annually for a license and require operators
to post bonds. In Antigua, the government requires the employment of local
residents and payment of education taxes. The governments of Liechtenstein and
Finland operate their national lottery via the Internet.
Australia and New Zealand have recently decided to legalize Internet gambling,
choosing to regulate and tax the activity as opposed to banning it. The State of
Queensland in Australia passed a law in March 1998, licensing cyber casinos and
sports betting operations. The other Australian states are expected to pass
similar laws. The states of Australia maintain pro-gambling environments -
Australians spend more than $40 billion a year gambling, or $2,000 per person
per year on average ("Aussies Love Their Gambling." Las Vegas Review-Journal,
Rohan Sullivan, March 9, 1998). Placing bets over the phone is legal in
Australia, making legalization of Internet gambling a less controversial issue.
To regulate the industry, the governments propose the establishment of gambling
Registration Statement Page 13
NET-FORCE SYTEMS, INC.
service providers who will check the identity and address of the gambler.
Winnings will then be taxed accordingly, with the taxes forwarded at the
appropriate rate for the state in which the service provider is based.
On May 15, 1998, European gambling regulators from 18 European countries signed
a recommendation on good practices for Internet gambling services. In the
non-binding statement, the countries agreed that European countries should be
free to regulate Internet gambling services. In addition, the countries should
ensure that Internet gambling is not used for money laundering or under-aged
gambling.
V. COMPETITION
-----------
The online commerce market is new, rapidly evolving and intensely competitive,
and we expect that competition will further intensify in the future. Barriers to
entry are minimal, and current and new competitors can launch new sites at a
relatively low cost. Management estimates that there are over 2,000 online
gaming and related sites in operation today with potentially thousands more
"affiliate" sites. . However, the majority of these sites do not produce
substantial revenues as compared to the established, brand name sites, whose
operators have invested heavily in their marketing, affiliate, and customer
service programs to continuously increase their customer bases and maximize
customer retention. Some of the more established Internet Gaming sites that
provide similar gaming services as Netforce Entertainment's web sites and that
the Company has identified as its competitors include http://globalinteract.com,
-------------------------
http://www.intertops.com/, http://www.playersonly.com/,
- ------------------------- ---------------------------
http://www.casinoonnet.com/, http://www.goldclubcasino.com/,
- --------------------------- ------------------------------
http://www.intercasino.com/, http://www.englishharbourcasino.com/,
- --------------------------- ------------------------------------
http://www.usacasino.com/, http://www.thesandscasino.com/,
- ------------------------- ------------------------------
http://www.betonsports.com/, http://www.sportingbet.com/, http://www.wwts.com/,
- --------------------------- --------------------------- --------------------
and http://www.poker.com/.
- -------------------------
In addition, the broader gaming industry is intensely competitive. We compete
with a variety of companies, including (i) online vendors of gaming and gaming
related products, (ii) online service providers which offer gaming products
directly or cooperation with other retailers, (iii) traditional providers of
gaming products, including specialty gaming providers, and (iv) other retailers
that offer gaming products. Many of these traditional providers also support
dedicated websites, which may compete directly with us.
We believe that the principal competitive factors in our online market are brand
recognition, selection, variety of value-added services, ease of use, site
content, quality of service, technical expertise and product availability. Many
of our intended and potential competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than us. We are aware that certain of
our proposed competitors have and may continue to adopt more aggressive pricing
or marketing policies and devote substantially more resources to website and
systems development than us. Increased competition may result in reduced
operating margins, loss of market share and a diminished brand franchise.
There can be no assurance that we will be able to compete successfully against
intended and future competitors. New technologies and the expansion of existing
technologies may increase the competitive pressures of the Company. There can be
no assurance of the economic success of any marketing effort by us since the
revenues derived from the Internet casino gaming and sports wagering websites
depend primarily upon the site's acceptance by the international public, which
cannot be predicted with certainty. To be ultimately successful, we will be
faced with the challenge of marketing our gaming websites to a variety of
foreign cultures. Our websites will compete for consumer acceptance with similar
websites hosted by other companies. As a result, the success of our marketing
efforts is dependent not only on the quality and acceptance of the our virtual
casino games and on-line sports wagering websites, but also on the acceptance of
other competing virtual casino games and websites offered in the marketplace
during the same time period.
VI. RISKS
-----
A. RISKS RELATED TO THE BUSINESS
-----------------------------
Limited Operating History. The Company was recently formed and has limited
- -------------------------
operating history. Since incorporation, the Company has expended resources on
technology, license fees, website development, hiring of personnel and startup
Registration Statement Page 14
NET-FORCE SYTEMS, INC.
costs. As a result, losses were incurred since incorporation and management
expects to experience operating losses and negative cash flow for the
foreseeable future. We anticipate losses will continue to increase from current
levels because we expect to incur additional costs and expenses related to:
brand development, marketing and other promotional activities; the addition of
customer service personnel; the continued development of the websites; the
expansion of service offerings and website content; and development of
relationships with strategic business partners.
There can be no assurance at this time that we will operate profitably or that
we will have adequate working capital to meet our obligations as they become
due. We believe that our success will depend in large part on our ability to (i)
offer aesthetic, interesting and diverse casino-style games on our websites, as
well as sports and pari-mutuel wagering, (ii) attract players and provide them
with outstanding service, (iii) instill consumer confidence, and (iv) achieve
name recognition. Accordingly, we intend to invest heavily in site development,
technology and operating infrastructure, as well as marketing and promotion. As
a result, we expect to incur operating losses in the initial stages of our
business and for the foreseeable future.
No Assurance of Profitability. Our business is speculative and dependent upon
- -----------------------------
the acceptance of our websites and the effectiveness of our marketing program.
Our only assets will be the offshore Internet gaming websites, some
administrative office furniture and equipment and the revenues derived from the
websites. There can be no assurance that our Internet gaming and sports wagering
websites will be successful or result in revenue or profit. There is no
assurance that we will earn significant revenues or that investors will not lose
their entire investment.
Failure to Respond to Change. If we face material delays in introducing new
- ----------------------------
services, products and enhancements, customers may forego the use of our
services and use those of competitors. To remain competitive, we must continue
to enhance and improve the functionality and features of the websites. The
Internet and the online commerce industry are rapidly changing. If competitors
introduce new products and services, or if new industry standards and practices
emerge, the existing websites, technology and systems may become obsolete. To
develop the websites and technology entails significant technical and business
risks. We may use new technologies ineffectively or may fail to adapt the
technology to meet customer requirements or emerging industry standards.
Intellectual Property Claims. Other parties may assert infringement or unfair
- ----------------------------
competition claims against the Company. We cannot predict whether they will do
so, or whether any future assertions or prosecutions will harm the business. If
we are forced to defend against any infringement claims, whether they are with
or without merit or are determined in our favor, then we may face costly
litigation, diversion of technical and management personnel, or product shipment
delays. Further, the outcome of a dispute may be that management would need to
develop non-infringing technology or enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may be unavailable on terms
acceptable to management, or at all.
Reliance on Trademarks and Copyrights. We intend to take steps to protect
- -------------------------------------
proprietary rights which steps may be inadequate. Management regards copyrights,
service marks, trademarks, trade secrets and similar intellectual property as
critical to its success. We intend to rely heavily on trademark and copyright
law, trade secret protection and confidentiality or license agreements with our
employees, customers, partners and others to protect proprietary rights.
Effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which we intend to provide its services.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. Therefore,
we may be unable to prevent third parties from acquiring domain names that are
similar to, infringe upon or otherwise decrease the value of intended trademarks
and other proprietary rights.
Risks Inherent in a New Industry. Both the Internet and Internet-based casinos
- --------------------------------
are relatively new industries. The market for Internet and Sports wagering has
only recently begun to develop, is rapidly evolving and is characterized by an
increasing number of market entrants. As is typical in the case of a new and
rapidly evolving industry, demand and market acceptance for recently introduced
services are subject to a high level of uncertainty. There can be no assurance
that gaming and wagering on the Internet will become widespread, or that our
websites will become widely used. If the market fails to develop, develops more
slowly than expected or becomes saturated with competitors or if our services do
not achieve market acceptance, our business, operating results, and the
financial condition will be materially adversely affected. Because of the
Registration Statement Page 15
NET-FORCE SYTEMS, INC.
uncertainty regarding the legality of Internet wagering in the United States,
and the existing or possible prohibitions in other jurisdictions, we will not
permit play by Canadian residents, and may be precluded from offering play to
residents of other countries.
Online Commerce Risks - Reliance on World Gaming, Plc. Concerns over the
- -----------------------------------------------------
security of transactions conducted on the Internet and other on-line services as
well as user's desires for privacy may also inhibit the growth of gaming and
wagering on the Internet. The activities of the Company are expected to involve
the storage and transmission of proprietary information, such as credit card
numbers and other confidential information. Any such security breaches could
damage our reputation and expose us to a risk of loss, litigation and possible
liability. There can be no assurance that our security measures will prevent
security breaches or that failure to prevent such security breaches will not
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company is dependent on World Gaming for its
software and the hosting of its websites.
Businesses on the Internet are subject to the risk of credit card fraud and
other types of theft and fraud perpetrated by "hackers" and on-line thieves.
Credit card companies may hold merchants fully responsible for any fraudulent
purchases made when the signature cannot be verified. Although credit card
companies and others are in the process of developing anti-theft and anti-fraud
protections, and while the Company itself will continually monitor this problem,
at the present time the risk from such activities could have a material adverse
effect on us. A party who is able to circumvent our security measures could
misappropriate confidential information or cause interruptions in our
operations. We may be required to expend significant capital and other resources
to protect against such security breaches or to alleviate problems caused by
such breaches. If a compromise of our security were to occur, or if World
Gaming's software or website hosting fails, there could be a material adverse
effect on our business, financial condition and the results of operations.
Lack of Consumer Confidence. Concerns that a virtual casino's odds can be easily
- ---------------------------
and arbitrarily manipulated may deter customers from using our website. There
can be no assurance that we will be able to instill customer confidence in and
alleviate negative perceptions about Internet gaming. If our efforts are
unsuccessful, it could have a material adverse effect on our business, financial
condition and the results of operations.
Competition. The market for our Internet gaming and sports wagering services is
- -----------
intensely competitive. Our principal competitors include other on-line Internet
casinos. These competitors have longer operating histories, greater name
recognition, larger installed customer bases, and substantially greater
financial, technical and marketing resources than us. We believe that the
principal factors affecting competition in its proposed market include name
recognition, ability to develop aesthetic and diverse casino-style games,
customer confidence, ability to respond to changing customer needs, and ease of
use. Other than technical expertise and the limited time available to enter the
market, there are no significant proprietary or other barriers of entry that
could keep potential competitors from developing or acquiring similar tools and
providing competing services in our proposed market. Our ability to compete
successfully in the on-line casino and sports wagering business will depend in
large part on its ability to attract new players and respond effectively to
continuing technological changes by developing more sophisticated on-line casino
games. There can be no assurance that we will be able to compete successfully in
the future, or that future competition will not have a material adverse effect
on the business, operating results and financial condition of the Company.
Potential for indebtedness. There is no assurance that we will not incur debt in
- --------------------------
the future, that it will have sufficient funds to repay its indebtedness or that
we will not default on our debt, jeopardizing our business viability.
Furthermore, we may not be able to borrow or raise additional capital in the
future to meet our needs or to otherwise provide the capital necessary to
conduct our business.
No Assurance that Dividends Will be Paid. We do not currently anticipate
- ----------------------------------------
declaring and paying dividends to our shareholders in the near future. It is our
current intention to apply net earnings, if any, in the foreseeable future to
increasing our capital base and marketing. Prospective investors seeking or
needing dividend income or liquidity should therefore not purchase the Shares.
There can be no assurance that we will ever have sufficient earnings to declare
and pay dividends to the holders of our Common Stock, and in any event, a
decision to declare and pay dividends is at the sole discretion of our Board of
Directors.
Government Regulation. The wagering and casino industry is subject to extensive
- ---------------------
government regulation and licensing requirements in certain jurisdictions of the
world. Legal uncertainties may preclude us from offering our planned Internet
Registration Statement Page 16
NET-FORCE SYTEMS, INC.
gaming in certain jurisdictions like Canada. Some jurisdictions may impose
restrictions, licensing requirements or prohibitions on Internet wagering. At
present, we do not anticipate any such restrictions, prohibitions or licensing
requirements in our target markets but no assurance can be made that such
restrictions, prohibitions or licensing requirements will not arise which would
materially adversely effect our business, operating results and financial
condition of the Company.
Dependence on Key Personnel. Our success is substantially dependent on the
- ---------------------------
performance of our executive officers and key employees. Given our early stage
of development in the Internet gaming business, we are dependent on our ability
to retain and motivate high quality personnel. Although we believe we will be
able to attract, retain and motivate qualified personnel for such purposes, an
inability to do so could materially adversely affect the Company's ability to
market, sell, and enhance our services. The loss of one or more of our employees
or our inability to hire and retain other qualified employees could have a
material adverse effect on the Company. Currently, we identify Mr. Terry G.
Bowering, President and Chief Executive Officer, as a key person, as he is
involved in the direction of all aspects of the daily operations of the Company.
Mr. Bowering does not have an employment contract in place, nor is there any key
person insurance on himself. We also depend on Mr. Derek C. Ferguson, Internet
Technology Consultant, Mr. Clint Jendyk, Director of Website Design and
Development, and Mr. Richard Pestes, Internet Marketing Consultant. We have not
entered into any employment or management contracts with our employees nor do we
maintain "key-person" insurance of any kind. (See "MANAGEMENT").
Uninsured Losses. There is no assurance that we will not incur uninsured
- ----------------
liabilities and losses as a result of the conduct of its proposed business. We
plan to maintain comprehensive liability and property insurance at customary
levels. We will also evaluate the availability and cost of business interruption
insurance. However, should uninsured losses occur, the shareholders could lose
their invested capital.
Liabilities. We may have liabilities to affiliated or unaffiliated lenders.
- -----------
These liabilities would represent fixed costs, which would be required to be
paid regardless of the level of profitability experienced by us. There is no
assurance that we will be able to pay all of our liabilities. Furthermore, we
are always subject to the risk of litigation from players, employees, suppliers
or others because of the nature of our business. Litigation could cause us to
incur substantial expenses and, if cases are lost, judgments and awards could
add to the Company's costs.
B. RISKS RELATED TO THE INDUSTRY
-----------------------------
Dependence on increasing use of the Internet. Our future revenues substantially
- --------------------------------------------
depend upon the increased acceptance and use of the Internet and other online
services as a medium of commerce. Rapid growth in the use of the Internet, the
Web and online services is a recent phenomenon. As a result, acceptance and use
may not continue to develop at historical rates and a sufficiently broad base of
customers may not adopt, and/or continue to use, the Internet and other online
services as a medium of commerce and entertainment. Demand and market acceptance
for recently introduced services and products over the Internet are subject to a
high level of uncertainty and there exist few proven services and products.
