UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 2, 2004
ZONE 4 PLAY, INC.
(Exact name of registrant as specified in its charter)
Nevada 333-91356 98-0374121
(State or Other Jurisdiction (Commission File (I.R.S. Employer
of Incorporation) Number) Identification Number)
103 Foulk Road
Wilmington, DE 19803
(Address of principal executive offices) (zip code)
(302) 691-6177
(Registrant's telephone number, including area code)
Copies to:
Gregory Sichenzia, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
Phone: (212) 930-9700
Fax: (212) 930-9725
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
On February 2, 2004, we consummated the purchase of 100% of the
outstanding common stock of Zone 4 Play, Inc., a Delaware corporation (the
"Acquisition"), pursuant to a Stock Purchase Agreement entered into between the
parties thereto on December 1, 2003 (the "Stock Purchase Agreement"), whereby we
issued 10,426,190 shares of our common stock to the shareholders of Zone 4 Play,
Inc. in exchange for 100% of the issued and outstanding shares of the common
stock of Zone 4 Play, Inc. As a result of the Acquisition, Zone 4 Play, Inc.
became our wholly-owned subsidiary. The transactions contemplated under the
Stock Purchase Agreement were approved by the written consent of a majority of
our shareholders on December 22, 2003.
On December 22, 2003, a majority of our shareholders approved a change in
our name to Zone 4 Play, Inc. On February 5, 2004, we filed a Certificate of
Amendment with the Nevada Secretary of State changing our name to Zone 4 Play,
Inc.
BUSINESS OF ZONE 4 PLAY, INC.
OVERVIEW
Subsequent to the Acquisition, we began to carry on the business of
developing an interactive games technology that provides an end-to-end solution
for multiple platforms and allows service providers to deliver games to their
subscribers. As of February 1, 2004, our customers included cable and satellite
television service providers and hospitality service providers. Our customers
include Lodgenet (US), RCN (US) and NDS (UK).
Our technology allows service providers to generate additional revenue
from their existing infrastructure and subscriber base, and allows a subscriber
to switch from one platform to another using a single account with the same
virtual account balance and user information. To our knowledge, our technology
is unique in its ability to utilize a single account to play a game on different
platforms, such as interactive TV (iTV), wireless or Internet. With this
capability, our technology increases the variety of services that our customers
can offer, which can help reduce subscriber turnover.
Our customers typically enter into revenue-share agreements with us under
which they use our technology to offer games to their subscribers and pay us a
percentage of the revenues or income generated from those games.
We were incorporated under the laws of the State of Nevada on April 23,
2002 as Old Goat Enterprises, Inc. On February 1, 2004, we acquired Zone4Play,
Inc., a Delaware corporation, and subsequently changed our name to Zone 4 Play,
Inc, a Nevada corporation. The acquisition was accounted for as a reverse
acquisition, whereby Old Goat was treated as the acquiree and Zone4Play, Inc
(Delaware) as the acquirer. The historical financial statements of Zone4Play,
Inc (Delaware) became our historical financial statements. We conduct our
operations through our wholly owned subsidiaries, Zone4Play (Israel) Limited, an
Israeli corporation incorporated in July 2001, and Zone4Play (UK) Limited, a
United Kingdom corporation incorporated in November 2002.
OUR PRODUCTS AND TECHNOLOGY
Our interactive games technology provides an end-to-end solution for
multiple platforms and features a single user account that enables switching
across iTV, wireless and Internet platforms. Our solution includes game engine
server applications, client applications and our e-management back-office
solution for play-for-real gaming. We have developed a modular application
architecture that allows us to quickly and easily develop applications for each
platform. We also offer Zone4Play-branded games and games we license from
third-party developers.
We have integrated our products to work with most common middleware
platforms. Our iTV products are capable of integrating with the following
middleware platforms:
o Liberate, NDS Core, Sony, Microsoft and CCTV (HTML, JavaScript and
Flash);
o Open TV and Power TV (C/C++); and
o NDS Core and Liberate (Java Virtual Machine).
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Our modular application architecture allows:
1. Easy modification of applications for specific uses;
2. Simple and fast creation of new applications; and
3. Addition of new functionalities.
A typical application is split into code and data sections.
The code section includes:
1. The application's business logics;
2. Dial-up module;
3. HTTP module;
4. Audio / video module; and
5. Gadgets and controls.
The data section includes:
1. Screen scenarios;
2. Texts;
3. Images for on-screen display;
4. MPEG still images; and
5. Sounds.
Any element of a data or code section can be loaded with the main code
module or requested for dynamic loading on the fly. Depending on our customers'
requirements, our application can either complete a full download all at once or
in download increments with a quick initial module so that a subscriber can
interact with the application immediately while the rest of the resources
continue to be downloaded. We have two groups of on-screen controls: "PC style"
and "TV style." PC style controls resemble standard PC user interface elements,
such as edit boxes, drop-down menus, checkboxes, and scrollers. The TV style
controls are more intuitive and do not require that subscribers be familiar with
computers, which makes our applications more widely accessible to subscribers.
THE INTERACTIVE ENTERTAINMENT MARKET
The interactive entertainment market has emerged as a result of the rapid
growth and significant technological advancement in the communications industry.
Service providers are launching new data services, including downloadable games,
ring tones and images, to drive revenues and retain subscribers. They invest
heavily in technology to take advantage of advanced networks and next-generation
devices, including 3G mobile phones and new set-top cable and satellite boxes.
Our primary markets include:
o iTV - (interactive cable and satellite television service
providers) Our iTV packages have been deployed by cable and
satellite TV service providers all around the world, including
RCN in the US, and NTL in the UK.
o Wireless service providers - We provide online games and
support SMS, WAP, J2ME, PDA and 3G technologies. We offer a
single user account feature which allows a user to utilize the
wireless platform to play the same games as on other
platforms, including iTV and Internet, under a single account
with the same virtual account balance and user information.
o Internet service providers - our products are being deployed
by ISP's and are available for IPTV (Internet Protocol TV
based on technologies such as xDSL and FTTx) to offer our
interactive games platform solutions.
o Hospitality service providers (Games on demand). Our products
are currently deployed by LodgeNet (US), a hotel in-room
service providers' platform.
Within the interactive entertainment market, we serve two market segments:
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o Play for Fun - Includes service providers offering interactive
games that do not involve the direct transaction of money
between the service provider and the subscriber. This is a
rapidly growing market which holds great potential and
opportunities for innovative gaming applications providers.
Our solutions for the play for fun market include Zone4Play
branded skill games, multi player games, trivia games, casino
games and sports games. We can also develop tailor-made games
as required by our customers. Additionally, we provide content
we license form third-party developers such as Slingo and Game
Universe.
o Play for Real - Includes service providers that operate
interactive gaming and gambling applications which involve
monetary transactions between the service provider and the
subscriber. Industry trends indicate that this market will
continue to grow and offer subscribers a broad range of access
possibilities to place real-money bets. This market is heavily
regulated. Our current operations in this market are conducted
exclusively in the United Kingdom.
OUR COMPETITIVE STRENGTHS
We believe that our competitive strengths include:
Proprietary, Award Winning, Technology, and Commitment to Research and
Development. We invest in research and development to create applications and
technologies that incorporate the advanced capabilities of next-generation
networks. We have developed proprietary technologies that enable us to
distribute our solutions across different platforms. In 2002, our innovative
technology won 1st place at the "Neddies," an International competition for iTV
applications developers organized by NDS Ltd. We offer our cross-platform
technologies through revenue-sharing arrangements with our customers. The
cross-platform nature of our technologies allows us to remain neutral to the
network choices made by our customers, and enables our customers to reach the
broadest number of subscribers possible.
Customer Relationships across Multiple Platforms. Service providers are
our primary customers and the distributors of our applications. Over the past
two years, we have established agreements to distribute our applications through
major wireless operators, Internet service providers, and cable and satellite
service providers. We believe we have been able to build our distribution
channels as a result of our focus on customer service, the quality of our
applications and our ability to deploy those applications on a broad range of
devices and networks. We believe that the time and difficulty involved in
building a global distribution channel represents a significant barrier to entry
for our potential competitors.
Diverse Portfolio of Original and Licensed Properties. We publish a
diverse portfolio of interactive entertainment applications. Our applications
span over multiple categories and are based on intellectual properties that we
create and own, and well-established brands that we license from third parties.
We believe our approach to develop branded content for our platform has broad
customer appeal and reduces our reliance on any particular application. In
addition to introducing new applications, we continuously update our existing
applications to take advantage of enhanced functionality of new media platforms.
Recurring Revenue-Generating Business Model. Our business strategy
emphasizes the collaborative nature of our approach to customers. We prefer to
enter into revenue-share agreements with our customers, rather than license our
technology. We believe this approach will continue to generate revenue long
after the technology's initial release. The market data we collect from sales
and usage of our applications also provides us with valuable insight into
carrier and subscriber preferences and guides the development of future
application.
OUR CUSTOMERS
CABLE AND SATELLITE SERVICE PROVIDERS
On November 6, 2003, we executed an agreement with RCN Telecom Services of
Illinois, LLC, under which we will supply certain software applications for use
in the Chicago area. Such applications include play for fun casino games and
others. The term of this agreement is for three years from the date the service
is first delivered by RCN to subscribers on a commercial basis. In consideration
of supplying the software application, we are entitled to certain fees and a
percentage of the revenue generated by RCN from the software application.
