As filed With the Securities and Exchange
Commission on May 13, 2004 Registration No.: XXXXXXX
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ELECTRONIC GAME CARD, INC.
(Name of small business issuer in its charter)
Nevada 6794
(State or jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
87-0570975
(IRS Employer
Identification No.)
712 Fifth Avenue, 19th Floor
New York, New York 10019-4108
(646) 723-8936
(Address and telephone number of principal executive offices and principal
place of business)
John Bentley, Chief Executive Officer
712 Fifth Avenue, 19th Floor
New York, New York 10019-4108
(646) 723-8936
(Name, address, and telephone number of agent for service)
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Copies of communications to:
L. STEPHEN ALBRIGHT, ESQ.
17337 Ventura Boulevard, Suite 208
Encino, California 91316
(818) 789-0779
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after ___________ the effective date of this registration statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed
Proposed maximum
Title of maximum aggregate Amount of
securities to Amount to be offering price offering registration
be registered registered per share(1) price fee
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Common Stock Par
Value $0.01 13,056,137 (2) $1.68 $21,934,310 $2,780.00
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(1) Estimated solely for purpose of calculating the registration fee
pursuant to Rule 457(c) on the basis of the average of the bid and ask prices
per share of our common stock, as reported on the OTC Bulletin Board, on May 5,
2004. Total filing fee is $2,780.00.
(2) These 13,056,137 shares include 6,853,750 shares held directly by
Selling Stockholders, 4,098,875 shares to be issued upon the exercise of
warrants issued to Selling Stockholders and 2,103,512 shares underlying options
which were issued to the Selling Stockholders.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PROSPECTUS
Dated: May __, 2004 Subject to completion
13,056,137 SHARES OF COMMON STOCK
ELECTRONIC GAME CARD, INC.
We have prepared this prospectus to allow certain of our current
stockholders to sell up to 13,056,137 shares of our common stock. We are not
selling any shares of common stock under this prospectus. The shares of common
stock that we are registering for resale include the exercise of warrants and
options to purchase shares of common stock. Up to 6,202,387 shares of common
stock will be issued upon the exercise of the warrants and options. The selling
stockholders listed on page 15 may sell these shares from time to time after
this Registration Statement is declared effective by the Securities & Exchange
Commission.
The prices at which the selling stockholders may sell the shares will be
determined by the prevailing market price for the shares or in negotiated
transactions. We will not receive any of the proceeds received by the selling
stockholders.
We may receive up to $5,150,631 in proceeds from the exercise of the
outstanding warrants and options. As of the date of this prospectus, none of the
warrants have been exercised.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"EGMI.OB." On May 5, 2004, the last reported sales price of our common stock as
reported by the OTC Bulletin Board was $1.68 per share.
We urge you to read carefully the "Risk Factors" section beginning on page
4 where we describe specific risks associated with an investment in Electronic
Game Card, Inc. and these securities before you make your investment decision.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY __, 2004
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TABLE OF CONTENTS
PAGE
PART I
Prospectus Summary.............................................................5
Risk Factors ..................................................................9
Disclosure Regarding Forward Looking Statements ..............................13
Use of Proceeds ..............................................................14
Determination of Offering Price ..............................................14
Dilution .....................................................................14
Selling Security Holders......................................................14
Plan of Distribution .........................................................20
Legal Proceedings ............................................................23
Management ...................................................................24
Security Ownership of Certain Beneficial Owners & Management..................25
Description of Securities.....................................................25
Experts.......................................................................26
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities.................................................26
Description of Business.......................................................27
Management=s Discussion and Analysis or Plan of Operation.....................34
Description of Property.......................................................37
Certain Relationships and Related Transactions................................37
Market for Common Equity and Related Stockholder Matters......................37
Executive Compensation .......................................................39
Changes and Disagreements with Accountants on Accounting and
Financial Disclosures......................................................39
Financial Information ........................................................40
PART II
Indemnification of Directors and Officers......................................i
Other Expenses of Issuance and Distribution...................................ii
Recent Sales of Unregistered Securities .....................................iii
Exhibits .....................................................................iv
Undertakings .............................................................v
Back Cover of Prospectus (no page number)
4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT
FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING
OFFERS TO BUY, SHARES OF THE COMPANY'S COMMON STOCK IN JURISDICTIONS WHERE
OFFERS AND SALES ARE PERMITTED. THE INFORMATION IN THIS PROSPECTUS MAY ONLY BE
ACCURATE AS OF THE DATE OF THIS PROSPECTUS REGARDLESS OF THE TIME OF DELIVERY OF
THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding us and the securities being offered for sale by means of
this prospectus and our financial statements and notes to those statements
appearing elsewhere in this prospectus. The summary highlights information
contained elsewhere in this prospectus.
CORPORATE INFORMATION/BACKGROUND
Our principal executive offices are located at 712 Fifth Avenue, 19th
Floor, New York, NY10019- 4108 and our phone number is (646) 723 8936.
Electronic Game Card Inc (the "Company") was formed as a Utah corporation
on June 26, 1981, under the name The Fence Post., Inc. On November 7, 1997 the
Company changed its name to Quazon Corp. On November 14, 1997, the Company filed
with the State of Nevada Articles of Merger whereby the Company was merged with
and into Quazon Corp., a newly formed Nevada corporation ("Quazon- Nevada"), for
the sole purpose of changing the Company's domicile from the State of Utah to
the State of Nevada. Each outstanding share of the Company's common stock was
exchanged for one share of common stock of Quazon-Nevada. Accordingly, the Utah
corporate entity was merged out of existence and the Company survived the merger
and succeeded to the assets, liability, and agreements of the Utah entity. On
June 6, 2001, the Company entered into an agreement and plan of reorganization
with Scientific Energy, Inc., a Utah Corporation. Pursuant to the agreement,
Scientific Energy, Inc. acquired 20,000,000 shares of Quazon's shares in
exchange for 100% of the issued and outstanding shares of Scientific Energy. The
Company subsequently changed its name to Scientific Energy, Inc. The Company
entered into a Share Exchange dated November 19, 2003 with Electronic Game Card,
Inc. ("EGC"), a Delaware Corporation having a principal place of business in New
York City, New York. The Company deemed that such exchange closed December 5,
2003. Under the terms of the agreement, the Company entered into a majority
shareholder exchange agreement whereby it elected to effect a reverse split of
its then existing and issued outstanding shares on a 100:1 reverse split basis
of all shareholders of record. We then issued new reverse split shares,
constituting approximately 92% of the issued and outstanding shares of the
company, to the shareholders of a private Delaware corporation known as
Electronic Game Card, Inc. The EGC shareholders, in turn, exchanged all of their
issued and outstanding shares of EGC to Scientific Energy, Inc. in order to
become its fully owned operating subsidiary. The acquisition of EGC was
considered to be a reverse merger and EGC became the accounting acquirer. On
December 5, 2003 the Company changed its name to Electronic Game Card, Inc.,
with Electronic Game Card, Inc., a Delaware corporation changing its name to
Electronic Game Card Marketing, Inc.
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THE COMPANY
Electronic Game Card, Inc. (referred to as "EGC", "us", "we" or "Company")
is a supplier of innovative gaming devices to the lottery and promotional
industry worldwide. Our lead product is the EGC GameCard, a revolutionary credit
card-sized pocket game combining interactive capability with "instant win"
excitement. We formerly launched our EGC GameCard product in August 2003.
The EGC GameCard was designed by us to be rich in functionality,
customizable, extremely portable, and relatively inexpensive. Each EGC GameCard
includes a microprocessor, LCD, and long life power source, as well as state of
the art security features protecting both the consumer and the promoter. Our EGC
GameCard weighs in at just under one half an ounce and is only 3mm thick.
We have identified two distinct markets for our GameCard product: Lottery
Market and Sales Promotion Market.
LOTTERY MARKET
Lottery operators currently make use of paper scratch cards to give players
an "instant" win or lose reward experience. This "instant" market currently
attracts approximately $30 billion (22%) of the total worldwide lottery gaming
market which is estimated to be $140 billion. Over the last several years,
scratch cards have become increasingly large and complex to accommodate consumer
demand for multiple plays and multiple chances to win. Consumers currently pay
as much as $30.00 per scratch card for this type of player experience.
We believe our EGC GameCard is the next evolution of the scratch card,
offering multiple plays and multiple chances to win in a credit card-sized
medium that is within the pricing parameters of state lottery operators. To
access the lottery market in the most expeditious manner possible, we signed an
exclusive distributorship in May 2003 with Scientific Games (Nasdaq: SGMS), the
largest printer and wholesaler of "instant" win scratch cards to the worldwide
lottery market. Scientific Games supplies over 70% of the scratch card needs to
the worldwide lottery market and, equally important, is intimately involved in
bringing new innovative products to the state lotteries. The exclusivity
conditions of the agreement are contingent upon Scientific Games hitting
pre-determined volume levels of EGC GameCard product over the term of the
agreement. We are in active discussions with several other state lotteries.
SALES PROMOTION MARKET
The sales promotion market consists broadly of "giveaways" by corporations
for use in loyalty programs, incentive programs, advertising, promotions,
marketing, competitions and the like. The market for promotional items is
extremely large and is estimated to be $100 billion worldwide. Newspapers,
magazines and direct mail solicitations offer rewards, frequently using scratch
cards, coupons and other forms of entry to engage consumers in promotional
competitions. While our EGC GameCard can be applied to a broad range of
potential promotional opportunities, we have focused our efforts initially on
hotel promotions, casino promotions, newspaper promotions and direct mail
solicitations. We have entered into a two year exclusive agreement with Clegg
Industries, Inc., a direct mail promotions specialist in the United States, to
utilize our EGC GameCard in direct mail campaigns in the United States. The
exclusivity conditions of the agreement are contingent upon Clegg Industries
hitting pre- determined volume levels of EGC GameCard product over the term of
the agreement.
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In January, 2004 we opened a New York sales office to deal directly with
specialist agencies in the sales promotion market in the United States. We also
intend to open a similar office in Tokyo in the spring of 2004. The Company
maintains its European headquarters at 32 Haymarket, London, SW1Y 4TP, United
Kingdom.
Each EGC GameCard is developed by us with direct input from our clients on
the style and functionality of the card. The GameCard's are produced in China
through an exclusive manufacturing agreement with a large Chinese manufacturer.
We hold international patents on our technology and have applied for patent
protection in the United States.
The Company owns 100% of the share capital of Electronic Game Card, Ltd., a
company incorporated under the laws of England, through its wholly owned U.S.
subsidiary Electronic Game Card Marketing, Inc. (Delaware).
We believe that we have the opportunity to become a leading business
providing an innovative gaming, platform technology servicing the sales
promotion and lottery markets in the next five years if we successfully execute
our growth strategy.
In addition, between December 11, 2003, and February 20, 2004, we sold an
aggregate total of 6,853,750 shares of common stock. The Company issued a press
release on February 23, 2004 announcing the closing of this private equity
financing. All of these sales were made in reliance upon exemptions from
registration under the Securities Act of 1933, as amended (the "Act"). We sold
all of these common stock shares for $1.00 per share. For every two common stock
shares sold the purchaser of those shares received a warrant to purchase an
additional common stock share at an exercise price of $1.00 each. Accordingly,
3,426,875 warrants in total were issued.
The shares of common stock underlying these warrants are being registered
pursuant to this registration statement. In addition to selling those shares, we
issued warrants to purchase up to 672,000 shares of our common stock to various
investment advisors and consultants. These warrants are exercisable at the price
of $1.00 per share. We are also registering 672,000 shares of our common stock
which underlie these warrants. These transactions are listed in the Selling
Shareholders portion of this registration statement.
In addition, on April 8, 2004 we issued an option to purchase up to
2,103,512 shares of our common stock to Scientific Games, Inc., a strategic
business partner of the Company's. These options are exercisable at the price of
$0.50 per share. The options expire on May 20, 2004. We are registering
2,103,512 shares of our common stock which underlie these options. These
transactions are listed in the Selling Shareholders portion of this registration
statement.
THE OFFERING
Shares offered by the
selling stockholders ...................up to 13,056,137 shares of common stock.
Shares outstanding prior to
offering ............................................................21,035,118
Shares to be outstanding
following offering ........................................... up to 27,237,505
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Use of proceeds ..............................We will not receive any proceeds
from the sale and and issuance of common
stock following its registration. However,
if the selling shareholders owning warrants
exercise them, we would receive up to
$5,150,631. We cannot know how many
warrants the selling shareholders will
exercise their warrants or, if so
exercised, that they will sell them to the
public. Depending upon the amount of
proceeds generated by this offering, we
plan to use most of the proceeds for
general working capital to pay
administrative and general expenses. We
estimate the expenses of this offering,
such as printing, legal, and accounting
will be approximately $100,000.
Risk Factors .................................An investment in our common stock
is subject to significant risks. You should
carefully consider the information set
forth in the "Risk Factors" section of this
prospectus as well as other information set
forth in this prospectus, including our
financial statements and related notes.
Dividend Policy ..............................We intend to retain any earnings
to finance the finance the development and
growth of our business. Accordingly, we do
not anticipate that we will declare any
cash dividends on our common stock for the
foreseeable future. See "Market For Common
Equity and Related Stockholder Matters" on
page 37.
Plan of Distribution ..........................The shares of common stock
offered for resale may be sold by the
selling stockholders pursuant to this
prospectus in the manner described under
"Plan of Distribution" on page 20.
OTC Bulletin Board symbol ..............................................EGMI.OB
SUMMARY FINANCIAL DATA
The following summary financial information is taken from our financial
statements included elsewhere in this prospectus and should be read along with
the financial statements and the related notes.
INCOME STATEMENT DATA
Fiscal Years Ended December 31
2003 2002
-------------- --------------
Total revenue $ 8,317 $ 0.00
Operating expenses $ 533,033 $ 390,484
Net profit / loss $ (542,000) $ (391,403)
Net loss per share $ (0.04) $ (0.08)
Average number of shares 12,777,700 5,256,390
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BALANCE DATA SHEET
Years Ended
December 31, 2003 December 31, 2002
(Audited) (Audited)
-------------- --------------
Total assets $ 122,219 $ 37,085
Cash & cash equivalents $ 6,732 $ 13,909
Total liabilities $ 1,317,735 $ 454,257
Working capital (deficiency) $ (335,002) $ (143,537)
Shareholder equity $ (1,195,516) $ (417,172)
RISK FACTORS
You should carefully consider the following risks before you decide to buy
our common stock. Our business, financial condition or operating results may
suffer if any of the events described in the following risk factors actually
occur. There may be additional risks that we are not currently able to identify.
These may also adversely affect our business, financial condition or operating
results. If any of the events we have identified or those that we cannot now
identify occurs, the trading price of our common stock could decline, and you
may lose all or part of the money you paid to buy our common stock.
We have a limited operating history, which makes it difficult to evaluate
our business and to predict our future operating results.
We were organized in June 1981. From our inception and until November,
2003, we went through several transformations and businesses which were engaged
in organizational activities, including developing a strategic operating plan,
entering into various collaborative agreements for the development of products
and technologies, hiring personnel and developing and testing our products. It
was not until December 5, 2003, when we closed the stock exchange agreement
between Scientific Energy, Inc. and Electronic Game Card, Inc., that we entered
the electronic game card and gaming card business described below.
We have incurred net losses since commencing business. We may incur future
losses. We may never generate material revenues or achieve profitability and, if
we do achieve profitability, we may not be able to maintain profitability.
We may fail to address risks we face as a developing business which could
adversely affect the implementation of our business plan.