In addition, the Internet may not be accepted as a viable long-term commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. If the Internet continues to
experience significant expansion in the number of users, frequency of use or
bandwidth requirements, the infrastructure for the Internet may be unable to
support the demands placed upon it. In addition, the Internet could lose its
viability as a commercial medium due to delays in the development or adoption of
new standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Changes in, or
insufficient availability of, telecommunications services to support the
Internet also could result in slower response times and adversely affect usage
of the Internet generally.
Our business, financial condition and results of operations would be seriously
harmed if: use of the Internet, the Web and other online services does not
continue to increase or increases more slowly than expected; the infrastructure
for the Internet, the Web and other online services does not effectively support
expansion that may occur; the Internet, the Web and other online services do not
become a viable commercial marketplace; or traffic to the websites decreases or
Registration Statement Page 17
NET-FORCE SYTEMS, INC.
fails to increase as expected or if management spends more than was expected to
attract visitors to the websites.
Inability to Acquire Domain Names. We may be unable to acquire or maintain Web
- ---------------------------------
domain names relating to the brand in the jurisdictions in which management may
conduct business. As a result, we may be unable to prevent third parties from
acquiring and using domain names relating to our brand, which could damage our
brand and reputation and take customers away from our websites. We currently
hold the www.aogaming.com, www.aocasino.com and www.aosportsbook.com domain
---------------- ---------------- --------------------
names and may seek to acquire additional domain names. Governmental agencies and
their designees generally regulate the acquisition and maintenance of domain
names. The regulation of domain names in the United States and in foreign
countries is subject to change in the near future. The changes in the United
States are expected to include a transition from the current system to a system
that is controlled by a non-profit corporation and the creation of additional
top-level domains. Governing bodies may establish additional top-level domains,
appoint additional domain name registrars or modify the requirements for holding
domain names.
Requirements to Change Manner of Business. The adoption or modification of laws
- -----------------------------------------
or regulations relating to the Internet could adversely affect the manner in
which we propose to conduct our business. In addition, the growth and
development of the market for online gaming may lead to more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on the Company. Laws and regulations directly applicable to
communications or commerce over the Internet are becoming more prevalent. The
United States Congress recently enacted Internet laws regarding children's
privacy, copyrights, taxation and the transmission of sexually explicit
material. The European Union recently enacted its own privacy regulations. Laws
regulating the Internet, however, remain largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws such as those governing intellectual property, privacy,
libel, and taxation apply to the Internet.
In order to comply with new or existing laws regulating online commerce, we may
need to modify the manner in which we propose to do business, which may result
in additional expenses. For instance, we may need to spend time and money
revising the process by which we intend to accept players' wagers to ensure that
each wager complies with applicable laws. We may need to hire additional
personnel to monitor compliance with applicable laws. We may also need to modify
our software to further protect players' personal information.
Liability for Content. As a publisher of online content, we face potential
- ---------------------
liability for defamation, negligence, copyright, patent or trademark
infringement, or other claims based on the nature and content of materials that
we publish or distribute. If we face liability, then our reputation and our
business may suffer. In the past, plaintiffs have brought these types of claims
and sometimes successfully litigated them against online companies. In addition,
we could be exposed to liability with respect to the unauthorized duplication of
content or unauthorized use of other parties' proprietary technology. Although
we intend to carry general liability insurance, such insurance may not cover
claims of these types. We cannot be certain that we will be able to obtain
insurance to cover the claims on reasonable terms or that we will be adequate to
indemnify the management or the Company for all liability that may be imposed.
Any imposition of liability that is not covered by our insurance or is in excess
of insurance coverage could harm the business.
The Imposition of Taxes. If one or more states or any foreign country
- -----------------------
successfully asserts that we should collect taxes on the winnings earned by
players, the financial position and results of operations could be harmed. If we
become obligated to collect taxes, we will need to update our system that
processes wagers and winnings to calculate the appropriate sales tax for each
player and to remit the collected sales to the appropriate authorities. These
upgrades will increase operating expenses. In addition, players may be
discouraged from utilizing our websites because they have to pay tax, causing
net sales to decrease. As a result, we may be adversely materially affected.
C. RISKS RELATED TO SECURITIES MARKETS
-----------------------------------
Inability to meet Future Capital Requirements. We cannot be certain that
- ---------------------------------------------
additional financing will be available on favorable terms when required, or at
all. If we raise additional funds through the issuance of equity, equity-related
Registration Statement Page 18
NET-FORCE SYTEMS, INC.
or debt securities, the securities may have rights, preferences or privileges
senior to those of the rights of the common stock and those stockholders may
experience additional dilution. We expect to require substantial working capital
to fund the business. Since inception, we have experienced negative cash flow
from operations and expect to experience significant negative cash flow from
operations for the foreseeable future. Management currently anticipates that the
private financing done to date, together with expected revenues, will be
sufficient to meet anticipated needs for working capital and capital
expenditures through at least the next 12 months. After that, we may need to
raise additional funds.
Volatility of the Common Stock. The market price for our common stock is likely
- ------------------------------
to be highly volatile and subject to wide fluctuations in response to factors
including the following, some of which are beyond our control: actual or
anticipated variations in the quarterly operating results; announcements of
technological innovations or new services by us or our competitors; changes in
financial estimates by securities analysts; conditions or trends in the Internet
and/or online commerce or gaming industries; changes in the economic performance
and/or market valuations of other Internet, online gaming companies;
announcements by management or competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments; additions or
departures of key personnel; release of lock-up or other transfer restrictions
on the outstanding shares of common stock or sales of additional shares of
common stock; and potential litigation.
In addition, the stock market has from time to time experienced extreme price
and volume fluctuations. These broad market fluctuations may adversely affect
the market price of our common stock.
Securities Class Action Lawsuit. In the past, following periods of volatility in
- -------------------------------
the market price of their stock, many companies have been the subject of
securities class action litigation. If we were sued in a securities class
action, it could result in substantial costs and a diversion of management's
attention and resources and would cause the stock price to fall.
VII. REGULATORY BACKGROUND
---------------------
In July 1998, the U.S. Senate voted to largely prohibit gambling on the
Internet. Under the legislation, operators of illegal Internet gambling sites
could be sentenced to up to four years in jail and fined up to $20,000. Gamblers
who illegally bet via the Internet could receive a jail sentence of up to three
months and a fine of either $500 or three time the amount of the bet. Some
Internet-based "fantasy" or "rotisserie" sports league activities would be
exempt from the ban. However, in August 1998 the U.S. House of Representatives
overwhelmingly voted down the legislation. On March 23, 1999, Senator Kyl
(R-Arz.) submitted Bill S.692 to the Senate for consideration. If passed, this
Bill would also serve to effectively outlaw gambling on the Internet in the
United States. As of November 1, 1999 the Senate had not voted on this
legislation, in part because it is effectively the same legislation that was
voted down in 1998, and even if it should pass a Senate vote it is highly
questionable as to whether the House of Representatives would view it any
differently from the last Internet gaming bill.
The move on the part of the federal government to ban Internet gambling is a
departure from gambling policy. The federal government has typically left the
issue up to the authority of the state governments, resulting in a wide range of
attitudes towards gambling. Most states allow some type of gambling whether it
be full casinos, card rooms, pari-mutuel tracks or state-operated lotteries.
Only two states, Hawaii and Utah, prohibit all forms of gaming.
While passage of the act is possible, in one form or another, practical
enforcement of the law is a separate matter. The Internet is a global
information and communications medium operating without boundaries. Due to the
global nature of this medium, no regulatory agency has control over the content
of information accessible to users. The inability of governments to regulate
materials it deems offensive or illegal results in political and social
frustration. Measures to remove offensive materials, such as those classified as
containing adult content, have been unsuccessful to date. The same enforcement
problems will be encountered with gambling sites. These are three avenues
through which law enforcement officials may attack the problem: the gaming
website, the ISP or the user. The enforcement of anti-Internet gambling laws
through each of the avenues presents interesting social and technological
problems.
In the United States, the ownership and operation of land-based facilities has
traditionally been regulated on a state-by-state basis. According to a recently
published industry report by Bear Stearns, the Federal Government's role in
Registration Statement Page 19
NET-FORCE SYTEMS, INC.
regulating gambling appears to be changing. Increased Federal interest may not
result in new regulations for the traditional forms of gambling that are easily
subject to police power of the individual states, may result in a redefined role
for the Federal Government in dealing with Internet gaming. The U.S. Department
of Justice currently maintains that, technically, there are no specific U.S.
Federal provisions against placing of bets overt the Internet. However, the
Justice Department also maintains that it is illegal to operate Internet Gaming
Websites and servers from within the United States. We are not physically
located in the United States nor do we house any computer servers or other such
computer hardware within the United States.
The United States Federal Wire Act contains provisions that make it a crime for
anyone engaged in the business of betting or wagering to knowingly use telephone
wires to transmit bets or wagers or information assisting in the placing of bets
or wagers on any sporting event, unless the wagering is legal in the
jurisdiction from which, and into which, the transmission is made. There are
other Federal laws impacting gaming activities, including the Wagering
Paraphernalia Act, the Travel Act, and the Organized Crime Control Act. However,
it remains unresolved whether these laws apply to gaming conducted over the
Internet. All aspects of our operations specifically involve the Internet for
delivery of our online gaming support services. We do not operate a telephone
wagering facility for the purpose of accepting and booking bets on sporting
events.
March 4, 1998 marked the first federal prosecution for gambling on the Internet
as 21 American gambling site operators were charged with conspiring to illegally
transmit bets over the Internet and the telephone. The men were owners or
managers of eight Caribbean and Central American-based companies that accepted
telephone and Internet wagers on sporting events. The individuals were charged
with felonies under the Wire Act, which explicitly prohibits placing sports
wagers over State lines via telephone wire. However, the Wire Act does not
directly identify or address the use of the Internet with its logistical factors
including the question of global borders and jurisdiction as it relates to where
a wager is actually received and/or processed. Only one of these indictments
resulted in a trial. Jay Cohen took the matter to trial and was convicted of
seven counts of violating the Wire Act and one count of conspiracy. Mr. Cohen
received a $5,000 fine and a 21-month prison sentence. The common factor in all
of the operators indicted was the fact that all were clearly directly accepting
and booking sports wagers via telephone lines from the U.S.
The following are excerpts from an article by Fred Faust of Rolling Good Times
Online entitled "U.S. Judge Backs Visa and MasterCard in Internet Gambling
---------------------------------------------------------
Ruling", submitted on March 12, 2001. This article highlights an important
- ------
federal ruling:
More than 11 federal cases against the credit card companies and several of the
issuing banks were consolidated and assigned to Judge Stanwood R. Duval Jr. in
New Orleans. The plaintiffs were people who lost money gambling online. If the
casinos had not accepted credit cards, the plaintiffs argued, they wouldn't have
gambled online. On Feb. 23, (2001) Duval dismissed the cases outright, before
they even got to trial. That's an unusually strong step for a judge, but Duval
ruled that the plaintiffs had no grounds to bring these cases. Perhaps more
significantly, he also ruled that Internet casinos do not violate federal law.
"Plaintiffs in these cases are not victims," the judge stated in his ruling. "At
this point in time, Internet casino gambling is not a violation of federal law."
In an opinion shared by many lawyers, Duval ruled that the 1961 federal Wire
Act, under which telephone and Internet bookmaker Jay Cohen was convicted,
applies only to sports betting and "does not prohibit Internet casino gambling."
CURRENT INTERNET GAMBLING ENFORCEMENT
Senator Jon Kyl released his proposed "Internet Gambling Prohibition Act" on
March 29, 1999. A similar Bill, also proposed by Senator Kyl failed to pass in
1998. The current proposed 28-page Bill attempts to ban most forms of gambling
on the Internet within U.S. borders. There is no prohibition on individuals
placing bets over the Internet, only "gambling businesses" within U.S.
jurisdictions, are proposed to be prohibited. The Bill also outlines several
exemptions, some of which are summarized as follows:
o The basic proposal states that it shall be unlawful for a person engaged in
a gambling business to use the Internet or any other interactive computer
service to place, receive, or otherwise make a bet or wager. The
significance of the language is that it does not make the act of gambling
on the Internet illegal. Only gambling businesses based and operated within
U.S. borders are affected.
Registration Statement Page 20
NET-FORCE SYTEMS, INC.
o Penalties for violators include fines in the amount of total wagers
received, or $20,000, whichever is greater, and jail time of up to four
years. This is significant and, if approved, will limit new participants.
o Several types of gambling are exempted. These include fantasy sports
leagues, state lotteries, and certain activities under the Interstate
Horseracing Act of 1978.
o The Bill provides that interactive computer service providers shall have no
liability for hosting illegal gambling businesses.
In its proposed format, compliance will be difficult to enforce. Therefore, it
seems the Bill will not pass in its current format. Some selected reasons are
summarized below as extracted from "Staking VALUE Early", The RESOURCE
INDICATOR, Vol. 3, No. 15:
o In testimony before the House Justice subcommittee on crime, Deputy
Assistant Attorney General Kevin V. DiGregory said the long reach of the
Internet into people's homes and across international borders creates
special obstacles for law enforcement. It simply will not be enforceable.
o Prosecutors will not be able to indict operators of virtual casinos who are
based legally in other countries. The Deputy Assistant Attorney General
supported this claim by stating that a foreign national who is operating a
licensed Internet-based casino in his country will not be violating his
country's laws if he solicits or accepts bets from Untied States citizens.
o It is nearly impossible to close off an entire category of content, since
presently, there is no mechanism to automatically identify and screen out
types of content from U.S. Internet consumers.
o In Australia, just seconds away in cyberspace, lawmakers are taking the
opposite road. Rather than attempting to ban Internet gaming, Australian
politicians are attempting to regulate online wagering by developing a seal
of approval that will draw players from unregulated cybercasinos and bring
new tax revenue to Australia.
o Other nations, including Sweden, Germany, South Africa, Costa Rica,
Antigua, the Marshall Islands, and Curaco have already begun licensing and
regulatory processes for online casino operators.
o Even if enacted, Michael Mount, deputy press secretary for Senator Kyl,
said the law will do little to stop an operator who is headquartered
abroad. "It will be hard to regulate it", he said of the possibility that
foreign sites might accept bets from inside of the United States. "There is
nothing the [law enforcement] can do if everything is run over there,
including the ISP." ("Senate effort to outlaw Internet Gambling may prove
futile," Knight-Riddler/Tribune News: Wed, May 12, 1999).
The only known federal case against an Internet gambling operator prior to the
March 1998 federal prosecutions involved the Interactive Gaming and
Communications Corporation in Pennsylvania. The company operated a virtual
gambling operation in Grenada, which reportedly handled over $58 million in
wagers. In February 1997, FBI agents seized company records and froze company
assets. ("Can Lawmakers Control Online Gambling?" New York Times, Peter Lewis,
September 22, 1997). The company is also involved in legal issues with the state
Attorney General's Office. No formal charges were filed by the Department of
Justice, although the company eventually sold its gambling assets to a
Canadian-based company.
STATES' ROLES IN INTERNET GAMBLING
Residents in states prohibiting gambling may circumvent anti-gaming laws by
logging into the Internet. Several states have taken the initiative to curtail
Internet Gambling within its borders by taking legal action against the website
operators. In the following section, measures taken by state offices to
prosecute Internet and offshore gambling operations that have transacted
business within their state are summarized.
