As filed with the Securities and Exchange Commission April 19, 2004
SEC Registration No. 333-_____
____________________________________________________________________________
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM SB-2 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
GWIN, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 7990 04-3021770
- ------------------------- ---------------------------- -------------------
(State or Other Jurisdic- (Primary Standard Industrial (IRS Employer Iden-
tion of Incorporation) Classification Code Number) tification Number)
5092 South Jones Boulevard, Las Vegas, Nevada 89118
(702) 967-6000
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(Address and Telephone Number of Principal
Executive Offices and Principal Place of Business)
Wayne Allyn Root, Chief Executive Officer
5092 South Jones Boulevard, Las Vegas, Nevada 89118
(702) 967-6000
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(Name, Address and Telephone Number of Agent for Service)
Copies to:
Jon D. Sawyer, Esq.
Krys Boyle, P.C.
600 Seventeenth Street, Suite 2700 South Tower, Denver, Colorado 80202
(303) 893-2300
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Title of Each Amount Maximum Maximum
Class of Secur- to be Offering Aggregate Amount of
ities to be Regis- Price Offering Registration
Registered tered per Unit Price Fee
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Common Stock 45,660,002 (1) $.2025 $9,246,150.41 $1,171.49
$.0001 Par Value Shares
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(1) To be offered by selling shareholders. Includes 40,017,002 shares
currently held by selling shareholders, 4,143,000 shares issuable on the
exercise of common stock purchase warrants held by selling shareholders, and
1,500,000 shares issuable upon the exercise of stock options held by a selling
shareholder. In accordance with Rule 416 under the Securities Act of 1933,
this registration statement also covers an indeterminable number of shares of
common stock, $.0001 par value, as may become issuable upon the exercise of
the common stock purchase warrants to prevent dilution resulting from stock
splits, stock dividends, and similar transactions in accordance with the terms
of the common stock purchase warrants.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based on the average of the closing bid and ask prices
of the common stock as reported on the OTC Bulletin Board on April 16, 2004.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
PROSPECTUS SUBJECT TO COMPLETION DATED APRIL 19, 2004
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The information in this Preliminary Prospectus is not complete
and may be changed. The securities may not be sold until the
registration statement filed with the Securities and Exchange
Commission is effective. This Preliminary Prospectus is not an
offer to sell these securities and it is not soliciting an offer
to buy these securities in any jurisdiction where the offer or
sale is not permitted.
GWIN, INC.
45,660,002 Shares of Common Stock
Certain selling shareholders are offering the shares of
common stock.
Our common stock is traded on the Over-the-Counter Bulletin
Board under the symbol "GWNI." On April __, 2004, the closing
price of the common stock was $______.
INVESTING IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS AND
IS HIGHLY SPECULATIVE. YOU SHOULD PURCHASE THESE SECURITIES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK
FACTORS" BEGINNING ON PAGE __ TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING THESE SECURITIES.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this Prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
_________, 2004
TABLE OF CONTENTS
PAGE
Prospectus Summary .......................................... 3
Risk Factors ................................................ 5
Use of Proceeds ............................................. 11
Price Range of Common Equity and Related Stockholder
Matters ................................................... 12
Management's Discussion and Analysis or Plan of Operations .. 13
Business .................................................... 19
Management .................................................. 25
Security Ownership of Certain Beneficial Owners
and Management ............................................ 32
Selling Shareholders ........................................ 34
Plan of Distribution ........................................ 37
Description of Securities ................................... 39
Legal Matters ............................................... 40
Experts ..................................................... 40
Where You Can Find More Information ......................... 40
Index to Financial Statements ............................... F-1
2
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding us, the sale of our common stock in this offering, our
financial statements and the notes to those financial statements that appear
elsewhere in this prospectus.
BUSINESS OVERVIEW
We provide sports handicapping analysis and advice to sports bettors
worldwide through our wholly-owned subsidiary - Global SportsEDGE, Inc. Global
SportsEDGE provides professional handicapping advice on professional and
college football, professional and college basketball, and professional
baseball, with plans to expand in Europe and Asia covering soccer, cricket and
rugby.
We generate revenue in two ways: through the sale of our services and
through the sale of advertising. Service revenues are generated by selling
the handicapping advice of our professional handicappers and advertising
revenues are generated from payments we received from advertisers on our
various television, radio, print and internet properties. Advertising
revenues also include revenues generated from production of our new "The
UltimateEDGE" pay-per-view television show airing on iNDemand and from the
rental of our databases to noncompetitive advertisers.
Our prime revenue generating vehicle is "Wayne Allyn Root's The
WinningEDGE," a 30-minute, professionally produced television infomercial,
which during 2003 aired nationally Saturday mornings during the football
season on all of the Fox Sports Network owned stations and other selected
stations and cable networks including Comcast Mid-Atlantic and Comcast
Philadelphia. The show is hosted by our Chairman and Chief Executive Officer,
Wayne Allyn Root, and showcases our team of professional handicappers,
including Randy White (NFL Hall of Fame, Super Bowl Most Valuable Player),
radio talk show host and Emmy award winner, Chet Coppeck, and handicappers
Larry Ness and Alex McMordie. Messrs. Ness and McMordie combined have won over
30 nationally recognized handicapping contests.
We generate revenue from our television show and other advertising by
having sports fans and bettors call a toll-free number, where an account
representative offers the caller a comprehensive selection of services, such
as a slate of predictions for the upcoming weekend's events or for an entire
season. We have approximately 35 commission-based account representatives in
our office in Las Vegas. We have also entered into revenue-sharing
advertising agreements with other websites and use guest spots on other sports
and sports handicapping television shows to generate customer interest.
In the fall of 2003, we started producing and airing a weekly pay-per-
view expanded version of the Winning EDGE television program called "Wayne
Allyn Root's UltimateEDGE" that aired nationwide on the iNDdemand and TVN pay-
per-view networks.
THE COMPANY
We were originally incorporated in Nevada in 1986. We reincorporated in
Massachusetts in 1987 and reincorporated in Delaware under the name IMSCO
Technologies, Inc. in 1996. From July 1992 to August 1999, we were engaged in
the research and development of electrostatic separation technologies. In
late 1999, we ceased our operations and shifted our focus toward the strategic
acquisition of an operating business. To that end, in July 2001, we acquired
our sports handicapping business, which we operate through our wholly-owned
subsidiary, Global SportsEDGE, Inc., a Delaware corporation. In August 2001,
3
we changed our name to Global Sports & Entertainment, Inc., and in August
2002, we changed our name to GWIN, Inc.
Our executive offices are located at 5092 South Jones Boulevard, Las
Vegas, Nevada 89118, and our telephone number is (702) 967-6000. Our primary
website is located at www.WinningEDGE.com.
THE OFFERING
Total shares outstanding ............. 75,526,816 (1)
Shares being offered for resale
to the public ........................ 45,660,002
Price per share to the public ........ Market price at time of resale,
or otherwise negotiated by
selling shareholders
Use of proceeds from the offering .... We will not receive any proceeds
from this offering. However,
we will receive approximately
$964,250 if the outstanding
warrants are exercised, and
$750,000 if the total outstand-
ing options are exercised.
See our discussion under Use of Proceeds.
________________
(1) As of April 12, 2004, and does not include 3,484,987 common shares
issuable upon exercise of outstanding options and 12,452,748 common shares,
issuable upon exercise of outstanding warrants.
4
RISK FACTORS
An investment in the common stock offered involves a high degree of risk.
You should consider carefully the risks described below and all other
information contained in this prospectus before making an investment decision.
All forward-looking statements are inherently uncertain as they are based on
current expectations and assumptions concerning future events or future
performance of, or related to, our company.
WE HAVE ACCUMULATED A SIGNIFICANT DEFICIT SINCE OUR INCEPTION, AND OUR
AUDITORS HAVE EXPRESSED UNCERTAINTY CONCERNING OUR ABILITY TO CONTINUE AS A
GOING CONCERN.
Our independent auditors have expressed that there is substantial doubt
in our ability to continue as a going concern. We incurred a net loss of
$2,075,443 during the seven months ended July 31, 2002, and $8,940,132 during
the year ended July 31, 2003. As of January 31, 2004, we have incurred an
accumulated deficit of $24,399,137 and a working capital deficit of
$1,923,804. For the six months ended January 31, 2004, our revenues were
$4,766,397 and we had a net loss of $601,343. Our operating losses, as well
as uncertain sources of financing, create an uncertainty about our ability to
continue as a going concern.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS.
Our business commenced operations in January 2000. As a result, we have a
limited operating history on which you can base your evaluation of our
business and prospects. Our business and prospects must be considered in light
of the risks and uncertainties frequently encountered by companies in their
early stages of development. These risks are further amplified by the fact
that we are operating in an industry which is relatively new and rapidly
evolving. These risks and uncertainties include the following:
* our business model and strategy are still evolving and are
continually being reviewed and revised;
* we may not be able to successfully implement our business model
and strategy; and
* our management has not worked together for very long.
We cannot be sure that we will be successful in meeting these challenges
and addressing these risks and uncertainties. If we are unable to do so, our
business will not be successful and the value of your investment in our
company will decline.
WE WILL CONTINUE TO REQUIRE MONEY TO FUND FUTURE OPERATIONS AND WE ARE NOT
SURE WE CAN OBTAIN ADDITIONAL FINANCING. OUR FAILURE TO SUCCESSFULLY OBTAIN
ADDITIONAL FUTURE FUNDING ON FAVORABLE TERMS MAY JEOPARDIZE OUR ABILITY TO
CONTINUE OUR BUSINESS AND OPERATIONS.