We are prone to all of the risks inherent to the establishment of any new
business venture. You should consider the likelihood of our future success to be
highly speculative in light of our limited operating history, as well as the
limited resources, problems, expenses, risks and complications frequently
encountered by similarly situated companies. To address these risks, we must,
among other things:
o maintain and increase our product portfolio;
o implement and successfully execute our business and marketing
strategy;
9
o continue to develop new products and upgrade our existing products;
o respond to industry and competitive developments; and
o attract, retain, and motivate qualified personnel.
We may not be successful in addressing these risks. If we are unable to do
so, our business prospects, financial condition and results of operations would
be materially adversely affected. We have limited experience in developing
products and may be unsuccessful in our efforts to develop products.
To achieve profitable operations, we, alone or with others, must
successfully develop, market and sell our products. The development of new
electronic products is highly uncertain and subject to a number of significant
risks. Some products resulting from our or our collaborative partners' product
development efforts are not expected to be available for sale for at least a
year. Potential products that appear to be promising at early stages of
development may not reach the market for a number of reasons.
To date, our resources have been substantially dedicated to the
acquisition, research and development of products and technologies. Most of the
existing and future products and technologies developed by us will require
extensive additional development. Our product development efforts may not be
successful.
An increase in competition from other entertainment product manufacturers
could have a material adverse effect on our ability to generate revenue and cash
flow.
Because many of our competitors have substantially greater capabilities and
resources, they may be able to develop products before us or develop more
effective products or market them more effectively which would limit our ability
to generate revenue and cash flow.
Competition in our industry is intense. Potential competitors in the United
States and Europe are numerous most of which have substantially greater capital
resources, marketing experience, research and development staffs and facilities
than us. Competing technologies and products may be more effective than any of
those that are being or will be developed by us.
If we fail to keep up with rapid technological change, our technologies and
products could become less competitive or obsolete.
The industry is characterized by rapid and significant technological
change. We expect that gaming technologies will continue to develop rapidly, and
our future success will depend on our ability to develop and maintain a
competitive position. Technological development by others may result in products
developed by us, branded or generic, becoming obsolete before they are marketed
or before we recover a significant portion of the development and
commercialization expenses incurred with respect to these products.
We have limited sales and marketing capability, and may not be successful
in selling or marketing our products.
We depend on patent and proprietary rights to develop and protect our
technologies and products, which rights may not offer us sufficient protection.
The industry places considerable importance on obtaining patent and trade
secret protection for new technologies, products and processes. Our success will
depend on our ability to obtain and enforce protection for products that we
develop under United States and foreign patent laws and other intellectual
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property laws, preserve the confidentiality of our trade secrets and operate
without infringing the proprietary rights of third parties.
We also rely upon trade secret protection for our confidential and
proprietary information. Others may independently develop substantially
equivalent proprietary information and techniques or gain access to our trade
secrets or disclose our technology. We may not be able to meaningfully protect
our trade secrets which could limit our ability to exclusively produce products.
We require our employees, consultants, and parties to collaborative
agreements to execute confidentiality agreements upon the commencement of
employment or consulting relationships or a collaboration with us. These
agreements may not provide meaningful protection of our trade secrets or
adequate remedies in the event of unauthorized use or disclosure of confidential
and proprietary information.
If we lose key management or other personnel our business will suffer.
We are highly dependent on the principal members of our management staff.
We also rely on consultants and advisors to assist us in formulating our
development strategy. Our success also depends upon retaining key management and
technical personnel, as well as our ability to continue to attract and retain
additional highly-qualified personnel. We face intense competition for personnel
from other companies, government entities and other organizations. We may not be
successful in retaining our current personnel. We may not be successful in
hiring or retaining qualified personnel in the future. If we lose the services
of any of our management staff or key technical personnel, or if we fail to
continue to attract qualified personnel, our ability to acquire, develop or sell
products would be adversely affected.
Our management and internal systems might be inadequate to handle our
potential growth.
Our success will depend, in significant part, on the expansion of our
operations and the effective management of growth. This growth will place a
significant strain on our management and information systems and resources and
operational and financial systems and resources. To manage future growth, our
management must continue to improve our operational and financial systems and
expand, train, retain and manage our employee base. Our management may not be
able to manage our growth effectively. If our systems, procedures, controls, and
resources are inadequate to support our operations, our expansion would be
halted and we could lose our opportunity to gain significant market share. Any
inability to manage growth effectively may harm our ability to institute our
business plan.
Because we intend to have international operations, we will be subject to
risks of conducting business in foreign countries.
If, as we anticipate, international operations will constitute a part of
our business, we will be subject to the risks of conducting business in foreign
countries, including:
o difficulty in establishing or managing distribution relationships;
o different standards for the development, use, packaging and marketing
of our products and technologies;
o our inability to locate qualified local employees, partners,
distributors and suppliers;
o the potential burden of complying with a variety of foreign laws,
trade standards and regulatory requirements; and,
11
o general geopolitical risks, such as political and economic
instability, changes in diplomatic and trade relations, and foreign
currency risks.
We cannot predict our future capital needs and we may not be able to secure
additional financing which could affect our ability to operate as a going
concern. We have recently completed an offering through the sale of shares of
the common stock. We received $6,853,750 in gross aggregate proceeds from the
sale of those securities. We issued warrants to purchasers of our common stock
in that offering and to placement agents and other consultants and advisors who
have provided services to us. We issued options to Scientific Games Inc. to
acquire shares of our common stock which are exercisable up to May 20, 2004. The
warrants to purchase common stock are generally exercisable within five years of
the issuance date. However, other terms, such as price, vary from warrant holder
to warrant holder. These variations reflect the differing circumstances, such as
then current needs, under which the warrants were issued. Nevertheless, we may
need additional financing to continue to fund the research and development of
our products and to generally expand and grow our business. To the extent that
we will be required to fund operating losses, our financial position would
deteriorate. There can be no assurance that we will be able to find significant
additional financing at all or on terms favorable to us. If equity securities
are issued in connection with a financing, dilution to our stockholders may
result, and if additional funds are raised through the incurrence of debt, we
may be subject to restrictions on our operations and finances. Furthermore, if
we do incur additional debt, we may be limiting our ability to repurchase
capital stock, engage in mergers, consolidations, acquisitions and asset sales,
or alter our lines of business or accounting methods, even though these actions
would otherwise benefit our business. As of December 31, 2003, we had
stockholders' deficit of $1,195,516, and a net working capital deficit of
$1,253,992.
If adequate financing is not available, we may be required to delay, scale
back or eliminate some of our research and development programs, to relinquish
rights to certain technologies or products, or to license third parties to
commercialize technologies or products that we would otherwise seek to develop.
Any inability to obtain additional financing, if required, would have a material
adverse effect on our ability to continue our operations and implement our
business plan.
The prices we charge for our products and the level of third-party
reimbursement may decrease and our revenues could decrease.
Our ability to commercialize products successfully depends in part on the
price we may be able to charge for our products.
We may encounter significant financial and operating risks if we grow our
business through acquisitions.
As part of our growth strategy, we may seek to acquire or invest in
complementary or competitive businesses, products or technologies. The process
of integrating acquired assets into our operations may result in unforeseen
operating difficulties and expenditures and may absorb significant management
attention that would otherwise be available for the ongoing development of our
business. We may allocate a significant portion of our available working capital
to finance all or a portion of the purchase price relating to possible
acquisitions although we have no immediate plans to do so. Any future
acquisition or investment opportunity may require us to obtain additional
financing to complete the transaction. The anticipated benefits of any
acquisitions may not be realized. In addition, future acquisitions by us could
result in potentially dilutive issuances of equity securities, the incurrence of
debt and contingent liabilities and amortization expenses related to goodwill
and other intangible assets, any of which could materially adversely affect our
operating results and financial position. Acquisitions also involve other risks,
including entering markets in which we have no or limited prior experience.
The price of our common stock is likely to be volatile and subject to wide
fluctuations.
12
The market price of the securities of technology based companies has been
especially volatile. Thus, the market price of our common stock is likely to be
subject to wide fluctuations. If our revenues do not grow or grow more slowly
than we anticipate, or, if operating or capital expenditures exceed our
expectations and cannot be adjusted accordingly, or if some other event
adversely affects us, the market price of our common stock could decline. In
addition, if the market for technology based stocks or the stock market in
general experiences a loss in investor confidence or otherwise fails, the market
price of our common stock could fall for reasons unrelated to our business,
results of operations and financial condition. The market price of our stock
also might decline in reaction to events that affect other companies in our
industry even if these events do not directly affect us. In the past, companies
that have experienced volatility in the market price of their stock have been
the subject of securities class action litigation. If we were to become the
subject of securities class action litigation, it could result in substantial
costs and a diversion of management's attention and resources.
The public trading market for our common stock is limited and may not be
developed or sustained which could limit the liquidity of an investment in our
common stock.
There is a limited trading market for the common stock. Since December
2003, the common stock has been traded sporadically under the symbol "EGMI.OB"
on the OTC bulletin board, an inter-dealer automated quotation system for equity
securities. There can be no assurance that an active and liquid trading market
will develop or, if developed, that it will be sustained which could limit your
ability to sell our common stock at a desired price.
Certain events could result in a dilution of your ownership of our common
stock.
As of April 15, 2004, we had 21,035,118 shares of common stock outstanding.
We also have outstanding warrants which represent 4,098,875 common stock
equivalents. The exercise prices of the common stock warrants is $1.00 per
share. In addition we have outstanding options to purchase 2,103,512 shares of
our common stock at an exercise price of $0.50 per share.
The provisions of Nevada law may inhibit potential acquisition bids that
stockholders may believe are desirable, and the market price of our common stock
may be lower as a result.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Risk Factors," "Business" and
in other sections of this prospectus that are forward-looking statements. In
some cases, you can identify these statements by forward-looking words such as
"may," "might," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue," the negative of these terms
and other comparable terminology. These forward-looking statements which are
subject to risks, uncertainties and assumptions about us, may include
projections of our future financial performance, or anticipated growth
strategies and anticipated trends in our business. These statements are only
predictions based on our current expectations and projections about future
events. There are important factors that could cause our actual results, level
of activity, performance or achievements to differ materially from the results,
level of activity, performance or achievements expressed or implied by the
forward-looking statements, including those factors discussed under the section
entitled "Risk Factors." You should specifically consider the numerous risks
outlined under "Risk Factors." Although we believe the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither we
nor any other person assumes responsibility for the accuracy and completeness or
any of these forward-looking statements.
13
USE OF PROCEEDS
The following table describes how we plan to allocate the proceeds of this
offering, assuming the selling shareholders exercise half or all of the
6,202,387 shares purchased upon the exercise of warrants or options for Common
Stock:
Sale of Sale of
3,101,193 Shares 6,202,387 Shares
(50% of Offering) (100% of Offering)
---------------- -----------------
Gross proceeds $ 2,575,315 $ 5,150,631
Estimated offering expenses
(e.g.; printing and mailing
costs, legal and accounting
fees, SEC registration fee,
and blue sky fees) $ 100,000 $ 100,000
Estimated net proceeds $ 2,475,315 $ 5,050,631
Estimated uses of proceeds
General and administrative
expenses and additional
working capital $ 2,475,315 $ 5,050,631
Regardless of the amount of proceeds we may receive from the exercise of
warrants, the funds will be used to cover general and administrative expenses
and as additional working capital. We are not relying on these proceeds to
finance the Company during the next twelve months.
DETERMINATION OF OFFERING PRICE
The selling stock holders will, at their discretion, sell the stock at the
prevailing market price for our shares. The warrant holders will pay us $1.00
per share upon the exercise of those warrants. The option holder, Scientific
Games, Inc. will pay us $0.50 per share upon exercise of those options. The
price for the shares of stock offered by this Prospectus has not been and will
not be determined by us.
DILUTION
As of May 5, 2004, we had: (i) 21,035,118 shares of common stock
outstanding; and, (ii) 4,098,875 warrants exercisable into 4,098,875 shares of
common stock and (iii) 2,103,512 options exercisable into 2,103,512 shares of
common stock. The exercise and conversion prices of the warrants into common
stock is $1.00 per share and the exercise and conversion prices of the options
into common stock is $0.50 per share.
SELLING STOCKHOLDERS
The following table details the name of each selling stockholder, the
number of shares owned by each selling stockholder and the number of shares that
may be offered for resale under this prospectus. To the extent permitted by law,
the selling stockholders who are not natural persons may distribute shares, from
time to time, to one or more of their respective affiliates, which may sell
shares pursuant to this prospectus. We have registered the shares to permit the
selling stockholders and their respective permitted transferees or other
successors in interest that receive their shares from the selling stockholders
after the date of this prospectus to resell the shares. Because each selling
stockholder may offer all, some or none of the shares it holds, and because
there are currently no agreements, arrangements, or understandings with respect
to the sale of any of the shares, no definitive estimate as to the number of
shares that will be held by each selling stockholder after the offering can be
provided. The selling
14
stockholders may from time to time offer all or some of the shares pursuant to
this offering. Pursuant to Rule 416 under the securities act, the registration
statement of which this prospectus is a part also covers any additional shares
of our common stock which becomes issuable in connection with such shares
because of any stock dividend, stock split, recapitalization or other similar
transaction effected without the receipt of consideration which results in an
increase in the number of outstanding shares of our common stock. The following
table has been prepared on the assumption that all shares offered under this
prospectus will be sold to parties unaffiliated with the selling stockholders.
Except as indicated by footnote, none of the selling stockholders has had a
significant relationship with us within the past three years, other than as a
result of the ownership of our shares or other securities. Except as indicated
by footnote, the selling stockholders have sole voting and investment power with
their respective shares. Percentages in the table below are based on 21,035,118
shares of our common stock outstanding as of May 5, 2004.