Registration Statement Page 21
NET-FORCE SYTEMS, INC.
Nevada - In July 1997, Nevada became the first state to pass a law prohibiting,
and legalizing, Internet gambling. It is a misdemeanor to place a bet from
Nevada over the Internet, regardless of the location of the gambling site. In
addition, the law allows for the prosecution of those accepting bets from Nevada
residents. However, Senate Bill 318 is also the first statute to expressly
allow: "licensed" race and sports books, off-track betting operators and casinos
to accept wagers via the Internet (Rose, J. Nelson, Gambling and the Law,
"Nevada First State to Expressly Prohibit, and Legalize, Internet Gambling,"
(Whittier Law School, Los Angeles, CA), May 12, 1999).
Minnesota - The Minnesota Attorney General sued Wager Net Web, a Las Vegas-based
company that was preparing to offer sports betting over the Internet, for
consumer fraud when the company advertised that its service was legal. The
company intended the service to be set up and run by another company located
outside the U.S. Subsequently, the company filed an appeal with the state court
of appeals claiming that the state did not have jurisdiction over the company
since it was not based in Minnesota. In December 1997, a Minnesota state court
ruled that the Attorney General does indeed have jurisdiction to prosecute
Internet gambling companies. (The National Bet, U.S. News Online, Dan McGraw).
The state is seeking a court order to stop the advertising and civil penalties
of at least $25,000. The case reached the Minnesota State Supreme Court, where
on May 8, the same court upheld a lower court's ruling. The court, however, did
not address the issue of whether Internet gambling itself is illegal.
Wisconsin and Missouri - The Coeur d'Adlene Indian Tribe of Idaho, Unistar
Entertainment and Executone Information Systems are being sued by the attorneys
general of Wisconsin and Missouri over the operation of a national online
lottery. The tribe claims that it has the authorization to operate the lottery
under the Indian Gaming Regulatory Act of 1988 since the computer server
operating the games is located on the reservation. The states contend that the
gambler must be physically present on the reservation when gambling as opposed
to using the Internet. The lawsuit seeks injunctions to stop the operation of
the gambling sites in Wisconsin, in addition to fines and consumer restitution
("Wisconsin Sues Over Internet Gambling," The Associated Press, The New York
Times on the Web, September 16, 1997).
Missouri - In May 1998 a Missouri judge upheld a civil lawsuit against
Interactive Gaming and Communication Corporation (IGCC) by the state's attorney
general. IGCC was found to have violated state consumer protection law, fined
$66,000 and ordered to "reject and refuse" all applications by Missouri
residents. When the company accepted wagers by undercover agents in Missouri,
criminal charges were filed against the company's president. The case is still
pending.
We are presently of the view that we are not prohibited from offering our
services and accepting wagers from residents of almost all jurisdictions in the
world. However, Internet gaming is a relatively new activity and some or all of
these jurisdictions may take action to more severely regulate or even prohibit
Internet gaming operations in their jurisdictions. We intend to adopt a
proactive policy of lobbying international jurisdictions, where appropriate, for
purposes of seeking approval of Internet gaming and the regulation of those
activities on a basis that is favorable to us.
In addition to the aforementioned regulations pertaining specifically to gaming,
we may become subject to any number of laws and regulations that may be adopted
with respect to the Internet in general as the Internet becomes widely used.
These laws may cover issues such as user privacy, freedom of expression,
pricing, content and quality of services, taxation, advertising, intellectual
property rights and information security. Furthermore, the growth of online
commerce may prompt calls for more stringent consumer protection laws. Several
states have proposed legislation to limit the uses of personal user information
gathered online or require online services to establish privacy policies. The
Federal Trade Commission has also initiated action against at least one online
service regarding the manner in which personal information is collected from
users and provided to third parties. Management does not contemplate providing
personal information regarding our customers to third parties. However, the
adoption of additional consumer protection laws could create uncertainty in Web
usage and reduce the demand for our products and services.
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. The vast majority of these laws were adopted prior
to the advent of the Internet. As a result, they do not contemplate or address
the unique issues of the Internet and related technologies. Changes in laws that
Registration Statement Page 22
NET-FORCE SYTEMS, INC.
are intended to address these issues could create uncertainty in the Internet
market place. This uncertainty could reduce demand for our services or our cost
of doing business may increase as a result of litigation costs or increased
service delivery costs.
In addition, because our services are intended to be made available over the
Internet in multiple foreign countries, other jurisdictions may claim that we
are required to qualify to do business in that foreign country. We intend to
qualify to do business only in Antigua and Barbuda. Our failure to qualify in a
jurisdiction where it is required to do so could subject us to taxes and
penalties. It could also hamper our ability to enforce contracts in these
jurisdictions. The application of laws or regulations from jurisdictions whose
laws do not currently apply to the business could have a material adverse effect
on the business, results of operations and financial condition.
Our Internet operations and corporate structure are structured in such a fashion
that we do not directly process wagers and facilitate payments of betting
customers, nor do we accept wagers via the telephone on sporting events.
Further, we do not physically operate within the boundaries of the United
States. Therefore, we are of the view that we are not in violation of or
specifically subject to the Wire Act of 1961. However, this may not preclude the
United States or other jurisdictions from initiating criminal or civil
proceedings against us and these proceedings could involve substantial
litigation expense, penalties, and fines. In addition, these proceedings may
divert the attention of our key executives, and may result in injunctions or
other prohibitions against us. These proceedings could have a material adverse
effect on the business, revenues, operating results, and financial conditions.
VIII. DISCLOSURE
----------
The public may read and copy any materials filed with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and/or
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, we intend to be an electronic filer and as
such, all items filed by us are available through an Internet site maintained by
the SEC which contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC, which site
is available at http://www.sec.gov. We also maintain an Internet site, which
contains information about the Company. This site is available at
http://www.netforcesystems.com.
- ------------------------------
ITEM 2. DESCRIPTION OF PROPERTY
The Company occupies 240 square feet of commercial office space at Suite #10,
Friars Hill Road, Woods Centre, St. John's, Antigua, West Indies. This office
houses our operations including workstations for four individuals engaged in
customer support, production, marketing, website development, and accounting,
and administration functions. All gaming transaction servers website hosting
facilities are physically housed and maintained by World Gaming's co-location
facilities in Antigua. The building in which we leased space is in the heart of
St. John's and is home to several other Technology and Internet based companies.
This arrangement and proximity to other similar companies is expected to lend
itself well to promoting the Company as being in the right area and on the
leading edge of technology. As well, our offices are in close proximity to
banking services, the post office, money transfer services, courier services,
and other essential business service providers and their offices.
The terms of the Woods Centre office lease are as follows: We lease 240 square
feet through to July 31, 2002 at an annual rent of $8,400 USD. Our lease said
space on a month-to-month basis during the term. We have a renewal option
thereafter of up to five years on terms to be negotiated at the time. It is our
intention to renew the lease at the end of the first year for an extended term.
ITEM 3. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
We are not aware of any material legal proceedings involving any director,
director nominee, promoter or control person including criminal convictions,
pending criminal matters, pending or concluded administrative or civil
proceedings limiting one's participation in the securities or banking
Registration Statement Page 23
NET-FORCE SYTEMS, INC.
industries, or findings of securities or commodities law violations. However,
legal bankruptcy proceeding under Canadian law involving Terry Bowering in 1997,
concluded with Mr. Bowering receiving a judicial discharge.
LEGAL PROCEEDINGS
The issuer is not a party to any pending legal proceeding nor is its property
the subject of any pending legal proceeding.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There have been no disagreements on accounting and financial disclosures from
the inception of the Company through to the date of this Registration Statement.
A change of auditors occurred on October 25, 2000. Our initial auditors, Pannel
Kerr Forster of Antigua, agreed to transfer the audit file to HJ & Associates,
L.L.C. of Salt Lake City, Utah, U.S.A.
EXPERTS
The consolidated financial statements of Net-Force Systems Inc. as at October
31, 2001, April 30, 2001and April 30, 2000, appearing in this Registration
Statement have been audited by HJ & Associates L.L.C. with head offices in Salt
Lake City, Utah, U.S.A., independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding beneficial
ownership of our Common Stock as of October 31, 2001 by (i) each person who is
known to us to own beneficially more than 5% of our outstanding Common Stock,
(ii) each of our directors, (iii) executive officers and (iv) all current
directors and executive officers as a group.
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Owner (1) of Class
- ------------------------------------------------------------------------------------------
Terry G. Bowering 6,544,830 40.0%
#2, Flamboyant Ave. beneficial owner (2)
P.O. Box W-645
St. John's, Antigua, West Indies
Chairman,/President/Chief Executive Officer
Terry G. Bowering 500,000 3.1%
C/o High Street & Corn Alley beneficial owner (3)
P.O. Box 1679
St. John's, Antigua, West Indies
IFG Investments Services Inc. 6,027,870 36.8%
Suite #4 - Temple Building beneficial owner (4)
Main & Princess William St.
Charelstown, Nevis, West Indies
Dwight Lewis, Director 50,000 0.30%
Cassada Gardens
P.O. Box W 386
St. Johns, Antigua West Indies
Registration Statement Page 24
NET-FORCE SYTEMS, INC.
Derek C. Ferguson, Director 50,000 0.30%
512-1238 Seymor St.
Vancouver, British Columbia, Canada, V6B 6J3
Trevor Bowering, Director 200,000 1.2%
370 Cedar Meadow Drive
Regina, Sask.
Canada S4X 3J5
All Directors & Executive Officers
And control persons as a Group (5 persons) 13,272,700 81.7%
Total shares outstanding 16,906,333 100%
- ---------------------------------------
(1) No member of Management has the right to acquire within sixty days through
options, warrants, rights, conversion, privilege or similar obligations any
security of the Company.
(2) Geneva Overseas Holdings Ltd., of which Terry G. Bowering is beneficial
owner, enjoys legal ownership of said securities.
(3) JPKT Metro Investment Corporation, of which Terry G. Bowering is a
beneficiary, enjoys legal ownership of said securities.
(4) IFG Investments Services Inc., of which Kevin C. Mellor is beneficial
owner, enjoys legal ownership of said securities.
Note: The table does not reflect the stock options that may be granted to
Employees, Officers, Directors or Consultants nor does it reflect the warrants
offered.
CHANGES IN CONTROL
Management is not aware of any arrangements, which may result in a change of
control of the issuer.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
(a) There are no governmental laws, decrees, or regulations in Antigua and
Barbuda under the "Act" that restrict the export or import of capital of the
registrant as an exempt corporation under the "Act". Section 280 of The
International Business Corporations Act, 1982, Antigua and Barbuda, states the
following with respect to exchange controls:
"280. The income, profits, gains and other revenues, and the funds and
securities of an exempt corporation that are generated, acquired or managed in
the course of the international trade or business of the exempt corporation are
exempt from the Exchange Control Ordinance; and, unless the exempt corporation
is a resident, the income, profits, gains, and other revenues of the exempt
corporation are also exempt from that Act."
(b) There are no limitations on the right of nonresident or foreign owners to
hold or vote the securities to be registered in this filing by the registrant
company either under the "Act" or by charter or other constituent document of
the registrant.
ITEM 7. TAXATION
United States security holders of the registrant company are not subject to
taxes or withholding provisions. Sections 271- 274 of the International Business
Corporations Act, 1982, Antigua and Barbuda, Division G: Special Taxation
Provisions detail the relevant tax provisions under the Act.
Section 271, "Exempt corporations" states the following:
"For the purposes of this Division, an exempt corporation shall mean any
corporation formed or continued under this Act."
Section 272, "Exemption from tax" states the following:
Registration Statement Page 25
NET-FORCE SYTEMS, INC.
(1) No income tax, capital gains tax, or other direct tax or impost may be
levied in Antigua and Barbuda upon the profits or gains of an exempt
corporation, in respect of the international trade and business it carries
on from within Antigua and Barbuda.
(2) No income tax, capital gains tax, or other direct tax or impost may be
levied in Antigua and Barbuda in respect of any securities or assets of an
exempt corporation that are beneficially owned by an exempt corporation or
by a person who is not a resident.
(3) No estate, inheritance, succession or similar tax or impost may be levied
in Antigua and Barbuda in respect of any securities or assets of an exempt
corporation that are beneficially owned by an exempt corporation or by a
person who is not a resident.
(4) No tax, duty or other impost may be levied upon the increment in value of
the property, or other assets in Antigua and Barbuda or elsewhere of an
exempt corporation other than upon such of them as are distributed to
residents.
Section 273, "No assets transfer tax".
(1) No tax, duty or other impost may be levied upon an exempt corporation, its
security holders or transferees in respect of the transfer of all or any
part of it's securities or other assets to another exempt corporation or to
a person who is not a resident.
(2) When an exempt corporation or a person who is not a resident transfers
securities or assets of an exempt corporation that are held by that exempt
corporation, or person to another exempt corporation, or to another person
who is not a resident, the transfer is exempt from the payment of any tax,
duty, or other impost thereon.
(3) No income tax or capital gains tax, and no other direct tax or impost, may
be levied or collected in Antigua and Barbuda, in respect of any dividends
interests or other returns from any securities, deposits or borrowings of
an exempt corporations or any assets managed by the exempt corporation if
the dividends, interest or other returns are in respect of securities,
deposits, borrowings or assets beneficially owned by another exempt
corporation, or a person who is not a resident; but the onus of
establishing ownership, lies upon the exempt corporation holding or
managing the deposits, borrowings or assets.
Section 274, "Withholding tax and report"
(1) Notwithstanding, any provision of the Income Tax Ordinance, but subject to
subsection (2), no exempt corporation need withhold any portion of any
dividend, interest or other returns, payable of any person in respect of
any borrowings of the exempt corporation from that person or in respect of
securities of the exempt corporation held by that person.
(2) All dividends interest or other returns attributable to the securities of,
or the management of, assets by an exempt corporation that are payable to a
resident who is known to be a resident, by the exempt corporation or who,
with the exercise of reasonable care by the exempt corporation, could be
known by him to be a resident, must be reported to the Commissioner of
Inland Revenue by the exempt corporation.
Section 276 of the Act, "Duration of tax exemption" states the following:
"Any tax exemption provided under this Act, shall continue in effect for a
period of fifty years from the date of incorporation of the exempt corporation."
There is no reciprocal tax treaty in existence between the United States and
Antigua and Barbuda regarding withholding taxes.
Registration Statement Page 26
NET-FORCE SYTEMS, INC.
ITEM 8. SELECTED FINANCIAL DATA
Selected Financial Data
Set forth below is certain selected consolidated financial data of the Company
for the April 30, 2001 and April 30, 2000 year-ends. The selected financial
information is derived from the Company's audited consolidated financial
statements for the period. The company's consolidated financial statements are
prepared in accordance with US GAAP. The information set forth below should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations.