We will need to raise significant additional capital in order to fully
implement our planned business expansion. See our discussion titled
"Business-Our Strategy." We cannot assure you that additional public or
private financing, including debt or equity financing, that we require now or
in the future will be available at all or, if available, may be on terms
unfavorable to us. Furthermore, debt financing, if available, will require
payment of interest and may involve restrictive covenants that could impose
limitations on our operating flexibility. If adequate funds are not available,
we may be unable to fully implement our planned expansion.
5
OUR EXECUTIVE OFFICERS AND DIRECTORS WILL HAVE SIGNIFICANT INFLUENCE OVER ALL
MATTERS REQUIRING STOCKHOLDER APPROVAL, INCLUDING DELAYING OR PREVENTING A
CHANGE IN OUR CORPORATE CONTROL.
Our executive officers and directors and their affiliates together
control approximately 14.7% of our outstanding common stock. As a result,
these stockholders, if they act together, will have significant influence in
all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. The interests of
our executive officers and directors may differ from the interests of our
other stockholders. This concentration of ownership may have the effect of
delaying, preventing or deterring a change in control of our company, could
deprive our stockholders of an opportunity to receive a premium for their
common stock as part of a sale or merger of our company and may affect the
market price of our stock.
OUR SHARE PRICE MAY DECLINE DUE TO THE LARGE NUMBER OF SHARES OF OUR COMMON
STOCK ELIGIBLE FOR FUTURE SALE IN THE PUBLIC MARKET.
Prior to the effective date of this registration statement, 28,545,889
shares of our common stock are eligible for sale in the public market under
Rule 144 of the Securities Act of 1933, as amended. This represents
approximately 37.8% of our issued and outstanding shares. While the sales will
be subject to volume limitations, sales of substantial amounts of these shares
of common stock in the public market, or the possibility of these sales, may
adversely affect our stock price.
WE EXPERIENCE SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS DUE TO
THE SEASONALITY ASSOCIATED WITH PROFESSIONAL AND COLLEGE SPORTS. THESE
FLUCTUATIONS MAY CAUSE CASH SHORTFALLS, MATERIALLY AFFECTING OUR RESULTS OF
OPERATIONS, AS WELL AS MAKING FINANCIAL FORECASTING DIFFICULT. BOTH OF THESE
FACTORS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR COMMON STOCK TRADING
PRICE.
As a result of our limited operating history and the nature of our
business, we believe that quarter-to-quarter comparisons of results of
operations for preceding quarters are not necessarily meaningful. Our
quarterly results of operations may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside our control. Some of
the factors that could cause our quarterly or annual operating results to
fluctuate include the cyclical nature of our business operations, market
acceptance of our services, competitive pressures, and customer retention. For
example, we currently provide handicapping analysis and advice for football,
basketball and baseball. The most popular sports for wagering in the United
States are professional and college football, which take place primarily
during the first and second quarters of our fiscal year (August-January),
followed by college basketball which takes place primarily during the second
and third quarters of our fiscal year. Accordingly, we have traditionally
experienced lower net sales in the third and fourth quarters and higher net
sales in the first and second quarters. This results in an uneven revenue
stream, and our quarterly operating results are difficult to predict and are
likely to vary in the future.
Any significant shortfall in revenues could have an immediate and adverse
effect on our business and financial condition. If our earnings are below
financial analysts' expectations in any quarter, our stock price may drop. You
should not rely on the results of any one quarter as an indication of our
future performance. If in some future quarter our results of operations were
to fall below the expectations of securities analysts and investors, the
trading price of our common stock would likely decline.
6
NEW STATUTORY OR REGULATORY RESTRICTIONS ON WAGERING ON LIVE SPORTING EVENTS
COULD DECREASE DEMAND FOR OUR HANDICAPPING SERVICES AND THEREBY DECREASE OUR
REVENUES.
Although our activities are not regulated by gaming authorities, gaming
activities are subject to extensive statutory and regulatory control by both
state and federal authorities, and are likely to be significantly affected by
any changes in the political climate and economic or regulatory policies.
Significant new restrictions on wagering on sporting events could have a
negative impact on sales of our handicapping services resulting in decreased
revenues.
A DECLINE IN GENERAL ECONOMIC CONDITIONS COULD CONTINUE TO NEGATIVELY AFFECT
THE ENTERTAINMENT AND GAMING INDUSTRIES, INCLUDING OUR BUSINESS.
Our operations are affected by general economic conditions, and therefore
our future success is unpredictable. The demand for entertainment and leisure
activities tends to be highly sensitive to consumers' disposable income, and
thus a decline in general economic conditions may lead to customers having
less discretionary income to wager on sports, which could result in a
continued material adverse effect on our business, financial condition,
operating results and prospects.
THE SUCCESS OF OUR BUSINESS IS HIGHLY DEPENDENT ON OUR PROFESSIONAL
HANDICAPPERS AND LOSING THE SERVICES OF OUR HANDICAPPERS COULD DECREASE OUR
REVENUES AND IMPAIR OUR ABILITY TO PURSUE OUR BUSINESS PLAN.
Our future success depends, in significant part, upon the continued
service and performance of our professional handicappers, in particular Wayne
Allyn Root, our Chairman and Chief Executive Officer. Although we have key-man
insurance on Mr. Root with a death benefit of $5 million, losing the services
of Mr. Root could impair our ability to effectively promote our company and to
carry out our business plan. Each of our handicappers is subject to a sports
personality agreement, which requires them to provide their handicapping
services to us, as well as appear on our infomercial, as requested, and is
renewed annually.
Our future success also depends on our continuing ability to attract and
retain highly qualified professional handicappers. Competition for these
individuals is intense. Our inability to attract and retain additional, highly
skilled personnel required for expansion of our operations could adversely
affect our results of operations.
WE FACE STRONG COMPETITION IN ALL ASPECTS OF OUR BUSINESS, AND OUR FAILURE TO
COMPETE SUCCESSFULLY WITH OUR COMPETITORS MAY HAVE A MATERIAL ADVERSE IMPACT
ON OUR REVENUES AND PROFITABILITY.
The market for our services and products is intensely competitive and we
expect that competition will increase. We face competition from numerous
operations that sell sports handicapping information through television
infomercials, the Internet, print media, direct mail and telemarketing. Many
of our competitors have longer operating histories, significantly greater
financial and marketing resources, greater name recognition and larger user
and membership bases. These competitors may be able to devote greater
resources to marketing and to the development and promotion of their services,
adopt more aggressive pricing policies and devote substantially more resources
to website and systems development than we. In addition, these competitors may
be able to respond more quickly to changes in Internet technology and adapt
more quickly to evolving industry trends or changing Internet user
preferences. We cannot assure you that we will be able to compete successfully
against current and future competitors, or that competitive pressures will not
7
have a negative impact on our ability to generate revenues and to achieve or
sustain profitability.
BECAUSE WE HAVE FEW PROPRIETARY RIGHTS, OTHERS CAN PROVIDE SERVICES
SUBSTANTIALLY EQUIVALENT TO OURS, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON
OUR COMPETITIVENESS AND OUR FINANCIAL POSITION.
Our product and service offerings are not protected by patents and are
generally not patentable. We believe that most of the information we use to
provide our handicapping analysis is generally known and available to others.
Consequently, apart from the advantages afforded by our expert handicappers,
others can offer services substantially equivalent to ours.
IF WE CANNOT PROTECT OUR TRADE NAMES OR OUR INTERNET DOMAIN NAMES, OUR ABILITY
TO CONDUCT OUR OPERATIONS MAY BE IMPEDED, AS WELL AS RESULT IN SUBSTANTIAL
COSTS DUE TO LITIGATION.
We have received trademark registration for our "The WinningEDGE" trade
name with the United States Patent and Trademark Office. However, we cannot
assure you that we will be able to secure adequate protection for our trade
name. Our actions may be inadequate to protect our trade name or to prevent
others from claiming violations of their trade names. We also own the Internet
domain names www.winningedge.com, www.globalsportsedge.com, and
www.gsportsedge.com. Government agencies and their designees generally
regulate the acquisition and maintenance of domain names. Governing bodies may
establish additional top-level domains, appoint additional domain registrars
or modify the requirements for holding domain names. As a result we may be
unable to acquire or maintain relevant domain names in all countries in which
we do business. Furthermore, the relationship between regulations governing
domain names and laws protecting trademarks and similar proprietary rights is
unclear. Therefore, we may be unable to prevent third parties from acquiring
domain names that are similar to, infringe on or otherwise decrease the value
of our trademarks and Internet domain names. Our failure to protect our trade
names or our Internet domain names could impair our ability to conduct our
business operations, or may result in costly litigation and the expenditure of
significant financial and managerial resources and injunctions preventing us
from providing services. Such claims could severely harm our financial
condition and ability to compete.
SYSTEM FAILURES, DELAYS AND CAPACITY CONSTRAINTS MAY DAMAGE OUR CUSTOMER
RELATIONS OR INHIBIT OUR POSSIBLE GROWTH.
Our success and our ability to provide high quality customer service
largely depends on the efficient and uninterrupted operation of our computer
and communications systems, which must be able to accommodate significant
numbers of users and advertisers. We may experience periodic systems
interruptions and down time caused by traffic to our website and technical
difficulties, which could result in a loss of potential or existing users and
advertisers and may adversely affect our results of operations. Limitations of
our technology infrastructure may prevent us from maximizing our business
opportunities and inhibit our possible growth.