OWNERSHIP OF COMMON STOCK PRIOR TO THE OFFERING
Number of Percentage
Name of Selling Shareholder Shares of Ownership
- --------------------------- ------ ------------
COMMON SHARES
Amy S. Bertsch 10,000 *
Andrew Maltin 25,000 *
Angela McCleer 6,250 *
Anne Esker 100,000 *
Arthur J. Papetti 25,000 *
Arthur Steinberg 25,000 *
Atlantic Business Services Ltd. 70,000 *
Avrohom Moshel 50,000 *
Bella Rosas Inc 18,750 *
Brendan McNamee 75,000 *
Brian Walsh 35,000 *
Bruce Lee McKee 50,000 *
C.R. Querbes 25,000 *
Caydal LLC 200,000 *
Central Point Partners LLC 50,000 *
Christopher Goggins 25,000 *
Christopher R. Siege 200,000 *
Cindy M. Dolgin 50,000 *
Dale Burns 100,000 *
Daniel Williams 12,500 *
Darren Taube 25,000 *
David D. Sims & Linda Wood Sims 12,500 *
David Dobell 50,000 *
David Harrison 6,250 *
David M. Scioscia 12,500 *
Dennis M & Concetina T Walsh 6,250 *
Dominic Maggiore 12,500 *
Don A. Guely 12,500 *
ECG, JZ LLC 25,000 *
Edward Hamilton 50,000 *
Eric Lichtenstein 25,000 *
Florence Mittleman 30,000 *
Generation Capital Associates 100,000 *
Greg Osborn 50,000 *
15
H John Greeniaus 50,000 *
H John Greeniaus 50,000 *
H. Shepard Boone 225,000 1.07 (1)
HK Partners for Aegis 25,000 *
I&S Technology Partners, LLP 300,000 1.43 (2)
Ira Belsky 50,000 *
IRA of Peter Janssen 37,500 *
Jack Grynberg 200,000 *
Jacob Engel 50,000 *
James Altman 25,000 *
James Bechand 50,000 *
James S. Gillespie 50,000 *
James S. Goldfinger 12,500 *
James T. Pappas 25,000 *
Janet Levitt Zalkin 6,250 *
Jennifer Z. Boone 75,000 *
John Cassarini 25,000 *
John Daugherty 250,000 1.19 (3)
John J Gebhardt 25,000 *
John J Gebhardt 25,000 *
John J Mutscheller 37,500 *
John M Wolf 25,000 *
John P. Smith & Katherine Smith 50,000 *
John Sullivan 25,000 *
John T. Boone & Katherine S. Boone 100,000 *
John Wang 25,000 *
Jon Buttles 25,000 *
Joshua Emanuel 50,000 *
Joshua Kazam 25,000 *
Jospeh A. Vales 25,000 *
Kendall Morrison 25,000 *
Kenneth G Futter 25,000 *
Kevin T. Nini 12,500 *
Larry D Bouts 200,000 *
Larry Kaplan 75,000 *
Louis & Erika Golia 12,500 *
M. Victor Von Althann 6,250 *
Mark L. Von Kreuter 6,250 *
Mark S Blank 50,000 *
Matt McGovern 15,000 *
Mervyn Klein 50,000 *
MF Investments 50,000 *
MHJ Holdings Co. 100,000 *
Michael D. Schutte 25,000 *
Michael E. Williams 50,000 *
Michael Morfit 25,000 *
Michael Wallach 25,000 *
Morgan Stanley as Custodian for
Philip Mittleman 50,000 *
Myron Neugeboren 50,000 *
Nathan Gantcher 50,000 *
Neeta Khubani & Anand Khubani 50,000 *
Neil B. Perkins DMD Retirement Trust 12,500 *
Neil V. Moody Rev. Trust 50,000 *
Nicole Martin 25,000 *
Patrick J. McMahon 25,000 *
Paul Goldman 25,000 *
16
Peter Grabler 50,000 *
Peter J O'Gorman & Rosemary A O'Gorman 50,000 *
Peter J. Murphy 25,000 *
Peter Janssen 37,500 *
Peter Rugg 50,000 *
Philip B. Smith 25,000 *
Philip Mittleman 25,000 *
Philip Rosenberg 12,500 *
Prana LLC 100,000 *
Professional Traders Management, LLC 150,000 *
Puglisi Capital Partners L.P. 100,000 *
Really Cool Group Ltd 300,000 1.43 (4)
Richard Molinsky 75,000 *
Richard Wilburn 25,000 *
Robert DeLeonardis 25,000 *
Robert G. Rex 25,000 *
Robert L. Hermanos 25,000 *
Rodd Friedman 100,000 *
Rosen Capital LP BSSC Prototype Def
Cont MPP Plan 50,000 *
Scott & Kathleen Mellynchuk 12,500 *
Scott A. Walker 12,500 *
Shelly Singhal 37,500 *
Shirley Rae Sullivan 25,000 *
Spencer Browne 50,000 *
Steven Bottcher 25,000 *
Steven J. Furnary 25,000 *
Steven Waldman 12,500 *
Terrance P. Curry 12,500 *
Thomas DiTosto 200,000 *
Thomas Pragas 12,500 *
Thomas R. Stevenson 25,000 *
Thomos Samph 25,000 *
Tryon N. Sisson & Dolores A. Sisson 100,000 *
Voltron Ventures L.P. 100,000 *
Wayne Saker 100,000 *
Wesley E. Carson & Sylvia B. Carson 25,000 *
Will Garwood, Jr 50,000 *
William H. Morton, Jr. 18,750 *
William J Truxal 100,000 *
William Mundell 25,000 *
William N. Tifft 6,250 *
TOTAL NUMBER OF COMMON SHARES: 6,853,750
WARRANTS
Amy S. Bertsch 5,000 *
Andrew Maltin 12,500 *
Angela McCleer 3,125 *
Anne Esker 50,000 *
Arthur J. Papetti 12,500 *
Arthur Steinberg 12,500 *
Atlantic Business Services Limited 35,000 *
Avrohom Moshel 25,000 *
17
Bella Rosas Inc 9,375 *
Brendan McNamee 37,500 *
Brian Walsh 17,500 *
Bruce Lee McKee 25,000 *
C.R. Querbes 12,500 *
Caydal LLC 100,000 *
Central Point Partners LLC 25,000 *
Christopher Goggins 12,500 *
Christopher R. Siege 100,000 *
Cindy M. Dolgin 25,000 *
Dale Burns 50,000 *
Daniel Williams 6,250 *
Darren Taube 12,500 *
David D. Sims & Linda Wood Sims 6,250 *
David Dobell 25,000 *
David Harrison 3,125 *
David M. Scioscia 6,250 *
Dennis M & Concetina T Walsh 3,125 *
Dominic Maggiore 6,250 *
Don A. Guely 6,250 *
ECG, JZ LLC 12,500 *
Edward Hamilton 25,000 *
Eric Lichtenstein 12,500 *
Florence Mittleman 15,000 *
Generation Capital Associates 50,000 *
Greg Osborn 25,000 *
H John Greeniaus 25,000 *
H John Greeniaus 25,000 *
H. Shepard Boone 112,500 *
HK Partners for Aegis 12,500 *
I&S Technology Partners, LLP 150,000 *
Ira Belsky 25,000 *
IRA of Peter Janssen 18,750 *
Jack Grynberg 100,000 *
Jacob Engel 25,000 *
James Altman 12,500 *
James Bechand 25,000 *
James S. Gillespie 25,000 *
James S. Goldfinger 6,250 *
James T. Pappas 12,500 *
Janet Levitt Zalkin 3,125 *
Jennifer Z. Boone 37,500 *
John Cassarini 12,500 *
John Daugherty 125,000 *
John J Gebhardt 12,500 *
John J Gebhardt 12,500 *
John J Mutscheller 18,750 *
John M Wolf 12,500 *
John P. Smith & Katherine Smith 25,000 *
John Sullivan 12,500 *
John T. Boone & Katherine S. Boone 50,000 *
John Wang 12,500 *
Jon Buttles 12,500 *
18
Joshua Emanuel 25,000 *
Joshua Kazam 12,500 *
Jospeh A. Vales 12,500 *
Kendall Morrison 12,500 *
Kenneth G Futter 12,500 *
Kevin T. Nini 6,250 *
Larry D Bouts 100,000 *
Larry Kaplan 37,500 *
Louis & Erika Golia 6,250 *
M. Victor Von Althann 3,125 *
Mark L. Von Kreuter 3,125 *
Mark S Blank 25,000 *
Matt McGovern 7,500 *
Mervyn Klein 25,000 *
MF Investments 25,000 *
MHJ Holdings Co. 50,000 *
Michael D. Schutte 12,500 *
Michael E. Williams 25,000 *
Michael Morfit 12,500 *
Michael Wallach 12,500 *
Morgan Stanley as Custodian for
Philip Mittleman 25,000 *
Myron Neugeboren 25,000 *
Nathan Gantcher 25,000 *
Neeta Khubani & Anand Khubani 25,000 *
Neil B. Perkins DMD Retirement Trust 6,250 *
Neil V. Moody Rev. Trust 25,000 *
Nicole Martin 12,500 *
Patrick J. McMahon 12,500 *
Paul Goldman 12,500 *
Peter Grabler 25,000 *
Peter J O'Gorman & Rosemary A O'Gorman 25,000 *
Peter J. Murphy 12,500 *
Peter Janssen 18,750 *
Peter Rugg 25,000 *
Philip B. Smith 12,500 *
Philip Mittleman 12,500 *
Philip Rosenberg 6,250 *
Prana LLC 50,000 *
Professional Traders Management, LLC 75,000 *
Puglisi Capital Partners L.P. 50,000 *
Really Cool Group Ltd 150,000 *
Richard Molinsky 37,500 *
Richard Wilburn 12,500 *
Robert DeLeonardis 12,500 *
Robert G. Rex 12,500 *
Robert L. Hermanos 12,500 *
Rodd Friedman 50,000 *
Rosen Capital LP BSSC Prototype Def
Cont MPP Plan 25,000 *
Scott & Kathleen Mellynchuk 6,250 *
Scott A. Walker 6,250 *
Shelly Singhal 18,750 *
Shirley Rae Sullivan 12,500 *
19
Spencer Browne 25,000 *
Steven Bottcher 12,500 *
Steven J. Furnary 12,500 *
Steven Waldman 6,250 *
Terrance P. Curry 6,250 *
Thomas DiTosto 100,000 *
Thomas Pragas 6,250 *
Thomas R. Stevenson 12,500 *
Thomos Samph 12,500 *
Tryon N. Sisson & Dolores A. Sisson 50,000 *
Voltron Ventures L.P. 50,000 *
Wayne Saker 50,000 *
Wesley E. Carson & Sylvia B. Carson 12,500 *
Will Garwood, Jr 25,000 *
William H. Morton, Jr. 9,375 *
William J Truxal 50,000 *
William Mundell 12,500 *
William N. Tifft 3,125 *
WARRANTS DUE TO PLACEMENT AGENTS:
Middlebury Capital LLC 353,750 1.68 (5)
National Securities, Inc 32,000 *
First Securities USA, Inc. 200,000 *
IQ Ventures 86,250 *
TOTAL: 4,098,875
OPTIONS DUE TO SCIENTIFIC GAMES
INTERNATIONAL, INC:
Scientific Games International, Inc. 2,103,512 10.00 (6)
TOTAL: 2,103,512
- ----------
* Represents less than 1% of our outstanding shares of common stock before
and after offering.
(1) Represents less than 1% after offering, assuming all warrants and options
are exercised
(2) Represents 1.19% after offering, assuming all warrants and options are
exercised
(3) Represents less than 1% after offering, assuming all warrants and options
are exercised
(4) Represents 1.19% after offering, assuming all warrants and options are
exercised
(5) Represents 1.41% after offering, assuming all warrants and options are
exercised
(6) Represents 7.72% after offering, assuming all warrants and options are
exercised
PLAN OF DISTRIBUTION
The shares covered by this prospectus may be offered and sold from time to
time by the selling stockholders. The term "selling stockholders" includes
pledgees, donees, transferees or other successors in interest selling shares
received after the date of this prospectus from the selling stockholders as a
pledge, gift, partnership distribution or other non-sale related transfer. The
number of shares beneficially owned by each selling stockholder will decrease as
and when it effects any such transfers. The plan of distribution for the selling
stockholders' shares sold hereunder will otherwise remain unchanged, except that
the transferees, pledgees, donees or other successors will be selling
stockholders hereunder. To the
20
extent required, we may amend and/or supplement this prospectus from time to
time to describe a specific plan of distribution.
The selling stockholders will act independently of us in making decisions
with respect to the timing, manner and size of each sale. The selling
stockholders may offer their shares from time to time pursuant to one or more of
the following methods:
o on the OTC Bulletin Board or on any other market on which our common
stock may from time to time be trading;
o one or more block trades in which the broker or dealer so engaged will
attempt to sell the shares of common stock as agent but may position
and resell a portion of the block as principal to facilitate the
transaction;
o purchases by a broker or dealer as principal and resale by the broker
or dealer for its account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
o in public or privately-negotiated transactions;
o through the writing of options on the shares;
o through underwriters, brokers or dealers (who may act as agents or
principals) or directly to one or more purchasers;
o an exchange distribution in accordance with the rules of an exchange;
o through agents;
o through market sales, both long or short, to the extent permitted
under the federal securities laws; or
o in any combination of these methods.
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o at negotiated prices; or
o any other prices as the selling stockholder may determine from time to
time. In connection with distributions of the shares or otherwise, the
selling stockholders may
o Enter into hedging transactions with broker-dealers or other financial
institutions, which may in turn engage in short sales of the shares in
the course of hedging the positions they assume;
o sell the shares short and redeliver the shares to close out such short
positions;
o enter into option or other transactions with broker-dealers or other
financial institutions which require the delivery to them of shares
offered by this prospectus, which they may in turn resell; and
21
o pledge shares to a broker-dealer or other financial institution,
which, upon a default, they may in turn resell.
In addition to the foregoing methods, the selling stockholders may offer
their share from time to time in transactions involving principals or brokers
not otherwise contemplated above, in a combination of such methods as described
above or any other lawful methods.
Sales through brokers may be made by any method of trading authorized by
any stock exchange or market on which the shares may be listed or quoted,
including block trading in negotiated transactions. Without limiting the
foregoing, such brokers may act as dealers by purchasing any or all of the
shares covered by this prospectus, either as agents for others or as principals
for their own accounts, and reselling such shares pursuant to this prospectus. A
selling stockholder may effect such transactions directly, or indirectly through
underwriters, broker-dealers or agents acting on their behalf. In effecting
sales, brokers and dealers engaged by the selling stockholders may arrange for
other brokers or dealers to participate.
The shares may also be sold pursuant to Rule 144 under the securities act,
which permits limited resale of shares purchased in a private placement subject
to the satisfaction of certain conditions, including, among other things, the
availability of certain current public information concerning the issuer, the
resale occurring following the required holding period under Rule 144 and the
number of shares during any three-month period not exceeding certain
limitations. The selling stockholders have the sole and absolute discretion not
to accept any purchase offer or make any sale of their shares if they deem the
purchase price to be unsatisfactory at any particular time.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. These broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom these broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that the selling stockholders will attempt to
sell shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered by this
prospectus will be issued to, or sold by, the selling stockholders if they do
not exercise or convert the common stock equivalents that they own. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered by this prospectus, may be deemed "underwriters" as that
term is defined under the securities act or the exchange act, or the rules and
regulations under those acts. In that event, any commissions received by the
broker-dealers or agents and any profit on the resale of the shares of common
stock purchased by them may be deemed to be underwriting commissions or
discounts under the securities act.
The selling stockholders, alternatively, may sell all or any part of the
shares offered by this prospectus through an underwriter. To our knowledge, none
of the selling stockholders have entered into any agreement with a prospective
underwriter and there can be no assurance that any such agreement will be
entered into. If the selling stockholders enter into such an agreement or
agreements, then we will set forth, in a post-effective amendment to this
prospectus, the following information:
o the number of shares being offered;
o the terms of the offering, including the name of any selling
stockholder, underwriter, broker, dealer or agent;
o the purchase price paid by any underwriter;
22
o any discount, commission and other underwriter compensation;
o any discount, commission or concession allowed or reallowed or paid to
any dealer;
o the proposed selling price to the public; and
o other facts material to the transaction.
We will also file such agreement or agreements. In addition, if we are
notified by the selling stockholders that a donee, pledgee, transferee or other
successor-in-interest intends to sell more than 500 shares, a supplement to this
prospectus will be filed.
The selling stockholders and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
exchange act and the rules and regulations under the exchange act, including,
without limitation, Regulation M. These provisions may restrict certain
activities of, and limit the timing of purchases and sales of any of the shares
by, the selling stockholders or any other such person. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to the same securities for a specified period of time prior to the
commencement of the distribution, subject to specified exceptions or exemptions.
All of these limitations may affect the marketability of the shares.
We have agreed to pay all costs and expenses incurred in connection with
the registration of the shares offered by this prospectus, except that the
selling stockholder will be responsible for all selling commissions, transfer
taxes and related charges in connection with the offer and sale of the shares
and the fees of the selling stockholder's counsel.