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On October 1, 2003, we entered into an agreement with NDS Limited, a
company registered in England and Wales, for distribution of our play for fun
interactive products to Cablevision subscribers in the United States. The term
of the agreement is for a period of three years beginning July 16, 2003. Upon
expiration of the initial term, the agreement will automatically renew for an
additional one year term unless NDS elects to terminate the agreement upon
thirty days prior written notice. In consideration of supplying the games, we
receive a percentage of the revenue generated by NDS from the applications.
On June 5, 2003, we entered into an agreement with Digital Impact (UK), a
company incorporated under the laws of England and Wales, and with DTPC, a
public company incorporated under the laws of England and Wales. We agreed to
provide five interactive play for real games based on a fixed odds betting
service, and two play for fun based games to be deployed on the AVAGO channel,
which is operational under the Sky platform. The agreement will run
non-exclusively for an initial period of 12 months from the date for the "reals"
game on the AVAGO channel .The agreement will run non-exclusively for an initial
period of three years with the option for the parties to extend the contract
term thereafter on a rolling yearly basis. Under this agreement we receive a
percentage of the revenues generated by The AVAGO Channel from the software
applications.
On March 10, 2003, we entered into an agreement with Two Way TV, Ltd., a
company incorporated and organized under the laws of England and Wales, to
supply software applications for play for fun interactive games on the digital
cable television platforms operated by NTL & TELEWEST in the United Kingdom.
Unless terminated by either party, the term of the agreement is for a period of
12 months from the commercial launch and is terminable upon 90 days notice. We
are entitled to receive a percentage of the revenues generated by Two Way TV
from the cable operators in connection with the applications.
HOSPITALITY SERVICE PROVIDERS
On January 8, 2004, we entered into an agreement with LodgeNet
Entertainment Corporation, a Delaware corporation, under which we granted
LodgeNet a license to use, and operate our solutions for Internet and
Flash-based games, as necessary for LodgeNet to deploy the technology in hotels
in the United States that receive LodgeNet programming through the LodgeNet
entertainment on demand system. The term of the agreement is for a period of
five years from January 8, 2004 unless sooner terminated. The agreement
automatically renews and continues for one year periods unless terminated by
either party providing at least 120 days' advance written notice of their desire
not to renew prior to any expiration date. We are entitled to receive a
percentage of the revenue generated by LodgeNet from our programming.
OUR STRATEGY
Our goal is to become a leading global provider of interactive games
technology to the iTV, wireless and Internet markets. We believe that developing
a diversified portfolio of high quality, innovative applications is critical to
our business. We intend to:
o Develop Innovative Applications. We will continue to devote
significant resources to the development of high-quality,
innovative applications and work with the best content
developers. As the interactive entertainment landscape
continuously evolves, we expect to extend our cross-platform
solutions to accommodate advancements in network and device
technology.
o Emphasize Zone4Play-Branded Technology. We plan to emphasize
the unique features of Zone4Play-branded applications, which
typically generate higher margins for us. We intend to broaden
our applications to highlight the community aspects of our
content, thereby offering our customers the opportunity to
increase subscriber satisfaction, leading to reduction in
subscriber turnover.
o License Third Party Brands. We will continue to license
well-known, third party brands and collaborate with major
media companies and other brand holders to introduce third
party branded applications. We believe that familiar titles
facilitate the adoption of our applications by our customers
and their subscribers, and create strong marketing
opportunities.
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COMPETITION
ITV MARKET
The interactive entertainment applications market is highly competitive
and characterized by frequent product introductions, new technologies, and
evolving platforms in iTV, wireless and Internet. As demand for applications
continues to increase, we expect new competitors to enter the market and
existing competitors to allocate more resources to develop and market their
applications. As a result, we expect competition in the interactive
entertainment market to intensify.
The current and potential competition in the interactive entertainment
applications market includes major media companies, traditional video game
publishing companies, service providers in the iTV, wireless and Internet
markets, iTV, wireless and Internet software applications providers, and other
pure-play interactive entertainment companies. Currently, we consider our
primary competitors in the iTV market to be Orbis UK/Visionik, , and Betting
Corp/Connect TV.
ORBIS UK/VISIONIK - NDS owned companies, specializing together in iTV
betting applications. Orbis develops a management server gaming engines and
Visionik develops front-end gaming graphics and presentation layers to the
end-user. Some of Orbis's iTV customers are Blue Square, Ladbrokes and
Littlewoods, all in the United Kingdom market).
BETTING CORP/CONNECT TV - An OpenTV owned company, this is an integrated
entity that jointly specializes in iTV betting applications. Betting Corp
develops the server and gaming engines and Connect TV develops the front-end
gaming applications to the end-user.
WIRELESS MARKET
The wireless entertainment applications market is highly competitive and
characterized by frequent product introductions, evolving wireless platforms and
new technologies. As demand for applications continues to increase, we expect
new competitors to enter the market and existing competitors to allocate more
resources to develop and market applications. As a result, we expect competition
in the wireless entertainment market to intensify.
The current and potential competition in the wireless entertainment
applications market includes major media companies, traditional video game
publishing companies, wireless carriers, wireless software providers and other
pure-play wireless entertainment companies. Larger, more established companies
are increasingly focused on developing and distributing wireless applications
that directly compete with us.
We also compete with wireless content aggregators, who combine
applications from multiple developers (and sometimes publishers) and offer them
to carriers or through other sales channels. We generally differentiate
ourselves from aggregators in several key respects. Unlike us, aggregators do
not typically fund development, provide design input or provide quality
assurance for their applications. Also, since aggregators usually do not own an
application's copyright, they often retain less than a majority of the revenues
generated from application sales. We consider our primary competitor in the
wireless market to be Chartwell Technologies.
To our knowledge, none of our competitors offer a cross-platform solution
that can be used for iTV, wireless and internet communications. Each of our
competitors focuses exclusively on its target network environment. Based on the
versatility of our technology, we believe that we have a competitive edge over
our competitors.
CHARTWELL TECHNOLOGIES - (CWH - Toronto Stock Exchange) A known brand for
Web development of internet gambling sites. Chartwell is also approaching the
mobile market with its customized applications to mobile devices.
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INTELLECTUAL PROPERTY
We rely exclusively on confidentiality agreements and common law
intellectual property rights for the protection of our proprietary technology.
As of February 1, 2004, we have not submitted any applications with any
governmental office to protect our intellectual property, including patent and
trademark applications.
GOVERNMENT REGULATION
We currently market and sell our interactive games technology for use in
gaming activities in the United Kingdom. Gaming activities are strictly
regulated in the United States. Gaming regulations are based on policies that
are concerned with, among other things: (i) the prevention of unsavory or
unsuitable persons from having a direct or indirect involvement with gaming;
(ii) the establishment and maintenance of responsible accounting practices and
procedures; (iii) the maintenance of effective controls over the financial
practices of licensees, including the establishment of minimum procedures for
internal fiscal affairs and the safeguarding of assets and revenues, providing
reliable record keeping and requiring the filing of periodic reports with the
governing jurisdictions; (iv) the prevention of cheating and fraudulent
practices; and (v) the provision of a source of government revenue through
taxation and licensing fees.
The United Kingdom recently released a report that will greatly enhance
its gambling business, including Internet gaming. Sports betting is currently
regulated by the government, and to be more attractive to operators, the
government is eliminating a nine percent tax on wagers, payable by bettors, with
a 15 percent tax on gross profits, to be paid for by the bookmakers, both
Internet and telephonic. The reforms will require primary legislation, and we
expect the United Kingdom government to bring a Bill before Parliament in the
near future.
EMPLOYEES
As of February 1, 2004 we employed 18 employees, all of whom work
full-time for us. None of our employees are covered by a collective bargaining
agreement. We consider our relations with our employees to be good.
DESCRIPTION OF PROPERTY
At February 1, 2004, the location of our principal operations was 3B
Hashlosha St., Tel Aviv, 67060 Israel. This location consists of approximately
3,600 square feet of office space and the rent is approximately $1,600 per
month. The location was sublet from Winner.com Israel (1999) Ltd., which is a
related party.
LEGAL PROCEEDINGS
As of February 1, 2004, we were not a party to, nor was any of our
property the subject of, any legal proceeding. Further, as of February 1, 2004,
none of our directors, officers or affiliates was involved in a proceeding
adverse to our business or had a material interest adverse to our business.
MANAGEMENT'S DISCUSSION AND ANAYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this report contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made
in this report are forward looking. In particular, the statements herein
regarding industry prospects and future results of operations or financial
position are forward-looking statements. Forward-looking statements reflect
management's current expectations and are inherently uncertain. Our actual
results may differ significantly from management's expectations.
6
The following discussion and analysis should be read in conjunction with
the financial statements included herewith. This discussion should not be
construed to imply that the results discussed herein will necessarily continue
into the future, or that any conclusion reached herein will necessarily be
indicative of actual operating results in the future. Such discussion represents
only the best present assessment of our management.
OVERVIEW
Our financial statements are stated in United States Dollars (US$) and are
prepared in accordance with United States Generally Accepted Accounting
Principles.
You should read the following discussion of our financial condition and
results of operations together with the audited financial statements and the
notes to audited financial statements included elsewhere in this report prepared
in accordance with accounting principles generally accepted in the United
States. This discussion contains forward-looking statements that reflect our
plans, estimates and beliefs. Our actual results could differ materially from
those anticipated in these forward-looking statements.
OUR BUSINESS
We develop interactive games technology that provides an end-to-end
solution for multiple platforms that allows service providers to deliver games
to their subscribers. Our customers include cable and satellite television
service providers and hospitality service providers. Our customers include
Lodgenet (US), RCN (US) and NDS (UK).