THE TRADING PRICE OF OUR COMMON STOCK MAY DECREASE DUE TO FACTORS BEYOND OUR
CONTROL.
The trading price of our common stock is subject to significant
fluctuations in response to numerous factors, including:
* quarterly variations in anticipated or actual results of operations;
8
* new services, products or strategic developments by us or our
competitors;
* increased expenses, whether related to sales and marketing or
administration; and
* comments about us or our markets posted on the Internet.
Moreover, the stock market from time to time has experienced extreme
price and volume fluctuations. These fluctuations have particularly affected
the market prices of equity securities for emerging growth companies and
certain industry groups such as Internet-related companies and are often
unrelated to the operating performance of the companies. These broad market
fluctuations may adversely affect the market price of our common stock. If our
shareholders sell substantial amounts of their common stock in the public
market, the price of our common stock could fall. These sales also might make
it more difficult for us to sell equity or equity-related securities in the
future at a price we deem appropriate.
THE LIMITED PUBLIC MARKET FOR OUR COMMON STOCK MAY REDUCE OUR SHAREHOLDERS'
ABILITY TO SELL OUR COMMON STOCK, AND INCREASE THE VOLATILITY OF OUR STOCK
PRICE.
Our common stock currently is traded on the OTC Bulletin Board, which is
generally considered to be a less efficient market than national exchanges or
trading systems, and trading volume has been low. Consequently, the liquidity
of our securities could be impaired, not only in the number of securities
which could be bought and sold, but also through delays in the timing of
transactions, difficulties in obtaining price quotations, reduction in
security analysts' and media coverage of us and our business, if any, and
lower prices for our securities than might otherwise be attained. This
circumstance could have an adverse effect on the ability of an investor to
sell any shares of our common stock as well as on the selling price for such
shares. In addition, the market price of our common stock may be significantly
affected by various additional factors, including, but not limited to, our
business performance, industry dynamics or changes in general economic
conditions.
WE HAVE NOT PAID CASH DIVIDENDS AND IT IS UNLIKELY THAT WE WILL PAY CASH
DIVIDENDS IN THE FORESEEABLE FUTURE.
We plan to use all of our earnings, to the extent we have earnings, to
fund our operations. We do not plan to pay any cash dividends in the
foreseeable future. We cannot guarantee that we will, at any time, generate
sufficient surplus cash that would be available for distribution as a dividend
to the holders of our common stock. You should not expect to receive cash
dividends on our common stock.
DELAWARE LAW AND OUR CORPORATE CHARTER AND BYLAWS CONTAIN ANTI-TAKEOVER
PROVISIONS THAT COULD DELAY OR DISCOURAGE TAKEOVER ATTEMPTS THAT STOCKHOLDERS
MAY CONSIDER FAVORABLE.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions that may inhibit changes in our control that are not approved by
our board of directors. These provisions may have the effect of delaying,
deferring or preventing a change in our control despite possible benefits to
our stockholders, may discourage bids at a premium over the market price of
our common stock and may adversely affect the market price of our common stock
and the voting and other rights of our stockholders.
9
APPLICABILITY OF "PENNY STOCK RULES" TO BROKER-DEALER SALES OF OUR COMMON
STOCK COULD HAVE A NEGATIVE EFFECT ON THE LIQUIDITY AND MARKET PRICE OF OUR
COMMON STOCK.
Our common stock is subject to the "penny stock rules" adopted pursuant
to Rule 15g-9 of the Securities and Exchange Act of 1934, as amended, which
apply to non-Nasdaq companies whose common stock trades at less than $5.00 per
share or which have a tangible net worth of less than $5,000,000 - or
$2,000,000 if we have been operating for three or more years. The penny stock
rules impose additional sales practice requirements on broker-dealers which
sell such securities to persons other than established customers and
institutional accredited investors. For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, the penny stock rules affect the ability of broker-dealers
to sell shares of our common stock and may affect the ability of shareholders
to sell their shares in the secondary market, as compliance with such rules
may delay and/or preclude certain trading transactions. The penny stock rules
could have an adverse effect on the liquidity and/or market price of our
common stock.
10
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by the
selling shareholders. However, if the selling shareholders exercise their
warrants or options we will receive the proceeds from the exercise. If we do
generate any proceeds, we intend to use the proceeds as general working
capital to fund our operations.
Following is a table showing the breakdown of the proceeds we would
receive from the exercise of the warrants and options:
Number of
Shares Proceeds if
to be issued Expiration Date Exercised
------------ --------------- -----------
Warrants exercisable
at $.13 2,010,000 August 2005 $261,300
Warrants exercisable
at $.15 1,283,000 September 2008 $192,450
Warrants exercisable
at $.25 150,000 April 2011 $ 37,500
Options exercisable 1,500,000 July 2006 $750,000
at $.50
Warrants exercisable
at $.50 450,000 December 2007 $225,000
Warrants exercisable
at $.88 125,000 June 2007 $110,000
Warrants exercisable
at $1.04 75,000 June 2007 $ 78,000
Warrants exercisable
at $1.20 50,000 June 2007 $ 60,000
11
PRICE RANGE OF COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has traded on the OTC Bulletin Board under the symbol
"GWNI" since September 6,2002. From September 7, 2001 to September 5, 2002,
our common stock traded on the OTC Bulletin Board under the symbol "GWIN."
From August 28, 2001 to September 6, 2001, our common stock traded on the
OTC Bulletin Board under the symbol "GSPE" and prior to August 28, 2001 our
common stock traded on the OTC Bulletin Board under the symbol "IMSO." The
following table shows the high and low bid prices of our common stock
for the periods indicated as reported by the OTC Bulletin Board.
The table below sets forth for the periods indicated the high and low bid
prices per share of our Common Stock, as reported by the Over the Counter
Bulletin Board. Quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
HIGH LOW
Fiscal Year ended December 31, 2001
First Quarter ..................... $ .08 .06
Second Quarter .................... $ .27 .05
Third Quarter ..................... $ 1.60 1.00
Fourth Quarter .................... $ 1.03 .51
Seven months ended July 31, 2002 $
First Quarter ..................... $ .86 .60
Second Quarter .................... $ .90 .47
Month of July .,................... $ .74 .42
Fiscal Year ended July 31, 2003
First Quarter ..................... $ .54 .29
Second Quarter .................... $ .45 .16
Third Quarter ..................... $ .40 .13
Fourth Quarter .................... $ .41 .21
Fiscal Year ending July 31, 2004
First Quarter ..................... $ .37 .22
Second Quarter .................... $ .28 .10
Third Quarter - through April __,
2004 ............................ $ ___ ___
STOCKHOLDERS
We consider our common stock to be thinly traded and any reported sale
prices may not be a true market-based valuation of our common stock. On April
__, 2004, the closing price of our common stock, as reported on the Over-the-
Counter Bulletin Board, was $____. There were approximately 575 holders of
record of our common stock.
DIVIDENDS
We have not paid any cash dividends since our inception and do not
contemplate paying dividends in the foreseeable future. It is anticipated that
earnings, if any, will be retained for the operation of our business.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This prospectus includes "forward-looking" statements, which reflect our
current views with respect to possible future events and financial
performance. They are subject to certain risks and uncertainties, including
specifically the absence of significant revenues, limited financial resources,
a history of losses, significant competition, trading risks of low-priced
stocks and those other risks and uncertainties discussed in this prospectus
that could cause our actual results to differ materially from our historical
results or those we hope to achieve. In this prospectus, the words
"anticipate," "believe," "expects," "intends," "future" and similar
expressions identify certain forward-looking statements. You are cautioned to
consider the specific risk factors described in "Risk Factors" and elsewhere
in this prospectus and not to place undue reliance on the forward-looking
statements contained in this prospectus. Except as required by law, we
undertake no obligation to announce publicly revisions we make to these
forward-looking statements to reflect the effect of events or circumstances
that may arise after the date of this prospectus.
OVERVIEW
We provide sports handicapping information and analysis to sports bettors
through direct marketing channels such as television, radio, the internet and
print media. The handicapping information that we currently provide includes
commentary, analysis and selections from leading sports handicappers for
professional and college football, professional and college basketball, and
professional baseball.
One of the attractive aspects of our business is that we generate
revenues from two sources. The two primary sources are Services Revenues and
Advertising Revenues.
Service Revenues are generated by selling the handicapping advice and
analysis of our professional handicappers. Service Revenues are generated
from respondents to our various media promotions including the telephone
numbers advertised on our weekly 30-minute television infomercial program
called "Wayne Allyn Root's WinningEDGE," which, during the 2003 football
season aired nationally on Fox Sports Network owned television stations and
other selected stations and cable networks including Comcast Mid-Atlantic and
Comcast Philadelphia. We also produced an hour long radio program called The
WinningEDGE that aired on selected radio stations nationwide as well as on
our flagship station, XTRA in Southern California.
In addition to The WinningEDGE television and radio programs we also
advertise our services on radio in various markets and in selected print media
including the week-end edition of USA Today. During the football season we
will receive phone calls weekly in response to our offers. These calls are
returned by our team of sports account representatives in our office in Las
Vegas. The account representative offers the caller a variety of handicapping
packages for the services of our handicappers. Our handicapping services are
also offered and sold on our Web site, www.WinningEDGE.com. The Web site
provides free live odds, scores, schedules, injury and weather reports and
free picks from our professional handicappers, as well as the opportunity for
visitors to purchase a broad selection of picks and services offered through
the site.