SUMMARY OF OPERATIONS (audited)
Stated in US Dollars 2001 2000
------ ------
Sales 318,490 1,399
Gross Profit 100,721 (78)
Loss from operations (406,798) (355,681)
Other Income and Expenses (77,799) (41,685)
Net Loss (484,597) (397,366)
Basic Loss Per Share (0.07) (0.05)
Weighted Average Number of Shares 7,171,233 8,500,000
Total Assets 269,194 221,512
Total Current Liabilities (773,554) 39,181
Long Term Debt (178,596) 550,690
Total Liabilities (952,150) 589,871
Common Stock 7,500 8,500
Paid in Capital 198,000 27,000
Accumulated deficit (888,456) (403,859)
Total Stockholders Equity (682,956) (368,359)
Total Liabilities and Shareholders Deficit 269,194 221,512
Eastern Caribbean and US Dollar Exchange Rates
- ----------------------------------------------
On March 22, 2000, the company received the following clarification from the
Director of Banking & Monetary Operations, Eastern Caribbean Central Bank,
Basseterre, St. Kitts, West Indies:
"The Eastern Caribbean dollar is pegged to the United States Dollar rate of
2.70. This rate has remained unchanged for several years and therefore is the
average exchange rate for the Eastern Caribbean Dollar to the United States
Dollar for the past five years."
All revenues are received in US Dollars. In addition, all marketing and
advertising expenditures and equipment of a material nature, are transacted in
US Dollars. Normal monthly office overhead expenses that include office rent,
leasehold improvements, utilities, bandwidth charges, and local salaries are
conducted in the EC Dollar.
Dividends
The company has not paid any cash dividends since its inception. The Company
does not intend to pay any cash dividends in the foreseeable future, but intends
to retain earnings, if any, for use in its business operations.
Registration Statement Page 27
NET-FORCE SYTEMS, INC.
ITEM 9. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION
I. PLAN OF OPERATIONS
------------------
A. Revenues and Financing
----------------------
Our principal source of revenue is generated from its operating subsidiary,
Netforce Entertainment, Inc. Netforce Gaming is a gaming company, which oversees
Internet wagering websites. It is anticipated that the Internet will continue to
become more accessible and that the market opportunities for us will continue to
expand. This tremendous growth will also attract many potential new competitors.
In order to maintain revenue growth, we intend to expand the content and to
improve the services on its Internet websites on a global basis, as well as
researching and developing other projects that will utilize its existing
facilities and expertise.
Revenue Generation Process. Revenues for the Company are generated each time a
customer makes a wager on the website. Net monthly revenues are calculated as
the total dollar amount wagered by customers in the virtual casino and/or the
sportsbook wagering web-site less winnings by customers in the virtual casino
and/or sportsbook wagering web-site less transaction processing fees for a given
calendar month.
Netforce Entertainment Inc. does not directly process player deposits and
winnings. Electronic Financial Services Caribbean, Inc., the transaction
processing subsidiary of World Gaming, is under contract to Netforce
Entertainment to process all deposits and credits on behalf of the Company's
gaming websites. Daily online activity reports of all financial transactions are
produced by Electronic Financial Service Caribbean, Inc.. These reports include
an account summary and an exposure report. The account summary details dollar
amounts deposited and withdrawn for each individual customer account for the
date queried. The exposure report provides an actual detailed breakdown of the
total dollar amounts wagered (i.e., total bets) and total winnings (i.e.,
payouts to winners of successful wagers) by each specific casino game played and
by each sports wagering type and event. The net amount (i.e., wagers less
payouts) is recognized as revenue. Electronic Financial Service Caribbean, Inc.
produces a monthly summary report of total net monthly revenue (i.e., total
dollar amount wagered less winnings) less transaction processing fees less
calculated software licensing fees (i.e., a percentage of net revenues
calculated according to the terms of the Software Licensing Agreement attached
hereto as an Exhibit).
We have been funded to date through debt financing from private arm's length
lenders. The Company has secured approximately $495,000 US through debt
financing. The sum was received by us pursuant to a note payable dated July 13,
1999 payable to Mountain High Management Inc. The loan was unsecured, with
interest at the rate of 15% per annum and was due on July 29, 2001. The Company
received the sum on or about July 13, 1999.
On June 1, 2000, pursuant to Regulation S, the Board authorized the issuance of
2,500,000 Units comprised of one (1) $0.001 par value common stock and one (1)
warrant that allows the holder to purchase one (1) share of the Company's $0.001
par value common stock at an exercise price of $2.00 per share, to be exercised
no later than December 31, 2002 after which the warrants would become null and
void. Each Unit was offered at the price of $0.10. This offering was sold out on
or about June 30, 2000.
Subsequent to the due date of July 13, 2001, the promissory note was acquired
from Mountain High Management Inc. by IFG Investments Inc. On September 15,
2001, Netforce Systems Inc. entered into an agreement with IFG Investments Inc.
to convert the total principal and accrued interest on the note to equity at a
value of $0.10 per share for a total of 6,027,870 shares issued. Related-party
unsecured shareholder loans with an interest rate of 8.0% made by Geneva
Overseas Holdings Ltd. totaled $208,121 as at September 15, 2001. Geneva
Overseas Holdings Ltd. is controlled by the President of Net-Force Systems Inc.,
Terry G. Bowering. On September 15, 2001, Net-Force Systems Inc. entered into an
agreement with Geneva Overseas Holdings Ltd. to convert the principal plus
accrued interest of $214,483 of the loan to equity at a share value of $0.10 per
share for a total of 2,144,830 shares issued. On November 20, 2000, Net-Force
Systems Inc. issued a promissory note for $50,000 with interest rate of 8.0% to
Low Tide Investments Inc. On September 15, 2001, Net-Force Systems Inc.
converted the loan payable plus accrued interest to Low Tide Investments Inc. to
equity at a value of $0.10 per share for a total of 533,333 shares issued. (See
Financial Statements, Note 5 - Material Events).
Registration Statement Page 28
NET-FORCE SYTEMS, INC.
Management believes that the reduction of this total debt burden combined with
existing cash resources and ongoing revenues from operations will enable the
Company to meet its financial obligations for the next 12 months. No assurance
can be given that revenues from gaming activities and/or proposed secondary
revenues will enable us to meet our financial obligations. As such, we may
solicit and arrange for additional debt financing from private arm's length
lenders in the event existing financing and revenues do not meet our financial
obligations. In addition, we may consider raising additional equity financing
through the sale of common stock of the Company through private placements to
sophisticated investors. The combination of existing financing, expected
revenues from operations and additional debt and/or equity financing is intended
to provide us with sufficient operating capital for a period of approximately
two years.
Historical Expenditures. Historical expenditures up to the period ending October
31st, 2001 have consisted primarily of organizational/set-up costs such as
office leasehold improvements and security deposits for rent, utilities, and
licenses as well as accounting/auditing and legal services. Monthly expenditures
for office overhead included rent, utilities, salaries, and marketing
expenditures.
Payments to be made to World Gaming for the gaming software are comprised of the
following 2 components:
1. Payment for the software: a one-time US$100,000 fee for the set-up and
---------------------------------------------------
configuration. This fee includes all future versions and upgrades of
the software at no additional cost.
Actual payments made by Netforce Systems Inc. to Softec Systems to date consist
of a deposit of US$ 10,000.00 upon the signing of the software agreement. This
payment was the first installment of the total US$100,000.00 one-time software
set-up and configuration fee. The balance of payments as detailed in the
software agreement called for the balance of US$90,000 to be paid in monthly
installments @ US$10,000 until fully paid. The payment schedule for the software
commenced on the date of `live' operations, the design and testing of the gaming
website is complete and the first wager. That date was April 7th, 2000.
2. Ongoing royalty payments to World Gaming consisting of a percentage of
----------------------------------------
the net revenue generated on a monthly basis. As detailed in the
software agreement, these payments will begin upon commencement of
live operations of the gaming website. The schedule of royalty
payments payable to World Gaming as detailed in Schedule "A" of the
software agreement is as follows:
*Net Monthly Revenue (US$) Royalty Fee Payable
-------------------------- -------------------
0 to < or = $500,000 25%
$500,000 to < = $1,000,000 20%
$1,000,000 to < = $5,000,000 15%
$5,000,000 < = $10,000,000 12.5%
$10,000,000 plus 10%
*Net Monthly Revenue is calculated as the total dollar amount wagered
in the virtual casino and/or the sportsbook wagering site LESS
winnings in the virtual casino and/or sportsbook wagering site LESS
transaction processing fees, for a given calendar month.
3. Payment Processing Agreement: Section 2.3.1 of the software agreement
----------------------------
states: "Softec shall provide a transaction processing system that
will allow the licensee's customers to deposit funds for use of the
Games (the "Transaction Processing System")." ... Deposits are made
electronically by Visa or Mastercard credit cards and by other methods
such as bank wire transfer and bank draft. This transaction processing
system is provided by Electronic Financial Services Caribbean Inc.,
wholly owned subsidiary of World Gaming. Electronic Financial Service
Caribbean, Inc. will also facilitate payouts of winnings for the
licensee by processing credits to credit cards and by bank draft.
Actual cost to the company for payment processing include transaction fees of
5.50 % and a flat fee of US$1.60 per transaction. As well, there is a monthly 5%
rolling reserve held which is rolled back to the licensee after 180 days. This
reserve is required to offset any credit card chargebacks that may occur.
Finally, there is a US$5.00 charge for each bank draft that is processed for
payouts of winnings.
Registration Statement Page 29
NET-FORCE SYTEMS, INC.
The only significant trends in expenditures in this industry of note, relate to
marketing expenditures and its direct relationship with net revenues generated.
Marketing expenditures are a variable cost, so it is anticipated that as these
expenditures are increased revenues will respond as a direct result, further
enhancing the company's liquidity. It is important to note that the revenues
generated are entirely of a cash nature as no credit is extended to customers.
Therefore since there are no customer receivables generated of a material
nature, there is no need to establish an allowance for doubtful accounts. Any
accounts receivable carried on the balance sheet consists of monthly net
revenues payable by Electronic Financial Services Caribbean Inc. and World
Gaming Plc. Typically net revenue is due and payable at month-end but not
actually paid until the 15th of the following month. As was stated in the
previous paragraph, EFS Caribbean Inc., the credit card transaction processor,
maintains a 10% rolling reserve hold on credit card deposits on behalf of the
company. These reserved funds are released after a 180-day period on a monthly
rolling basis. EFS had increased the rolling reserve to 10% of deposits to allow
for a slightly increased level of credit card chargebacks industry-wide.
B. Operations for the Next Twelve Months
-------------------------------------
Our primary on-line wagering website, www.aogaming.com, went live on the
----------------
Internet on April 7th, 2000. Since that time, the Web site has gone through
several changes, re-designs, and upgrades as management had deemed necessary as
a result of evolving customer needs and competitive influences. We intend to
hire additional product, marketing, website and graphic design personnel over
the next twelve months as is deemed necessary by management. From player data
obtained from the websites during the first twelve to fifteen months of
operations, we plan to make adjustments to the operations as is deemed necessary
by management.
C. Balance Sheet Data
------------------
At Oct.31,2001 At April 30,2001 April 30, 2000
-------------- ---------------- --------------
Total Assets 294,798 269,184 221,512
Shareholders' Equity (deficit) 154,280 (682,956) (368,359)
D. Liquidity and Capital Resources
-------------------------------
Funding for the next year will be derived from current cash resources and
expected revenues from ongoing operations. However, to fuel the growth of the
company through the funding of marketing expenditures, we may seek further
funding in the form of a promissory note combined with the issuance of
additional stock from our treasury. The company anticipates revenues from
operations will provide sufficient cash flow to supplement existing current cash
resources to allow the company to adequately cover all overhead expenses over
the balance of the calendar year 2002. Because of the very nature of the
Internet, our company operates and delivers its service with relatively low
fixed overhead costs. The material variable cost factor is marketing
expenditures, which in turn drives revenues.
During the most recent financial quarter, an agreement was reached whereby the
promissory note issued by Netforce Systems, Inc. to Mountain High Management,
Inc. on July 15, 1999 was swapped for equity. IFG Investments, Inc. reached an
agreement with Mountain High Management, Inc. to purchase the note at a
discount. IFG then approached Netforce Systems, Inc. with a proposal to convert
the note to equity. On September 15, 2001, under an agreement between the
company and IFG Investments, Inc., the principal plus accrued interest on the
note was converted to equity at a value of $0.10 per share. Also on September
15, 2001, Net-Force Systems Inc. entered into an agreement with Geneva Overseas
Holdings Ltd. to convert the principal and accrued interest of its related party
shareholder loan to equity at a share value of $0.10 per share. In addition, on
September 15, 2001, Net-Force Systems Inc. converted a loan payable to Low Tide
Investments Inc. to equity at a value of $0.10 per share. Management believes
that these transactions substantially increases our liquidity and reduces the
financial risk for our company by effectively eliminating the long-term debt on
our balance sheet. (See Financial Statements, note 5-Material Events).
Registration Statement Page 30
NET-FORCE SYTEMS, INC.
Initially, the software license fee agreement booked on the balance sheet as a
current payable, (net payable = $90,000), was payable in monthly installments of
US$10,000 per month until the balance of $100,000 was fully paid. The first
payment of the balance was to commence 90 days from the date of commencement of
live operations. We negotiated an agreement to have the balance of payments
waived as compensation for the failure of its software provider (Starnet Systems
International), to deliver on promised software upgrades and support services.
As of April 7, 2000, Netforce Entertainment, Inc. launched its primary online
gaming site Antigua Online Gaming at www.aogaming.com. The gaming website has
----------------
grown steadily from that date. However, to continue to grow our gaming websites'
customer traffic, member base, and revenues, we will need to increase our
investment in marketing expenditures. We may therefore find it necessary to
raise additional funds as is deemed necessary by management through private
placements of stock issued out of our treasury to individuals or corporations
who have expressed interest in obtaining stock in the Company.
E. Material Commitments for Capital Expenditures
---------------------------------------------
Material commitments for capital expenditures as of the end of the latest
interim period consisted of computer hardware and office furniture and equipment
(desks and chairs), and office leasehold improvements. The office and computer
hardware specifically included personal computers, printers, fax machines, and
backup power supply units, which maintain operation of the electronic office
equipment during short power outages.
The purpose of these capital expenditure commitments was to establish a
corporate and administrative office for the company. From this office, the
company conducts web-site design, marketing, customer service support services
for the company's websites. The company also manages corporate communications
and investor relations from this office. The company maintains access to the
Internet, which requires personal computers, communications hardware and
software, and backup power supply units. All of the above commitments were
settled in full payment from cash resources made available from the initial
share issuances and from the proceeds from the promissory note. The details of
the note are provided in the financial statements and in the body of the
registration statement.
As stated, the major capital expenditure for software was US$100,000 payable to
Starnet Systems International (formerly Softec Systems). An initial payment of
US$10,000.00 was paid upon execution of the agreement leaving a balance of
US$90,000.00 payable upon completion of the configuration/design of the software
and commencement of live operations. The balance was negotiated to zero as a
result of a compensation agreement with Starnet Systems International.