Our technology allows service providers to generate additional revenue
from their existing infrastructure and subscriber base by launching additional
services quickly. Our technology allows a subscriber to switch from one platform
to another using a single account with the same virtual account balance and user
information. To our knowledge, our technology is unique in its ability to
utilize a single account to play a game on different platforms, such as
interactive TV, wireless or Internet. With this capability, our technology
increases the variety of services that our customers can offer, which can help
reduce subscriber turnover.
Our customers typically enter into revenue-share agreements with us under
which they use our technology to offer games to their subscribers and pay us a
percentage of the revenues or income generated from those games.
We devote substantially all of our efforts toward conducting research,
development and marketing of our software. In the course of these activities, we
have sustained operating losses and expect such losses to continue in the
foreseeable future. To date, we have not generated sufficient revenues to
achieve profitable operations or positive cash flow from operations. On December
31, 2003, we had a working capital deficiency of $924,675 and an accumulated
deficit of $936,766. There is no assurance that profitable operations, if ever
achieved, will be sustained on a continuing basis. During the twelve months
ended December 31, 2003, we derived 92% of our revenues from two major
customers. 69% of this revenue was from one time sale of clearing system to a
related party.
RESULTS OF OPERATIONS - FISCAL YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE
FISCAL YEAR ENDED DECEMBER 31, 2002
REVENUES AND COST OF REVENUES
Total revenues for the year ended December 31, 2003 increased by 193% to
$553,707 from $189,008 for the year ended December 31, 2002. Revenues from sales
of software applications to unrelated third parties for the year ended December
31, 2003 increased by 186% to $173,707 from $60,668 for the year ended December
31, 2002. Revenues from sales of software applications to related parties for
the year ended December 31, 2003 increased by 196% to $380,000 compared to
$128,340 for the year ended December 31, 2002. The increase in revenues from
sales of software applications was due to new contracts, mainly in the United
Kingdom. The revenues from sale of software applications to related parties in
2003 are from a one-time sale of credit card clearing software to a related
party. Going forward, we expect that revenues from sale of software applications
to related parties will be nominal.
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Cost of revenues for the year ended December 31, 2003 increased by 100% to
$194,904 from $97,192 for the year ended December 31, 2002. Gross profit
increased by 291% for the year ended December 31, 2003 to $358,803 from $91,816
for the same period in 2002. The increase in cost of revenues is mostly
attributable to the one time sale of software to a related party, which included
customization of the software and required allocation of employees in our R&D
department. As a result, some R&D expenses were allocated to cost of sales.
RESEARCH AND DEVELOPMENT
Research and development expenses for the year ended December 31, 2003
increased by 1% to $504,153 from $497,523 for the year ended December 31, 2002.
The increase in research and development expenses was minor and was a result of
the one time sale of software to a related party, which included customization
of software and required allocation of employees in our R&D department.
SALES AND MARKETING
Selling and marketing expenses for the year ended December 31, 2003
increased by 142% to $144,919 from $59,811 for the year ended December 31, 2002.
The increase in sales and marketing expenses is mostly attributable to increases
in labor costs and travel expenses to the United Kingdom and the United States.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the year ended December 31, 2003
increased by 399% to $108,471 from $21,735 for the year ended December 31, 2002.
The increase in general and administrative expenses is primarily attributable to
the recruitment of employees and additional legal and audit expenses.
NET LOSS AND NET LOSS PER SHARE
For the years ended December 31, 2003 and 2002, we incurred net losses of
$442,412 ($0.042 per share) and $487,716 ($0.047 per share), respectively. The
increased net loss is primarily attributable to increased operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, total current assets were $106,232 and total
current liabilities were $1,030,907. On December 31, 2003, we had a working
capital deficiency of $924,675 and an accumulated deficit of $936,766. We
finance our operations with a combination of stock issuances and revenues from
product sales.
Our management believes that we have sufficient funds to operate for the
next 12 months, with additional funds anticipated from the performance of
agreements that we have entered with our current customers, and from future
contracts that we expect to execute in the near future. Nonetheless, we intend
to raise additional funds in order to broaden our financial strength and
liquidity.
SUBSEQUENT EVENTS
In April 2004, we completed a $1.2 million private placement, consisting
of units offered at a price of $0.80 per unit, with each unit comprised of one
share of common stock and two common stock purchase warrants. One warrant is
exercisable for 24 months at a price of $1.85 per share and one warrant is
exercisable for 36 months at a price of $2.50 per share. The private placement
agreement was signed with a group of institutional and accredited investors.
On August 17, 2004, we completed a $1 million private placement of common
stock and warrants. The private placement consisted of units offered at a price
of $1.00 per unit, with each unit comprised of one share of common stock and two
common stock purchase warrants. One warrant is exercisable for 24 months at a
price of $2.00 per share and one warrant is exercisable for 36 months at a price
of $2.50 per share.
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OUTLOOK
We believe that our future success will depend upon our ability to enhance
our existing products and solutions and introduce new commercially viable
products and solutions addressing the demands of the evolving markets. As part
of the product development process, we work closely with current and potential
customers, distribution channels and leaders in our industry segments to
identify market needs and define appropriate product specifications. Our current
anticipated levels of revenue and cash flow are subject to many uncertainties
and cannot be assured. In order to have sufficient cash to meet our anticipated
requirements for the next twelve months, we may be dependent upon our ability to
obtain additional financing. The inability to generate sufficient cash from
operations or to obtain the required additional funds could require us to
curtail operations.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
results of operations, liquidity or capital expenditures.
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following are the names and certain information regarding or current
directors and executive officers:
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NAME AGE POSITION
---- --- --------
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Shimon Citron 49 Chief Executive Officer and Director
--------------------------------------------------------------------------------
Uri Levy 35 Chief Financial Officer
--------------------------------------------------------------------------------
Haim Tabak 57 Chief Operating Officer
--------------------------------------------------------------------------------
Shachar Schalka 30 Chief Technology Officer
--------------------------------------------------------------------------------
Gil Levi 32 Vice President, Research and Development
--------------------------------------------------------------------------------
Gil Arbel 36 Vice President, Business Development
--------------------------------------------------------------------------------
Shlomo Rothman 58 Director
--------------------------------------------------------------------------------
Oded Zucker 39 Director
--------------------------------------------------------------------------------
Officers are elected annually by the Board of Directors (subject to the
terms of any employment agreement), at our annual meeting, to hold such office
until an officer's successor has been duly appointed and qualified, unless an
officer sooner dies, resigns or is removed by the Board. Some of our directors
and executive officers also serve in various capacities with our subsidiaries.
There are no family relationships among any of our directors and executive
officers.
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS
SHIMON CITRON, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr. Citron founded
our company in 2001 and he has held the positions of Chief Executive Officer and
Director since inception. Mr. Citron is also the Chief Executive Officer and a
Director of each of our wholly owned subsidiaries in Israel and in the United
Kingdom. He has held these positions since 2001. From 1999-2001 Mr. Citron was
the founder and President of Gigi Media Ltd., a private company based in Israel.
From 1994 to 1999 he managed his own private investments in a number of startup
companies in Israel.
URI LEVY, CHIEF FINANCIAL OFFICER. Mr. Levy joined us as Chief Financial
Officer in December 2003. Prior to joining us, Mr. Levy was Vice President,
Finance of Loram Ltd. from June 2002 until December 2003, and as a controller of
EasyRun Communications Software Systems from January 1999 until June 2003. Mr.
Levy is a Certified Public Accountant in Israel and has a LL.M Degree from the
Bar Ilan University in Ramat Gan.
9
HAIM TABAK, CHIEF OPERATING OFFICER. Mr. Tabak joined us in January 2003
as Chief Operating Officer. Prior to joining us, Mr. Tabak was General Manager
of Winner.com Ltd., Tel Aviv, Israel, a subsidiary of Winner.com, Inc. from
March 2000 to December 2002. From January 1998 until December 1999, he held the
position of Chief Operating Officer for Transtech Systems Ltd, an IT logistics
solution provider located in Tel Aviv.
SHACHAR SCHALKA, CHIEF TECHNOLOGY OFFICER. Mr. Schalka was appointed as
our Chief Technology Officer in December 2001. Prior to joining us, Mr. Schalka
held various technical, programming and managerial positions with Gigi Media
Ltd. from September 2000 until November 2001.
GIL LEVI, VICE PRESIDENT OF RESEARCH & DEVELOPMENT. Mr. Levi was appointed
Vice President of Research and Development on June 2002. Prior to joining us,
Mr. Levi held the position of senior software programmer of Gigi Media Ltd. from
August 2000 until May 2002.
GIL ARBEL, VICE PRESIDENT OF BUSINESS DEVELOPMENT. Mr. Arbel joined us in
February 2004, with more then 14 years experience in the Interactive media and
communications field. From 2002 to 2003, he served as General manager of
RestArt, a consulting firm. From 2000 to 2001 he served as Director of Media at
Starband Inc, a Gilat satellite networks spin-off launched with Microsoft and
Dish Networks.
SHLOMO ROTHMAN, DIRECTOR. Mr. Rothman has been a member of our Board of
Directors since January 2004. Since February 2002, Mr. Rothman has been the
President and CEO of S.R. Consulting Ltd., a private company that provides
financial services, investment banking, mergers and acquisitions and project
financing. From 1987 until 2002, Mr. Rothman was Senior Deputy General Manager
of the First International Bank, a safra bank in Israel. From 1987 to 1999, he
was the Head of Marketing, Capital Markets and Investments Divisions of the
First International Bank. From 1999 until 2002, Mr. Rothman was the head of the
Retail and Commercial Banking Division of the First International Bank. Mr.