We have agreed with the selling stockholders to keep the registration
statement of which this prospectus forms a part continuously effective until the
earlier of the date that the shares covered by this prospectus may be sold
pursuant to Rule 144 of the securities act and the date that all of the shares
registered for sale under this prospectus have been sold.
We have agreed to indemnify the selling stockholders, or their respective
transferees or assignees, against certain liabilities, including liabilities
under the securities act, or to contribute to payments that the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of those liabilities.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
23
MANAGEMENT
Our executive officers, directors and other significant employees and their
ages and positions are as follows:
NAME OF INDIVIDUAL AGE POSITION WITH EGC AND SUBSIDIARIES
- ------------------ --- ----------------------------------
John Bentley 64 Chairman and Chief Executive Officer
Lee J. Cole 42 Director
Linden Boyne 60 Chief Financial Officer, Director and Secretary
Daniel Kane 55 Senior Vice-President Gaming
Matt Webb 31 Vice-President of Product Development
All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. There are no
agreements with respect to the election of directors or regarding their position
with the Company.
JOHN BENTLEY, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND DIRECTOR - Mr. Bentley
has been a director of EGC (UK) since 1999 and managed the business initially as
Chairman and Chief Executive Officer. He is an experienced entrepreneurial
Chairman and CEO of successful start-ups and growth companies for over thirty
years, which have included a number of publicly listed companies in the media,
communications, and entertainment fields, ranging from twenty employees up to
10,000. These included the UK's largest video rental distributor. He is a joint
creator of the EGC game concept.
LEE J. COLE, DIRECTOR - Mr. Cole has been a director of EGC since 2001. Mr.
Cole has been a director of DBP Holdings Ltd. ("DBP"), our largest stockholder,
since 1999. DBP currently has investments in fourteen European software and
related service companies. From 1995 to 1999, Mr. Cole served as the Managing
Director of TEC Capital Group, a venture capital firm.
LINDEN J. H. BOYNE, CHIEF FINANCIAL OFFICER, SECRETARY AND DIRECTOR - Mr.
Boyne is a Director of the Company and is its Chief Financial Officer and
Secretary. Since 1991 he has acted as a consultant to a number of retail
businesses advising on general operations. He was previously a director of NSS
Newsagents Plc with responsibility for several thousand branches.
SIGNIFICANT EMPLOYEES:
DANIEL KANE - Mr. Kane is Senior Vice President of Gaming. He has over 30
years experience with U.S. state and European lotteries, particularly in the
introduction of new technology and game formats. He managed the introduction of
scratch cards for the UK's national lottery operator Camelot. Following the
exclusive agreement with Scientific Games International to market EGC lottery
product worldwide, Mr. Kane will manage the SGI account as well as be
responsible for EGC's sales to casinos.
MATT WEBB - Mr. Webb is Vice President of Product Development. He is an
international business technology developer and business modeller specializing
in the lotteries sector. He has led development projects in the UK, Indian and
Nigeria working with international partners including the UK's Camelot Group,
PLC. He is in charge of EGC's technology relationships including the manufacture
of hardware and software.
24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of common stock, as of May 5, 2004 by (i) each person whom we know to
beneficially own 5% or more of the common stock, (ii) each of our directors,
(iii) each person listed on the Summary Compensation Table set forth under
"Executive Compensation" and (iv) all of our directors and executive officers.
The number of shares of common stock beneficially owned by each stockholder is
determined in accordance with the rules of the Commission and does not
necessarily indicate beneficial ownership for any other purpose. Under these
rules, beneficial ownership includes those shares of common stock over which the
stockholder exercises sole or shared voting or investment power. The percentage
ownership of the common stock, however, is based on the assumption, expressly
required by the rules of the Commission, that only the person or entity whose
ownership is being reported has converted or exercised common stock equivalents
into shares of common stock; that is, shares underlying common stock equivalents
are not included in calculations in the table below for any other purpose,
including for the purpose of calculating the number of shares outstanding
generally.
PERCENTAGE OF PERCENTAGE OF
NUMBER OF CLASS OWNED CLASS OWNED
NAME SHARES OWNED BEFORE OFFERING AFTER OFFERING (1)
- ---- ------------ --------------- ------------------
John Bentley(2) 2,050,001 9.75% 7.53%
Lee J. Cole (3) Nil Nil Nil
Linden Boyne (4) 307,500 (5) 1.46% 1.13%
J. Seward (6) 1,537,500 7.31% 5.64%
H. McNally (7) 1,947,791 9.26% 7.15%
All officers and
directors as a group
(3 persons) 2,357,501 11.21% 8.66%
- ---------------
(1) Assumes that all 6,202,387 warrants offered by the selling stockholders
are exercised.
(2) Gipps Farmhouse, Spithurst Lane, Barcombe, Lewes, UK
(3) 32 Haymarket, Piccadilly, London, SW1Y 4TP, UK
(4) Aberfoyle, 33 Green Lane, Blackwater, Camberley, Surrey, UK
(5) Options awarded in the 2002 management share options scheme.
(6) c/o Abbey National Offshore, P. O. Box 545, 41 The Parade, St. Helier,
Jersey, U.K.
(7) Fountain House, Park Street, London, U.K.
DESCRIPTION OF SECURITIES
DESCRIPTION OF COMMON STOCK
NUMBER OF AUTHORIZED AND OUTSTANDING SHARES. Our Certificate of
Incorporation authorizes the issuance of 100,000,000 shares of common stock,
$.001 par value per share, of which 21,035,118 shares were outstanding on April
15, 2004. All of the outstanding shares of common stock are fully paid and
non-assessable.
VOTING RIGHTS. Holders of shares of common stock are entitled to one vote
for each share on all matters to be voted on by the stockholders. Holders of
common stock have no cumulative voting rights. Accordingly, the holders of in
excess of 50% of the aggregate number of shares of common stock outstanding will
be able to elect all of our directors and to approve or disapprove any other
matter submitted to a vote of all stockholders.
25
OTHER. Holders of common stock have no preemptive rights to purchase our
common stock. There are no conversion rights or redemption or sinking fund
provisions with respect to the common stock.
TRANSFER AGENT. Shares of common stock are registered at the transfer agent
and are transferable at such office by the registered holder (or duly authorized
attorney) upon surrender of the common stock certificate, properly endorsed. No
transfer shall be registered unless we are satisfied that such transfer will not
result in a violation of any applicable federal or state securities laws. The
transfer agent for our common stock is Liberty Transfer Company, 274B New York
Avenue, Huntington, New York 11743.
DESCRIPTION OF PREFERRED STOCK
Our Certificate of Incorporation does not authorize the issuance of
preferred stock.
WARRANTS
As of May 5, 2004, there were outstanding warrants to purchase an aggregate
of 4,098,875 shares of our common stock, exercisable at $1.00 per share.
STOCK OPTIONS
As of May 5, 2004, there were outstanding options to purchase 2,103,512
shares of our common stock, exercisable at $0.50 per share. These options are
held by Scientific Games International, Inc., a strategic business partners of
the Company's, and are exercisable up to May 20, 2004.
The Company instituted a stock option plan for officers, key employees,
consultants and advisors. The 2002 Equity Compensation Plan provided for options
equivalent up to 10% of the then issued share capital of the company to be
offered to such individuals by the Board. 676,500 of a total possible of
1,230,000 options have been distributed. No further stock option plans have been
instituted.
TRANSFER AGENT
Our transfer agent is Liberty Transfer Company, Inc., 274B New York Avenue,
Huntington, New York 11743.
EXPERTS
Our auditors are Robison, Hill and Co., certified public accountants. Our
consolidated financial statements as at and for the year ended December 31, 2003
have been included in this prospectus and in the registration statement in
reliance upon the report of Robison, Hill and Co., and upon their authority, as
experts in accounting and auditing.
L. Stephen Albright, attorney at law, has passed upon the validity of the
securities being offered hereby.
Neither Robison, Hill and Co. nor Mr. Albright were hired on a contingent
basis, nor will either receive a direct or indirect interest in the business of
issuer. Further, neither was or will be a promoter, underwriter, voting trustee,
director, officer, or employee of the issuer.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Certificate of Incorporation and its By-Laws contain provisions for
indemnification of officers, directors, employees and agents of the Company. Our
By-Laws require us to indemnify such persons to the full extent permitted by the
Nevada General Corporation Law (Nev. Rev. Stat. Ann. sec.78.751
26
(1995)). Each person will be indemnified in any proceeding if he acted in good
faith and in a manner which he reasonably believed to be in, or not opposed to
the best interests of the Company.
Indemnification would cover expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement. Our By-Laws also provide that the Board of
Directors may cause us to purchase and maintain insurance on behalf of any
present or past director or officer insuring against any liability asserted
against such person incurred in the capacity of director or officer or arising
out of such status, whether or not we would have the power to indemnify such
person. We may seek to obtain directors' and officers' liability insurance upon
completion of this registration. However, we have not determined whether to
obtain such insurance.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceedings) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such court.
DESCRIPTION OF BUSINESS
We are an emerging technology company. Our primary business focus is the
development and sale of gaming products to the sales promotion and lottery
industries. We have a single product platform, the electronic game card, under
development.
PRODUCTS
The EGC Gamecard was developed by us over the last two years. We
invested significant time and capital into its development to produce an end
product that met the size and technical specifications required for its end
users while at the same time maintaining a reasonable price point.
The standard EGC Gamecard is the size and shape of a credit card,
incorporating a proprietary PCB design, a long life battery, LCD screen, a
microprocessor and random number generator in a thin (approximately 3 mm) rigid
sandwich construction encased in plastic. On one side there is a security tag to
activate the device, and on the play area touch sensitive buttons are used to
start and to play each game by putting the numbers or icons on the display in
motion. LCD designs may incorporate alphanumerics or icons to allow for games to
carry brands logos and symbols or various game formats, and game units may also
incorporate a counter display allowing for accumulator or incentive points to be
awarded. An EGC Gamecard can also contain sound, for example to play a jingle or
give a win alert. A win may be determined by a number of means; for example by
matching the LCD display to printed numbers or symbols on the card itself, or
shown elsewhere, such as in a newspaper, television commercial, in-store, or via
some other venue or medium. The game may also be set to play over given time
periods so extending its play value.
The EGC Gamecard is flexible enough to allow for any number of plays
according to the promoters requirements. The EGC Gamecard may be produced to a
generic design or application as directed by the Company. Alternatively, it may
be customized to various designs and applications chosen by our customers.
Security features to identify multiple prize levels in a single game are
incorporated in the software. Additional security, such as that currently used
in the production and identification of individual scratch cards, can be printed
or otherwise ineradicably inscribed on the reverse of each game unit, as can the
rules of play or other identifying mediums such as bar codes.
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Our corporate executive team has many years of commercial operating
experience.
SUPPLIERS
Our principal suppliers are the manufacturers of the EGC Gamecard with whom
we have contractual agreements designed to ensure quality control, security,
competitive pricing and on time delivery. These include packaging arrangements.
Our largest supplier is Tak Shun Technology Group ("Tak Shun") based in Hong
Kong which is the manufacturer of our EGC Gamecard,. Tak Shun has the capacity
to produce 500,000 EGC Gamecards per day. Our other suppliers are software
specialists, independent quality control advisors, game designers, and artwork
designers.
INDUSTRY
Our EGC Gamecard is a unique product that we believe will generate demand
across several different industries. Initially, we have narrowed our sales and
development focus on the following industries:
LOTTERIES/SALES PROMOTIONS
Both the lottery and sales promotion industries currently make use of
scratch cards, otherwise known as "instants". The "instant" market currently
attracts approximately one fifth (twenty two percent (22%)) or $30 billion of
total worldwide lottery gaming revenue of $140 billion, according to the Casino
and Gaming Market Research Handbook. The "sales promotional items" market
overall is in the region of $100 billion worldwide. Of this, "sales competition
items" are five percent (5%) and that of "electronic items" are also estimated
at five percent (5%). In the lottery market, a purchase is made (i.e. a lottery
ticket), whereas a normal sales promotion consists of a "free" inducement to
obtain a free prize of a product or service of the promoter.
The lottery and sales promotion industries have progressed by means of
technology changes whether by demand or invention. Two major principal changes
included (1) the advent of security printing techniques for scratch cards some
35 years ago, allowing the excitement of an "instant" win for the player, and
(2) the increasing installation of high security online terminal networks for
lottery sales over the last twenty years allowing for massively increased
individual prize wins.
LOTTERY MARKET
There are approximately 220 lotteries in the world, either state owned and
operated as in the United States of America, or state licensed as for example in
the United Kingdom and in France. Total lottery sales in the United States
increased by six percent (6%) from 2002 to 2003. Of this increase, seventy six
percent (76%) was accounted for by "instant" sales against online sales. Of
"instants" (i.e. scratch cards), the upscale category with $10 plus price points
led with a sixty one percent (61%) increase, followed by $7 tickets with a
twenty two percent (22%) increase, demonstrating their demand over $2 tickets at
five percent (5%). In the United States especially, state authorities depend, to
a substantial degree, on lottery revenues from all sources including the sale of
"instant" scratch cards to support local essential services such as education
and health.
Seventy eight percent (78%) of total lottery sales in the North American
and European markets are obtained through networked online terminals at
specially equipped retail outlets at a cost of several thousand dollars per
installation. These installations continue to increase slowly although a maximum
saturation point of economic return is getting closer. However, in many
countries ticket sales are still made by way of scratch cards which are only
sold through various types of retail outlets. This process works because
security is assured by the sophisticated printing techniques used to identify
winning tickets. The "instant" market where the excitement of a potential win
can be identified immediately after purchase, is the main compelling feature of
scratch cards.
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The industry trend over the past few years in the United States has moved
continuously towards creating the means to obtain a higher price point for
tickets which in effect is made possible only by giving extended play
opportunity to the consumer. However there is a point at which the number of
scratch off panels on a sheet of scratch cards becomes overwhelming and
unamusing to the consumer. Further, there are few scratch cards which carry more
than ten scratch off panels or are priced at over $10 per card. Changes in the
gaming laws, such as permitting an increase in the selling price of tickets, are
providing for greater acceptance and use of lotteries by governments and the
public. Consequently, these changes provide a suitable industry entry point for
our EGC Gamecards. We view this as an opportunistic opening for sales of our EGC
Gamecards and their ability to play an unlimited amount of game plays at a price
point already proven to be acceptable by consumers and regulators.
Although lotteries outside the United States have not yet moved to
similarly high price points, it is likely that in time they will be legally
permitted to follow the examples found in the United States. Recently the United
Kingdom's sole national lottery operator, Camelot, moving its price point from
$4.50 to $7.50 for scratch cards. Since their introduction in 1995, Camelot has,
on average, produced 11 different scratch card editions a year. Upswings in
sales coincide with new game formats demonstrating a market that is responsive
to novel variations of design, which variation requirements can be satisfied by
the adaptability of the EGC Gamecard.
SALES PROMOTIONS
The overall global sales promotion market consist of various types and are
growing and discerning markets totaling approximately $500 billion worldwide. Up
until about ten years ago the common model was to run promotions in house
through a large corporation's marketing department. These departments devised
promotions, direct marketing programs and promotional materials direct from
manufacturers, or from other distributors, and used special consultants on a
project by project basis. Recently most of the larger brands have moved to a
more traditional marketing services business model such as a full service agency
offering strategy, design and creative work, implementation, fulfillment and
management.