The second major source of revenues for us is advertising revenues.
Advertising revenues are revenues generated from payments made to us from
third party advertisers on our various television, radio, print, and Internet
properties. They also include revenues generated from the rental of our
databases to noncompetitive advertisers.
13
We have built a telemarketing/direct mail database of potential clients
who have called for our services, and an e-mail database of email addresses.
We consider these unrecorded intangible assets to be extremely valuable both
as a continuing lead source for our handicapping services and as an additional
source of revenue. This database and the loyal viewing and listening audience
that we have built for our television, radio, print, and Internet properties
has enabled us to attract a number of paid advertisers for these various
media. We believe that going ahead, we are well positioned to continue to
grow both services and advertising revenues.
COMPARISON OF SIX MONTHS ENDED JANUARY 31, 2004 TO THE SIX MONTHS ENDED
JANUARY 31, 2003
REVENUES. Total revenues for the six months ended January 31, 2004
increased 6%, from $4,470,117 to $4,766,397 for the comparable period in
2003. Revenues from advertising increased from $133,334 for the six months
ended January 31, 2003 to $577,076 for the same period in 2004, an increase
of 436%. This increase in advertising revenues is a result of the Company's
creation and continued expansion of its television and radio shows, website,
and database that deliver a highly desirable, upscale male demographic for
advertisers. Net revenues from sports handicapping services (after
charge-backs and deferred revenue adjustments) decreased from $4,336,783 for
the months ended January 31, 2003 to $4,189,321 for the same period in 2004, a
decrease of 0.04%. This decrease is attributable to the Company's strategic
decision to place an increased focus on profitability rather than growth by
reducing its media expenditures during the period. Also, in late November the
Company was the victim of a security breach with an outside computer hacker
gaining access to our proprietary customer and lead database and clandestinely
selling it to a number of our competitors. We believe that the extent of the
loss in reduced revenues and increased chargebacks is substantial. It is
still being quantified. We have notified and are working closely with the
proper authorities and have filed insurance claims.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses,
excluding non-recurring items were $5,044,109 for the six months ended January
31, 2004 versus $6,369,147 for the same period in 2003, a decrease of 20%.
These savings were across the board, with key components as follows:
Advertising Expenses, including production costs, decreased from $2,202,707
for the six months ended January 31, 2003 to $1,579,199 for the same period in
2004. These reduced media expenditures are a direct result of the decision to
reduce the Company's emphasis on growth in favor of an increased emphasis on
near-term profitability. The majority of our advertising expense is incurred
from September to December, during the football season and the early part of
the basketball season.
Other substantial cost savings were realized by restructuring the
commission schedule for sales personnel, decreasing Commission Expense from
$1,587,015 for the six months ended January 31, 2003 to $1,415,140 for the
same period in 2004, a decrease of 11%, and by decreasing Salaries and Wages
from $722,846 for the six months ended January 31, 2003 to $628,903 for the
same period in 2004, a decrease of 12%. This savings was accomplished by
operating with a slightly reduced staff and replacing selected staff with
lower paid employees. Professional Fees also decreased from $350,768 for the
six months ended January 31, 2003 to $137,047 for the same period in 2004, a
60% reduction. The Company does not have any ongoing litigation and expenses
are in line with stabilized costs involving a publicly traded company.
Finally, General and Administrative Expenses decreased from $917,232 for
the six months ended January 31, 2003 to $814,738 for the same period in 2004,
a decrease of 11%. The Company's general operating expenses have stabilized
and several contracts were renegotiated for better pricing. This includes
telephone charges and credit card fees on sales revenue. These two major
expenses vary directly with sales activity and are consistent with revenues.
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OPERATING RESULTS. The Company showed substantial progress in improving
Operating Results. For the six months ended January 31, 2004 the Company's
operating loss decreased to $277,712 compared to $1,899,030 for the same
period in 2003. As described above, his improvement was due to reducing
operating costs by $1,325,038 and increasing advertising revenue by over
$400,000. The Company has also made improvements on the balance sheet, by
paying off and converting debt thereby decreasing liabilities by over
$3,334,000.
COMPARISON OF THE YEAR ENDED JULY 31, 2003 TO THE SEVEN MONTH PERIOD
ENDED JULY 31, 2002 AND YEAR ENDED DECEMBER 31, 2001
Our business is highly seasonal and the seven months ended July 31, 2002
exclude virtually all of the college and professional football season. This
has historically been the period in which a substantial part of annual
revenues are generated. Therefore, comparisons of twelve month periods to the
seven months ended July 31, 2002, may not be effective.
Our net loss for the year ended July 31, 2003, the seven month period
ended July 31, 2002 and the year ended December 31, 2001 were $7,141,561,
$2,075,443 and $5,527,352, respectively. The net loss used in loss per share
calculation in 2003 and 2001 were further increased by an imputed non-cash
dividend on our Series C Preferred Shares of $1,798,571 in 2003 and
$1,092,000 in 2001. The net loss used in the per share calculations for the
year ended July 31, 2003, the seven month period ended July 31, 2002 and the
year ended December 31, 2001 were $8,940,132, $2,075,443 and $6,619,352,
respectively.
Revenue from sales of sports handicapping information and analysis for
the year ended July 31, 2003, the seven month period ended July 31, 2002 and
the year ended December 31, 2001 were $$5,720,582, $2,765,233 and $3,083,314
respectively. Revenue from advertising agreements for these same periods was
$206,334, $261,998 and $157,168, respectively. This increase in revenue is a
result of the continued effective marketing efforts and repeat business.
Handicappers' fees for the year ended July 1, 2003, the seven month
period ended July 31, 2002 and the year ended December 31, 2001 were $654,425,
$264,257 and $424,002, respectively. These changes are in line with the
changes in revenue from sales of sports handicapping information.
Advertising expenses for the year ended July 31, 2003, the seven month
period ended July 31, 2002 and the year ended December 31, 2001 were
$2,342,432, $194,755 and $2,160,245, respectively. The seven months ended July
31, 2002 were very low because the bulk of our advertising comes during the
football season (September to December). The 2003 year is only slightly
higher than the 2001 year, even though revenues are up significantly, because
we are becoming more effective in our use of advertising.
Professional fees for the year ended July 31, 2003, the seven month
period ended July 31, 2002 and the year ended December 31, 2001 were
$532,354, $868,148 and $556,201, respectively. These fees were especially
high in the seven month period ended July 31, 2002 because of fees paid in
connection with efforts to raise investment capital and the process of
settling all of the ongoing litigation.
General and administrative expenses for the year ended July 31, 2003, the
seven month period ended July 31, 2002 and the year ended December 31, 2001
were $1,624,464, $864,629 and $1,238,880, respectively. These increases are
as a result of the growth of our revenues offset by cost containment efforts
undertaken in the 4th quarter of the 2003 fiscal year.
15
The non-recurring charge of $40,000 for the year ended July 31, 2003,
$608,525 for the seven month period ended July 31, 2002 and $866,453 for the
year ended December 31, 2001 represent costs associated with a contemplated
merger transaction. This transaction was rescinded and agreement was reached
for payments of $90,000 and issuance of shares and warrants in exchange for
mutual releases from further claims in connection with this transaction. We
provided approximately $1,153,000 for the costs of these settlements.
The operating loss for the year ended July 31, 2003, the seven month
period ended July 31, 2002 and the year ended December 31, 2001 were
$2,501,866, $1,371,117 and $4,637,370, respectively. The net operating loss
declined from $4,637,370 in the year ended December 31, 2001 to $1,371,117 for
the seven months ended July 31, 2002, primarily because the revenues on a
monthly basis grew approximately 60% and there was a significant decrease in
advertising expense and a lesser decrease in compensation and general and
administrative expense. The net operating loss increased from $1,371,117 for
the seven months ended July 31, 2002 to $2,501,866 for the year ended July 31,
2003. Even though the revenue continue to grow on a monthly basis, there were
significant increases in advertising expense, compensation expense and general
and administrative expense. In order to reduce the operating loss in the
current fiscal year, management is attempting to increase its advertising
revenue and to bring its advertising expense and compensation expense more in
line with its revenue from handicapping fees.
SEASONALITY
Our business is highly seasonal. Because football and basketball are the
most popular sports for wagering, the demand for the handicapping analysis for
these sports is substantially higher than for any other sporting events. As a
result, approximately 80% of our sales occur in the first and second quarters
of the fiscal year. Because of these factors, our quarterly operating results
are difficult to predict and are likely to vary in the future. We have
traditionally experienced lower net sales in the third and fourth quarters of
the fiscal year. and higher net sales in the first and second quarters of the
fiscal year. We expect this seasonality to continue for the foreseeable
future. If we are ultimately successful in pursuing our strategy to expand
our handicapping services to cover other sports that are popular
internationally, such as soccer and cricket, we may reduce the seasonality of
our business. However, there can be no assurance that future seasonal
fluctuations will not adversely affect the business or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital deficit as of January 31, 2004, was $1,923,804 as
compared to a deficit of $3,240,157 as of July 31, 2003. Of the January 31,
2004 amount, approximately $420,500 represents revenues from sales which will
not be recognized until after January 31, 2004. During the six months ended
January 31, 2004, we raised approximately $427,800 from accredited investors.