Rothman was a Director of the Tel Aviv Stock Exchange from 1989 until 2000 and a
Director of Maalot-Israeli Rating Co. from 1995 until 2000. He is currently a
Director of the Menorah-Gaon Investment House Ltd. and Edmond de
Rothschild-Portfolio Management Ltd., both located in Israel.
ODED ZUCKER, DIRECTOR. Mr. Zucker has been a member of our Board of
Directors since January 2004. Mr. Zucker has been the United Kingdom Senior Vice
President for Prudential Bache Inc. since 1995. He was also a co-founder of the
Israeli operations for Prudential Bache. Mr. Zucker is a registered
representative with the New York Stock Exchange and the NASD. Mr. Zucker is also
a Director of Nisko Projects Electronics and Communication Ltd., which currently
trades on the Tel Aviv Stock Exchange in Israel.
EMPLOYMENT AGREEMENTS
On January 1, 2004, we entered into an employment agreement with Uri Levy
to act as our Chief Financial Officer. The base gross salary under the agreement
is approximately $3,333 per month for the first 90 days of the agreement and
$4,444 per month thereafter. Each monthly payment is adjusted to reflect changes
in the consumer price index as published on the date of payment. The agreement
does not have an expiration date, but may be terminated by either party at any
time upon 30 days written notice to the other party specifying the effective
date of termination. The agreement has a non-competition provision, which
provides that Mr. Levy shall not during the term of the agreement and for a
period of 12 months from the termination date, directly or indirectly engage in
certain activities that compete with us.
DIRECTORS' COMPENSATION
On January 1 2004, we signed agreements with Shlomo Rothman and Oded
Zucker, our two non-employee directors. While each such director serves as a
member of the Board, we agreed to pay the director a director's fee of $7,000
per annum, payable in quarterly installments. In addition, we agreed to pay
Messrs. Rothman and Zucker $750 per board meeting. Both directors will be
granted an option under the terms of our option plan to purchase 192,261 shares
of our common stock at an exercise price per share of $1. Each director's rights
to exercise such option will vest in three equal annual installments during a
period of three years commencing on May 2004, provided that our agreement with
such director is not terminated earlier. To date we have not adopted a stock
option plan and accordingly have not granted these options.
10
We do not have any formal or informal arrangements or agreements to
compensate our employee directors for services they provide as members of our
Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the total
compensation that we have paid or that has accrued on behalf of our chief
executive officer and other executive officers with annual compensation
exceeding $100,000 during the years ended December 31, 2003 and 2002.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------------------------------------------------
SECURITIES
OTHER UNDER- ALL
ANNUAL RESTRICTED LYING OTHER
NAME AND COMPEN- STOCK AWARD(S) OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SATION ($) ($) SARS (#) PAYOUTS ($) SATION ($)
-----------------------------------------------------------------------------------------------------------------------------------
Shimon Citron, Chief 2003 -0- -0- -0- -0- -0- -0- -0-
Executive Officer 2002 -0- -0- -0- -0- -0- -0- -0-
and Director
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 2002, we signed an agreement in the amount of $296,500 with Winner.com
(UK) Ltd. to provide a software application. According to the agreement, we
received an advance payment in the amount of $196,000 from Winner.com. Due to a
dispute with Winner.com, the software application was not delivered until the
first quarter of 2004, when the dispute was resolved. Our Chief Executive
Officer, Shimon Citron, owns 60% of Winner.com (UK) Ltd - of which half of the
shares are being held as a trustee to other shareholders. Our management
believes that the terms of the agreement with Winner.com were at least as
favorable as could have been obtained from an unrelated third party.
In December 2002, we signed a line of credit loan agreement with Shimon
Citron, our Chief Executive Officer, in an amount of up to $500,000 for a term
of two years. The loan is in U.S. dollars and bears an annual interest rate of
1.5%. As of December 2003, we used received $85,359 from the credit line. Our
management believes that this loan agreement is on terms at least as favorable
as could be obtained from an unrelated third party
We currently sublet office space located at 3B Hashlosha St., Tel Aviv,
67060 Israel from Winner.com Israel (1999) Ltd., which is a related party. Our
management believes that this space is rented on terms at least as favorable as
could be procured from unrelated third parties.
During 2002, we entered into a software development agreement with a
related party to sell credit card clearing software. From this agreement, we
generated one-time revenues in 2003 of $380,000.
11
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of February 1, 2004
with respect to the beneficial ownership of the outstanding common stock by (i)
any holder of more than five (5%) percent; (ii) each of the named executive
officers and directors; and (iii) our directors and executive officers as a
group. Except as otherwise indicated, each of the stockholders listed below has
sole voting and investment power over the shares beneficially owned.
Common Stock Percentage of
Name of Beneficial Owner (1) Beneficially Owned (2) Common Stock (3)
-------------------------------------------------------------------------------------
Shimon Citron (4) 3,258,772 18.13%
Haim Tabak 71,977 *
Gil Levy 178,377 1%
Shachar Schalka 178,377 1%
Shlomo Rothman 0 *
Oded Zucker 0 *
Pini Gershon 2,706,950 15.05%
-------------------------------------------------------------------------------------
All officers and directors as a group 3,687,503 20.51%
(6 persons)
* Less than 1%
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
Zone 4 Play, Inc., 103 Foulk Road, Wilmington, DE 19803
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to the shares shown. Except where indicated
by footnote and subject to community property laws where applicable, the
persons named in the table have sole voting and investment power with
respect to all shares of voting securities shown as beneficially owned by
them.
(3) Based on 17,976,190 shares outstanding.
(4) Includes 494,449 shares owned by Yariv Citron, son of Shimon Citron.
DESCRIPTION OF SECURITIES
The following description of our capital stock is a summary and is
qualified in its entirety by the provisions of our Articles of Incorporation,
with amendments, all of which have been filed as exhibits to our registration
statement of which this prospectus is a part.
DIVIDEND POLICY
We have not had any earnings or profits and have not paid any dividends.
Our proposed operations are capital intensive and we need working capital.
Therefore, we will be required to reinvest any future earnings in our
operations. Our Board of Directors has no present intention of declaring any
cash dividends, as we expect to re-invest all profits in the business for
additional working capital for continuity and growth. The future declaration and
payment of dividends will be determined by our Board of Directors after
considering the conditions then existing, including our earnings, financial
condition, capital requirements, and other factors.
CAPITAL STRUCTURE
Our authorized capital consists of 75,000,000 shares of common stock, par
value $.001 per share and no shares of preferred stock. As of February 1, 2004,
we had 17,976,190 shares of common stock outstanding. Stockholders: (i) have
general ratable rights to dividends from funds legally available therefore,
when, as and if declared by the Board of Directors; (ii) are entitled to share
ratably in all assets available for distribution to stockholders upon
liquidation, dissolution or winding up of our affairs; (iii) do not have
preemptive, subscription or conversion rights, nor are there any redemption or
sinking fund provisions applicable thereto; and (iv) are entitled to one vote
per share on all matters on which stockholders may vote at all shareholder
meetings. The common stock does not have cumulative voting rights, which means
that the holders of more than fifty percent of the common stock voting for
election of directors can elect one hundred percent of our directors if they
choose to do so.
12
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR SECURITIES
Our common stock began quotation on the Over-The-Counter Bulletin Board
during the third quarter of 2003, and is currently quoted under the symbol
"ZFPI." The following sets forth the high and low bid quotations for the common
stock since the third quarter of 2003. These quotations reflect prices between
dealers, do not include retail mark-ups, markdowns, and commissions and may not
necessarily represent actual transactions. The prices are adjusted to reflect
all stock splits.
HIGH LOW
------------------------------------------------ ------------ ------------
FISCAL YEAR ENDED DECEMBER 31, 2003
-----------------------------------------
First Quarter Ended March 31, 2003 --- ---
Second Quarter Ended June 30, 2003 --- ---
Third Quarter Ended September 30, 2003 $0.07* $0.01*
Fourth Quarter ended December 31, 2003 $1.01 $0.27
* Adjusted to reflect a 10:1 reverse stock split effected on September
26, 2003.
As of February 1, 2004, there were approximately 60 stockholders of record
of our common stock.
DIVIDEND POLICY
Historically, we have not declared or paid any cash dividends on our
common stock. Any future determination to pay dividends on our common stock will
depend upon our results of operations, financial condition and capital
requirements, applicable restrictions under any contractual arrangements and
such other factors deemed relevant by our Board of Directors.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table shows information with respect to each equity
compensation plan under which our common stock is authorized for issuance as of
the fiscal year ended December 31, 2003.
EQUITY COMPENSATION PLAN INFORMATION
-----------------------------------------------------------------------------------------------------------------
Plan category NUMBER OF SECURITIES WEIGHTED AVERAGE NUMBER OF SECURITIES
TO BE ISSUED UPON EXERCISE PRICE OF REMAINING AVAILABLE FOR
EXERCISE OF OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER
OUTSTANDING OPTIONS, WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
WARRANTS AND RIGHTS (EXCLUDING SECURITIES
REFLECTED IN COLUMN (A)
-----------------------------------------------------------------------------------------------------------------
(A) (B) (C)
-----------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS APPROVED -0- -0- -0-
BY SECURITY HOLDERS
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS NOT -0- -0- -0-
APPROVED BY SECURITY HOLDERS
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
TOTAL -0- -0- -0-
-----------------------------------------------------------------------------------------------------------------
13
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On February 5, 2004, we appointed Kost Forer Gabbay & Kasierer a member of
Ernst & Young, Global as our new principal independent accountants with the
approval of our Board of Directors. Accordingly, we dismissed Peach Goddard
Chartered Accountants on February 5, 2004. Peach Goddard acted as our principal
independent accountant since the inception of our company in April 2002.