The emergence of agencies owned by international advertising groups, which
include planning and creative departments, reflects the increasing
sophistication of technology driven innovation, which is coupled with the
ability to deliver projects in shorter lead times. A majority of marketing firms
now take responsibility for guiding a product from concept to final sales. Even
so, the roles of the manufacturer, sales agent, distributor, sales promotion
agency and marketing department can often be found performing a cross section of
these functions.
For definition purposes, "sales promotions" are typically found at outlets
such as gas stations or in direct mail shots where entry to competitions, free
gifts or loyalty points are given against purchases. In some cases, and in some
countries , prizes such as cars, travel packages or household goods may be
awarded. Similar schemes are widely used in supermarkets and in the sale of
beverages. Gas, food, alcohol and tobacco products are the dominant markets for
sales promotions worldwide. However, financial services, including banks and
credit card companies, are also in the business of attracting customer by
similar means. Million dollar prizes are frequently given away in a single
scratch card promotion, either across the board or as single individual prizes.
Newspapers and magazines offer prize competitions and free promotional items
such as music CD's to attract purchasers.
The promotional games contests and sweepstakes market in the United States
rose by ten percent (10%) in 2001 according to Promo Magazine USA. In the United
Kingdom the market for sales promotions in general has been growing at the rate
of twenty percent (20%) annually for the past ten years, according to Mintel.
This is set against an above the line decline in advertising spending.
Recessionary economic times may also favor sweepstakes and comparable products
since they are "a fixed cost tactic that reduces budget risk, yet still provides
promotion excitement and merchandising thematics" [quote from Carlson Draddy
Associates, a United States. advertising agency].
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Revenues of promotional agencies in the United States were $100 billion in
2001 with a further $100 billion expended direct by marketers. The size of the
United Kingdom sales promotion market is $25.0 billion, according to Mintel.
European figures are unknown but can be considered to be around $100 billion on
an extrapolation of United Kingdom figures. Worldwide promotional sales of all
types are estimated to exceed $500 billion. Of this, $100 billion is devoted to
"sales promotions items" of which "electronic items" form five percent (5%) and
"competition items" form five percent (5%).
Other potential users of sales promotion items and "free" prizes and
competitions are:
o Newspaper competitions to increase market share and boost advertising
revenue
o Sports for loyalty and membership use (e.g. football, baseball,
racing, Formula 1)
o Financial services for loyalty and registration promotions
o Food and restaurants chains to attract frequent users
o Corporate presentation as gifts for brand promotion by corporations to
customers or staff
o Casinos for souvenir gift, promotional and "free competitions"
purposes
INCREMENTAL MARKETS
In addition to our main target markets described above, we are also
pursuing other markets that we believe fit the profile for the EGC Gamecard.
Although we have discussed these potential markets in this section, we have not
included these markets in our financial projections. A summary of some of the
incremental markets we are actively following are as follows:
CASINOS
Lottery laws and those laws which govern the operation of gaming machines
in casinos do not permit the purchase of our EGC Gamecard as a hand held pocket
gaming machine to the public. EGC Gamecards can only be given away as free
promotion devices. As such, we have recently completed a successful promotion
starting with the Las Vegas Hilton, part of the Park Place group (recently
renamed Caesars), who own many casino venues worldwide. Despite the
proliferation of casinos worldwide, there are only a handful of major groups
based in the United States who control the majority of worldwide casino spend.
We intend to sell direct to these groups.
In time, the retail sale of our EGC GameCard to the public in casinos may
be permitted, but will require extensive application to the various authorities
whose regulations and laws may vary from state to state and country to country.
Slot machines now account for eighty percent (80%) of casino sales according to
Harrah's report of March 30, 2002. There may, however, be an untapped market for
our EGC Gamecard to Indian Reservations in the United States. which have
separate regulations.
CHARITY AND SPORTS LOTTERIES
There are many thousands of charity lotteries worldwide. A breakdown of
their sales is not available, but it is an area that offers a market opportunity
for new product such as our EGC Gamecards. In the United Kingdom, charities
suffered a thirty five (35%) fall in revenues on the advent of the United
Kingdom national lottery which effectively monopolizes lottery sales with
uncreative product.
The charity area includes sports lotteries where money is raised by selling
tickets at parties to finance sport of every description, but where permitted
price points are most likely to be uneconomic for the time
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being. We believe this market presents future opportunities as changes in the
law become more favorable.
AIRLINES
The international airline industry is a potential gaming and sales
promotion market with few legal restrictions once a carrier flies into
international air space. International flights in the developed world are
forecast at 0.5 billion by 2005, and domestic flights a further 1.3 billion,
according to IATA post September 11, 2001 estimates. Although currently not
permitted in the United States, an increasing number of airlines in Europe are
beginning to sell scratch cards to passengers. Premiair, a European chartered
airline, has sales of scratch cards averaging $3 per passenger per flight. A one
half percent (0.5%) share of global annual passenger bookings would equate to
sales of 9 million EGC cards.
CRUISE LINES
Casino gambling and cruise line ship competitions are major revenue earners
for all cruise lines. We believe our EGC Gamecard is a natural fit for this
market. This is an area that is in the mainly out of the jurisdiction of local
authority or state controls and where a purchase can be made by the public.
SALES & MARKETING STRATEGY
We intend to sell our products through an internal sales team as well as
through licensing agreements with certain third parties. Our internal sales team
consists of two individuals, and we are planning to add to our sales staff upon
completion of this offering. We currently have sales offices in London, and have
recently opened an office in New York. We intend to open in office in Tokyo in
the first half of 2004. Our sales team has relevant experience in their
appropriate markets. We also intend to utilize a customer relationship
management system to allow our staff to share information directly with sales
agents.
In addition to our current and planned sales team, we are also working
closely with strategic partners to distribute our products. We typically enter
into exclusive contracts with our strategic partners for a specific market and
geography. Each contract includes performance measures that must be achieved to
maintain exclusivity. Our current third party partners include Scientific Games,
Inc. and Clegg Industries.
SCIENTIFIC GAMES. Scientific Games is the world's largest supplier of
instant tickets and scratch cards to lotteries, supplying over seventy percent
(70%) of the world market. In May 2003 we signed a five year exclusive
distributorship with Scientific Games for the marketing and distribution of our
EGC Gamecard to the United States lottery market. We believe the contract with
Scientific Games is a compelling testament to the interest level in our EGC
Gamecard, and will increase visibility and credibility in our products
throughout all of our markets. The resources of Scientific Games International
as our sole lottery distributor are very substantial and will ensure that our
EGC Gamecard product is shown at all major lottery conventions and trade shows
around the world. The first of these at NASPL in New Orleans in September 2003
has resulted in substantial interest from a dozen or more major United States
lotteries. A focus group activity by a state lottery in the United States on our
EGC Gamecard product has shown interest at all levels and the Iowa state lottery
is to be the first to start an EGC Gamecard trial promotion with sales to the
public due in 2004.
The exclusivity of our contract with Scientific Games is contingent upon
Scientific Games achieving pre-determined sales and volume levels for our EGC
Gamecard in the United States lottery market. These targets were set upon
contract date and are evaluated annually. If the sales targets are not achieved,
Scientific Games has the option to pay a fee to maintain its exclusivity or let
the exclusivity expire.
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CLEGG INDUSTRIES. In August 2003, we signed an exclusive agreement with
Clegg Industries Inc. and its associate Americhip Inc. as our distributor for
EGC Gamecard products for use in direct mail marketing. Clegg Industries is a
United States based promotional items distributor with annual sales of over $70
million and extensive experience in direct mail marketing. A further sales
promotion distribution arrangement has recently been put in place in Australia
with a newly formed company, EGC Australia Pty. The continuation of the
exclusivity of these distribution alliances are dependent on the achievement of
agreed performance figures on an annual basis and the demonstrable commitment of
the distributor's use of existing sales base and contacts to promote the sale of
EGC game card products.
COMPETITION
While we believe there to be no existing direct competitor offering an
electronic game card product, our competition includes other "instant" prize
reward products, such as paper scratch cards. Scratch card sales are a fully
developed market and we will be competing to obtain market share from scratch
cards. We believe, though, that our product is a unique offering and does not
compare directly in price or usage and is most likely to be seen as a
complementary rather than a competitive product. In the lottery industry our
product is positioned as a novel and unique higher price point ticket item with
a better perceived entertainment and game play value than can be obtained from a
multiple scratch card. Scientific Games with whom we have recently completed an
exclusive worldwide five year agreement, are the largest supplier of scratch
cards and instant tickets to the United States and international lottery
industry, and are on public record in stating they have expectations of our EGC
Gamecard product as an exciting means to expand sales overall and to attract new
lottery business (Scientific Games press release dated October 29, 2003).
In the sales promotion industry, we will compete at a level with items such
as giveaway compact disks or similar promotional products. Our EGC Gamecard
provides a novel choice for sales promotions agencies to offer to their clients.
Neither they nor scratch card security printers are likely to have the volume
manufacturing capabilities or resource of technology skills to enter the same
field with an electronic device such as our EGC card on a competitive basis.
Manufacturers who are able to make similar electronic devices will find
obstacles in imitating our EGC Gamecard from both the protection of its
intellectual property components and the effectiveness of its design. We also
hold an exclusive contract with our manufacturing partners, and others may not
have the capability for low cost and reliable volume production. Additionally
insurers to this marketplace are few and will only warrant prize wins against
tried and tested products to which they are party. Exclusive long term
distribution agreements with major suppliers to the industry may also limit
entry to this market from potential competitors.
Competition may come over a period of three years or so from other
technology advances such as that from cell phones or wireless Internet
appliances. These, although mooted regularly, are still awaiting efficient
widespread broadband networks, and security issues such as proof of use or
payment that are vital issues for the lottery industry. Internet gaming or
lottery sales by these means are currently prohibited in the United States and
will continue to be so for some time, but this prohibition does not preclude
sales promotions where no purchase or entry fee is necessary. Games do exist now
on cell phones currently using SMS messaging, but they are unreliable, give few
rewards and are mainly used by youngsters tolerant of time consuming text
messaging.
BARRIERS TO ENTRY AND RISK
The lottery industry is a mature and relatively closed industry with a
handful of major suppliers, nevertheless requiring new products over time to
retain interest and sales. Our EGC Gamecard has received a good reception as the
first item for many years to appear alongside the dated existing products in
this market. Nevertheless, the public reception and reaction to our EGC Gamecard
has not yet been
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fully tested in the reality of the consumer marketplace.
Although generally aware of current gaming laws, we have not investigated
the specific laws of each nation or state which ultimately is the responsibility
and liability of the promoters themselves. In the case of lotteries, our sole
role is a supplier of hardware (and in some cases software) capable of
delivering the promoter's specialized requirements for which the promoter is
primarily responsible.
We are reasonably confident from enquiries within industry sources that the
sale of our EGC Gamecards to licensed gaming entities, such as lotteries, will
for the most part fall into the same category and regulations as scratch cards
which they resemble in law. The lawful requirements for "non purchase" sales
promotions are less stringent, but these too are the responsibility of the
promoter. Our product is familiar to a public acquainted with slot machines or
scratch cards to which our EGC Gamecard bears resemblance.
INTELLECTUAL PROPERTY
We have intellectual property in the form of patent applications and
copyright on which it has been advised by our attorneys there is no prior art.
We regard substantial elements of our product offering as proprietary and
believe that we are protected by intellectual property rights including patent
applications, trademark and trade secret laws, copyright, and contractual
restrictions on their use by licensees and others. Although from time to time we
may apply for registration of our trademarks, service marks, and copyrights with
the appropriate United Kingdom and European agencies, we do not rely solely on
such registrations for the protection of these intellectual property rights. We
also enter into confidentiality agreements with our consultants, manufacturers
and distributors, and with third parties in connection with our business
operations and services offerings. These agreements generally seek to control
access to, and distribution of, our technology, documentation, and other
confidential information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use or disclose to others our
confidential information without authorization or to develop similar technology
independently.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or trademarks or to determine the
validity and scope of the intellectual property rights of others. Furthermore,
our business activities may infringe upon the proprietary rights of others and
other parties may assert infringement claims against us, including claims that
arise from directly or indirectly providing hyper-text links to Web sites
operated by third parties. Moreover, from time to time, we may be subject to
claims of alleged infringement by us or our subscribers of the trademarks,
service marks and other intellectual property rights of third parties. These
claims and any resultant litigation, should it occur, might subject us to
significant liability for damages, might result in invalidation of our
intellectual property rights and, even if not meritorious, could result in
substantial costs and diversion of resources and management attention and have a
material adverse effect on our business, results of operations and financial
condition.
LEGAL ENVIRONMENT AND INSURANCE
Outsourced legal advisors in the United States and Europe advise us in our
manufacturing and agency agreements. Specialists in gaming laws also advise us
on the legality of the use of electronic games cards. Our trademarks, logos,
copyrights, patents, etc. that are currently not registered will be registered
through suitable international attorneys.
Insurance of prize promotions against prize redemption liability will be
taken out and paid for by customers and their clients on their own behalf,
either through our partner insurance agents or their own insurers. Manufacturers
are liable for faulty product or failure to deliver on time. We have developed
relationships with insurers to take out additional product liability, freight,
errors and omissions, and
33
directors' liability insurance, and where necessary to provide adequate
protection at a cost which is compatible with the economic cost of its product.
EMPLOYEES
We currently have seven full time employees. In addition to this staff, we
employ the services of several specialist independent contractors for game
design, software support, artwork and quality control. We consider our relations
with our employees to be good. We have never had a work stoppage, and no
employees are represented under collective bargaining agreements. All employees
have contracts of employment with Electronic Game Card Limited or Electronic
Game Card, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of our results of
operations and financial condition. The discussion should be read together with
our audited financial statements and notes included elsewhere in this
prospectus.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of our results of
operations and financial condition. The discussion should be read together with
our audited financial statements and notes included elsewhere in this
prospectus.
REVENUE-RECOGNITION
All products once supplied will be invoiced in arrears and will be
immediately collectible.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles of the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates, and such differences may be material to the financial statements.
OVERVIEW
We are a supplier of innovative gaming devices to the lottery and
promotional industry worldwide. Our lead product is the EGC GameCard, a
revolutionary credit card-sized pocket game combining interactive capability
with "instant win" excitement. The EGC GameCard was designed by us to be rich in
functionality, customizable, extremely portable, and relatively inexpensive.
Each EGC GameCard includes a microprocessor, LCD, and long life power source, as
well as state of the art security features protecting both the consumer and the
promoter. Our EGC GameCard weighs in at just under one half an ounce and is only
3mm thick. We have identified two distinct markets for our GameCard product: the
Lottery market and the Sales Promotion market.
We are a development stage company, have had no revenue from operations,
and have no operations from which revenue will be generated in the near future.
For the fiscal year ended December 31, 2003, we incurred net losses of $540,790.
See Consolidated Financial Statements.
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The Company expects to purchase some significant equipment and expects a
small increase in the number of employees in the next 12 months.
COMPANY STATUS
We have made solid progress in developing our business over the past twelve
months. We have incurred losses during our development stage. Our management
believes that we have the opportunity to become a leading supplier of gaming
devices to the lottery and sales promotion industries. A key element of our
business strategy is to continue to acquire, obtain licenses for, and develop
new technologies and products that we believe offer unique market opportunities
and/or complement our existing product lines.