In order to reduce our working capital deficit and to finance our
continuing operations, management is in the process of or intends in the
future to take the following actions. We will be able to generate sufficient
cash to support our operations during the twelve month period following the
date of the financial statements by raising additional financing by continuing
to sell shares of our common stock in a private offering to accredited
investors through the offshore investment banker which has raised capital for
us in the past and we may attempt to use other investment bankers to sell our
common stock. Secondly, during the period October through January 2004,
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Newmarket Investments converted a total of approximately $1,200,000 of its
convertible debenture into common stock, and Newmarket agreed to restructure
the remaining short-term debt (including interest) of approximately $226,000
such that we have now agreed to pay this debt off over eighteen months at the
rate of $13,000 per month beginning January 30, 2004. We also intend to
increase our advertising revenue by selling additional sponsorship and
advertising opportunities, and we intend to expand our business to cover
additional sports and services and new geographic markets.
SUMMARY OF CASH FLOWS FOR THE SIX MONTHS ENDED JANUARY 31, 2004
GWIN's cash decreased approximately $386,000 during the six months ended
January 31, 2004, to approximately $34,000 on January 31, 2004. The decrease
was a result of the operating loss of $601,343 which was offset in part by the
$427,793 in proceeds from the issuance of equity in order to fund advertising
costs and to expand operations.
OPERATING ACTIVITIES
Net cash used in operating activities decreased from $1,021,709 in the
six months ended January 31, 2003 to $562,975 in the six months ended January
31, 2004. Operating income was negatively impacted in the six months ended
January 31, 2004 by compensation and advertising costs.
INVESTING ACTIVITIES
Net cash used in investing activities increased from $22,488 during the
six months ended January 31, 2003 to $43,447 during the six months ended
January 31, 2004, due to the purchase of computer equipment essentially to
enhance operational efficiency.
FINANCING ACTIVITIES
Net cash provided by financing activities decreased from $841,192 during
the six months ended January 31, 2003 to $220,078 during the six months ended
January 31, 2004. Included in the amount for the six months ended January 31,
2004, $427,793 was received from the sale of common stock.
CRITICAL ACCOUNTING POLICIES
In preparing our financial statements, we make estimates, assumptions and
judgments that can have a significant effect on our revenues and net income or
net loss, as well as on the value of certain assets on our balance sheet. We
believe that there are several accounting policies that are important to an
understanding of our historical and future performance as these policies
affect the reported amounts of revenues, expenses, and significant estimates
and judgments applied by management. While there are a number of accounting
policies, methods and estimates affecting our financial statements, two areas
of particular significance are identified. One of theses areas is the
deferral estimate applied to revenues and the other area is the pricing of
options and warrants issued by GWIN. In addition, please refer to Note 2 to
the accompanying consolidated financial statements for further discussion of
our accounting policies.
REVENUE RECOGNITION
Our service contracts with clients vary substantially in length from a
single sporting event to entire seasons. We recognize the revenue from
service contracts ratably, as the services are rendered in proportion to the
total services to be provided under the contracts. It is important to note
that while revenue from service contracts is deferred and recognized as the
service is delivered, the bulk of the costs associated with generating that
revenue including advertising, commissions, and handicapping fees are expensed
in the quarter that the service contract is generated.
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STOCK OPTIONS AND EQUITY INSTRUMENTS
We have issued substantial amounts of warrants and options to purchase
common stock in connection with financing activities and as payment for
services and other items. We record the cost attributable to those issuances
on the basis of the Black-Scholes option valuation model. The use of this
model requires some highly subjective assumptions including expected stock
price volatility.
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BUSINESS
OVERVIEW
GWIN, Inc is headquartered in Las Vegas, Nevada. We provide sports
handicapping analysis and advice to sports bettors worldwide through our
wholly-owned subsidiary, Global SportsEDGE, Inc. Global SportsEDGE provides
professional handicapping advice on professional and college football,
professional and college basketball, and professional major-league baseball
via television, radio and the internet.
We generate revenue in two ways: through the sale of our services and
through the sale of advertising. Service revenues are generated by selling
the handicapping advice of our professional handicappers and advertising
revenues are generated from payments we received from advertisers on our
various television, radio, print and internet properties. Advertising
revenues also include revenues from the rental of our databases to
noncompetitive advertisers.
CORPORATE HISTORY
We were originally incorporated in Nevada in 1986. We reincorporated in
Massachusetts in 1987 and reincorporated in Delaware under the name of IMSCO
Technologies, Inc. in 1996. From July 1992 to August 1999, we were engaged
in the research and development of electrostatic separation technologies. In
late 1999, we ceased our operations and shifted our focus toward the strategic
acquisition of an operating business. To that end, in July 2001, we acquired
our sports handicapping business, which we operate through our wholly-owned
subsidiary, Global SportsEDGE, Inc., a Delaware corporation. In August 2001,
we changed our name to Global Sports & Entertainment, Inc. and on August 22,
2003, we changed our name to GWIN, Inc.
Effective August 22, 2002, we changed our name to GWIN, Inc. in order to
avoid both consumer confusion and potential and actual litigation with another
Delaware company with a similar name, Global Sports, Inc. The Board of
Directors approved a change in our Fiscal Year from a calendar year to one
beginning August 1 and ending July 31. That change was effective July 31,
2002.
THE GAMING AND SPORTS HANDICAPPING MARKET
Our services are intended to assist fans of the games and teams we cover
in analyzing the prospects for their favored teams throughout the season, and
for sports bettors who wish to use our analysis in determining their wagers on
specific teams and/or games. We believe that our handicappers have superior
experience, knowledge and/or skill and purchasing our handicappers' analysis
and advice allows our customers to increase their odds of winning.
We believe that there is a market for our sports handicapping information
and analysis wherever there is a market for sports wagering and that the size
of the market for our sports handicapping information and analysis is directly
related to the market for sports wagering. In the United States, wagering on
sporting events, other than pari-mutuel betting, is currently legal only in
the State of Nevada. According to a 1999 report by the National Gambling
Impact Study Commission, sports wagering reached $2.3 billion in Nevada's
sports books in 1998. Estimates of the scope of other sports betting in the
United States range from $80 billion to $380 billion annually. We believe
that the proliferation of cable and satellite television, which has increased
the viewing access to sporting events worldwide, has also increased viewers'
interest in sports betting.
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OUR BUSINESS MODEL
Our business model is centered around the handicappers featured on our
television show "Wayne Allyn Root's Winning EDGE" ("WinningEDGE"). The show
is anchored by Mr. Wayne Allyn Root, our Chairman and Chief Executive
Officer. Mr. Root has been employed in the handicapping industry for the past
15 years. Prior to founding Global SportsEDGE, Inc., our subsidiary, Mr. Root
was a leading revenue generator for National Sports Service, a competitor of
ours and an industry leader for the past 25 years. Joining Mr. Root on the
show are his hand selected experts in the sports handicapping field, including
Mr. Alec McMordie who has won 30 national handicapping championships over the
past nine years, Mr. Larry Ness, also a handicapping champion, Mr. Randy
White, a former NFL player and a member of the NFL Hall of Fame, and Mr. Chet
Coppeck, an Emmy winning sports talk show host and sports handicapper. The
celebrity of our handicappers allows us to attract highly qualified account
representatives. These account representatives are then able to convert
incoming telephone leads into completed sales, as described further below.
MARKETING AND SALES
The primary way in which we generate revenue is from the direct sale of
our handicapping advice. Interest in our service is derived primarily from
three different sources in addition to word-of-mouth and repeat customers:
television, radio, and the Internet. Our primary promotional vehicle is the
WinningEDGE program. This lively, 30-minute, professionally produced
television infomercial is broadcast nationally on Saturday mornings
throughout the football season, generally September through December. During
the fall of 2003, "Wayne Allyn Root's WinningEDGE" aired on all Fox Sports
Network-owned stations nationwide as well as on Comcast Sports Net
Mid-Atlantic, Comcast Sports Net Philadelphia, Empire Sports, WCIU Chicago,
and Fox World, reaching approximately 60,000,000 households. The show stars
and is hosted by Mr. Root and showcases our team of professional
handicappers. In addition to the television show we also produce a radio show
by the same name, "Wayne Allyn Root's WinningEDGE." The hour long radio show
is also hosted by Mr. Root and stars most of the same cast of handicappers as
the television show. The show airs on a number of radio stations in local
markets including what we consider to be our flagship stations: XTRA in Los
Angeles and San Diego, ESPN radio in Las Vegas, and ESPN radio in Los Angeles.
Like the television show, the radio program provides analysis of upcoming
games and promotes the various handicappers services.
We also sell our handicapping analysis, or "picks," on our website
www.WinningEDGE.com, and develop customer interest through other radio and
print advertisements. Our primary service is the handicapping analysis and
advice of our professional handicappers. This may be sold as one pick from
one handicapper for one game, or a series of picks for a series of games
played in one sport, a series of events in one season, a series of different
events for different sports during a season, or a series of picks from
different handicappers for one or many games in one or many sports. The cost
varies based on the event, the sport, the number of picks and the handicapper.
Once a potential customer has decided to purchase our picks, the customer
calls a toll-free number listed on our website or displayed on our programs or
in our advertising. Unique telephone numbers are assigned to each of our
handicappers and to each advertising source, to assist us with identifying
which promotional sources generate the highest revenue. An experienced
account representative receives the call, and offers the customer various
picks, which the customer can purchase individually or in packages, such as a
series of games, sports, or an entire season. Our representatives encourage
package sales, which generate higher revenues. Once the customer has selected
the individual pick or package, the customer pays us for the services via
credit card, check, or cash. Most sales are completed using a credit card.
Upon verified receipt of payment the customer then receives the selected
pick(s) or package(s).