During our recent fiscal year ended March 31, 2003, and the subsequent
interim period through February 5, 2004, the date of Peach Goddard's dismissal
and the date of Kost Forer Gabbay & Kasierer a member of Ernst & Young Global
appointment, there were no disagreements with Peach Goddard on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. The report on the financial statements prepared by Peach
Goddard for the fiscal year ended March 31, 2003 was, however, modified as to
uncertainty as the report contained a paragraph with respect to our ability to
continue as a going concern.
In connection with the fiscal year ended March 31, 2003 and the subsequent
interim period through February 5, 2004, Kost Forer Gabbay & Kasierer a member
of Ernst & Young Global was not consulted on any matter relating to accounting
principles to a specific completed or proposed transaction or the type of audit
opinion that might be rendered on our financial statements. In connection with
the fiscal year ended March 31, 2003 and the subsequent interim period through
February 5, 2004 preceding the change in accountants, Kost Forer Gabbay &
Kasierer a member of Ernst & Young Global did not provide any written or oral
advice that was an important factor considered by it in reaching any decision as
to the accounting, auditing or financial reporting issues.
RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to a Stock Purchase Agreement dated December 1, 2004, we issued
10,426,191 shares of common stock to the following natural persons and entities
in consideration for all of the issued and outstanding capital stock of Zone 4
Play, Inc., a Delaware corporation: Shimon Citron, Yariv Citron, Pini Gershon,
Natan Lerer, Computer Direct Ltd., Sayex Trading Company1982 Ltd., Jacob
Tennenbaum, Rivka Shmueli, Azriel Zolti, Roni Shatan, Ehud Zadokya, Sachin
Mehta, Giora Grinberg, Shachar Schalka, Gil Levy, Erez Lahav, Ira Vinitzki, Haim
Tabak and Avi Abramovich. These issuances and sales were deemed to be exempt
under Regulation S under the Securities Act of 1933, as amended. The shares were
acquired in an "offshore transaction" as defined in, and pursuant to, Regulation
S on the basis that the purchaser was not offered the shares in the United
States and did not execute or deliver any agreement in the United States.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Bylaws require that we indemnify and hold harmless our officers and
directors who are made a party to or threatened to be made a party to or is
involved in any action, suit, or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director of officer of Zone 4 Play, Inc. to the fullest extent permitted under
Chapter 78 of the Nevada Revised Statutes, as amended.
The State of Nevada permits a corporation to indemnify such persons for
reasonable expenses in defending against liability incurred in any legal
proceeding if:
(a) The person conducted himself or herself in good faith;
(b) The person reasonably believed:
(1) In the case of conduct in an official capacity with the
corporation, that his or her conduct was in the corporation's
best interests; and
(2) In all other cases, that his or her conduct was at least not
opposed to the corporation's best interests.
(c) In the case of any criminal proceeding, the person had no reasonable
cause to believe that his or her conduct was unlawful.
14
The indemnification discussed herein is not exclusive of any other rights
to which those indemnified may be entitled under the Articles of Incorporation,
any Bylaws, agreement, vote of stockholders, or otherwise, and any procedure
provided for by any of the foregoing, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of heirs, executors, and administrators of
such a person.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
ITEM 3.02. UNREGISTERED SALES OF EQUITY SECURITIES
See Item 2.01.
ITEM 4.01. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
On February 5, 2004, we appointed Ernst & Young, Israel ("E&Y") as our new
principal independent accountants with the approval of our Board of Directors.
Accordingly, we dismissed Peach Goddard Chartered Accountants on February 5,
2004. Peach Goddard has acted as our principal independent accountant since the
inception of our company in April 2002.
During our recent fiscal year ended March 31, 2003, and the subsequent
interim period through February 5, 2004, the date of Peach Goddard's dismissal
and the date of E&Y's appointment, there were no disagreements with Peach
Goddard on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. The report on the financial
statements prepared by Peach Goddard for the fiscal year ended March 31, 2003
was, however, modified as to uncertainty as the report contained a modifying
paragraph with respect to our ability to continue as a going concern.
We provided Peach Goddard with a copy of this Current Report on Form 8-K
prior to its filing with the SEC, and requested that they furnish us with a
letter addressed to the SEC stating whether they agree with the statements made
in this Current Report on Form 8-K, and if not, stating the aspects with which
they do not agree. A copy of the letter provided by Peach Goddard, dated
February 5, 2004, is attached to this Form 8-K as an exhibit.
In connection with the fiscal year ended March 31, 2003 and the subsequent
interim period through February 5, 2004, E&Y was not consulted on any matter
relating to accounting principles to a specific completed or proposed
transaction or the type of audit opinion that might be rendered on our financial
statements. In connection with the fiscal year ended March 31, 2003 and the
subsequent interim period through February 5, 2004 preceding the change in
accountants, E&Y did not provide any written or oral advice that was an
important factor considered by it in reaching any decision as to the accounting,
auditing or financial reporting issues.
ITEM 5.01. CHANGES IN CONTROL OF REGISTRANT
See Item 2.01.
ITEM 5.02. DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF PRINCIPAL OFFICERS
Pursuant to the terms of the Stock Purchase Agreement dated December 1,
2003, on February 2, 2004, Jean Blanchard and Laurel Blanchard resigned as
members of our Board of Directors without disagreement. The remaining director,
Dennis Cox, appointed Shimon Citron and Shlomo Rothman to fill the two vacant
positions on February 2, 2004, to serve until their re-election, removal or
resignation. Thereafter, Mr. Cox resigned without disagreement on February 2,
2004. On February 2, 2004, Mr. Citron and Mr. Rothman appointed Oded Zucker to
fill the directorship left vacant by Mr. Cox's resignation until his
re-election, removal or resignation.
15
Pursuant to the terms of the Stock Purchase Agreement, on February 2,
2004, Lois Meisinger resigned from her positions as Chief Executive Officer and
President, and Laurel Blanchard resigned from her position as Chief Financial
Officer. On February 2, 2004, the Board of Directors appointed Shimon Citron to
the position of Chief Executive Officer and President, Haim Tabak to the
position of Chief Operating Officer, Uri Levy to the position of Chief Financial
Officer, Shachar Schalka to the position of Chief Technology Officer and Gil
Levi to the position of Vice President of Research & Development of the
Registrant.
For a complete description of Messrs. Citron, Rothman, Zucker, Tabak,
Levy, Schalka and Levi please see "Management" beginning on page 9 of this Form
8-K under Item 2.01.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of business acquired.
Report of Independent Auditors, Ernst & Young
Audited Consolidated Balance Sheets of Zone4Play, Inc. and its
subsidiaries
Audited Consolidated Statements of Operations of Zone4Play, Inc. and its
subsidiaries
Audited Changes in Stockholders' Deficiency of Zone4Play, Inc. and its
subsidiaries
Audited Consolidated Statements of Cash Flows of Zone4Play, Inc. and its
subsidiaries
Notes to Consolidated Financial Statements
(b) Pro forma financial information.
Not applicable.
(c) Exhibits
EXHIBIT NUMBER DESCRIPTION
--------------------------------------------------------------------------------
2.1 Stock Purchase Agreement dated December 1, 2003 between
Zone4play, Inc. and Old Goat Enterprises, Inc. (incorporated
by reference to Form 8-K/A filed on April 5, 2004)
3.1 Articles of Incorporation (incorporated by reference to Form
SB-2 (File No. 333-91356) filed on June 27, 2002)
3.2 Certificate of Amendment to Articles of Incorporation
(incorporated by reference to Form 8-K filed on February 6,
2004)
3.3 Bylaws (incorporated by reference to Form SB-2 (File No.
333-91356) filed on June 27, 2002)
10.1 Director Appointment Agreement of Oded Zucker dated January
1, 2004 (incorporated by reference to Form 10-QSB filed on
August 16, 2004)
10.2 Director Appointment Agreement of Shlomo Rothman dated
January 1, 2004 (incorporated by reference to Form 10-QSB
filed on August 16, 2004)
10.3 Employment Agreement with Uri Levy dated January 1, 2004
(incorporated by reference to registration statement on From
SB-2 (File No. 333-120174) filed on November 3, 2004)
10.4 Interactive Service Agreement, dated November 6, 2003, by
and between Zone4Play, Inc. and RCN Telecom Services of
Illinois, LLC
10.5 Casino Games Supply and License Subcontract Agreement, dated
October 1, 2003, between NDS Limited and Zone4Play, Inc.
10.6 Game Licensing Agreement, dated January 8, 2004, by and
between Zone 4 Play, Inc. and LodgeNet Entertainment
Corporation
10.7 Agreement dated June 5, 2003 between Digital Impact (UK),
Zone 4 Play (Israel) Ltd. and DTPC Ltd.
10.8 Interactive Television Content Service Agreement dated March
10, 2003 between Two Way TV, Ltd., Zone4Play (CY) Limited,
and Zone4Play (Israel) Ltd.
10.9 Agreement of Novation made on September 8, 2003 between Two
Way TV, Ltd., Zone 4 Play (CY) Ltd., Zone4Play (Israel)
Ltd., and Zone 4 Play (UK) Ltd.
10.10 Commercial Sublease Agreement dated December 31, 2002 by and
between Winner.com Israel (1999) Ltd. and Zone4Play (Israel)
Ltd.
16
16.1 Letter from Peach Goddard Chartered Accountants dated
February 5, 2004 (incorporated by reference to Form 8-K
filed on February 6, 2004)
17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ZONE 4 PLAY, INC.