F. Material Commitments for Resources
----------------------------------
As already stated, the only material commitment of resources anticipated over
the next year will be marketing expenditures. Being a variable cost, marketing
and advertising expenses are controlled by management. There will be no
additional material capital expenditures necessary over the next year.
Given that the product delivery process utilizes the Internet, overhead expenses
are kept at a minimal level, as an increase in customer base and revenues does
not necessarily require incremental investment in personnel or equipment. The
customer service function and transaction processing system; as well as
web-hosting costs are absorbed by World Gaming as outlined in the software
agreement. After the one-time set-up fee is accounted for, the cost of the
software to the company on an ongoing basis is a variable cost (percentage of
monthly net revenues).
Any material commitments of resources and normal monthly operating expenses over
the next year will be funded from a combination of existing cash resources, cash
flow generated from anticipated proceeds from an additional financing. This
additional financing, if necessary, may consist of a combination of equity
financing and issuing a promissory note with a possible convertible equity
component attached.
Registration Statement Page 31
NET-FORCE SYTEMS, INC.
G. Impact of Inflation
-------------------
The Company believes that inflation will not materially affect its business.
H. Year 2000 Risks and Compliance
------------------------------
The Year 2000 issue did not in any way adversely affect us. We experienced no
negative affects in the three of the potential areas of its computer systems
that it identified as potential for risk; its internal systems, its third-party
providers of computer systems, and the general infrastructure of the Internet.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
I. QUANTITATIVE INFORMATION ABOUT MARKET RISK
------------------------------------------
Not Applicable
II. QUALITATIVE INFORMATION ABOUT MARKET RISK
-----------------------------------------
Not Applicable
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
I. DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
Terry G. Bowering
- -----------------
Chairman, President and Chief Executive Officer
- -----------------------------------------------
# 2, Flamboyant Avenue
P.O. Box W-645
St. John's, Antigua, West Indies
DOB: August 30, 1960 (Age 41)
Regina, Saskatchewan, Canada
Terry G. Bowering, B.Admin, M.B.A.
Mr. Bowering brings over fifteen years of experience in business management. Mr.
Bowering has considerable experience in both large corporations and
entrepreneurial enterprises and is qualified in the areas of business
development, finance, information systems, marketing, and sales. From January
1998 until his resignation June 20, 1999, Mr. Bowering was Vice President,
Offshore Operations for Starnet Communications International Inc., a Delaware
corporation, which is a fully reporting issuer on the NASD OTC:BB. Described as
being the "Microsoft of Internet Gaming", Starnet Communications International,
Inc., now World Gaming, is one of the world's leading Internet Gaming Software
providers. Mr. Bowering was instrumental in establishing and developing offshore
operations and foreign government relations for World Gaming in Antigua and for
establishing worldwide offshore banking relationships in concert with the
corporate development of World Gaming's subsidiaries, Electronic Financial
Services Caribbean Inc. and its group of International companies. Mr. Bowering
has been interviewed and quoted in the International press including FOX TV,
COMPUTER WORLD MAGAZINE, SHIFT MAGAZINE, TIME MAGAZINE (Atlantic Edition), and
ESPN, specifically on the subject of offshore Internet Gaming. From 1996 to
1998, Mr. Bowering was an Investment Advisor, Vancouver office, with Levesque
Securities Inc., a major Canadian brokerage firm. From May 1992 to June 1996,
Mr. Bowering was a financial analyst with the Asset Management Group Dept. of
Crown Life Insurance in Regina, Saskatchewan, Canada.
Registration Statement Page 32
NET-FORCE SYTEMS, INC.
Mr. Bowering holds a Bachelor of Administration in Finance from the University
of Regina, and a Master of Business Administration with a concentration in
Strategic Management from the University of Saskatchewan. Mr. Bowering resides
in Antigua, West Indies.
Mr. Bowering was appointed to the above positions on March 1, 1999 to serve
until his successor has been elected and qualifies.
Dwight Lewis
- ------------
Director
- --------
Cassada Gardens
P.O. Box W-386
St. John's, Antigua, West Indies
DOB: May 24, 1961 (Age 40)
St. Lucia, West Indies
Dwight Lewis, MA, BSc.
Mr. Lewis is presently engaged as a Financial Consultant to Hanson International
Investment Services Ltd., an investment advisory organization. He also is
Managing Director of Mahaut Ltd., a corporation that provides offshore financial
services to its clients. Most recently Mr. Lewis was engaged as a Financial
Consultant and Interim Manager of RYO International Corporation and SAGA
Corporation, which were eventually merged to form International Data Processing.
This corporation owns and operates a number of Internet Casinos based and
licensed in Antigua. On behalf of the corporation's overseas principals, Mr.
Lewis was responsible for establishing these operations from conception to live
operation, having dealt with all aspects of the company's operations and
providing ongoing management and supervisory services.
From 1992 to 1997, Mr. Lewis was employed with the Bank of Antigua Ltd. as a
Senior Manager dealing with management of the investment portfolio and general
supervision of all bank operations. From 1988 to 1992, Mr. Lewis was employed
with the Eastern Caribbean Central Bank, located in St. Kitts, as a Senior Bank
Examiner. This entailed general supervision of commercial banking activities in
all member banks of the Eastern Caribbean Central Bank. From 1986 to 1988, Mr.
Lewis worked as a Budget Analyst with the Ministry of Finance, Government of St.
Lucia, and with Barclays Bank, St. Lucia, from 1980 to 1983.
Mr. Lewis graduated from the University of West Indies, Cave Hill Campus,
Barbados, with a Bachelor of Science Degree in Economics and Management. Mr.
Lewis also attended the University of Sheffield, Management School, England,
where he obtained an MA in Banking and International Finance. Mr. Lewis resides
in Antigua, West Indies.
Mr. Lewis was appointed to the position of Director on December 20, 1999 to
serve until his successor has been elected and qualifies.
Derek C. Ferguson
- -----------------
Director
- --------
512-1238 Seymor St.
Vancouver, B.C., V6B 6J3 Canada
DOB: August 12, 1972 (Age 30)
Vancouver, Canada
Derek C. Ferguson, B.Comm
Mr. Ferguson advises on and oversees technical and systems-related issues and
initiatives for Netforce Systems Inc. Mr. Ferguson is presently a Director and
Chief Operations Officer for eTunnels Inc., a Delaware corporation that delivers
mass-market and corporate virtual private networking solutions over the
Internet.
Registration Statement Page 33
NET-FORCE SYTEMS, INC.
From April 1998 to October of 1999, Mr. Ferguson acquired in-depth experience in
the online gaming industry in his role as Senior Systems Administrator for
Starnet Communications International Inc., an International Internet Technology
company. Starnet is recognized as the world's leading Internet Gaming Software
provider. In addition to providing technical design and maintenance leadership
for the Systems Administration department, Mr. Ferguson redesigned its systems
infrastructure to dramatically improve the reliability and scalability of
Starnet's Internet services. Mr. Ferguson was also Network Manager for I.D.
Internet Direct Ltd., a division of Look Communications Inc., a publicly traded
Canadian company operating in the fields of broadcast distribution services and
Internet solutions. At Internet Direct, Mr. Ferguson directed technical design
and support operations for their national consumer dial and corporate broadband
services, helping to grow the service to 35,000 subscribers. Mr. Ferguson
received his Bachelor of Commerce degree with a concentration in Management and
Information Systems (MIS) from Dalhousie University, Halifax, Canada. Mr.
Ferguson resides in Vancouver, Canada.
Mr. Ferguson was appointed to the position of Director on September 10, 2001 to
serve until his successor has been elected and qualifies.
Trevor L. Bowering
- ------------------
Director
- --------
370 Cedar Meadow Drive
Regina, Saskatchewan, Canada, S4X 3J5
DOB: March 14, 1959 (Age 42)
Regina, Canada
Trevor L. Bowering - Technical Consultant
Mr. Bowering has been employed in the telecommunications field with SaskTel for
over 22 years. With assets of over $1.2 billion, SaskTel has been in operation
for 90 years and provides a full range of hi-tech communication solutions for
more than 454,000 business and residential customers worldwide. SaskTel is a
crown corporation, wholly-owned by the province of Saskatchewan, Canada, and a
world leader in providing the latest technological and software solutions
telecommunications expertise as well as Internet and Interactive services. Mr.
Bowering currently manages SaskTel's Local and Long-distance switching network
including DMS100's, DMS200, STP, DC Power Plants, Operator Services,
Interexchange Carriers (Telus, ATT, Bell, Nexia), 911, Mobility (cellular),
CCS7, and Network Management. He personally oversees a staff of staff of 39
Trunking and Switching Technicians responsible for installing, maintaining and
trouble shooting on a 24/7 basis. SaskTel's entire high-speed Internet system
interfaces to its customers via this Switching equipment. Mr. Bowering and his
staff have been on assignment with SaskTel International in England, Italy,
Spain, Chile, Belgium, and France. Mr. Bowering currently resides in Regina,
Saskatchewan, Canada.
Mr. Bowering was appointed to the position of Director on August 15, 2001 to
serve until his successor has been elected and qualifies.
II. FAMILY RELATIONSHIPS
--------------------
Among directors, executive officers or persons nominated or chosen by the
Company to become officers or executive officers, a family relationship exists
between Chairman and President Mr. Terry G. Bowering and Director Trevor L.
Bowering.
III. INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
Article VIII of the Company's Articles of Incorporation read as follows:
Registration Statement Page 34
NET-FORCE SYTEMS, INC.
INDEMNIFICATION. The Corporation shall indemnify any and all of its Directors,
officers, employees or agents or former Directors, officers, employees or agents
or any person or persons who may have served at its request as a Director,
officer, employee or agent of another company, partnership, joint venture, trust
or other enterprise in which it owns shares of capital stock or of which it is a
creditor, to the full extent permitted by law. Said indemnification shall
include, but not be limited to, the expenses, including the cost of any
judgments, fines, settlements and counsel's fees, actually and necessarily paid
or incurred in connection with any action, suit or proceeding, whether civil,
criminal, administrative or investigative, and any appeals thereof, to which any
such person or his legal representative may be made a party or may be threatened
to be made a party by reason of his being or having been a Director, officer,
employee or agent as herein provided unless such action, suit or proceeding is a
result of the Director, officer, employee or agent's own negligence or illegal
action. The foregoing right of indemnification shall not be exclusive of any
other rights to which any Directors, officer, employee or agent may be entitled
as a matter of law or which he may be lawfully granted.
In addition, Section 97 of The Antigua and Barbuda International Business
Corporations Act, 1982 indicates that the foregoing provisions shall not
eliminate or limit the liability of a director to the corporation or to its
shareholders for monetary damages for any breach of the director's duty of care
to the corporation or to its shareholders, acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, improper
corporate distributions, or any transaction from which the director directly or
indirectly derived an improper personal benefit.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
In the fiscal years ended April 2000 and April 2001, our Chairman, President and
Chief Executive Officer, Terry G. Bowering, received a salary of $52,000 and
$38,000, respectively. Mr. Douglas Bolen, acting as Secretary and Director,
received a salary of $18,000 during the fiscal year ended April 2000 and in the
fiscal year ended April 2001. In the current fiscal year, Mr. Bowering is not
receiving a salary but is reimbursed for business travel expenses. Currently, no
other Directors or Officers are receiving a salary. The members of our Board are
reimbursed for actual expenses incurred in attending Board meetings. There are
no other arrangements for compensation to the Board of Directors' members.
There are no written employment contracts or agreements with any executive
officers or contract employees. Employee salaries are set by the Members of the
Board of Directors.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
To date, we have not authorized the issuance nor granted any Employee Stock
Options pursuant to a Non-Qualified Stock Option Plan to any Officers,
Directors, Consultants, or Employees.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A related party transaction took place between Geneva Overseas Holdings Ltd. and
Net-Force Systems Inc. Geneva Overseas Holdings Ltd. is controlled by the
President of Net-Force Systems Inc., Mr. Terry G. Bowering. Geneva Overseas
Holdings Ltd. provided a total of $214,483 in shareholder loans to Net-Force
Systems Inc. On September 15, 2001, Geneva Overseas Holdings Ltd. entered into
an agreement with Net-Force Systems Inc. to convert the principal and accrued
interest at that date on the loans to equity at $0.10 per share. The total
shares issued to Geneva Overseas Holdings Ltd. was 2,144,830. (See Financial
Statements, Note 5 - Material Events).
We are not aware of any other transactions or proposed transactions in respect
of which we were or are to be a party, in which any director, executive officer,
nominee for election as a director, 5% security holder, member of the immediate
family of any of the previously named persons had a direct or indirect interest
in the transaction.
Registration Statement Page 35
NET-FORCE SYTEMS, INC.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
The securities to be registered pursuant to this Form 20-F are all of the
authorized Common Stock of Net-Force Systems Inc. Holders of the Common Stock
are entitled to cast one vote for each share held at all shareholder meetings
for all purposes, except that in the election of Directors, each shareholder of
Common Stock shall have as many votes for each share held by him as there are
directors to be elected and for whose election the shareholder has a right to
vote. There are no preemptive rights associated with the securities and no
cumulative voting is authorized by the Articles of Incorporation or the By-Laws.
The total amount of shares authorized by the Company's Articles of Incorporation
is 150,000,000. Of these, 100,000,000 are Common Stock and 50,000,000 are
Preferred Stock. There has been no issuance of any Preferred stock. Dividend,
voting, conversion rights, liquidation rights and other rights of the Preferred
Stock, if any, will be established by the Board of Directors upon issuance.
The Company has never declared or paid cash dividends on the common stock of the
Company. Management intends to retain all available funds and any future
earnings for use in the operation and expansion of the business and does not
anticipate paying any cash dividends in the foreseeable future.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
There is no public trading market for the common equity shares of the
registrant. If the registrant successfully obtains a listing, as is presently
intended by management, the common equity shares will be listed upon the OTC
Bulletin Board Service. As of January 28, 2002, there are approximately 38
equity holders of record of the Company's Common Stock. As of January 28, 2002,
there are 2,500,000 shares of the Company's Common Stock subject to outstanding
warrants to purchase or securities convertible into Common Stock of the Company.
The number of shares eligible for trading will be all of the Common Stock except
that which is owned by management of the Company. The Management of the Company
currently owns an aggregate of 13,372,700 shares, which can be sold only in
compliance with Rule 144. There have been no cash dividends declared since the
inception of the Company its subsidiaries. There are no restrictions that would
limit the ability to pay dividends on common equity or that are likely to do so
in the future.
PART IV
ITEM 17. FINANCIAL STATEMENTS
N/A
ITEM 18. FINANCIAL STATEMENTS
i. NET FORCE SYSTEMS INC. UNAUDITED QUARTERLY STATEMENT OCTOBER 31, 2001
ii. NET FORCE SYSTEMS INC. AUDITED FINANCIAL STATEMENTS, APRIL 30, 2001
Registration Statement Page 36
NET FORCE SYSTEMS INC. UNAUDITED QUARTERLY STATEMENT OCTOBER 31, 2001
NET-FORCE SYSTEMS INC.
CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2001 and April 30, 2001
Registration Statement Page 37
NET-FORCE SYSTEMS INC.