20
During the football and basketball seasons, which combined, extend from
September to March, we maintain a staff of approximately 40 experienced sales
representatives at our telemarketing center located in Las Vegas, Nevada.
During the football season, our weekly television and radio infomercials
generate significant consumer interest in our handicapping information, and a
large portion of our revenues is generated by inbound calls that our account
representatives convert into sales. Each unique inbound call, whether or not
converted to an immediate sale, is added to our database of potential
customers. Outside of football season, when we do not air regular weekly
television infomercials, our account representatives rely more heavily on
contacts within our caller database to sell handicapping information for other
sporting events, such as professional and college basketball and major league
baseball.
Our account representatives have a comprehensive knowledge of sports and
the business of sports betting, although they themselves do not conduct any of
the handicapping analysis. We train our sales representatives thoroughly and
randomly monitor calls for quality assurance. We believe that our sales force
is among the most experienced and professional in our industry. The customer
can chose to receive the picks via a telephone recorded message with the use
of a pin number, via email or directly from his account representative. Our
account representatives, also referred to as sales representatives, are
compensated on a commission basis, with total commissions averaging
approximately 25% of our gross sales. In addition, sales managers may also
receive a small percentage (1-2%) of gross sales achieved by their sales
representatives in excess of predetermined sales targets. We sell the
analysis and picks of our professional handicappers in a variety of packages
and at various prices. Our prices vary by handicapper and by the packages and
picks offered by each handicapper, with higher prices for the picks considered
by our handicappers to have better odds of beating the spread for a particular
game.
Customers may also purchase picks directly from our website, without
interaction with account representatives. Visitors to this site can purchase
both unique packages of picks offered only on our website as well as many of
the picks of our sports handicappers in the same packages and for the same
prices as if they had called our sales office.
In the fall of 2003, we started producing and airing a weekly pay-per-
view expanded version of the Winning EDGE television program called "Wayne
Allyn Root's UltimateEDGE" that aired nationwide on the iNDemand and TVN pay-
per-view network.
OUR STRATEGY
Our goal is to become the leading provider of sports handicapping
information and advice in the United States and the world. Our strategy
includes the following key elements:
EXPAND OUR BUSINESS TO COVER ADDITIONAL SPORTS AND SERVICES AND NEW
GEOGRAPHIC MARKETS. We currently provide handicapping analysis and advice
primarily for football, basketball and baseball in the United States. We have
also begun to cover minor U.S. betting sports such as NASCAR and golf. Our
overall goal is to form strategic alliances to expand our services globally to
cover soccer, cricket, rugby and other heavily wagered sports in Europe and
Asia, where wagering on sporting events is widespread.
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ESTABLISH A GLOBAL BRAND NAME. We plan to vigorously promote our
handicappers and the WinningEDGE brand name and related website. In the Fall
of 2003, we started producing and airing a weekly pay per view expanded
version of Winning EDGE television program called "Wayne Allyn Root's
UltimateEDGE," that aired nationwide on the iNDemand and TVN. We believe
that by hiring only the most insightful handicappers in each field that we
enter, and paying close attention to customer service, we can continue to grow
a satisfied and loyal customer base and establish our brands as the leading
handicapping services in the world.
BUILD STRATEGIC ALLIANCES WITH KEY BUSINESS PARTNERS. We intend to
continue developing strategic relationships with leading sports information
and sports wagering providers and pay per view cable and satellite providers.
We believe that we can enhance our brand recognition through advertising and
co-marketing arrangements with leading television, radio and Internet sports
information and entertainment providers.
EXPAND ADVERTISING SALES. In addition to the sale of handicapping
analysis and advice, we also generate revenues by the sale of advertising
exposure on all of our media properties: television, radio, and the Internet.
We intend to continue to increase these revenues by developing additional
media properties for which we can sell additional sponsorship and advertising
opportunities. Our advertising revenue has grown significantly during the
current year.
COMPETITION
We face competition from numerous operations that sell sports
handicapping information through television infomercials, print media, direct
mail, the Internet, and telemarketing. While we believe that we feature the
leading handicappers in the country, some of our competitors have longer
operating histories, significantly greater financial and marketing resources,
greater name recognition and larger user and membership bases.
Our industry is characterized by a large number of privately held, small
companies and sole proprietorships, and information regarding capitalization,
revenues and market share of these companies is not available. We are unaware
of any independent reporting service which may supply information of this
nature regarding businesses operating in our industry. We believe that our
principal competitor is National Sports Service, Inc., which has a business
model very similar to ours and airs the Proline sports handicapping program on
the USA Network. National Sports Service has been well known in the industry
for the past 25 years. Other major competitors include vegasinsider.com, a
well-known provider of sports gaming information, and formerly a subsidiary
of Sportsline.com, which is a leading online sports information site.
Our primary method of competing with these businesses is employing
handicappers who are well-known and have an established reputation and success
rate, as well as the promotion of our brand name and services and the
successful use of our proprietary database of actual and potential customers.
INTELLECTUAL PROPERTY
We regard the professional reputations of our expert handicappers, and
the methodologies they employ, as important to our ability to maintain and
grow our business. We generally enter into sports personality agreements with
our handicappers to obtain rights to use their name, likeness and services in
connection with our business. The enforceability of these agreements may be
limited in some jurisdictions and, without additional employment agreements,
we cannot prevent our handicappers from terminating their relationships with
us.
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We own the registered trademark "The WinningEdge." We also own the
Internet domain name www.WinningEDGE.com www.TheWinningedge.com as well as
over a dozen other domain names that are pertinent to our business and
industry. We believe that our trade names and other proprietary rights are
important to our brand-building efforts and our marketing concept. However,
we may not be able to enforce our intellectual property rights, which may
cause us to pay significant costs due to litigation, and, if unsuccessful, may
result in a reduction in our ability to remain competitive in our industry.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
Gaming activities are subject to extensive statutory and regulatory
control by both state and federal authorities, and are likely to be
significantly affected by any changes in the political climate and economic or
regulatory policies. We do not engage in gaming and do not accept or place
wagers. The marketing and sale of our handicapping information and analysis
is not currently subject to direct government control, other than regulations
applicable to businesses generally. However, we believe that demand for our
services is related to availability of legal gaming activities. Significant
new restrictions on wagering on sporting events could have a negative impact
on our sales of handicapping information.
All 50 states currently have statutes or regulations restricting or
prohibiting gaming activities. In most states it is illegal for anyone either
to accept or make a wager, although there are exceptions that vary by state,
such as exceptions for pari-mutuel betting in many states. The Federal
Interstate Wire Act contains provisions that make it a crime for anyone in the
business of gaming to use an interstate or international telephone line to
transmit information assisting in the placing of wagers, unless the wagering
is legal in the jurisdictions from which and into which the transmission is
made. Other federal laws also impact gaming activities and further
legislation is being considered in Congress and individual states. However,
none of these regulations currently affects or applies directly to our
business and operations, and we are not aware of any legislation which applies
directly to our business becoming effective in the immediate future.
EMPLOYEES
We have 16 full-time employees (including one of our four handicappers)
and four part-time employees. Three of our handicappers are under sports
personality agreements, each of which is automatically renewable annually.
The fourth, Mr. Root, is a full-time employee and serves as the Chief
Executive Officer of GWIN. Mr. Root has entered into an employment agreement
with GWIN, which expires August 31, 2005. We have also entered into an
employment agreement with Douglas R. Miller, President which expires December
31, 2004. In addition, we have approximately 40 commission-based
telemarketing sales representatives in our Las Vegas sales office during the
peak football and basketball seasons. Our employees are not represented by
any collective bargaining agreement and we have never had a work stoppage. We
believe our employee relations are good.
FACILITIES
We currently lease approximately 7,536 square feet of office space for
our corporate headquarters and sales office in Las Vegas, Nevada, under a
lease that expires on January 22, 2007, with an option to extend the term of
the lease for an additional three years. Our lease for our Las Vegas facility
requires monthly base rental payments of $9,520.
23
LEGAL PROCEEDINGS
There is no pending material legal proceedings, and we are not aware of
any threatened legal proceedings to which we may become a party.
24
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and Officers of GWIN, Inc. are as follows:
Name Age Positions and Offices Held
---- --- --------------------------
Wayne Allyn Root 42 Chairman, CEO and Director
Douglas R. Miller 58 President, COO and Director
Jeff Johnson 45 Chief Financial Officer
Roger Aspey-Kent 60 Director
Robert L. Seale 62 Director
Timothy Michael Whalley 54 Director
Roger L. Harrison 61 Director
There is no family relationship between any of the Directors or the
Executive Officers of GWIN.
The following sets forth biographical information as to the business
experience of each Officer and Director for at least the last five years.
WAYNE ALLYN ROOT has served as our Chief Executive Officer and Chairman
of our Board of Directors since our reorganization in July 2001. From 1999 to
2001, Mr. Root served as Chairman and Chief Executive Officer of our
subsidiary, Global Sports Edge, Inc. From 1990 to 1999, Mr. Root served as a
sports handicapper for National Sports Service. Mr. Root holds a B.A. from
Columbia University.
DOUGLAS R. MILLER has served as our President, Chief Operating Officer,
Secretary and a director since our reorganization in July 2001. Mr. Miller has
also served as our Chief Financial Officer from November 2001 to April 2003.
From 1999 to 2001, Mr. Miller served as President of our subsidiary, Global
Sports Edge, Inc. From 1998 to 1999, Mr. Miller was the Chief Financial
Officer of Body Code International, an apparel manufacturer. Mr. Miller holds
a B.A. degree in economics from the University of Nebraska, and an MBA degree
from Stanford University.