Dated: December 20, 2004 By: /s/ Uri Levy
---------------------------------
Name: Uri Levy
Title: Chief Financial Officer
18
[LOGO] ERNST & YOUNG
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF
ZONE4PLAY INC.
(A DEVELOPMENT STAGE COMPANY)
We have audited the accompanying consolidated balance sheets of Zone4Play
Inc. (a development stage company) (the "Company") and its subsidiaries as of
December 31, 2003 and December 31, 2002, and the related consolidated statements
of operations, changes in shareholders' equity and cash flows for each of the
two years in the period ended December 31, 2003 and for the period from April 2,
2001 (commencement of operations) through December 31, 2001 and for the period
from April 2, 2001 (commencement of operations) through 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 audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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 consolidated financial position of the Company and
its subsidiaries as of December 31, 2003 and December 31, 2002, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 2003 and for the period from April 2,
2001 (commencement of operations) through December 31, 2001 and for the period
from April 2, 2001 (commencement of operations) through December 31, 2003, in
conformity with U.S. generally accepted accounting principles.
/s/ Kost Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
April 5, 2004 A Member of Ernst & Young Global
F-1
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
================================================================================
U.S. DOLLARS
DECEMBER 31,
---------------------
2003 2002
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 49,882 $ 816
Trade receivables 46,313 --
Other accounts receivable and prepaid expenses 10,037 13,787
-------- --------
Total current assets 106,232 14,603
-------- --------
SEVERANCE PAY FUND 24,714 22,846
-------- --------
PROPERTY AND EQUIPMENT, NET 55,696 55,487
-------- --------
Total assets $186,642 $ 92,936
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
================================================================================
U.S. DOLLARS (EXCEPT SHARE DATA)
DECEMBER 31,
--------------------------
2003 2002
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Short-term bank credit $ 36,853 $ 36,947
Short-term loans from stockholders and related parties 484,295 --
Trade payables 77,547 61,428
Employees and payroll accruals 161,887 161,394
Advance payments from customers and related parties 243,500 196,000
Accrued expenses and other liabilities 26,825 8,224
----------- -----------
Total current liabilities 1,030,907 463,993
----------- -----------
LONG-TERM LIABILITIES:
Accrued severance pay 92,491 66,844
Long-term loan -- 56,443
----------- -----------
92,491 123,287
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' DEFICIENCY:
Common stock of $ 0.001 par value:
Authorized: 75,000,000 shares as of December 31, 2003 and 2002; Issued and
outstanding: 10,426,190 shares as of December 31, 2003 and 2002 10 10
Deficit accumulated during the development stage (936,766) (494,354)
----------- -----------
Total stockholders' deficiency (936,756) (494,344)
----------- -----------
$ 186,642 $ 92,936
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
U.S. DOLLARS (EXCEPT SHARE DATA)
PERIOD FROM PERIOD FROM
APRIL 2, 2001 APRIL 2, 2001
(COMMENCEMENT (COMMENCEMENT
OF OF
YEAR ENDED OPERATIONS) OPERATIONS)
DECEMBER 31, THROUGH THROUGH
------------------------- DECEMBER 31, DECEMBER 31,
2003 2002 2001 2003
----------- ----------- ----------- -----------
Revenues:
Sale of software applications $ 173,707 $ 60,668 $ 4,529 $ 238,904
One-time sale of software
applications to related party 380,000 128,340 -- 508,340
----------- ----------- ----------- -----------
Total revenues 553,707 189,008 4,529 747,244
Cost of revenues 194,904 97,192 -- 292,096
----------- ----------- ----------- -----------
Gross profit 358,803 91,816 4,529 455,148
----------- ----------- ----------- -----------
Operating expenses:
Research and development 504,153 497,523 11,157 1,012,833
Selling and marketing 144,919 59,811 -- 204,730
General and administrative 108,471 21,735 -- 130,206
----------- ----------- ----------- -----------
Total operating expenses 757,543 579,069 11,157 1,347,769
----------- ----------- ----------- -----------
Operating loss 398,740 487,253 6,628 892,621
Financial expenses, net 43,672 463 10 44,145
----------- ----------- ----------- -----------
Net loss $ 442,412 $ 487,716 $ 6,638 $ 936,766
=========== =========== =========== ===========
Basic and diluted net loss per share $ 0.04 $ 0.05 $ 0.0001
=========== =========== ===========
Weighted average number of common stock
used in computing basic and diluted net
loss per share 10,426,190 10,426,190 7,819,642
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
================================================================================
U.S. DOLLARS (EXCEPT SHARE DATA)
DEFICIT
ACCUMULATED
DURING THE TOTAL
COMMON SHARE DEVELOPMENT STOCKHOLDERS'
STOCK CAPITAL STAGE DEFICIENCY
---------- ---------- ---------- ----------
NUMBER
----------
Balance as of April 2, 2001
(commencement of operations) -- $ -- $ -- $ --
Issuance Common stock on April 2, 2001 10,426,190 10 -- 10
Net loss -- -- (6,638) (6,638)
---------- ---------- ---------- ----------
Balance as of December 31, 2001 10,426,190 10 (6,638) (6,628)
Net loss -- -- (487,716) (487,716)
---------- ---------- ---------- ----------
Balance as of December 31, 2002 10,426,190 10 (494,354) (494,344)
Net loss -- -- (442,412) (442,412)
---------- ---------- ---------- ----------
Balance as of December 31, 2003 10,426,190 $ 10 $ (936,766) $ (936,756)
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
U.S. DOLLARS
PERIOD FROM PERIOD FROM
APRIL 2, 2001 APRIL 2, 2001
(COMMENCEMENT (COMMENCEMENT
YEAR ENDED OF OPERATIONS) OF OPERATIONS)
DECEMBER 31, THROUGH THROUGH
------------------------- DECEMBER 31 DECEMBER 31,
2003 2002 2001 2003
--------- --------- --------- ---------
Cash flows from operating activities:
Net loss $(442,412) $(487,716) $ (6,638) $(936,766)
Adjustments required to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation 22,291 5,741 -- 28,032
Loss from sale of property and equipment 1,702 -- -- 1,702
Increase in trade and other accounts
receivable and prepaid expenses (42,563) (12,980) (797) (56,340)
Increase in trade payables 16,119 55,973 5,455 77,547
Increase in employees and payroll accruals 493 155,695 5,699 161,887
Increase in accrued expenses and other
liabilities 18,601 6,724 1,500 26,825
Increase in advance payments from
customers and related parties 47,500 196,000 -- 243,500
Accrued severance pay, net 23,779 43,998 -- 67,777
--------- --------- --------- ---------
Net cash provided by (used in) operating
activities (354,490) (36,565) 5,219 (385,836)
--------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment (24,202) (61,228) -- (85,430)
--------- --------- --------- ---------
Net cash used in investing activities (24,202) (61,228) -- (85,430)
--------- --------- --------- ---------
Cash flows from financing activities:
Issuance of shares -- -- *) -- *) --
Short-term bank credit, net (94) 36,947 -- 36,853
Receipt of short-term loans from
stockholders and related parties 427,852 56,443 -- 484,295
--------- --------- --------- ---------
Net cash provided by financing activities 427,758 93,390 *) -- 521,148
--------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents 49,066 (4,403) 5,219 49,882
Cash and cash equivalents at the beginning of
the period 816 5,219 -- --
--------- --------- --------- ---------
Cash and cash equivalents at the end of the
period $ 49,882 $ 816 $ 5,219 $ 49,882
========= ========= ========= =========
Supplemental disclosure of cash flows
information:
Cash paid during the period for:
Interest $ 4,571 $ 3,830 $ 10 $ 8,411
========= ========= ========= =========
*) Represents an amount lower than $ 1.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
U.S. DOLLARS
NOTE 1:- GENERAL
a. Zone4Play Inc. ("the Company") was incorporated under the laws of
the State of Nevada on April 23, 2002 as Old Goat Enterprises, Inc.
On February 1, 2004, the company acquired Zone4Play, Inc.
("Zone4Play (Delaware)"), which was incorporated under the laws of
the State of Delaware on April 2, 2001, and subsequently changed the
Company name to Zone4Play, Inc., a Nevada corporation. The Company
develops and markets interactive games applications for Internet,
portable devices and interactive TV platforms.
The Company conducts its operations and business with and through
its wholly-owned subsidiaries, Zone4Play Limited, an Israeli
corporation incorporated in July 2001, which is engaged in research
and development and marketing of the applications, Zone4Play (UK)
Limited, a United Kingdom corporation, incorporated in November
2002, which is engaged in marketing of the applications.
The Company's shares are currently traded on the OTC Bulletin Board
under the trading symbol "ZFPI.OB."
b. The Company and its subsidiaries are devoting substantially all of
its efforts toward conducting research, development and marketing of
its software. The Company's and its subsidiaries' activities also
include raising capital and recruiting personnel. In the course of
such activities, the Company and its subsidiaries have sustained
operating losses and expect such losses to continue in the
foreseeable future. The Company and its subsidiaries have not
generated sufficient revenues and have not achieved profitable
operations or positive cash flow from operations. The Company's
accumulated deficit aggregated to $ 936,766 as of December 31, 2003.
There is no assurance that profitable operations, if ever achieved,
could be sustained on a continuing basis.
The Company plans to continue to finance its operations with a
combination of stock issuance and private placements and revenues
from product sales.
c. Acquisition of Zone4Play (Delaware):
According to the agreement between the Company and Zone4Play
(Delaware), the Company issued 10,426,190 Common stock to the former
holders of equity interest in Zone4Play (Delaware).