Consolidated Balance Sheets
ASSETS
------
October 31, April 30,
2001 2001
------------------ ------------------
(Unaudited)
CURRENT ASSETS
Cash $ 33,005 $ 33,292
Accounts Receivable, net 39,818 9,805
Reserves and deposits with credit card processors 45,519 30,858
Prepaid expenses 20,000 -
------------------ ------------------
Total Current Assets 138,342 73,955
------------------ ------------------
PROPERTY AND EQUIPMENT 22,630 26,551
------------------ ------------------
OTHER ASSETS
Player deposits 87,367 73,828
Deposits 4,792 3,193
Gaming license 41,667 91,667
------------------ ------------------
Total Other Assets 113,826 168,688
------------------ ------------------
TOTAL ASSETS $ 294,798 $ 269,194
================== ==================
Registration Statement Page 38
NET-FORCE SYSTEMS INC.
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
October 31, April 30,
2001 2001
------------------ ------------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 25,432 $ 42,400
Accrued expenses 25,205 24,351
Interest payable - related party 14 4,243
Interest payable - 81,707
Stock subscription payable - 50,000
Player deposits 87,367 73,828
Current portion note payable - related party - 2,025
Current portion note payable - 495,000
------------------ ------------------
Total Current Liabilities 138,018 773,554
------------------ ------------------
LONG-TERM DEBT
Note payable - related party 2,500 128,596
Note payable - 50,000
------------------ ------------------
Total Long-Term Debt 2,500 178,596
------------------ ------------------
Total Liabilities 140,518 952,150
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock: 50,000,000 shares authorized of $0.001 par
value, zero issued and outstanding - -
Common stock: 100,000,000 shares authorized of $0.001
par value, 16,906,033 and 7,500,000 shares issued and
outstanding, respectively. 16,906 7,500
Additional paid-in capital 1,129,197 198,000
Accumulated deficit (991,823) (888,456)
------------------ ------------------
Total Stockholders' Equity (Deficit) 154,280 (682,956)
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 294,798 $ 269,194
================== ==================
Registration Statement Page 39
NET-FORCE SYSTEMS INC.
Consolidated Statements of Operations
(Unaudited)
For the For the
Six Months Ended Three Months Ended
October 31, October 31,
--------------------------------- ---------------------------------
2001 2000 2001 2000
---------------- --------------- --------------- ----------------
REVENUE
Sales $ 292,544 $ 106,445 $ 169,557 $ 50,932
Cost of sales 187,421 57,564 76,567 4,012
---------------- --------------- --------------- ----------------
Gross Margin 105,123 48,881 92,990 46,920
---------------- --------------- --------------- ----------------
EXPENSES
General and administrative 120,552 354,339 85,546 200,195
Depreciation and amortization 54,388 3,994 27,206 1,997
---------------- --------------- --------------- ----------------
Total Expenses 174,940 358,333 112,752 202,192
---------------- --------------- --------------- ----------------
LOSS FROM OPERATIONS (69,817) (309,452) (19,762) (155,272)
---------------- --------------- --------------- ----------------
OTHER INCOME (EXPENSE)
Interest income - 204 - 204
Other income 493 10,687 - 4,257
Interest expense (34,043) (37,126) (11,831) (18,563)
---------------- --------------- --------------- ----------------
Total Other Income (Expense) (33,550) (26,235) (11,831) (14,102)
---------------- --------------- --------------- ----------------
PROVISION FOR INCOME TAX - - - -
---------------- --------------- --------------- ----------------
NET LOSS $ (103,367) $ (335,687) $ (31,593) $ (169,374)
================ =============== =============== ================
BASIC LOSS PER SHARE $ (0.01) $ (0.05) $ (0.00) $ (0.03)
================ =============== =============== ================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 9,824,516 6,838,798 12,149,031 6,181,319
================ =============== =============== ================
Registration Statement Page 40
NET-FORCE SYSTEMS, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
Common Stock Additional
------------------------------ Paid-in Accumulated
Shares Amount Capital Deficit
-------------- -------------- ------------- -------------
Balance, March 1, 1999 - $ - $ - $ -
March 1, 1999, common stock
issued to founders for cash at
$0.001 per share 5,500,000 5,500 - -
April 22, 1999, common stock
issued for cash at $0.01 per
share 3,000,000 3,000 27,000 -
Net loss from inception on
March 1, 1999 through
April 30, 1999 - - - (6,493)
-------------- -------------- ------------- -------------
Balance, April 30, 1999 8,500,000 8,500 27,000 (6,493)
Net loss for the year ended
April 30, 2000 - - - (397,366)
-------------- -------------- ------------- -------------
Balance, April 30, 2000 8,500,000 8,500 27,000 (403,859)
July 1, 2000, common stock
repurchased and canceled at
$0.01 per share (3,000,000) (3,000) (27,000) -
September 30, 2000, common
stock issued for cash at $0.10
per share 2,000,000 2,000 198,000 -
Net loss for the year ended
April 30, 2001 - - - (484,597)
-------------- -------------- ------------- -------------
Balance, April 30, 2001 7,500,000 $ 7,500 $ 198,000 $ (888,456)
-------------- -------------- ------------- -------------
Registration Statement Page 41
NET-FORCE SYSTEMS, INC.
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
Common Stock Additional
------------------------------ Paid-in Accumulated
Shares Amount Capital Deficit
-------------- -------------- ------------- -------------
Balance forward 7,500,000 $ 7,500 $ 198,000 $ (888,456)
August 15, 2001, common stock
issued for services at $0.10 per
share (unaudited) 200,000 200 19,800 -
September 15, 2001, common
stock issued for debt at $0.10 per
share (unaudited) 2,144,830 2,145 212,338 -
September 15, 2001, common
stock issued for debt at $0.10
per share (unaudited) 6,027,870 6,028 596,759 -
September 20, 2001, common
stock issued for debt at $0.10
per share (unaudited) 533,333 533 52,800 -
October 2, 2001, common
stock issued for debt at $0.10
per share (unaudited) 500,000 500 49,500 -
Net loss for the six months
ended October 31, 2001
(unaudited) - - - (103,367)
-------------- -------------- ------------- -------------
Balance, October 31, 2001
(unaudited) 16,906,033 $ 16,906 $ 1,129,197 $ (991,823)
============== ============== ============= =============
Registration Statement Page 42
NET-FORCE SYSTEMS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
For the
Six Months Ended
October 31,
--------------------------------------
2001 2000
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (103,367) $ (335,687)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 54,388 3,994
Stock issued for services 20,000 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivables and other assets (63,551) (65,061)
(Increase) in reserves and deposits (16,261) -
Increase (decrease) in accounts payable and other
current liabilities (16,111) 44,028
Increase in accrued interest 29,409 37,126
Increase in accrued interest - related party 4,634 -
Increase (decrease) in player deposits 13,539 48,368
------------------ ------------------
Net Cash Used by Operating Activities (77,320) (267,232)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of fixed assets 333 -
Purchase of fixed assets (800) (3,871)
------------------ ------------------
Net Cash Used by Investing Activities (467) (3,871)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock repurchase - (30,000)
Proceeds from notes payable - related party 80,000 60,000
Payment on notes payable - related party (2,500) -
Common stock issued for cash - 200,000
------------------ ------------------
Net Cash Provided by financing Activities 77,500 230,000
------------------ ------------------
NET INCREASE (DECREASE) IN CASH (287) (41,103)
CASH AT BEGINNING OF PERIOD 33,292 131,269
------------------ ------------------
CASH AT END OF PERIOD $ 33,005 $ 90,166
================== ==================
CASH PAID FOR:
Interest $ - $ -
Income taxes $ - $ -
Registration Statement Page 43
NET-FORCE SYSTEMS, INC.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the
Six Months Ended
October 31,
--------------------------------------
2001 2000
------------------ ------------------
NON-CASH FINANCING ACTIVITIES:
Issuance of stock for services $ 20,000 $ -
Issuance of stock for debt $ 706,116 $ -
Issuance of stock for related party debt $ 214,483 $ -
Registration Statement Page 44
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
October 31, 2001 and April 30, 2001
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted in accordance with such rules and regulations.
The information furnished in the interim consolidated financial
statements include normal recurring adjustments and reflects all
adjustments, which, in the opinion of management, are necessary for a
fair presentation of such financial statements. Although management
believes the disclosures and information presented are adequate to
make the information not misleading, it is suggested that these
interim consolidated financial statements be read in conjunction with
the Company's most recent audited financial statements and notes
thereto included in its April 30, 2001 Annual Report on Form 20-F.
Operating results for the six months ended October 31, 2001 are not
necessarily indicative of the results that may be expected for the
year ending April 30, 2002.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENT
The Company has adopted the provisions of FASB Statement No. 138
"Accounting for Certain Derivative Instruments and Hedging Activities,
(an amendment of FASB Statement No. 133.)" Because the Company had
adopted the provisions of FASB Statement No. 133, prior to June 15,
2000, this statement is effective for all fiscal quarters beginning
after June 15, 2000. The adoption of this principle had no material
effect on the company's consolidated financial statements.
The Company has adopted the provisions of FASB Statement No. 140
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (a replacement of FASB Statement No.
125.)" This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that
approach, the transfer of financial assets, the Company recognized the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This
statement provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. This statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
March 31, 2001. This statement is effective for recognition and
reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending
after December 15, 2000. The adoption of this principle had no
material effect on the Company's consolidated financial statements.
Registration Statement Page 45
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
October 31, 2001 and April 30, 2001
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENT (Continued)
The Company had adopted the provisions of FIN 44 "Accounting for
Certain Transactions Involving Stock Compensation (an interpretation
of APB Opinion No. 25.)" This interpretation is effective July 1,
2000. FIN 44 clarifies the application of Opinion No. 25 for only
certain issues. It does not address any issues related to the
application of the fair value method in Statement No. 123. Among other
issues, FIN 44 clarifies the definition of employee for purposes of
applying Opinion 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of
various modifications to the terms of a previously fixed stock option
or award, and accounting for an exchange of stock compensation awards
in a business combination. The adoption of this principle had no
material effect on the Company's consolidated financial statements.
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
long-lived assets, including goodwill associated with other long-lived
assets, are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
SFAS No.'s 141 and 142 -- In June 2001, the Financial Accounting
------------------------
Standards Board (FASB) adopted Statement of Financial Accounting
Standards SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 is effective as
to any business combination occurring after June 30, 2001 and certain
transition provisions that affect accounting for business combinations
prior to June 30, 2001 are effective as of the date that SFAS No. 142
is applied in its entirety, which will be January 1, 2002 for the
Company. SFAS No. 142 is effective, generally, in fiscal years
beginning after December 15, 2001, which will be the fiscal year
ending April 30, 2002 for the Company.
SFAS No. 141 provides standards for accounting for business
combinations. Among other things, it requires that only the purchase
method of accounting be used and that certain intangible assets
acquired in a business combination (i.e. those that result from
contractual or other legal rights or are separable) be recorded as an
asset apart from goodwill. The transition provisions require that an
assessment be made of previous business combinations and, if
appropriate, reclassifications be made to or from goodwill to adjust
the recording of intangible assets such that the criteria for
recording intangible assets apart from goodwill is applied to the
previous business combinations.
Registration Statement Page 46
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
October 31, 2001 and April 30, 2001
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENT (Continued)
SFAS No. 142 provides, among other things, that goodwill and
intangible assets with indeterminate lives shall not be amortized.
Goodwill shall be assigned to a reporting unit and annually assessed
for impairment. Intangible assets with determinate lives shall be
amortized over their estimated useful lives, with the useful lives
reassessed continuously, and shall be assessed for impairment under
the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Goodwill is also assessed for impairment on an interim basis when
events and circumstances warrant. Upon adoption of SFAS No. 142, the
Company will assess whether an impairment loss should be recognized
and measured by comparing the fair value of the "reporting unit" to
the carrying value, including goodwill. If the carrying value exceeds
fair value, then the Company will compare the implied fair value of
the goodwill" (as defined in SFAS No. 142) to the carrying amount of
the goodwill. If the carrying amount of the goodwill exceeds the
implied fair value, then the goodwill will be adjusted to the implied
fair value.
While the Company has not completed the process of determining the
effect of these new accounting pronouncements on its consolidated
financial statements, the Company currently expects that there will be
no reclassification in connection with the transition provisions of
SFAS No. 141 based on clarifications of the transition provisions
issued by the FASB in October 2001. Accordingly, the Company expects
that, after implementation of SFAS No. 142, all intangible assets will
be amortizable and the goodwill will not be amortizable.
NOTE 3 - SUBSEQUENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 143 -- On August 16, 2001, the FASB issued SFAS No. 143,
------------
"Accounting for Asset Retirement Obligations," which is effective for
fiscal years beginning after June 15, 2002. It requires that
obligations associated with the retirement of a tangible long-lived
asset be recorded as a liability when those obligations are incurred,
with the amount of the liability initially measured at fair value.
Upon initially recognizing a liability for an accrued retirement
obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and
the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either
settles the obligation for its recorded amount or incurs a gain or
loss upon settlement. While the Company has not completed the process
of determining the effect of this new accounting pronouncement on its
consolidated financial statements, the Company currently expects that
the effect of SFAS No. 143 on the Company's consolidated financial
statements, when it becomes effective, will not be significant.
Registration Statement Page 47
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
October 31, 2001 and April 30, 2001
NOTE 3 - SUBSEQUENT ACCOUNTING PRONOUNCEMENTS (Continued)
SFAS No. 144 - On October 3, 2001, the Financial Accounting Standards
------------
Board issued SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" which is effective for financial statements
issued for fiscal years beginning after December 15, 2001 and,
generally, its provisions are to be applied prospectively. SFAS 144
supercedes SFAS Statement No. 121 (FAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles
Board Opinion No. 30 (APB 30), "Reporting Results of Operations
Reporting the Effects of Disposal of a Segment of a Business."
SFAS 144 develops one accounting model (based on the model in SFAS
121) for long-lived assets that are to be disposed of by sale, as well
as addresses the principal implementation issues. SFAS 144 requires
that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less cost to sell. That
requirement eliminates the requirement of APB 30 that discontinued
operations be measured at net realizable value or that entities
include under "discontinued operations" in the financial statements
amounts for operating losses that have not yet occurred. Additionally,
FAS 144 expands the scope of discontinued operations to include all
components of an entity with operations that (1) can be distinguished
from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction.
While the Company has not completed the process of determining the
effect of this new accounting pronouncement on its consolidated
financial statements, the Company currently expects that the effect of
SFAS No. 144 on the Company's consolidated financial statements, when
it becomes effective, will not be significant.
NOTE 4 - GOING CONCERN
The Company's consolidated financial statements are prepared using
generally accepted accounting principles applicable to a going concern
which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has incurred
losses from its inception through April 30, 2001 and has a significant
working capital deficit. The Company does not have an established
source of revenues sufficient to cover its operating costs and to
allow it to continue as a going concern. It is the intent of the
Company to seek additional financing through private placements of its
common stock. This will be accomplished through the use of equity
issuances. Management believes the funds will more likely than not be
successfully raised, but there can be no assurance of this. The
Company expects that operations will increase in 2002, and will start
to provide cash flows from operations and expansion. The Company
expects that it will need $480,000 to $600,000 additional funds for
operations and expansion in 2002.