We are considered a development-stage company for accounting purposes
because we have not generated any material revenues to date. Accordingly, we
have no relevant operating history upon which an evaluation of our performance
and future prospects can be made. We are prone to all of the risks to the
establishment of any new business venture. You should consider the likelihood of
our future success to be highly speculative in light of our limited operating
history, as well as the limited resources, problems, expenses, risks and
complications frequently encountered by similarly situated companies. To address
these risks, we must, among other things:
o satisfy our future capital requirements for the implementation of our
business plan;
o commercialize our existing products;
o complete development of products presently in our pipeline and obtain
necessary regulatory approvals for use;
o implement and successfully execute our business and marketing strategy
to commercialize products;
o establish and maintain our client base;
o continue to develop new products and upgrade our existing products;
o respond to industry and competitive developments; and
o attract, retain, and motivate qualified personnel.
We may not be successful in addressing these risks. If we were unable to do
so, our business prospects, financial condition and results of operations would
be materially adversely affected. The likelihood of our success must be
considered in light of the development cycles of new technologies and the
competitive and regulatory environment in which we operate.
RESULTS OF OPERATIONS
For the fiscal year end December 31, 2003.
There were $8,317 revenues from operations for the year ended December 31,
2003. We sustained a net loss of approximately $540,790 from continuing
operations for the year ended December 31, 2003, which was due to expenses
incurred by us for developing and marketing the game card. Since April, 2000,
the Company is a development stage company and had not begun principal
operations.
The Company anticipates improved revenues during the next 12 months.
Expenses will increase as sales and marketing efforts of the game card increase.
35
In the opinion of management, with the exception of the ability to borrow
money, inflation has not and will not have a material effect on the operations
of the Company.
Total assets have increased to $122,219 compared with $37,085 in the
previous year.
LIQUIDITY AND CAPITAL RESOURCES
The Company remains in the development stage and, since the reorganization
between Scientific Energy, Inc.-UT and the Company, has experienced some changes
in liquidity, capital resources and stockholder's equity. The Company's balance
sheet as of December 31, 2003, and 2002, reflects a current asset value of
$63,743 and $25,406, respectively, and a total asset value of $122,219 and
$37,085, respectively. Previous to the reorganization the Company had no assets
and was completely inactive.
Between December 11, 2003, and February 20, 2004, we sold an aggregate
total of 6,853,750 shares of common stock and issued warrants to purchase an
aggregate of 4,098,875 shares of common stock and options to purchase 2,103,512
shares of common stock resulting in gross proceeds of approximately $5,150,631
once all warrants and options are exercised.
We intend to raise additional capital from public or private placements to
investors of our common stock and/or other series of preferred stock. However,
there can be no assurance that we will be able to obtain capital from a
placement of our common stock or whether the funds required by the Company will
enable us to further develop our operations. Additionally, there is no guarantee
that we will be able to raise capital on terms and conditions which are
acceptable to us. The inability to raise additional capital may forestall our
growth.
PLAN OF OPERATION
Our management does not believe that we need any of the net proceeds from
the exercise of the warrants and that without those proceeds, we will be able to
continue as currently planned operations for the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets, effective for fiscal years beginning after December 15, 2001.
Under the new rules, goodwill and intangible assets with indefinite lives will
no longer be amortized, but will be subject to annual impairment tests in
accordance with Statement 142. Other intangible assets will continue to be
amortized over their useful lives. The Company is still in the process of
evaluating the impact of adopting this pronouncement on its consolidated
financial statements, however, it does not believe that the adoption of this
pronouncement will have a material impact on the consolidated financial
statements.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement is effective for fiscal years
beginning after December 31, 2001. This supercedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
while retaining many of the requirements of such statement. We do not believe
that this statement will have a material effect on our financial statements.
In April 2002, the FASB, issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, 64, Amendment of FASB Statement No. 13, and Technical Corrections. In
addition to amending and rescinding other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or describe their
applicability under changed conditions, SFAS No. 145 precludes companies from
recording gains and losses from the extinguishment of debt as an extraordinary
item. SFAS No. 145 is effective for our first quarter in the fiscal year ending
June 30, 2003. The Company does not expect the
36
adoption of this pronouncement to have a material impact on our consolidated
results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, :Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal
activity. SFAS No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company does not expect the
adoption of this pronouncement to have a material effect on the consolidated
results of operations or financial position.
DESCRIPTION OF PROPERTY
As of the date of this report we do not own any interest in real property.
Our corporate headquarters are located at 712 Fifth Avenue, 19th Floor, New
York, NY10019-4108. The Company holds a license for office space in New York and
London from Sterling FCS, an aggregate space of approximately 2,000 square feet
at a monthly fee of $12,000 a month.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended December 31, 2003, there were no material
transactions or relationships between the Company and its management.
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
During the year ended December 31, 2003, our common stock was traded in the
Over-The- Counter ("OTC") market and quoted on the Electronic Bulletin Board
(the "Bulletin Board"). The trading volume of the common stock is limited. This
limited trading volume creates the potential for significant changes in the
trading price of the common stock as a result of a relatively minor changes in
the supply and demand. It is likely that trading prices will fluctuate in the
future without regard to our business activities.
The following table presents the high and low bid quotations for the Common
Stock as reported by the OTC Bulletin Board for each quarter during the year
ended December 31, 2003. During the year, the Company actively conducted the
development of its EGC GameCard. However, as of December 31, 2003 the Company
had not actively commenced the commercial sale of the EGC GameCard. Such prices
reflect inter-dealer quotations without adjustments for retail markup, markdown
or commission, and do not necessarily represent actual transactions. There has
been no solicitation of the sale or purchase of the Common Stock. The price for
the common stock has approximately ranged in price as follows:
2001: HIGH LOW
Period May 30, 2001 (Inception) to
June 30, 2001 $6.38 $1.35
Quarter Ended September 30, 2001 $5.25 $2.10
Quarter Ended December 31, 2001 $2.75 $1.55
2002: HIGH LOW
Quarter Ended March 31, 2002 $1.75 $0.85
Quarter Ended June 30, 2002 $0.42 $0.02
Quarter Ended September 30, 2002 $0.07 $0.03
Quarter Ended December 31, 2002 $0.02 $0.01
37
2003: HIGH LOW
Quarter Ended March 31, 2003 $30.00 $1.0
Quarter Ended June 30, 2003 $10.00 $5.0
Quarter Ended September 30, 2003 $10.00 $7.0
Quarter Ended December, 31, 2003 $10.00 $1.9
To date, the Company is not aware of any significant trading in its shares.
Trading of the Company's shares may be subject to certain state and federal
restrictions regarding non-national market securities and "Penny Stocks".
COMMON STOCK
The Company's certificate of incorporation provides for the authorization
of 100,000,000 shares of Common Stock, par value $0.001 per share. As of April
15, 2004, 21,035,118 shares of Common Stock were issued and outstanding, all of
which are fully paid and non-assessable. As of August 15, 2004, we estimate that
there were 720 shareholders of record of common stock.
Each share of our Common Stock is entitled to one vote. Our stockholders
have no pre-emptive rights.
PREFERRED STOCK
As stated above, our Articles of Incorporation do not authorize the
issuance of preferred stock.
DIVIDENDS
We have never declared or paid cash dividends on our capital stock, and our
board of directors does not intend to declare or pay any dividends on the common
stock in the foreseeable future. Our earnings, if any, are expected to be
retained for use in expanding our business. The declaration and payment in the
future of any cash or stock dividends on the common stock will be at the
discretion of the board of directors and will depend upon a variety of factors,
including our ability to service our outstanding indebtedness and to pay our
dividend obligations on securities ranking senior to the common stock, our
future earnings, if any, capital requirements, financial condition and such
other factors as our board of directors may consider to be relevant from time to
time.
TRANSFER AGENT
The transfer agent for our Common Stock is Liberty Transfer Co. located at
274 New York Avenue, Suite B Huntington, New York 11743. Their telephone number
is 212 509-4000.
38
EXECUTIVE COMPENSATION
The following table sets forth information for the fiscal year ended
December 31, 2003 concerning the compensation paid and awarded to all
individuals serving as (a) our chief executive officer, (b) each of our four
other most highly compensated executive officers (other than our chief executive
officer) at the end of our fiscal year ended December 31, 2003 whose total
annual salary and bonus exceeded $100,000 for these periods, and (c) up to two
additional individuals, if any, for whom disclosure would have been provided
pursuant to (b) except that the individual(s) were not serving as our executive
officers at the end of our fiscal year ended December 31, 2003:
SUMMARY COMPENSATION TABLE
RESTRICTED SECURITIES
NAME & OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) (#) ($) ($) ($)
- -------------------------------------------------------------------------------------------------------------------
John Bentley 2003 200,000(1) 0 0 0 0 0 0
Lee Cole 2003 0 0 0 0 0 0 0
Linden Boyne 2003 0 0 0 0 307,500(2) 0 0
All Directors were appointed on November 19, 2003.
With the exception of the CEO, John Bentley, the remaining directors are
not compensated in their role as directors as such, but receive a per diem of
$1,000 per meeting attended, plus any incurred travel and lodging expenses.
<FN>
(1) John Bentley's salary is $200,000 per annum.
(2) Options for 307,500 shares granted under the 2002 Equity Compensation
Plan.
</FN>
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
39
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report...............................................F - 1
Consolidated Balance Sheets
December 31, 2003 and 2002...............................................F - 2
Consolidated Statements of Operations for the
Years Ended December 31, 2003 and December 31, 2002
and the Cumulative Period April 6, 2000 (Inception)
to December 31, 2003.....................................................F - 4
Statement of Stockholders' Equity for the
Period From April 6, 2000 (Inception) to December 31, 2003...............F - 5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2003 and December 31, 2002
and the Cumulative Period April 6, 2000 (Inception)
to December 31, 2003.....................................................F - 6
Notes to Consolidated Financial Statements.................................F - 8
40
INDEPENDENT AUDITOR'S REPORT
Electronic Game Card, Inc.
(Formerly Scientific Energy, Inc.)
(A Development Stage Company)
We have audited the accompanying consolidated balance sheets of
Electronic Game Card, Inc. (formerly Scientific Energy, Inc.) (a development
stage company) as of December 31, 2003 and 2002, and the related statements of
operations and cash flows for the years ended December 31, 2003 and 2002 and the
cumulative period April 6, 2000 (inception) to December 31, 2003, and the
statement of stockholders' equity for the period April 6, 2000 (Inception) to
December 31, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Electronic Game
Card, Inc. (formerly Scientific Energy, Inc.) (a development stage company) as
of December 31, 2003 and 2002, and the results of its operations and its cash
flows for the years ended December 31, 2003 and 2002 and the cumulative period
April 6, 2000 (inception) to December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Respectfully Submitted,
/s/ Robison, Hill & Co.
-----------------------------------
Certified Public Accountants
Salt Lake City, Utah
April 8, 2004
F-1
ELECTRONIC GAME CARD, INC.
(FORMERLY SCIENTIFIC ENERGY, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
December 31,
2003 2002
--------- ---------
ASSETS:
CURRENT ASSETS:
Cash & Cash Equivalents ................... $ 6,732 $ 13,909
Prepaid Expense ........................... 6,873 --
Value Added Tax Receivable ................ 7,868 11,497
Note Receivable ........................... 42,270 --
--------- ---------
Total Current Assets ................. 63,743 25,406
--------- ---------
PROPERTY AND EQUIPMENT:
Plant and Machinery Equipment ............. 6,015 6,015
Office Equipment .......................... 8,598 7,009
Less: Accumulated Depreciation ............ (6,177) (1,345)
--------- ---------
Net Fixed Assets ..................... 8,436 11,679
--------- ---------
Net Assets of Discontinued Operations .......... 50,040 --
--------- ---------
TOTAL ASSETS ................................... $ 122,219 $ 37,085
========= =========
F-2
ELECTRONIC GAME CARD, INC.
(FORMERLY SCIENTIFIC ENERGY, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
December 31,
2003 2002
----------- -----------
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts Payable ............................ $ 297,357 $ 153,543
Accrued Payroll Liabilities ................. 101,388 15,400
----------- -----------
Total Current Liabilities .............. 398,745 168,943
----------- -----------
NON-CURRENT LIABILITIES:
Long Term Note Payable ...................... 912,205 285,314
----------- -----------
Total Non-Current Liabilities .......... 912,205 285,314
----------- -----------
Net Liabilities of Discontinued Operations ....... 6,785 --
----------- -----------
TOTAL LIABILITIES ........................... 1,317,735 454,257
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock, Par Value $.001,
Authorized 100,000,000 shares
Issued 13,823,062 and 12,696,595 shares at
December 31, 2003 and 2002 .................. 13,823 12,697
Paid-In Capital .................................. -- --
Currency Translation Adjustment .................. (118,441) (25,927)
Retained Deficit ................................. (157,495) (12,539)
Deficit Accumulated During the Development Stage . (933,403) (391,403)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY .................. (1,195,516) (417,172)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $ 122,219 $ 37,085
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
ELECTRONIC GAME CARD, INC.
(FORMERLY SCIENTIFIC ENERGY, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
Since
April 6, 2000
For the Years Ended Inception of
December 31, Development
2003 2002 Stage
------------ ------------ ------------
Revenue: ....................... $ 8,317 $ -- $ 8,317
Cost of Good Sold .............. 13,452 -- 13,452
------------ ------------ ------------
Gross Loss ..................... (5,135) -- (5,135)
------------ ------------ ------------
Expenses:
Selling and Marketing Expense .. 30,514 43,839 74,353
General & Administrative ....... 178,612 97,191 275,803
Consulting Expenses ............ 178,456 216,872 395,328
Salaries and Wages ............. 145,451 32,582 178,033
------------ ------------ ------------
Total Operating Expenses .. 533,033 390,484 923,517
Loss from Operations ...... (538,168) (390,484) (928,652)
------------ ------------ ------------
Other Income (Expense)
Interest, Net .................. (2,167) (919) (3,086)
------------ ------------ ------------
Net Loss from Operations
before Taxes ............ (540,335) (391,403) (931,738)
Income Taxes ................... (455) -- (455)
------------ ------------ ------------
Net Loss from Operations .. (540,790) (391,403) (932,193)
Discontinued Operations:
Net Loss from Operations of
Scientific Energy, Inc.
to be Disposed, Net of
Tax Effects of $0 ...... (1,210) -- (1,210)
------------ ------------ ------------
Net Loss .................. $ (542,000) $ 391,403 $ (933,403)
------------ ------------ ------------
Basic & Diluted Loss Per Share:
Continuing Operations ..... $ (0.04) $ (0.08)
Discontinued Operations ... -- --
------------ ------------
$ (0.04) $ (0.08)
============ ============
Weighted Average Shares ........ 12,777,700 5,256,390
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
ELECTRONIC GAME CARD, INC.
(FORMERLY SCIENTIFIC ENERGY, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD APRIL 6, 2000 (INCEPTION) TO DECEMBER 31, 2003
Deficit
Accumulated
Since
April 6, 2000 Total
Inception of Stockholders'
Common Stock Paid-In Currency Retained Development Equity
Shares Par Value Capital Translation Deficit Stage (Deficit)
---------- ----------- --------- ----------- ----------- ----------- -----------
August 2, 2002, Shares Issued
for Services .................. 12,696,595 $ 12,697 $ -- $ -- $ (12,539) $ -- $ 158
Currency Translation ............ -- -- -- (25,927) -- -- (25,927)
Net Loss ........................ -- -- -- -- -- (391,403) (391,403)
---------- ----------- --------- ----------- ----------- ----------- -----------
Total Comprehensive Income ...... -- -- -- (25,927) -- (391,403) (417,330)
---------- ----------- --------- ----------- ----------- ----------- -----------
Balance December 31, 2002 ....... 12,696,595 12,697 -- (25,927) (12,539) (391,403) (417,172)
December 5, 2003, Shares Issued
in connection with Reverse
Acquisition of Scientific
Energy, Inc ................... 1,126,467 1,126 -- -- (144,956) -- (143,830)
Currency Translation ............ -- -- -- (92,514) -- -- (92,514)
Net Loss ........................ -- -- -- -- -- (542,000) (542,000)
---------- ----------- --------- ----------- ----------- ----------- -----------
Total Comprehensive Income ...... -- -- -- (92,514) -- (542,000) (634,514)
---------- ----------- --------- ----------- ----------- ----------- -----------
Balance December 31, 2003 ....... 13,823,062 $ 13,823 $ -- $ (118,441) $ (157,495) $ (933,403) $(1,195,516)
========== =========== ========= =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
ELECTRONIC GAME CARD, INC.