JEFF JOHNSON has served as Chief Financial Officer since May 2003. From
1995 to 2002, Mr. Johnson was the Chief Financial Officer for KNPR Radio. Mr.
Johnson was the Chief Financial Officer for Display Ad for 3 years and prior
to that Mr. Johnson was with the national public accounting firms of Laventhal
& Horwath and Coopers and Lybrand. Mr. Johnson does not hold a directorship
in any public company.
ROGER ASPEY-KENT has been a member of the Board of Directors since
January 1, 2004. He is currently an executive director of a property
development company based in Cyprus and also a non-executive director of a
technology systems company based in London. He is an executive partner of
Falcon Capital which is in the venture capital business operating in various
locations throughout Europe. From 1985 until 1990 he worked in general
management of Credit Commercial de France, in London. From 1980 until 1985 he
worked as a senior associate director of Societe Generale, Merchant Banking.
While at Societe Generale he served as senior corporate finance advisor for
25
equity strategy and he was responsible for corporate syndications in London
and Southeast Asia and for aerospace business development in Asia. From 1963
until 1967 he worked as a corporate finance executive at Lazard Brothers & Co.
Ltd in London where he was responsible for corporate finance activity in
developing markets. Mr. Aspey-Kent currently serves as a director of EIG
Technology Ltd and Marrakesh Properties Ltd.
ROBERT L. SEALE has been a member of the Board of Directors since January
1, 2004. Currently, Mr. Seale is a Principle with GIF Services, Inc., a
Manager of Managers program managing the portfolios of state and local
governments. From January 1999 until December 2002, Mr. Seale served as
Managing Director of Gabelli Fixed Income, LLC where he was responsible for
managing the $2.0 billion portfolio under management as a senior executive.
From 1991 until 1999 he served as the Nevada State Treasurer where he was
responsible for investing the State's $2.1 billion portfolio, managing the $28
billion cash flow, and debt issuance. From 1981 until 1990 he was the
Managing Partner for Pangborn & Co. CPA's in Reno, Nevada. He graduated with
a Bachelor of Science in Accountancy from California State Polytechnic
University in 1964.
TIMOTHY MICHAEL WHALLEY has been a member of the Board of Directors since
January 1, 2004. Mr. Whalley has served as a director and independent
consultant of Pierpont, Monroe & Co. in London since 2000. Pierpont, Monroe &
Co is an international banking consultancy specializing in structured and
trade finance related assignments for corporate and financial institution
clients. From 1997 until 1999 he served as General Manager Banking Division
of Standard Bank London where his responsibilities included Global Head of
Trade Finance and being a member of the credit and country risk committees.
From 1993 until 1998, Mr. Whalley served as a member of the Board of the
African Export-Import Bank, Cairo. From 1995 until 1997 he served as Head of
Trade Finance for the Sumitomo Bank Ltd. From 1978 through 1995 he held
various positions with Standard Chartered Bank. During the last two years he
served as General Manager, Trade and Project Finance. Mr. Whalley received a
BA degree in International Relations from the University of Sussex in 1971.
ROGER L. HARRISON has been a member of the Board of Directors since
January 15, 2004. Since the early 1980's Mr. Harrison has been involved in
creating, producing and directing films. Since 1999 he has been working on
twenty-three projects, three of which are currently considered "hot": Cousins
(Jerry Lee Lewis, Mickey Gilley, Jimmy Swaggart biopic); The Las Vegas
Showgirls Meet the Furry Hamsters from Hell ( a Mel Brooks-type spoof); and a
documentary on capitalism and the republic form of democracy called "The
Perfect Incubator." He is also on the creative team for Sony's upcoming
feature film Police Woman, starring Queen Latifah. Prior to his involvement
with films, Mr. Harrison worked for approximately fourteen years in the
securities industry as an account executive with seven years at Merrill Lynch,
three years as Regional Manager with E.F. Hutton & Co., and four years with
A.G. Edwards. His first film project was The Chosen which he produced during
1981-1983. The Chosen was the winner of the Christopher Award; best film and
best actor (Rod Steiger) at the Montreal Film Festival; and the New York Film
Critics, best screenplay and best director awards.
Our Board of Directors held seven (7) meetings during the fiscal year
ended July 31, 2003. Each Director attended at least 75% of the aggregate
number of meetings held by the Board of Directors during the time each such
Director was a member of the Board.
Our executive officers hold office until the next annual meeting of
directors. There are no known arrangements or understandings between any
director or executive officer and any other person pursuant to which any of
the above-named executive officers or directors was selected as an officer or
director.
26
COMMITTEES
We have two standing committees: the audit committee and the
compensation committee.
AUDIT COMMITTEE
Our current Audit Committee was formed during February 2004. It attends
to and reports to our Board of Directors with respect to matters regarding our
independent public accountants, including, without limitation: annual review
of their charter; approving the firm to be engaged as our independent public
accountants for the next fiscal year; reviewing with our independent public
accountants the scope and results of their audit and any related management
letter; consulting with our independent public accountants and our management
with regard to our accounting methods and adequacy of our internal accounting
controls; approving the professional services rendered by our independent
public accountants; reviewing the independence, management consulting services
and fees of our independent public accountants; inquiring about significant
risks or exposures and methods to minimize such risk; ensuring effective use
of audit resources; and preparing and supervising the Securities and Exchange
Commission reporting requirements. Our Audit Committee currently consists of
Robert L. Seale, Roger Aspey-Kent, and Timothy Michael Whalley.
COMPENSATION COMMITTEE
Our Compensation Committee was formed during February 2004 to attend to
and report to our Board of Directors with respect to the appropriate
compensation of our directors and executive officers and is responsible for
administering all of our employee benefit plans. The Compensation Committee
currently consists of Robert L. Seale and Roger L. Harrison.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to us during our most recent fiscal year, and Forms 5 and amendments
thereto furnished to us with respect to our most recent fiscal year and
certain representations, no persons who were either a director, officer, or
beneficial owner of more than 10% of our common stock, failed to file on a
timely basis reports required by Section 16(a) of the Exchange Act during the
most recent fiscal year.
EXECUTIVE COMPENSATION
The following table sets forth information regarding the executive
compensation for our President during the fiscal year ended July 31, 2003, the
seven months ended July 31, 2002, and the year ended December 31, 2001, and
each other executive officer who had total annual salary and bonus in excess
of $100,000 during such periods.
27
SUMMARY COMPENSATION TABLE
Long-Term Compensation
---------------------------
Annual Compensation Awards Payouts Awards Payouts
---------------------------------- ---------------------------
Securi-
ties
Re- Under- All
stricted lying LTIP Other
Stock Options/ Payout Compen-
Name and Principal Position Year Salary Bonus Awards SARs(#) ($) sation
- --------------------------- ---- ------ ----- -------- ------- ----- ------
Wayne Allyn Root; Chairman & 2003 $175,000 $350,000(1) 2,100,000 -- -- --
Chief Executive Officer 2002* $ 68,000 $163,262 -- -- -- --
2001 $165,000 $227,000 -- -- -- --
Douglas R. Miller; President 2003 $175,000 -- -- -- -- --
2002* $ 92,115 -- -- -- -- --
2001 $173,845 -- -- -- -- --
Hollis Barnhart; Vice 2003 $150,000 $123,929 300,000 -- -- --
President - Sales 2002* $ 87,500 $ 37,304 -- -- -- --
2001 $150,000 $ 71,167 -- -- -- --
________________
* Seven months ending July 31, 2002.
(1) Bonus Compensation for Mr. Root in 2003 includes $161,250 earned but not paid from
handicapping fees.
The following table sets forth information concerning option
exercises and option holdings for the year ended July 31, 2003 with
respect to our Chief Executive Officer and each of our other executive
officers listed above.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR
ENDED JULY 31, 2003 AND OPTION VALUES
AS OF JULY 31, 2003
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
EXERCISE EXPIRATION OPTIONS AT JULY 31,2003 AT JULY 31, 2003
NAME PRICE DATE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- ---------- ----------- ------------- ----------- -------------
Douglas R. Miller $1.41 May 2005 106,551 -- -- --
EMPLOYMENT AGREEMENTS
On July 31, 2003, we entered into a two-year employment agreement with
Wayne Allyn Root pursuant to which Mr. Root is serving as our Chief Executive
Officer and Chairman of the Board of Directors. His compensation includes:
(a) a base salary of $175,000 per year for the first year and 10% of our
operating income for the second year, provided that in no event will the base
salary fall below $175,000 per year or exceed $250,000; (b) handicapping fees
of 10% of Mr. Root's handicapping revenues received by us, not to exceed a
maximum of $350,000 per year during the first year, and not to exceed the
28
greater of $450,000 or 20% of our operating income for subsequent fiscal
years; and (c) a performance bonus in the second year equal to 25% of the
amount in our performance pool; (d) a restricted stock grant in the amount of
2,100,000 shares of our common stock where the stock vests at the rate of
700,000 shares per year with the first 700,000 shares vesting on July 31,
2003; (e) compensation in the event of a change in ownership or control of
GWIN, either friendly or hostile, which includes a minimum annual base salary
of $250,000, the handicapping fee of 12% versus the 10% described above, and
the ceiling will be removed, and all unvested shares will immediately vest;
and other employee benefits provided to senior executives. The agreement also
includes an agreement to indemnify Mr. Root, non-compete provisions and
provision regarding payments in the event of termination of Mr. Root's
employment. As consideration for the issuance of the 2,100,000 restricted
shares, Mr. Root surrendered all written options and warrants which were
issued to him prior to July 31, 2003.