Registration Statement Page 48
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
October 31, 2001 and April 30, 2001
NOTE 5 - MATERIAL EVENTS
Common Stock
------------
On August 15, 2001, the Company issued 200,000 shares of common stock
valued at $0.10 per share, to a director for services and consulting.
On September 15, 2001, the Company converted the related party note
payable of $208,121 and accrued interest of $6,362 into equity by
issuing 2,144,830 shares of common stock at $0.10 per share for a
total of $214,483.
On September 15, 2001, the Company converted a note payable of
$495,000 and accrued interest of $107,783 into equity by issuing
6,027,830 shares of common stock at $0.10 per share for a total of
$602,783.
On September 15, 2001, the Company converted a note payable of $50,000
and accrued interest of $3,333 into equity by issuing 533,333 shares
of common stock at $0.10 per share for a total of $53,333.
On October 2, 2001, the Company converted the stock subscription
payable of $50,000 into equity by issuing 500,000 shares of common
stock at $0.10 per share.
506 regulation D
----------------
On November 15, 2001, the board of directors approved a best efforts
private placement equity fundraising under Rule 506 of Regulation D
for up to 500,000 shares at $0.10 per share. The Company has raised
$-0- as of the date of the audit report.
Registration Statement Page 49
NET FORCE SYSTEMS INC. AUDITED FINANCIAL STATEMENTS, APRIL 30, 2001
NET-FORCE SYSTEMS INC.
CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2001 and 2000
Registration Statement Page 50
C O N T E N T S
Independent Auditors' Report................................................ 3
Consolidated Balance Sheet.................................................. 4
Consolidated Statements of Operations....................................... 6
Consolidated Statements of Stockholders' Equity (Deficit)................... 7
Consolidated Statements of Cash Flows....................................... 8
Notes to the Consolidated Financial Statements............................. 10
Registration Statement Page 51
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Net-Force Systems Inc.
Antigua, West Indies
We have audited the accompanying consolidated balance sheets of Net-Force
Systems Inc. as of April 30, 2001 and 2000 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
years ended April 30, 2001, 2000, and from inception on March 1, 1999 through
April 30, 1999. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Net-Force Systems Inc. as of April 30, 2001 and 2000, and the consolidated
results of their operations and their cash flows for the years ended April 30,
2001, 2000, and from inception on March 1, 1999 through April 30, 1999 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 5 to the
consolidated financial statements, the Company's recurring losses from
operations and working capital deficit raise substantial doubt about its ability
to continue as a going concern. Management's plans concerning these matters are
also described in Note 5. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
HJ & Associates, LLC
Salt Lake City, Utah
January 2, 2002
Page 3
Registration Statement Page 52
NET-FORCE SYSTEMS INC.
Consolidated Balance Sheets
ASSETS
------
April 30,
----------------------------------------
2001 2000
------------------ ------------------
CURRENT ASSETS
Cash $ 33,292 $ 131,269
Accounts receivable, net 9,805 -
Reserves and deposits with credit card
processors (Note 8) 30,858 -
Prepaid expenses - 34,698
Other current assets - 2,593
------------------ ------------------
Total Current Assets 73,955 168,560
------------------ ------------------
PROPERTY AND EQUIPMENT (Note 2) 26,551 40,891
------------------ ------------------
OTHER ASSETS
Player deposits (Note 9) 73,828 -
Deposits 3,193 12,061
Gaming license (Note 10) 91,667 -
------------------ ------------------
Total Other Assets 168,688 12,061
------------------ ------------------
TOTAL ASSETS $ 269,194 $ 221,512
================== ==================
Page 4
Registration Statement Page 53
NET-FORCE SYSTEMS INC.
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
April 30,
----------------------------------------
2001 2000
------------------ ------------------
CURRENT LIABILITIES
Accounts payable $ 42,400 $ 37,157
Accrued expenses 24,351 -
Interest payable - related party 4,243 -
Interest payable 81,707 55,690
Stock subscription payable 50,000 -
Player deposits (Note 9) 73,828 -
Current portion note payable - related party
(Note 3) 2,025 2,024
Current portion notes payable (Note 4) 495,000 -
------------------ ------------------
Total Current Liabilities 773,554 94,871
------------------ ------------------
LONG-TERM DEBT
Note payable - related party (Note 3) 128,596 -
Notes payable (Note 4) 50,000 495,000
------------------ ------------------
Total Long-Term Debt 178,596 495,000
------------------ ------------------
Total Liabilities 952,150 589,871
------------------ ------------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock: 50,000,000 shares authorized of
$0.001 par value, zero issued and outstanding - -
Common stock: 100,000,000 shares authorized
of $0.001 par value, 7,500,000 and 8,500,000 7,500 8,500
shares issued and outstanding, respectively
Additional paid-in capital 198,000 27,000
Accumulated deficit (888,456) (403,859)
------------------ ------------------
Total Stockholders' Equity (Deficit) (682,956) (368,359)
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 269,194 $ 221,512
================== ==================
The accompanying notes are an integral part of these
consolidated financial statements.
Page 5
Registration Statement Page 54
NET-FORCE SYSTEMS INC.
Consolidated Statements of Operations
For the From
Years Ended Inception on
April 30, March 1, 1999
------------------------------------- Through April 30,
2001 2000 1999
------------------ ------------------ ------------------
REVENUE
Sales $ 318,490 $ 1,399 $ -
Cost of sales 217,769 1,477 -
------------------ ------------------ ------------------
Gross Margin (Deficit) 100,721 (78) -
------------------ ------------------ ------------------
EXPENSES
General and administrative 489,278 349,175 6,493
Depreciation and amortization 18,241 6,428 -
------------------ ------------------ ------------------
Total Expenses 507,519 355,603 6,493
------------------ ------------------ ------------------
LOSS FROM OPERATIONS (406,798) (355,681) (6,493)
------------------ ------------------ ------------------
OTHER INCOME (EXPENSE)
Loss on disposal of assets (6,700) - -
Gain on sale of assets 491 - -
Interest income 1,013 3,635 -
Other income 7,656 10,370 -
Interest expense (80,259) (55,690) -
------------------ ------------------ ------------------
Total Other Income (Expense) (77,799) (41,685) -
------------------ ------------------ ------------------
PROVISION FOR INCOME TAX - - -
------------------ ------------------ ------------------
NET LOSS $ (484,597) $ (397,366) $ (6,493)
================== ================= ==================
BASIC LOSS PER SHARE $ (0.07) $ (0.05) $ (0.01)
=================== ================= ==================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 7,171,233 8,500,000 969,863
================== ================== ==================
The accompanying notes are an integral part of these
consolidated financial statements.
Page 6
Registration Statement Page 55
NET-FORCE SYSTEMS INC.
Consolidated Statements of Stockholders' Equity (Deficit)
Common Stock Additional
------------------------------ Paid-in Accumulated
Shares Amount Capital Deficit
-------------- -------------- ------------- -------------
Balance, March 1, 1999 - $ - $ - $ -
March 1, 1999, common stock
issued to founders for cash at
$0.001 per share 5,500,000 5,500 - -
April 22, 1999, common stock
issued for cash at $0.01 per
share 3,000,000 3,000 27,000 -
Net loss from inception on
March 1, 1999 through
April 30, 1999 - - - (6,493)
-------------- -------------- ------------- -------------
Balance, April 30, 1999 8,500,000 $ 8,500 $ 27,000 $ (6,493)
Net loss for the year ended
April 30, 2000 - - - (397,366)
-------------- -------------- ------------- -------------
Balance, April 30, 2000 8,500,000 8,500 27,000 (403,859)
July 1, 2000, common stock
repurchased and canceled at
$0.01 per share (3,000,000) (3,000) (27,000) -
September 30, 2000, common
stock issued for cash at $0.10
per share 2,000,000 2,000 198,000 -
Net loss for the year ended
April 30, 2001 - - - (484,597)
-------------- -------------- ------------- -------------
Balance, April 30, 2001 7,500,000 $ 7,500 $ 198,000 $ (888,456)
============== ============== ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
Page 7
Registration Statement Page 56
NET-FORCE SYSTEMS INC.
Consolidated Statements of Cash Flows
For the From
Years Ended Inception on
April 30, March 1, 1999
------------------------------------- Through April 30,
2001 2000 1999
------------------ ------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (484,597) $ (397,366) $ (6,493)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 18,241 6,428 -
Gain on sale of asset (491) - -
Loss on disposal of assets 6,700 - -
Changes in assets and liabilities:
(Increase) in reserves and deposits (30,858) - -
(Increase) in accounts receivables (7,212) (49,352) -
Decrease in prepaid expenses 34,698 - -
Decrease in other assets (64,960) - -
(Increase) in license (100,000) - -
Increase in accounts payable 5,243 34,681 4,500
Increase in accrued interest 26,017 55,690 -
Increase in accrued interest - related party 4,243 - -
Increase in accrued expense 24,351 - -
Increase in player deposit 73,828 - -
------------------ ------------------ ------------------
Net Cash (Used) by Operating Activities (494,797) (349,919) (1,993)
------------------ ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (3,704) (47,319) -
Proceeds from sale of fixed assets 1,927 - -
------------------ ------------------ ------------------
Net Cash (Used) by Investing Activities (1,777) (47,319) -
------------------ ------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - related party 128,597 - -
Proceeds from notes payable 50,000 495,000 -
Increase in stock subscription payable 50,000 - -
Common stock issued for cash 200,000 - 35,500
Repurchase of and cancellation of common stock (30,000) - -
------------------ ------------------ ------------------
Net Cash Provided by Financing Activities 398,597 495,000 35,500
------------------ ------------------ ------------------
The accompanying notes are an integral part of these
consolidated financial statements.
Page 8
Registration Statement Page 57
NET-FORCE SYSTEMS INC.
Consolidated Statements of Cash Flows (Continued)
For the From
Years Ended Inception on
April 30, March 1, 1999
------------------------------------- Through April 30,
2001 2000 1999
------------------ ------------------ ------------------
NET INCREASE (DECREASE) IN CASH (97,977) 97,762 33,507
CASH AT BEGINNING OF PERIOD 131,269 33,507 -
------------------ ------------------ ------------------
CASH AT END OF PERIOD $ 33,292 $ 131,269 $ 33,507
================== ================== ==================
CASH PAID FOR:
Interest $ 50,000 $ - $ -
Income taxes $ - $ - $ -
The accompanying notes are an integral part of these
consolidated financial statements.
Page 9
Registration Statement Page 58
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
The Company was incorporated on March 1, 1999 under the International
Business Corporations Act No. 28 of 1982 of the laws of Antigua and
Barbuda as Net-Force Systems Inc.
The Company will be engaged in all business activities permitted under
the International Business Corporations Act of 1982 except
International Banking, Trust and Insurance. It will generally carry on
the business of an investment and holding company.
On August 5, 1999, a wholly-owned subsidiary, Net Force Entertainment
Inc. (Entertainment) was incorporated under the International Business
Corporations Act No. 28 of 1982 of the laws of Antigua and Barbuda.
This subsidiary company will be engaged in all aspect of International
betting, gaming, sports betting and bookmaking but with a major
emphasis on internet gaming.
Entertainment has been granted a gaming license by the Antigua and
Barbuda Free Trade & Processing zone and has also entered into a
software gaming license with Softec Systems for the operation of an
internet casino. The Company commenced operations in April 2000.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
a. Accounting Method
The Company's financial statements are prepared using the accrual
method of accounting. The Company has elected an April 30 year end.
b. Basic Loss Per Share
Basic loss per share has been calculated based on the weighted average
number of shares of common stock outstanding during the period.
For the From
Years Ended Inception on
April 30, March 1, 1999
--------------------------------------- Through April 30,
2001 2000 1999
------------------ ------------------- ------------------
Basic loss per share:
Numerator - net loss $ (484,597) $ (397,366) $ (6,493)
Denominator - weighted
average number of
shares outstanding 7,171,233 8,500,000 969,863
------------------ ------------------- ------------------
Loss per share $ (0.07) $ (0.05) $ (0.01)
================== =================== ==================
Page 10
Registration Statement Page 59
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
c. Provision for Taxes
The Company's operations are within the Jurisdiction of St. John's,
Antigua, where there is no corporate income tax.
d. Cash and Cash Equivalents
The Company considers all highly liquid investment with a maturity of
three months or less when purchased to be cash equivalent.
e. Principles of Consolidation
The April 30, 2001 financial statements are consolidated with the
Company and Entertainment. All significant intercompany accounts and
transaction have been eliminated.
f. Property and Equipment
Office equipment and leasehold improvements are recorded at cost.
Minor additions and renewals are expensed in the year incurred. Major
additions and renewals are capitalized and depreciated over their
estimated useful lives. Depreciation of office equipment and leasehold
improvements is computed using the straight-line method over the
estimated useful lives of the asset of 5 and 10 years, respectively.
Software is depreciated over a life of 5 years. Depreciation expense
for continuing operations for the years ended April 30, 2001, 2000 and
1999 was $9,908, $6,428, and $-0-, respectively.
Property and equipment consists of the following:
April 30,
---------------------------------------
2001 2000
------------------ ------------------
Vehicles $ 3,704 $ -
Computer equipment 19,450 19,550
Computer software 10,000 10,000
Office furniture and equipment 6,274 8,101
Leasehold improvements - 9,668
Accumulated depreciation (12,877) (6,428)
------------------ ------------------
Net Property and Equipment $ 26,551 $ 40,891
================== ==================
Page 11
Registration Statement Page 60
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
g. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
h. Recent Accounting Pronouncements
The Company has adopted the provisions of FASB Statement No. 138
"Accounting for Certain Derivative Instruments and Hedging Activities,
(an amendment of FASB Statement No. 133.)" Because the Company had
adopted the provisions of FASB Statement No. 133, prior to June 15,
2000, this statement is effective for all fiscal quarters beginning
after June 15, 2000. The adoption of this principle had no material
effect on the company's consolidated financial statements.
The Company has adopted the provisions of FASB Statement No. 140
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (a replacement of FASB Statement No.
125.)" This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that
approach, the transfer of financial assets, the Company recognized the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This
statement provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. This statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
March 31, 2001. This statement is effective for recognition and
reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending
after December 15, 2000. The adoption of this principle had no
material effect on the Company's consolidated financial statements.
The Company had adopted the provisions of FIN 44 "Accounting for
Certain Transactions Involving Stock Compensation (an interpretation
of APB Opinion No. 25.)" This interpretation is effective July 1,
2000. FIN 44 clarifies the application of Opinion No. 25 for only
certain issues. It does not address any issues related to the
application of the fair value method in Statement No. 123. Among other
issues, FIN 44 clarifies the definition of employee for purposes of
applying Opinion 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of
various modifications to the terms of a previously fixed stock option
or award, and accounting for an exchange of stock compensation awards
in a business combination. The adoption of this principle had no
material effect on the Company's consolidated financial statements.