(FORMERLY SCIENTIFIC ENERGY, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
Since
April 6, 2000
For the Years Ended Inception of
December 31, Development
2003 2002 Stage
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ......................................... $(542,000) $(391,403) $(933,403)
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities:
Depreciation ..................................... 4,831 1,345 6,176
Stock Issued for Expenses ........................ -- 159 159
Foreign Currency Translation ..................... (86,642) (25,927) (112,569)
Net Loss from Discontinued Operations ............ 1,210 -- 1,210
Change in operating assets and liabilities:
(Increase) Decrease in Prepaid Expenses .......... (6,873) -- (6,873)
(Increase) Decrease in Value Added Tax Receivable 3,629 (11,497) (7,868)
Increase (Decrease) in Accounts Payable .......... 68,296 153,543 221,839
Increase (Decrease) in Accrued Payroll Liabilities 85,988 15,400 101,388
--------- --------- ---------
Net Cash Used in continuing activities ......... (471,561) (258,380) (729,941)
Net Cash Used in discontinued activities ....... (1,250) -- (1,250)
--------- --------- ---------
Net Cash Used in operating activities .......... (472,811) (258,380) (731,191)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Acquired in Merger .......................... 3,834 -- 3,834
Purchase of Plant and Machinery Equipment ........ -- (6,015) (6,015)
Purchase of Office Equipment ..................... (1,589) (7,009) (8,598)
--------- --------- ---------
Net cash provided by investing activities ........ 2,245 (13,024) (10,779)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Amount Loaned on Note Receivable ................. (42,270) -- (42,270)
Payment on Long-Term Note Payable ................ (37,307) -- (37,307)
Proceeds from Long-Term Note Payable ............. 542,966 285,313 828,279
--------- --------- ---------
Net Cash Provided by Financing Activities ...... 463,389 285,313 748,702
--------- --------- ---------
Net (Decrease) Increase in Cash .................. (7,177) 13,909 6,732
Cash at Beginning of Period ...................... 13,909 -- --
--------- --------- ---------
Cash at End of Period ............................ $ 6,732 $ 13,909 $ 6,732
========= ========= =========
F-6
ELECTRONIC GAME CARD, INC.
(FORMERLY SCIENTIFIC ENERGY, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
since
April 6,
2000
For the Years Ended Inception of
December 31, Development
2003 2002 Stage
------ ------ ------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest ........................ $1,453 $ 17 $1,470
Income taxes .................... $ 455 $ -- $ 455
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On May 5, 2003, the Company acquired in a reverse acquisition of
Electronic Game Card Marketing $1,735 in cash, accounts payable of $69,646 and a
long-term note payable of $121,233, in exchange for all of the Company=s
outstanding common stock.
On December 5, 2003, the Company acquired in a reverse acquisition of
Scientific Energy, Inc. $2,099 in cash, technology valued at $50,000, accounts
payable of $5,595 and a note payable to a shareholder of $1,095.
The accompanying notes are an integral part of these financial statements.
F-7
ELECTRONIC GAME CARD, INC.
(FORMERLY SCIENTIFIC ENERGY, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for Electronic Game, Inc. (formerly
Scientific Energy, Inc.) (a development stage company) is presented to assist in
understanding the Company's financial statements. The accounting policies
conform to generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
NATURE OF OPERATIONS AND GOING CONCERN
The accompanying financial statements have been prepared on the basis
of accounting principles applicable to a "going concern," which assume that the
Company will continue in operation for at least one year and will be able to
realize its assets and discharge its liabilities in the normal course of
operations.
Several conditions and events cast doubt about the Company's ability to
continue as a "going concern." The Company has incurred net losses of
approximately $933,403 for the period from April 6, 2000 (inception) to December
31, 2003, and requires additional financing in order to finance its business
activities on an ongoing basis. The Company is actively pursuing alternative
financing and has had discussions with various third parties, although no firm
commitments have been obtained. On December 11, 2003, the Company offered
6,833,750 shares of common stock at $1.00 per share in a private placement.
The Company's future capital requirements will depend on numerous
factors including, but not limited to, continued progress in developing its
products, and market penetration and profitable operations from sale of its
electronic game cards.
These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a "going concern." While
management believes that the actions already taken or planned, will mitigate the
adverse conditions and events which raise doubt about the validity of the "going
concern" assumption used in preparing these financial statements, there can be
no assurance that these actions will be successful.
If the Company were unable to continue as a "going concern," then
substantial adjustments would be necessary to the carrying values of assets, the
reported amounts of its liabilities, the reported expenses, and the balance
sheet classifications used.
ORGANIZATION AND BASIS OF PRESENTATION
The Company was incorporated under the laws of the United Kingdom on
April 1, 2000, under the name of Electronic Game Card, Ltd. Until 2002, the
Company remained dormant and had no operations. On May 5, 2003, the Company
entered into an agreement whereby it acquired 100% of the outstanding stock of
Electronic Game Card Marketing, a Delaware Company.
F-8
ELECTRONIC GAME CARD, INC.
(FORMERLY SCIENTIFIC ENERGY, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
On December 5, 2003, the Company acquired 100% of the outstanding stock
of the Electronic Game Card, Inc in a reverse acquisition. At this time, a new
reporting entity was created and the name of the Company was changed to
Electronic Game Card, Inc.
As of December 31, 2003, the Company is in the development stage and
has not begun planned principal operations.
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
following companies:
o Electronic Game Card, Inc. (formerly Scientific Energy, Inc.) (a
Nevada Corporation)
o Electronic Game Card, Ltd. (United Kingdom Corporation)
o Electronic Game Card Marketing (a Delaware Corporation)
o Scientific Energy, Inc. (a Nevada Corporation)
The results of subsidiaries acquired during the year are consolidated
from their effective dates of acquisition. All significant intercompany accounts
and transactions have been eliminated.
NATURE OF BUSINESS
The Company plans to engage in the development, marketing, sale and
distribution of recreational electronic software which primarily targeted
towards lottery and sales promotion markets through its Great Britain
subsidiary.
CONCENTRATION OF CREDIT RISK
The Company has no significant off-balance-sheet concentrations of
credit risk such as foreign exchange contracts, options contracts or other
foreign hedging arrangements.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents to the extent the funds are not being held for investment
purposes.
F-9
ELECTRONIC GAME CARD, INC.
(FORMERLY SCIENTIFIC ENERGY, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION
Fixed assets are stated at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets as follows:
Asset Rate
----- ----
Plant and Machinery Equipment 3 years
Office Equipment 3 years
Maintenance and repairs are charged to operations; betterments are
capitalized. The cost of property sold or otherwise disposed of and the
accumulated depreciation thereon are eliminated from the property and related
accumulated depreciation accounts, and any resulting gain or loss is credited or
charged to income.
Depreciation Expense for the two years ending December 31, 2003 and
2002, were $4,831 and $1,345.
REVENUE RECOGNITION
Revenue is recognized from sales of product at the time of shipment to
customers. As the Company is still in the development stage, during 2002 and
2003, it had very little revenue.
ADVERTISING COSTS
Advertising costs are expensed as incurred. As of December 31, 2003 and
2002, advertising costs were $13,064 and $26,409, respectively.
FOREIGN CURRENCY TRANSLATION
The Company's primary functional currency is the British Pound.
Monetary assets and liabilities resulting from transactions with foreign
suppliers and customers are remeasured at year-end exchange rates. All other
assets, liabilities, and stockholders' equity are remeasured at historical
exchange rates for past transactions and at year-end exchange rates for current
and future transactions. Revenue and expense accounts are remeasured at the
average exchange rates in effect during the year, except those related to assets
and liabilities, which are remeasured at historical exchange rates.
Remeasurement gains and losses are included in income.
F-10
ELECTRONIC GAME CARD, INC.
(FORMERLY SCIENTIFIC ENERGY, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's reporting currency is the U.S. dollar. Balance sheet
accounts are translated at year-end exchange rates and revenue and expense
accounts are translated at the average exchange rates in effect during the year.
Translation gains and losses are included as a separate component of
stockholders' equity.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required 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.
LOSS PER SHARE
Basic loss per share has been computed by dividing the loss for the
year applicable to the common stockholders by the weighted average number of
common shares outstanding during the years. There were no common equivalent
shares outstanding at December 31, 2003 and 2002.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes." SFAS No.109 requires recognition of deferred
income tax assets and liabilities for the expected future income tax
consequences, based on enacted tax laws, of temporary differences between the
financial reporting and tax bases of assets and liabilities.
STOCK COMPENSATION FOR NON-EMPLOYEES
The Company accounts for the fair value of its stock compensation
grants for non-employees in accordance with FASB Statement 123. The fair value
of each grant is equal to the market price of the Company's stock on the date of
grant if an active market exists or at a value determined in an arms length
negotiation between the Company and the non-employee.
F-11
ELECTRONIC GAME CARD, INC.
(FORMERLY SCIENTIFIC ENERGY, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 - INCOME TAXES
The Company is subject to income taxes in the United States of America,
United Kingdom, and the state of New York. As of December 31, 2003, the Company
had a net operating loss carryforward for income tax reporting purposes of
approximately $312,000 in the United States and $931,000 in the United Kingdom
that may be offset against future taxable income through 2023. Current tax laws
limit the amount of loss available to be offset against future taxable income
when a substantial change in ownership occurs. Therefore, the amount available
to offset future taxable income may be limited. No tax benefit has been reported
in the financial statements, because the Company believes there is a 50% or
greater chance the carry-forwards will expire unused. Accordingly, the potential
tax benefits of the loss carry-forwards are offset by a valuation allowance of
the same amount.
For the years ending December 31, 2003 and 2002 income tax expense was
$455 and $0.
NOTE 3 - DEVELOPMENT STAGE COMPANY
The Company has not begun principal operations and as is common with a
development stage company, the Company has had recurring losses during its
development stage. The Company's 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. However, as of December 31, 2003, the Company did not
have significant cash or other material assets, nor did it have an established
source of revenues sufficient to cover its operating costs and to allow it to
continue as a going concern.
NOTE 4 - NOTES RECEIVABLE
As of December 31, 2003 and 2002, the Company has the following amounts
owed to the Company:
2003 2002
------- -------
Note Receivable,interest equal to LIBOR, due upon
demand ............................................ $31,602 $ --
Note Receivable, no interest, due upon demand ........ 10,668 --
------- -------
Total Note Receivable ................................ $42,270 $ --
======= =======
F-12
ELECTRONIC GAME CARD, INC.
(FORMERLY SCIENTIFIC ENERGY, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5 - LONG-TERM NOTES PAYABLE
As of December 31, 2003 and 2002, the Company has the following amounts
due:
2003 2002
-------- --------
Note Payable, interest equal to LIBOR, due
within 14 days of Company initiating
public offering or due on demand,
secured by all assets of the Company ...... $883,402 $248,006
Note Payable, interest equal to LIBOR,
due November 2, 2004 or 14 days of
Company initiating public offering,
secured by assets of the Company .......... -- 37,308
Note Payable, interest equal to LIBOR,
due November 2, 2004 or 14 days of
Company initiating public offering,
secured by assets of the Company .......... 28,803 --
-------- --------
Total Long-Term Debt ........................... $912,205 $285,314
======== ========
NOTE 6 - RELATED PARTY TRANSACTIONS
As at December 31, 2003 and 2002, shareholder payables include
approximately $1,090 and $0 owing to a shareholder. On December 5, 2003, $31,344
of the note was converted into the Parent Company's stock in connection with the
Share Exchange.
During the years ending December 31, 2003 and 2002, a former officer of
the Company received $11,480 (9,000UK) and $7,112 (4,000UK) for providing
consulting services.
NOTE 7- COMMON STOCK TRANSACTIONS
On August 2, 2002, the Company issued 99 shares at 1.00 British Pound
or the equivalent of $1.60, these shares were later forward split to 12,696,595
shares in connection with the acquisition of Scientific Energy and it was
recorded by $12,539 credit to common stock of and a debit to retained earnings
of $12,539. All references to stock reflect the stock split.
On December 5, 2003, an additional 1,126,467 shares were issued to the
previous owners of Scientific Energy, Inc. and for the conversion of a note
payable of $31,344.
NOTE 8 - CONTINGENCIES
Currently, Electronic Game Card, Ltd. is a party to a lawsuit brought
in the Central London County Court by a former consultant. The claim is for
arrears of remuneration totaling $49,117 (27,625UK), remuneration for six
months' notice period of $57,341 (32,250UK) to be assessed in relation to the
Senior Executive Bonus Scheme, interest, costs and "further or other relief"
arising from EGC's alleged breaches of a written agreement. In conjunction, EGC
has filed a counterclaim which seeks damages in excess of $26,670 but limited to
$88,900 and interest. The case is listed for trial between June 24, 2004 and
August 20, 2004. It is
F-13
ELECTRONIC GAME CARD, INC.
(FORMERLY SCIENTIFIC ENERGY, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
uncertain as to the outcome of the proceedings, but management estimates a
possible loss of $88,900 (50,000UK). As of December 31, 2003 and 2002, the
company has recorded $88,900 and $54,000, respectively, included in accounts
payable for this lawsuit.
NOTE 9 - DISCONTINUED OPERATIONS
On December 5, 2003, the Company entered into an agreement with
Scientific Energy, Inc. Utah, that upon completion, 100% (20,000,000 shares) of
the Scientific Energy's shares would be returned, and the Company would cease to
be a wholly owned subsidiary of Electronic Game Card, Inc. As of the date of
this report, the transaction has not been completed.
NOTE 9 - DISCONTINUED OPERATIONS (Continued)
As of December 31, 2003, the assets and liabilities of Scientific
Energy, Inc. Utah to be disposed of consisted of the following:
2003 2002
-------- --------
Cash ...................................... $ 40 $ --
Intangibles ............................... 50,000 --
-------- --------
Total Assets .............................. 50,040 --
-------- --------
Accounts Payable .......................... 5,595 --
Income Tax Payable ........................ 100 --
Shareholder Loan .......................... 1,090 --
-------- --------
Total Liabilities ......................... 6,785 --
-------- --------
Net Assets to be Disposed of .............. $ 43,255 $ --
======== ========
Net assets and liabilities to be disposed of have been separately
classified in the accompanying consolidated balance sheet at December 31, 2003.
The December 31, 2002 balance sheet has not been restated as the Company did not
own Scientific Energy Inc. Utah as of December 31, 2002.
F-14
ELECTRONIC GAME CARD, INC.