The acquisition has been accounted for as a reverse acquisition,
whereby the Company was treated as the acquiree and Zone4Play
(Delaware) as the acquirer, primarily because Zone4Play (Delaware)
shareholders owned a majority, approximately 58% of the Company's
Common stock, upon completion of the acquisition. Immediately prior
the consumption of the transaction Zone4play Inc. had no material
assets and liabilities, hence the reverse acquisition is treated as
a capital stock transaction in which Zone4Play (Delaware) is deemed
to have issued the Common stock held by the Company shareholders for
the net assets of the Company. The historical financial statements
of the Company became the historical financial statements of
Zone4Play (Delaware).
F-7
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
U.S. DOLLARS
NOTE 1:- GENERAL (CONT.)
d. Concentration of risk that may have a significant impact on the
Company:
In the year ended December 31, 2003, the Company derived most of its
revenues from two major customers (see Note 8).
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States ("U.S.
GAAP").
a. Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
b. Financial statements in U.S. dollars:
All of the revenues of the Company and its subsidiaries are
generated in U.S. dollars ("dollar"). In addition, a substantial
portion of the Company's and its subsidiaries costs are incurred in
dollars. Company's management believes that the dollar is the
primary currency of the economic environment in which the Company
and its subsidiaries operate. Thus, the functional and reporting
currency of the Company and its subsidiaries is the dollar.
Accordingly, monetary accounts maintained in currencies other than
the dollar are remeasured into U.S. dollars in accordance with
Statement of Financial Accounting Standard No. 52, "Foreign Currency
Translation" ("SFAS No. 52"). All transactions gains and losses of
the remeasurement of monetary balance sheet items are reflected in
the consolidated statements of income as financial income or
expenses as appropriate, and have not been significant to date for
all years presented.
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Intercompany transactions
and balances, have been eliminated upon consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that are
readily convertible to cash with original maturities of three months
or less.
F-8
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
e. Property and equipment, net:
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line
method, over the estimated useful lives of the assets, at the
following annual rates:
%
---------------
Computers and peripheral equipment 20 - 33
Electronic devices 15
The Company's long-lived assets are reviewed for impairment in
accordance with Statement of Financial Accounting Standard No. 144
"Accounting for the Impairment or Disposal of Long- Lived Assets"
("SFAS No. 144") whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the
future undiscounted cash flows expected to be generated by the
assets. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. As of
December 31, 2003, no impairment losses have been identified.
f. Severance pay:
The Company's liability for severance pay in respect to its Israeli
employees is calculated pursuant to Israeli severance pay law based
on the most recent salary of the employees multiplied by the number
of years of employment as of the balance sheet date. Israeli
employees are entitled to one month's salary for each year of
employment, or a portion thereof. The subsidiary's liability for its
employees is fully provided by monthly deposits with severance pay
funds, insurance policies and by an accrual. The value of these
policies is recorded as an asset in the Company's balance sheet.
The deposited funds may be withdrawn only upon the fulfillment of
the obligation pursuant to Israeli severance pay law or labor
agreements. The value of the deposited funds is based on the cash
surrendered value of these policies, and includes immaterial
profits.
F-9
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Severance expenses for the years ended December 31, 2003 and
December 31, 2002 amounted to $ 37,674 and $ 66,844, respectively.
g. Revenue recognition:
The Company generates revenues mainly from the sale of software
applications, from customization services and from revenue sharing
agreements.
The Company generates revenues through its direct sales force.
The Company accounts for revenues from software applications
agreements in accordance with Statement of Position 97-2, "Software
Revenue Recognition", as amended ("SOP 97-2"). The revenue from
license fees is recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is fixed
or determinable and collectibility is probable.
Revenues from software licenses that require significant
customization, integration and installation are recognized in
accordance with Statement of Position 81-1, "Accounting for
Performance of Construction - Type and Certain Production Type
Contracts" ("SOP 81-1"), using contract accounting on a completed
contract method. After delivery, if uncertainty exists about
customer acceptance of the software, license revenue is not
recognized until acceptance. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses
are first determined, in the amount of the estimated loss on the
entire contract. As of December 31, 2003, no such estimated losses
were identified.
Estimated gross profit or loss from long-term contracts may change
due to changes in estimates resulting from differences between
actual performance and original forecasts. Such changes in estimated
gross profit are recorded in results of operations when they are
reasonably determinable by management, on a cumulative catch-up
basis.
The Company is entitled to royalties from revenue sharing
arrangement upon sublicensing of the Company's products to
end-users. Royalties out of revenue sharing arrangements are
recognized when such royalties are reported to the Company.
h. Research and development costs:
Research and development costs are charged to the Statement of
Operations as incurred. Statement of Financial Accounting Standard
No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" ("SFAS No. 86"), requires
capitalization of certain software development costs subsequent to
the establishment of technological feasibility.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs
incurred by the Company between completion of the working models and
the point at which the products are ready for general release have
been insignificant. Therefore, all research and development costs
have been expensed.
F-10
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
i Income taxes:
The Company and its subsidiaries account for income taxes in
accordance with Statement of Financial Accounting Standards,
"Accounting for Income Taxes" ("SFAS No. 109"). This statement
prescribes the use of the liability method whereby deferred tax
assets and liability account balances are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
The Company and its subsidiaries provide a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated
realizable value.
j. Concentrations of credit risk:
Financial instruments that potentially subject the Company and its
subsidiaries to concentrations of credit risk consist principally of
cash and cash equivalents and trade receivables. The majority of the
Company's cash and cash equivalents are invested in dollar
instruments with major banks in Israel, the United Kingdom and the
United States. Management believes that the financial institutions
that hold the Company's investments are financially sound and
accordingly, minimal credit risk exists with respect to these
investments. Such cash and cash equivalents in the United States may
be in excess of insured limits and are not insured in other
jurisdictions. However, management believes that such financial
institutions are financially sound.
The Company's trade receivables are derived mainly from sales to two
organizations located in Cyprus and in the United Kingdom, one of
which (Cyprus) is related party. The Company performs ongoing credit
evaluations of its customers and to date has not experienced any
material losses.
The Company and its subsidiaries have no off-balance-sheet
concentration credit risk such as foreign exchange contracts, option
contracts or other foreign hedging arrangements.
k. Fair value of financial instruments:
The following methods and assumptions were used by the Company and
its subsidiaries in estimating their fair value disclosures for
financial instruments:
The carrying amounts of cash and cash equivalents, trade
receivables, other accounts receivable, short-term bank credit,
short-term loans, trade payables and other accounts payable
approximate their fair value due to the short-term maturity of such
instruments.
Long-terms loans are estimated by discounting the future cash flows
using current interest rates for loans or similar terms and
maturities. The carrying amount of the long-term liabilities
approximates their fair value.
F-11
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
l. Impact of recently issued accounting standard
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB")
No. 104, "Revenue Recognition," ("SAB No. 104") which revises or
rescinds certain sections of SAB No. 101, "Revenue Recognition," in
order to make this interpretive guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and
regulations. The changes noted in SAB No. 104 did not have a
material effect on the Company's consolidated results of operations,
consolidated financial position or consolidated cash flows.
NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
DECEMBER 31,
-----------------
2003 2002
------- -------
Government authorities $ 7,200 $12,402
Prepaid expenses and other 2,837 1,375
------- -------
$10,037 $13,777
======= =======
NOTE 4:- PROPERTY AND EQUIPMENT, NET
Cost:
Computers and peripheral equipment $82,176 $58,687
Electronic devices 1,468 2,541
------- -------
83,644 61,228
------- -------
Accumulated depreciation:
Computers and peripheral equipment 27,716 5,620
Electronic devices 232 121
------- -------
27,948 5,741
------- -------
Depreciated cost $55,696 $55,487
======= =======
NOTE 5:- SHORT-TERM BANK CREDIT
DECEMBER 31,
---------------------------------------------------------------
INTEREST RATE AMOUNT
------------------------------ --------------------------------
2003 2002 2003 2002
------------- --------------- ---------------- ---------------
%
------------------------------
Short-term bank credit linked to New
Israeli Shekel (NIS) NIS 9.7-20.2 $ 36,853 $ 36,947
================ ===============
(1) Total authorized credit lines $ 39,963 $ 36,947
================ ===============
(2) Weighted average interest rate at the
end of the year (NIS) 13% 17%
================ ===============
F-12
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
U.S. DOLLARS
NOTE 6:- SHORT-TERM LOANS FROM STOCKHOLDERS AND RELATED PARTIES
a. In December 2002, the Company signed a loan agreement with its
stockholder in an amount of up to $ 500,000, for a term of two
years. Up until December 2003, the Company obtained a total amount
of $ 85,359.
The loan is in U.S. dollars and bears an annual interest rate of
1.5%.
b. The Company had received short-term loans from related parties in
Israel and in the U.S. All loans were paid by the end of March 2004.
DECEMBER 31,
---------------------------
2003 2002
------------ ------------
Short-term loans from related parties $ 398,936 $ --
============ ============
The weighted average interest rate on these short-term loans as of
December 31, 2003 was 0%.
NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Lease commitments:
The Company and its subsidiaries rent its facility from a related
party under an operating lease agreement, which expires on August
19, 2004. The minimum rental payments and other attendant expenses
under non-cancelable operating lease are as follows:
For the period ended August 19, 2004 16,231
--------------
$ 16,231
==============
Total rent and other attendant expenses for the years ended December
31, 2003 and December 31, 2002, were approximately $ 19,570 and $
25,586, respectively.
b. Litigation:
In October 2002, the Company signed an agreement in the amount of $
296,500 with a related party and a third party to provide a software
application.