Page 12
Registration Statement Page 61
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
i. Subsequent Accounting Pronouncements
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
long-lived assets, including goodwill associated with other long-lived
assets, are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
SFAS No.'s 141 and 142 -- In June 2001, the Financial Accounting
Standards Board (FASB) adopted Statement of Financial Accounting
Standards SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 is effective as
to any business combination occurring after June 30, 2001 and certain
transition provisions that affect accounting for business combinations
prior to June 30, 2001 are effective as of the date that SFAS No. 142
is applied in its entirety, which will be January 1, 2002 for the
Company. SFAS No. 142 is effective, generally, in fiscal years
beginning after December 15, 2001, which will be the fiscal year
ending April 30, 2002 for the Company.
SFAS No. 141 provides standards for accounting for business
combinations. Among other things, it requires that only the purchase
method of accounting be used and that certain intangible assets
acquired in a business combination (i.e. those that result from
contractual or other legal rights or are separable) be recorded as an
asset apart from goodwill. The transition provisions require that an
assessment be made of previous business combinations and, if
appropriate, reclassifications be made to or from goodwill to adjust
the recording of intangible assets such that the criteria for
recording intangible assets apart from goodwill is applied to the
previous business combinations.
SFAS No. 142 provides, among other things, that goodwill and
intangible assets with indeterminate lives shall not be amortized.
Goodwill shall be assigned to a reporting unit and annually assessed
for impairment. Intangible assets with determinate lives shall be
amortized over their estimated useful lives, with the useful lives
reassessed continuously, and shall be assessed for impairment under
the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Goodwill is also assessed for impairment on an interim basis when
events and circumstances warrant. Upon adoption of SFAS No. 142, the
Company will assess whether an impairment loss should be recognized
and measured by comparing the fair value of the "reporting unit" to
the carrying value, including goodwill. If the carrying value exceeds
fair value, then the Company will compare the implied fair value of
the goodwill" (as defined in SFAS No. 142) to the carrying amount of
the goodwill. If the carrying amount of the goodwill exceeds the
implied fair value, then the goodwill will be adjusted to the implied
fair value.
Page 13
Registration Statement Page 62
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
i. Subsequent Accounting Pronouncements (Continued)
While the Company has not completed the process of determining the
effect of these new accounting pronouncements on its consolidated
financial statements, the Company currently expects that there will be
no reclassification in connection with the transition provisions of
SFAS No. 141 based on clarifications of the transition provisions
issued by the FASB in October 2001. Accordingly, the Company expects
that, after implementation of SFAS No. 142, all intangible assets will
be amortizable and the goodwill will not be amortizable.
SFAS No. 143 -- On August 16, 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," which is effective for
fiscal years beginning after June 15, 2002. It requires that
obligations associated with the retirement of a tangible long-lived
asset be recorded as a liability when those obligations are incurred,
with the amount of the liability initially measured at fair value.
Upon initially recognizing a liability for an accrued retirement
obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and
the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either
settles the obligation for its recorded amount or incurs a gain or
loss upon settlement. While the Company has not completed the process
of determining the effect of this new accounting pronouncement on its
consolidated financial statements, the Company currently expects that
the effect of SFAS No. 143 on the Company's consolidated financial
statements, when it becomes effective, will not be significant.
SFAS No. 144 - On October 3, 2001, the Financial Accounting Standards
Board issued SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" which is effective for financial statements
issued for fiscal years beginning after December 15, 2001 and,
generally, its provisions are to be applied prospectively. SFAS 144
supercedes SFAS Statement No. 121 (FAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles
Board Opinion No. 30 (APB 30), "Reporting Results of Operations
Reporting the Effects of Disposal of a Segment of a Business."
SFAS 144 develops one accounting model (based on the model in SFAS
121) for long-lived assets that are to be disposed of by sale, as well
as addresses the principal implementation issues. SFAS 144 requires
that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less cost to sell. That
requirement eliminates the requirement of APB 30 that discontinued
operations be measured at net realizable value or that entities
include under "discontinued operations" in the financial statements
amounts for operating losses that have not yet occurred. Additionally,
FAS 144 expands the scope of discontinued operations to include all
components of an entity with operations that (1) can be distinguished
from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction.
Page 14
Registration Statement Page 63
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
i. Subsequent Accounting Pronouncements (Continued)
While the Company has not completed the process of determining the
effect of this new accounting pronouncement on its consolidated
financial statements, the Company currently expects that the effect of
SFAS No. 144 on the Company's consolidated financial statements, when
it becomes effective, will not be significant.
j. Revenue Recognition Policy
Net Monthly RevenueRoyalty Fee Payable
--------------------------------------
0 to $500,000 25%
$500,001 to $1,000,000 20%
$1,000,001 to $5,000,000 15%
$5,000,001 to $10,000,000 12.5%
$10,000,001 plus 10%
The Company renegotiated the 25% factor down to 15% for the period
from September 2000 through August 2000, after which the factor rose
to 25% again.
k. Advertising
The Company follows the policy of charging the costs of advertising to
expense as incurred.
l. Long-Lived Assets
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
long-lived assets, including goodwill associated with other long-lived
assets, are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company will adopt SFAS No. 144 and apply the
provisions thereof.
m. Foreign Currency Translation
Monetary assets and liabilities denominated in foreign currencies are
translated into United States dollars at the period end exchange rate.
Non-monetary assets are translated at the historical exchange rate and
all income and expenses are translated at the exchange rates
prevailing during the period. Foreign exchange currency translation
adjustments are included in the stockholders' equity section as other
comprehensive income. The Company operates with East Caribbean Dollars
(EC). The exchange rate between the EC and the United States Dollar
(USD) is always constant at .37453. This constant exchange rate makes
it unnecessary to have a foreign exchange translation adjustment in
the stockholder's equity section.
Page 15
Registration Statement Page 64
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
n. Concentrations of Risk - Foreign Operations
The Company operates in St. John's which has a developing economy.
Hyperinflation, volatile exchange rates and rapid political and legal
change, often accompanied by military insurrection, have been common
in this and certain other emerging markets in which the Company may
conduct operations. The Company may be materially adversely affected
by possible political or economic instability in St John's. The risks
include, but are not limited to terrorism, military repression,
expropriation, changing fiscal regimes, extreme fluctuations in
currency exchange rates, high rates of inflation and the absence of
industrial and economic infrastructure. Changes in development or
investment policies or shifts in the prevailing political climate in
St. John's in which the Company operates could adversely affect the
Company's business. Operations may be affected in varying degrees by
government regulations with respect to development restrictions, price
controls, export controls, income and other taxes, expropriation of
property, maintenance of claims, environmental legislation, labor,
welfare, benefit policies, land use, land claims of local residents,
water use and mine safety. The effect of these factors cannot be
accurately predicted.
o. Reclassifications
Certain prior year amounts have been reclassified to conform to 2001
presentation.
NOTE 3 - NOTE PAYABLE - RELATED PARTY
Geneva Overseas Holdings Ltd. (A Company April 30,
controlled by the president of the Company) ------------------------------
made advances to the Company totaling 2000 1999
$128,596. These advances have an interest -------------- --------------
rate of 8% annually. This note is unsecured. $ 130,621 $ 2,024
Less Current Portion 2,025 2,024
-------------- --------------
Total Long-Term Debt -Related Party $ 128,596 $ -
============== ==============
The following is a summary of the future maturities of the long-term
debt-related party:
For the
Year Ended
April 30,
------------
2002 $ 2,025
2003 68,596
2004 60,000
2005 -
--------------
$ 130,621
==============
Interest expense for the years ending April 30, 2000, 2000 and 1999 was $4,243,
$-0- and $-0-,respectively.
Page 16
Registration Statement Page 65
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 4 - NOTES PAYABLE
April 30,
Note payable to Mountain High Management Inc. ------------------------------
dated July 13, 1999, accruing interest at 15% 2000 1999
annually, due on July 29, 2001. This note is -------------- --------------
unsecured. $ 495,000 $ 495,000
Note payable to Low Tide Investments, dated
November 1, 2001, accruing interest at 8%
annually, due on November 1, 2004. This note
is unsecured. 50,000 -
-------------- --------------
Total Notes Payable 545,000 495,000
Less Current Portion 495,000 -
-------------- --------------
Total Long-Term Debt $ 50,000 $ 495,000
============== ==============
The following is a summary of the future maturities of the long-term
debt:
For the
Year Ended
April 30,
----------
2002 $ 495,000
2003 -
2004 50,000
2005 -
---------------
$ 545,000
===============
Interest expense for the years ending April 30, 2001, 2000 and 1999
was $76,016, $55,690, and $-0- respectively.
NOTE 5 - GOING CONCERN
The Company's consolidated financial statements are prepared using
generally accepted accounting principles applicable to a going concern
which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has incurred
losses from its inception through April 30, 2001 and has a significant
working capital deficit. The Company does not have an established
source of revenues sufficient to cover its operating costs and to
allow it to continue as a going concern. It is the intent of the
Company to seek additional financing through private placements of its
common stock. This will be accomplished through the use of equity
issuances. Management believes the funds will more likely than not be
successfully raised, but there can be no assurance of this. The
Company expects that operations will increase in 2002, and will start
to provide cash flows from operations and expansion. The Company
expects that it will need $480,000 to $600,000 additional funds for
operations and expansion in 2002.
Page 17
Registration Statement Page 66
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 6 - STOCK TRANSACTIONS
On March 1, 1999, the Company issued 5,500,000 shares of common stock
to founders of the Company for $5,500 of cash. The shares were sold at
the par value of $0.001.
On April 22, 1999, the Company sold 3,000,000 shares of common stock
to related investors for cash of $30,000 at $0.01 per share.
On July 1, 2000, the Company repurchased and canceled 3,000,000 shares
of common stock at $0.01 per share or $30,000 of cash.
On September 30, 2000, the Company issued 2,000,000 shares of common
stock at $0.10 per share for $200,000 of cash.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Software Licensing Agreement
In the first quarter of 1999, the Company entered into a software
licensing agreement with Softec Systems Caribbean Inc. (Softec), to
provide online-gaming software and hardware services. The license
agreement calls for a commitment by the Company to spend a minimum of
10% of the previous months net revenue (based on a yearly average) for
ongoing promotion and marketing. The marketing obligation only applies
to the first 365 days of operation. The license agreement also calls
for sharing of net revenues based on a specific formula agreed to by
the Company and Softec. The license agreement may be terminated by the
Company at the end of any one-year term or by softec at the end of any
one-year term subsequent to the first year of the agreement.
All of the Company's websites and advertising are directly linked to
Softec's software. Softec manages the software as well as the upkeep
and maintenance. The Company is highly dependent, therefore, on
Softec's ability to maintain the software and keep it running. In the
event that the software fails, the Company's business and operations
could be strongly affected.
Private Placement
On June 1, 2000, the board of directors approved a Regulation S
Private Placement for 2,500,000 shares of common stock to be sold at
$0.10 per share. Each share sold has an attached warrant exercisable
at $2.00 per share which expires on December 31, 2002. The Company has
received $250,000 and issued 2,500,000 shares pursuant to the Private
Placement.
Page 18
Registration Statement Page 67
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
506 Regulation D
----------------
On July 1, 2000, the board of directors approved a best efforts
private placement equity fundraising under Rule 506 of Regulation D
for up to 2,000,000 shares at $0.50 per share. Each share sold
pursuant to this offering is to have an attached warrant exercisable
at $4.00 per share. Any warrants issued are to expire on December 31,
2002. The Company has not raised any funds from this offering.
NOTE 8 - RESERVES AND DEPOSITS WITH CREDIT CARD PROCESSORS
Reserves and deposits with credit card processors consist of rolling
reserves held by merchant banks and funds for transactions processed
and awaiting transfer to the Company's bank accounts. As of April 30,
2001 and 2000, the balance of these reserves and deposits were $30,858
and $-0-, respectively.
NOTE 9 - PLAYER DEPOSITS
As of April 30, 2001 and 2000, the Company had $73,828 and $-0-,
respectively, in cash representing funds held on deposit in the form
of e-cash balances. These deposits are non-interest bearing and
repayable on demand. These deposits are actually held by a third party
for the benefit of the Company.
NOTE 10 - GAMING LICENSE
The Company is required to purchase a gaming business license on an
annual basis. The cost of the license is $100,000 and is amortized
over twelve months. Amortization expense for the years ending April
30, 2001 2000, and 1999 was $8,333, $-0- and $-0-, respectively.
NOTE 11 - SUBSEQUENT EVENTS
Notes Payable - Related Party
-----------------------------
Subsequent to April 30, 2001, the Company borrowed from related
parties an additional $77,500 in two notes payable. These notes bear
an annual interest rate of 8% and are due two years from the note
dates.
Page 19
Registration Statement Page 68
NET-FORCE SYSTEMS INC.
Notes to the Consolidated Financial Statements
April 30, 2001, 2000 and1999
NOTE 11 - SUBSEQUENT EVENTS (Continued)
Common Stock
------------
On August 15, 2001, the Company issued 200,000 shares of common stock
valued at $0.10 per share, to a director for services and consulting.
On September 15, 2001, the Company converted the related party note
payable of $208,121 and accrued interest of $6,362 into equity by
issuing 2,144,830 shares of common stock at $0.10 per share for a
total of $214,483.
On September 15, 2001, the Company converted a note payable of
$495,000 and accrued interest of $107,783 into equity by issuing
6,027,830 shares of common stock at $0.10 per share for a total of
$602,783.
On September 15, 2001, the Company converted a note payable of $50,000
and accrued interest of $3,333 into equity by issuing 533,333 shares
of common stock at $0.10 per share for a total of $53,333.
On October 2, 2001, the Company issued 500,000 shares of common stock
for the subscription payable of $50,000 at $0.10 per share.
On August 15, 2001, the Company issued 200,000 shares of common stock
valued at $0.10 per share, to a director for services and consulting.
506 regulation D
----------------
On November 15, 2001, the board of directors approved a best efforts
private placement equity fundraising under Rule 506 of Regulation D
for up to 500,000 shares at $0.10 per share. The Company has raised
$-0- as of the date of the audit report.
Page 20
Registration Statement Page 69
NET-FORCE SYSTEMS INC.
PART III. INDEX TO EXHIBITS
Exhibit 3.1 Articles of Incorporation of Net-Force Systems Inc.
Exhibit 3.2 Bylaws of Net-Force Systems Inc.
Exhibit 3.3 Articles of Incorporation - Net-Force Entertainment Inc.
Exhibit 3.4 Bylaws of Net-Force Entertainment Inc.
Material Contracts
Exhibit 10.1 Starnet Systems Inc. (formerly Softec Systems Caribbean Inc),
Amendment to Software License Agreement
Exhibit 10.2 Government of Antigua and Barbuda Gaming License
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Net-Force Systems Inc.
(Registrant)
Date: January 30, 2002
/s/ "Terry G. Bowering"
----------------------------------------------------
Terry G. Bowering, President, Chairman of the Board,
Chief Executive Officer and Director
Date: January 30, 2002
/s/ "Dwight Lewis"
----------------------------------------------------
Dwight Lewis, Director
Registration Statement Page 70