(FORMERLY SCIENTIFIC ENERGY, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Operating results of this discontinued operation for the year ended
December 31, 2003 are shown separately in the accompanying consolidated
statement of operations. The operating results of this discontinued operation
for the years ended December 31, 2003 and 2002 consist of:
2003 2002
------- --------
General and Administrative Expenses ........ $ 20 $ --
Interest Expense ........................... 1,090 --
Tax Expense ................................ 100 --
------- --------
Net Loss ................................... $(1,210) $ --
======= ========
F-15
BACK COVER OF PROSPECTUS
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL MAY __, 2006, (TWO YEAR ANNIVERSARY OF EFFECTIVE DATE) ALL
DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article IX Articles of Incorporation states: "To the fullest extent
allowed by law, the directors and executive officers of this Corporation shall
be entitled to indemnification from the Corporation for acts and omissions
taking place in connection with their activities in such capacities."
Further, indemnification of officers and directors of the company is
provided for under the Article VIII of the Company's by-laws which states:
"Section 8.01 INDEMNIFICATION: THIRD PART ACTIONS. The corporation
shall have the power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that he or she is or was a director, officer, employee, or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against expenses (including
attorneys' fees) judgments, finds, and amounts paid in settlement actually and
reasonably incurred by him or her in connection with any such action, suite or
proceeding, if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The termination of
any action, suite, or proceeding by judgment, order, settlement, conviction, or
upon a plea of NOLO CONTENDERE, or its equivalent, shall not, of itself, create
a presumption that the person did not act in good faith and in a manner which he
or she reasonably believed to be in or not opposed to best interests of the
corporation, and with respect to any criminal action or proceeding, he or she
had reasonable cause to believe that his or her conduct was unlawful."
"Section 8.02 INDEMNIFICATION: CORPORATE ACTIONS. The corporation shall
have the power to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending, or completed action or suite by or
in the right of the corporation to procure a judgment in its favor by reason of
the fact that he or she is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses (including attorneys'
fees) actually and reasonable incurred by him or her in connection with the
defense or settlement of such action or suite, if he or she acted in good faith
and in a manner he or she reasonable believed to be in or not opposed to the
best interests of the corporation, except that no indemnification shall be made
in respect of any claim, issue, or matter as to which such a person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his or her duty to the corporation, unless and only to the extent that the court
in which the action or suite was brought shall determine on application that,
despite the adjudication of liability but in view of all circumstances of the
case, the person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper."
"Section 8.03 DETERMINATION. To the extent that a director, officer,
employee, or agent of the corporation has been successful on the merits or
otherwise in defense of any action, suite, or proceeding referred to in Sections
8.01 and 8.02 hereof, or in defense of any claim, issue, or matter therein, he
or she shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith. Any other
indemnification under Sections 8.01 and 8.02 hereto, shall be made by the
corporation upon a determination that indemnification of the officer, director,
employee, or agent is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in Section 8.01 and 8.02 hereof. Such
determination shall be made either (1) by the Board of Directors by a majority
vote of a quorum consisting of directors who were not parties to such action,
site, or proceeding; or (ii) by independent legal
i
counsel on a written opinion; or (iii) by the shareholders by a majority vote of
a quorum of shareholders at any meeting duly called for such purpose."
"Section 8.04 GENERAL INDEMNIFICATION. The indemnification provided by
this Section shall not be deemed exclusive of any other indemnification granted
under any provision of any statute, in the corporation's Articles of
Incorporation, these Bylaws, agreement, vote of the shareholders or
disinterested directors, or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceases to be a director, officer,
employee, or agent, and shall inure to the benefit of the heirs and legal
representatives of such person."
"Section 8.05 ADVANCES. Expenses incurred in defending a civil or
criminal action, suite, or proceeding as contemplated in this Section may be
paid by the corporation in advance of the final disposition of such action,
suit, or proceeding upon a majority vote of a quorum of the Board of Directors
and upon receipt of an undertaking by or on behalf of the director, officers,
employee, or agent to repay such amount or amounts unless if it is ultimately
determined that he or she is to indemnified by the corporation as authorized by
this Section."
"Section 8.06 SCOPE OF INDEMNIFICATION. The indemnification authorized
by this Section shall apply to a future directors, officers, employees, and
agents of the corporation, and shall inure to the benefit of the heirs,
executors, and administrators of all such persons and shall be in addition to
all other indemnification permitted by law."
"Section 8.07 INSURANCE. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, employee, or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise against any liability asserted against him
or her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against any such liability and under the laws of the state
of incorporation, as the same may hereafter be amended or modified."
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceedings) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such court.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
We estimate the following expenses in connection with this
registration.
SEC registration fee $ 2,780
Printing costs 10,000
Accounting fees and expenses 30,000
Legal fees and expenses 40,000
Miscellaneous 17,220
--------
Total $100,000
ii
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Between December 11, 2003, and February 20, 2004, we sold an aggregate
total of 6,853,750 shares of common stock. All of these sales were made in
reliance upon exemptions from registration under the Securities Act of 1933, as
amended (the "Act"). These transactions are listed under the Common Stock table
in the Selling Shareholders portion of this registration statement. All shares
were sold at the price of $1.00 per share. For every two common stock shares
sold the purchaser of those shares received a warrant to purchase an additional
common stock share at an exercise price of $1.00 each. Accordingly, 3,426,875
warrants in total were issued. The shares of common stock underlying these
warrants are being registered pursuant to this registration statement. In
addition to selling those shares, we issued warrants to purchase up to 672,000
shares of our common stock to various investment advisors and consultants. These
warrants are exercisable at the price of $1.00 per share. We are also
registering 672,000 shares of our common stock which underlie these warrants.
These transactions are listed in the Selling Shareholders portion of this
registration statement.
In addition, on April 8, 2004 we issued an option to purchase up to
2,103,512 shares of our common stock to Scientific Games, Inc. These options are
exercisable at the price of $0.50 per share. The options expire on May 20, 2004.
We are registering 2,103,512 shares of our common stock which underlie these
options. These transactions are listed in the Selling Shareholders portion of
this registration statement.
As a result of our sale of 6,853,750 shares of Common Stock in a
private placement, we received $6,853,750 in gross proceeds. The following is an
analysis of our use of those proceeds.
Gross proceeds $6,853,750
Offering expenses
placement agent commissions and
placement agent expenses 497,730
Miscellaneous expenses, such as
printing, mailing costs, legal
and accounting fees, SEC registration
fee, and blue sky fees) 100,000
Net proceeds 6,256,020
Anticipated uses of proceeds
General and administrative expenses
and working capital $6,256,020
Regardless of whether or not we receive any proceeds from the selling
shareholders' exercise of warrants we believe that the proceeds generated from
the sale of the common stock shares are sufficient to provide us with the
working capital necessary to cover our planned needs for at least the next
twelve months.
Unless otherwise stated, each of the persons who received these
unregistered securities had knowledge and experience in financial and business
matters which allowed them to evaluate the merits and risk of the receipt of
these securities, and that they were knowledgeable about our operations and
financial condition; (ii) no underwriter participated in, nor did we pay any
commission or fees to any underwriter in connection with the transactions; (iii)
the transactions did not involve a public offering; and, (iv) each certificate
issued for these unregistered securities contained a legend stating that the
securities have not been registered under the Act and setting forth the
restrictions on the transferability and the sale of the securities.
iii
In addition, between December 11, 2003, and February 20, 2004, we
issued warrants to purchase shares of common stock in the Company. These were
issued as consideration for assistance in placing the common stock, the sale of
which is described above, and to other consultants and advisors. The warrants
were issued as follows:
1. Warrants to purchase up to 353,750 shares of common stock at an
exercise price of $1.00 per share were granted to Middlebury Capital LLC. These
were granted as compensation for placement agents for the preferred stock. These
are exercisable through February 20, 2009.
2. Warrants to purchase up to 32,000 shares of common stock at an
exercise price of $1.00 per share were granted to National Securities, Inc.
These were granted as compensation for placement agents for the preferred stock.
These are exercisable through February 20, 2009.
3. Warrants to purchase up to 200,000 shares of common stock at an
exercise price of $1.00 per share were granted to First Securities USA, Inc.
These were granted as compensation for placement agents for the preferred stock.
These are exercisable through February 20, 2009.
4. Warrants to purchase up to 86,250 shares of common stock at an
exercise price of $1.00 per share were granted to IQ Ventures. These were
granted as compensation for placement agents for the preferred stock. These are
exercisable through February 20, 2009.
ITEM 27. EXHIBITS.
The following exhibits are filed or incorporated by reference as part
of this Registration Statement.
(3) ARTICLES OF INCORPORATION AND BYLAWS (incorporated by reference, except
where noted to the contrary)
3.1 Articles of Incorporation of the registrant (then named Quazon
Corp), dated October 27, 1997, and filed with the State of
Nevada, Secretary of State, on October 30, 1997, filed as
Exhibit 3.1 to Form 10-SB 12G filed with the Commission on
April 22, 1999;
3.2 Certificate of Amendment to Articles of Incorporation of the
registrant (then named Quazon Corp) dated October 23, 1998,
regarding a one for fifteen reverse stock split, and which was
filed with the State of Nevada, Secretary of State on October
27, 1998, and filed as part of Exhibit 3.1 to Form 10-SB12G
filed with the Commission on April 22, 1999;
3.3 Amendment to the Articles of Incorporation of Registrant
(changing its then name Quazon, Corp. to Scientific Energy,
Inc.), dated August 14, 2001, which were filed with the State
of Nevada, Secretary of State on August 16, 2001, and filed as
part of Exhibit 3.1 to Form 10-QSB filed with the Commission
on August 20, 2001;
3.4 Articles of Share Exchange and Name Change for Scientific
Energy, Inc. To Be Known as Electronic Game Card,
Inc.(Registrant then named Scientific Energy, Inc.) dated
November 21, 2003, and filed with the State of Nevada,
Secretary of State, on November 26, 2003, filed as Exhibit 1.1
to Form 8-K filed with the Commission on December 10, 2003;
iv
3.5 Bylaws of Registrant (then named Quazon Corp.) which were
adopted pursuant to the December 5, 2003, closing of the Share
Exchange Agreement dated November 19, 2003 between Registrant
(then named Scientific Energy, Inc.) and Electronic Game Card,
Inc., a Delaware corporation, which were filed as Exhibit 3.2
to Form 10-SB12G filed with the Commission on April 22, 1999;
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
4.1 Form of Certificate of Common Stock (filed herewith);
4.2 Share Exchange Agreement between Registrant (then named
Scientific Energy) and Electric Game Card, Inc., a Delaware
corporation, dated November 19, 2003, filed as Exhibit 1.3 to
Form 8-K filed with the Commission on December 10, 2003;
(5) OPINION ON LEGALITY
5.1 Opinion of L. Stephen Albright regarding the legality of the
securities being registered (filed herewith);
(10) MATERIAL CONTRACTS
10.1 Form of Securities Purchase Agreement by and among Electronic
Game Card, Inc. and certain purchasers, dated as of December
11, 2003, which was filed with the Commission on February 27,
2004 as Exhibit 10.20 to Form 8-K;
(21) SUBSIDIARIES OF THE REGISTRANT
NONE
(23) CONSENTS OF EXPERTS AND COUNSEL
23.1 Consent of Accountants (filed herewith);
23.2 Consent of L. Stephen Albright, See Exhibit 5.1
(99) ADDITIONAL EXHIBITS
99.1 Press Release, dated February 23, 2004 of Electronic Game
Card, Inc. filed with the Commission on February 27, 2004 as
Exhibit 99.1 to Form 8-K.
ITEM 28. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
v
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information in the registration
statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered
(if the total dollar value of securities offered
would not exceed that which was registered) and any
deviation from the low or high end of the estimated
maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in
the ACalculation of Registration Fee" table in the
effective registration statement;
(iii) To include any additional or changed material
information on the plan of distribution;
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at
that time to be the initial bona fide offering; and
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the
offering.
(e) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
vi
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2, as amended, and authorized this
registration statement to be signed on its behalf by the undersigned, in the New
York City, State of New York, on May 12, 2004.
ELECTRONIC GAME CARD, INC.
A Nevada corporation, Registrant
By: /S/ JOHN BENTLEY
------------------------------------
JOHN BENTLEY,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
/s/ John Bentley Chairman, Chief Executive May 12, 2004
- ------------------- Officer, and Director (Principal
JOHN BENTLEY Executive Officer)
/s/ Linden Boyne Chief Financial Officer May 12, 2004
- ------------------- (Principal Financial Officer) and
LINDEN BOYNE Director
/s/ Lee Cole Director May 12, 2004
- -------------------
LEE COLE
vii
EXHIBITS INDEX
EXHIBIT NO. TITLE OF DOCUMENT
- ----------- ------------------
(3) ARTICLES OF INCORPORATION AND BYLAWS (incorporated by reference, except
where noted to the contrary)
3.1 Articles of Incorporation of the registrant (then named Quazon
Corp), dated October 27, 1997, and filed with the State of
Nevada, Secretary of State, on October 30, 1997, filed as
Exhibit 3.1 to Form 10-SB 12G filed with the Commission on
April 22, 1999;
3.2 Certificate of Amendment to Articles of Incorporation of the
registrant (then named Quazon Corp) dated October 23, 1998,
regarding a one for fifteen reverse stock split, and which was
filed with the State of Nevada, Secretary of State on October
27, 1998, and filed as part of Exhibit 3.1 to Form 10-SB12G
filed with the Commission on April 22, 1999;
3.3 Amendment to the Articles of Incorporation of Registrant
(changing its then name Quazon, Corp. to Scientific Energy,
Inc.), dated August 14, 2001, which were filed with the State
of Nevada, Secretary of State on August 16, 2001, and filed as
part of Exhibit 3.1 to Form 10-QSB filed with the Commission
on August 20, 2001;
3.4 Articles of Share Exchange and Name Change for Scientific
Energy, Inc. To Be Known as Electronic Game Card,
Inc.(Registrant then named Scientific Energy, Inc.) dated
November 21, 2003, and filed with the State of Nevada,
Secretary of State, on November 26, 2003, filed as Exhibit 1.1
to Form 8-K filed with the Commission on December 10, 2003;
3.5 Bylaws of Registrant (then named Quazon Corp.) which were
adopted pursuant to the December 5, 2003, closing of the Share
Exchange Agreement dated November 19, 2003 between Registrant
(then named Scientific Energy, Inc.) and Electronic Game Card,
Inc., a Delaware corporation, which were filed as Exhibit 3.2
to Form 10-SB12G filed with the Commission on April 22, 1999;
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
4.1 Form of Certificate of Common Stock (filed herewith);
4.2 Share Exchange Agreement between Registrant (then named
Scientific Energy) and Electric Game Card, Inc., a Delaware
corporation, dated November 19, 2003, filed as Exhibit 1.3 to
Form 8-K filed with the Commission on December 10, 2003;
(5) OPINION ON LEGALITY
5.1 Opinion of L. Stephen Albright regarding the legality of the
securities being registered (filed herewith);
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(10) MATERIAL CONTRACTS
10.1 Form of Securities Purchase Agreement by and among Electronic
Game Card, Inc. and certain purchasers, dated as of December
11, 2003, which was filed with the Commission on February 27,
2004 as Exhibit 10.20 to Form 8-K;
(21) SUBSIDIARIES OF THE REGISTRANT
NONE
(23) CONSENTS OF EXPERTS AND COUNSEL
23.1 Consent of Accountants (filed herewith);
23.2 Consent of L. Stephen Albright, See Exhibit 5.1
(99) ADDITIONAL EXHIBITS
99.1 Press Release, dated February 23, 2004 of Electronic Game
Card, Inc. filed with the Commission on February 27, 2004 as
Exhibit 99.1 to Form 8-K.
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