According to the agreement, the Company received an advance payment
in the amount of $ 196,000 from the third party.
Due to a dispute with the third party, the software application was
not delivered.
In March 2003, the Company and a related party filed a claim in the
Court of law in the state of Israel against the third party. During
2004, the Company's reached a settlement with all the parties
involved. According to the settlement, each party dismissed its
claim and the Company will provide the software application for the
amount of $ 196,000 instead of $ 296,500.
F-13
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
U.S. DOLLARS
NOTE 8:- SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION
Summary information about geographic areas:
The Company manages its business on the basis of one reportable
segment (see Note 1 for a brief description of the Company's
business) and follows the requirements of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information".
a. The following is a summary of operations within geographic areas,
based on customer's location:
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
----------------------- DECEMBER 31,
2003 2002 2001
-------- -------- --------
TOTAL REVENUES
----------------------------------------
United Kingdom $153,857 $ -- $ --
Israel 5,687 189,008 4,529
Cyprus 380,000 -- --
Holland 14,163 -- --
-------- -------- --------
$553,707 $189,008 $ 4,529
======== ======== ========
b. Major customer data as percentage of total revenues:
2003 2002 2001
---- ---- ----
Customer A 23% -- --
==== ==== ====
Customer B (related party) 69% -- --
==== ==== ====
Customer C -- 30% --
==== ==== ====
Customer D (related party) -- 68% --
==== ==== ====
Customer E -- -- 100%
==== ==== ====
c. Long-lived assets located in Israel at the Company's premises.
NOTE 9:- SHARE CAPITAL
a. Shareholders' rights:
The shares of Common stock confer upon the holders the right to
elect the directors and to receive notice to participate and vote in
the general meetings of the Company, and the right to receive
dividends, if and when declared.
F-14
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
U.S. DOLLARS
NOTE 9:- SHARE CAPITAL (CONT.)
b. Private placement:
1. All Common stock and per share stock amounts have been
adjusted of 10,426,190 Common Stock resulted from the
acquisition agreement, as described in note 1c.
2. In April 2001, upon commencement of operation, the Company
issued 104,314 shares of Common stock of $ 0.001 par value in
consideration of $ 0.1 and in addition was obligated to issue
10,321,876 shares of its Common stock to its founders. These
shares were issued in August 2003 (9,233,880 shares), in
September 2003 (734,371 shares) and in November 2003 (353,625
shares).
All Common stock and per share amounts have been
adjusted to give retroactive effect these issuance of
shares.
c. Dividends:
In the event that cash dividends are declared in the future, such
dividends will be paid in NIS. The Company does not intend to pay
cash dividends in the foreseeable future.
NOTE 10:- RELATED PARTY TRANSACTIONS
a. During 2002, the Company entered into a software development
agreement with a company owned by the Chairman of the Board of
Directors. In consideration of this agreement, the Company generated
in 2002 revenues in a total amount of $ 128,340.
b. During 2002, the Company entered into a software development
agreement with a company owned by the founder of the Company to sale
a credit card clearing software. The Company generated one-time
revenues from this agreement in 2003, in a total amount of $
380,000.
c. In December 2002, the company signed a loan agreement with its
stockholder in an amount of up to $ 500,000 for a term of two years.
The loan is in U.S. dollars and bears an annual interest rate of
1.5%. As of December 2003, the company used amount of $ 85,359 out
of total credit line.
F-15
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
U.S. DOLLARS
NOTE 11:- INCOME TAXES
a. Measurement of taxable income under the Income Tax Law (Inflationary
Adjustments), 1985:
Results for tax purposes of the Israeli subsidiary are measured in
terms of earnings in NIS, after certain adjustments for increases in
the Israeli Consumer Price Index ("CPI"). As explained in Note 2b,
the financial statements are measured in U.S. dollars. The
difference between the annual change in the Israeli CPI and in the
NIS/dollar exchange rate causes a further difference between taxable
income and the income before taxes shown in the financial
statements. In accordance with paragraph 9(f) of SFAS No. 109, the
Israeli subsidiary has not provided deferred income taxes on the
difference between the functional currency and the tax bases of
assets and liabilities.
Israeli tax reform:
On January 1, 2003, a comprehensive tax reform took effect in
Israel. Pursuant to the reform, resident companies are subject to
Israeli tax on income accrued or derived in Israel or abroad. In
addition, the concept of "controlled foreign corporation" was
introduced, according to which an Israeli company may become subject
to Israeli taxes on certain income of a non-Israeli subsidiary if
the subsidiary's primary source of income is passive income (such as
interest, dividends, royalties, rental income or capital gains). The
tax reform also substantially changed the system of taxation of
capital gains.
b. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company and its
subsidiaries' deferred tax assets are as follows:
DECEMBER 31,
----------------------
2003 2002
--------- ---------
Operating loss carryforward $ 327,293 $ 173,273
Reserves and allowances 38,350 25,860
--------- ---------
Net deferred tax asset before valuation allowance 365,643 199,133
Valuation allowance (365,643) (199,133)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
As of December 31, 2003, the Company and its subsidiaries have
provided valuation allowances of $ 365,643, in respect of deferred
tax assets resulting from tax loss carryforwards and other temporary
differences. Management currently believes that since the Company
and its subsidiaries have a history of losses it is more likely than
not that the deferred tax regarding the loss carryforwards and other
temporary differences will not be realized in the foreseeable
future. The change in valuation allowance was $ 166,510.
F-16
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
U.S. DOLLARS
NOTE 11:- INCOME TAXES (CONT.)
c. Net operating losses carryforwards:
The Company has accumulated losses for tax purposes as of December
31, 2003, in the amount of $ 760,497, which may be carried forward
and offset against taxable income, and which expire during the years
2021-2023.
Utilization of U.S. net operating losses may be subject to
substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of
net operating losses before utilization.
The Israeli subsidiary, a subsidiary of Zone4Play Inc. in Israel,
has accumulated losses for tax purposes as of December 31, 2003, in
the amount of approximately $ 141,915, which may be carried forward
and offset against taxable income in the future, for an indefinite
period.
The United Kingdom subsidiary, a subsidiary of Zone4Play Inc. in
United Kingdom, has accumulated losses for tax purposes as of
December 31, 2003, in the amount of approximately $ 28,656, which
may be carried forward and offset against taxable income in the
future, for an indefinite period.
d. The main reconciling items between the statutory tax rate of the
Company and the effective tax rate are the non-recognition of the
benefits from accumulated net operating losses carry forward among
the various subsidiaries worldwide due to the uncertainty of the
realization of such tax benefits.
NOTE 12:- FINANCIAL EXPENSES
YEAR ENDED
DECEMBER 31,
-----------------
2003 2002
------- -------
Financial expenses:
Interest, bank charges and fees $19,918 $ 2,518
Financial income:
Foreign currency translation differences 23,754 (2,055)
------- -------
$43,672 $ 463
======= =======
F-17
ZONE4PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
U.S. DOLLARS
NOTE 13:- SUBSEQUENT EVENTS (UNAUDITED)
In April 2004, the Company completed a $ 1.2 million private
placement, consisting of 1,500,000 shares of its Common stock of $
0.001 par value and two warrants to purchase one share of Common
stock each. One warrant is exercisable for 24 months at a price of
$1.85 per share and one warrant is exercisable for 36 months at a
price of $2.50 per share. The purchase price for each Common stock
and two warrants was $ 0.80. The privet placement agreement was
signed with a group of institutional and individual investors.
In August 2004, the Company completed a $ 1 million private
placement consisting of 1,000,000 shares of its Common stock of $
0.001 par value and two warrants to purchase one share of Common
stock each. One warrant is exercisable for 24 months at a price of $
2.00 per share and one warrant is exercisable for 36 months at a
price of $ 2.5 per share. The purchase price for each Common stock
and two warrants was $ 1.
On May 1, 2004, the Company signed an agreement with the Executive
Vice President of the Company. According to the agreement the
Company will grant options to purchase 200,000 shares of its Common
stock at a purchase price per share at a 15% discount to the market
price of its Common stock on May 1, 2004. The options are
exercisable for a period of 60 months from the grant date and vest
1/8 every three months beginning July 1, 2004. In addition, if the
company's gross revenues exceed $ 15 million during the 2005
calendar year, the Company agreed to grant him fully vested options
to purchase 180,000 shares of its Common stock exercisable for a 60
months from May 1, 2004 at a purchase price per share at a 15%
discount to the market price of its Common stock. To date, The
Company's Board of Directors has not approved this grant. Further
more the Executive Vice President is entitled to sales commissions
equal to 5% of aggregate total net revenues from institutional
gaming operators.
The Company has signed agreements with two non-employee directors.
While each such Director serves as a member of the Board, the
Company shall pay the Director a director's fee of $ 7,000 per
annum, payable in quarterly installments. Both Directors shall be
granted an option under the terms of the Company's option plan, when
it will be issued, to purchase 192,261 shares of Common stock of the
Company, at an exercise price per share of $ 1. Each Director's
rights to exercise such option shall vest in three equal annual
installments during a period of three years commencing on May 2004,
provided that the Company's agreement with such Director is not
earlier terminated. To date the Company has not adopted a stock
option plan and accordingly has not granted these options.
During 2004, the Company issued 66,570 shares to service providers,
regarding there service agreements. The company had accounted for
these shares to the service providers under the fair value method of
Statement of Financial Accounting Standard No.123 "Accounting for
Stock Based Compensation". The fair value of these shares was
estimated using the Company's share price at grant dates.
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