On December 6, 1999, our predecessor entered into a five-year employment
agreement with Douglas Miller pursuant to which Mr. Miller is serving as Chief
Operating Officer. His compensation includes: (a) a base salary which is
now $250,000 per year, although Mr. Miller has voluntarily elected to be paid
$175,000 per year until certain debt obligations of the Company have been
repaid; (b) a bonus within the discretion of the Board of Directors; (c) a car
allowance of $600 per month; and other employee benefits provided to senior
executives. If Mr. Miller is terminated without cause, he will be entitled to
receive the base salary for the remainder of his term plus his base salary for
an additional two years. In the event that Mr. Miller dies or becomes
disabled during the term, we shall continue paying to his legal representative
the base salary for another two years.
DIRECTOR COMPENSATION
Commencing in February 2004, our non-employee directors receive $1,000
for each meeting of our Board of Directors they attend in person. These fees
may be paid in cash or with restricted shares of common stock at the
discretion of the Company. These fees were paid in restricted common stock
for the meeting held in February 2004. We also reimburse our directors for
out-of-pocket expenses incurred to attend meetings of the board.
EQUITY INCENTIVE PLAN
On June 14, 2002, the Board approved a resolution adopting and approving
an Equity Incentive Plan (the "Plan"), reserving 3,000,000 shares of common
stock for issuance under the Plan. On June 18, 2002, the consenting
stockholders signed a consent, whereby they approved the adoption of the Plan.
Under the Plan, options may be issued to directors, officers, key employees,
consultants, agents, advisors, and independent contractors who are in a
position to contribute materially to the prosperity of GWIN. The Plan provides
for the issuance of both incentive stock options, or ISOs, and non-qualified
stock options, or NQSOs. ISOs are issued to employees and NQSOs are generally
issued to non-employees. The number of shares that are subject to ISOs is
limited to the discretion of the Board.
Our board administers the Plan but may delegate such administration to a
committee, which shall consist of at least two members of the board. The board
or the committee has the authority to determine the number of options to be
granted, when the options may be exercised and the exercise price of the
options, provided that the exercise price may never be less than the fair
market value of the shares of the common stock on the date the option is
granted, or 110% in the case of any employee who owns more than 10% of the
combined voting power or value of all classes of stock. Options may be granted
for terms not exceeding ten years from the date of the grant, except for
29
options granted to persons holding in excess of 10% of the common stock, in
which case the options may be granted for a term not to exceed five years from
the date of the grant.
The board believes that the Plan will provide greater flexibility in
structuring compensation arrangements with management, consultants and
employees, and will provide an equity incentive for those who are awarded
shares under the Plan. The issuance of common stock as an award under the Plan
may have a financially dilutive effect depending on the price paid for such
shares, and an absolute dilutive effect due to the increase in issued and
outstanding shares.
During the fiscal year ended July 31, 2003, we issued 1,500,000 options
under the Plan to Newmarket Investment PLC with an exercise price of $.50 per
share, and we issued 310,000 options to employees with an exercise price of
$0.27 per share.
EQUITY COMPENSATION PLAN INFORMATION
Plan category Number of securities Weighted Average Number of securities
to be issued upon ex- exercise price of remaining available
exercise of outstand- outstanding options for future issuance
ing options, warrants warrants and rights
and rights
- -------------- --------------------- ------------------- --------------------
Equity compen-
sation plans
approved by
securityholders 1,140,000 $ 0.80 2,144,000
- --------------------------------------------------------------------------------
Equity compen-
sation plans
not approved by
securityholders -0- -0- -0-
- --------------------------------------------------------------------------------
Total 1,140,000 $ 0.80 2,144,000
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 2001, we sold 64,000 units consisting of one share of Series C
Convertible Preferred stock and one warrant exercisable at $1.00 for an
additional share of Series C stock for a price of $1,500,000. The base
conversion rate was adjusted in the quarter ended October 31, 2001. In the
quarter ended October 31, 2002, there was an additional adjustment to the
conversion rate resulting from anti-dilution provisions in the purchase
agreement. In April 2003 all of the Series C Convertible Preferred
stockholders converted their shares to 10,000,000 Common shares and they
continue to hold warrants to purchase 1,910,000 shares of common stock at
$1.00 per share. These warrants expire on July 10,2004. Approximately
one-third of these shares were issued to Mr. Keating and affiliates of Mr.
Keating. Mr. Keating was a director from August 1999 until October 8, 2003.
In connection with the reorganization and sale of Series C preferred
stock in July 2001, Keating Investments, LLC received a placement fee of
$150,000 for services rendered in connection with the private placement of our
Series C preferred stock. Timothy J. Keating, a Director from August 1999
until October 8, 2003, and our former President and Chief Executive Officer,
is the Managing Member and President of Keating Investments, LLC. This fee
represents 10% of the amount of gross proceeds from the placement.
30
On September 4, 2001, we sold to Keating Partners, L.P., for an aggregate
purchase price of $200,000, a total of 400,000 shares of our common stock,
together with a warrant to purchase an additional 400,000 shares at an
exercise price of $1.00 per share expiring on August 31, 2004. This
transaction triggered the anti-dilution adjustment provisions of our Series C
preferred stock, of which 36,694 shares were beneficially owned by Mr.
Keating, resulting in an adjustment in the conversion rate for the Series C
preferred stock from 31.25 to 46.875 shares of common stock for every one
share of Series C preferred stock.
In September 2001, we entered into a 4-year financial advisory agreement
with Keating Investments, LLC. In consideration for the services to be
rendered pursuant to this agreement, we issued Keating Investments, LLC a
warrant to purchase 600,000 shares of our common stock at an exercise price of
$0.10 per share, exercisable until September 10, 2006. In March 2003, we
negotiated a settlement with Keating Investments pursuant to which we issued
218,916 shares of common stock in exchange for the outstanding warrants and
consulting services which has been performed for GWIN.
In November 2001, we borrowed money from and entered into note payable
agreements with Mr. Root, an officer and director, and Mr. Keating, a former
director, for $50,000 each which accrue interest at 12% annually. At July 31,
2003, we had a principal balance of $100,000 outstanding under these
agreements with accrued interest of $19,496.
In September 2002, we entered into an agreement with Newmarket
Investments, plc ("Newmarket"), an existing convertible debenture holder,
which provided that Newmarket invest an additional $700,000 in GWIN by
amending the existing $500,000 convertible debenture held by Newmarket to
reflect a principal amount of $1,200,000. The Anti-Dilution provisions on
the combined $1,200,000 convertible debenture provided that 5,802,199
additional shares be issued upon conversion. The total Newmarket convertible
debenture shares upon conversion was 9,230,769. In addition, we agreed to
exchange an existing warrant held by Newmarket to acquire 1,000,000 shares of
common stock at $1.00 per share for a warrant to acquire 3,000,000 shares of
common stock at $0.13 per share. This Warrant expires on August 31, 2005.
Newmarket also extended an unsecured standby credit facility of $250,000 with
a 16% annual interest rate, and payable on March 31, 2003. We were in default
and owed $100,000 principal and interest of $31,023 as of October 14, 2003. In
connection with these transactions, we also issued to Newmarket a three year
option to purchase 1,500,000 shares at a price per share of $0.50. The option
expires July 31, 2006. Simon Hayes, a director of GWIN from December 2002
until October 8, 2003, is a Director of Newmarket. During the six months
ended January 31, 2004, the entire $1,200,000 debenture was converted into
9,230,769 shares of common stock.
During April 2004, we issued 1,190,625 shares to Wayne Allyn Root, the
Company's Chairman and President, and 200,000 shares to the assignee of Mr.
Root as payment for $111,250 in commissions which was owed to Mr. Root.
31
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of shares of our
$.0001 value common stock owned beneficially, as of April 12, 2004, by any
person, who is known by us to be the beneficial owner of 5% or more of such
common stock, by all Directors and Executive Officers individually, and by all
Directors and Executive Officers as a group. Information as to beneficial
ownership is based upon statements furnished to us by such persons.
Amount of
Name and Address Beneficial Percentage
of Beneficial Owner (1) Ownership of Class
- ------------------- -------------- ----------
Wayne Allyn Root 5,947,262 (2) 7.9%
Douglas R. Miller 3,542,370 (3) 4.7%
Roger Aspey-Kent 714,666 (4) *
Timothy Michael Whalley 806,666 (5) 1.1%
Robert L. Seale 6,666 *
Roger L. Harrison 6,666 *
Jeff Johnson -0- -0-
Hollis Barnhart 200,000 (6) *
Newmarket Investments plc 8,724,614 (7) 11.1%
10 St. Georges Yard
Rafnham, Surrey
GU9 7LW
England
All Officers and Directors 11,224,296 14.7%
as a group (8 persons)
_______________
* Less than one percent.
(1) Unless otherwise noted, the address for each of the named beneficial
owners is 5092 South Jones Blvd., Las Vegas, Nevada 89188.
(2) Does not include 1,400,000 shares which will vest as follows: 700,000
shares on July 31, 2004 and 700,000 shares on July 31, 2005.
(3) Includes 36,568 shares held directly by Mr. Miller; and 3,505,802
shares held in the name of the Kerlee Intervivos Trust of which Mr.
Miller is a beneficiary.
(4) Includes 356,666 shares held directly by Roger Aspey-Kent and 358,000
shares underlying currently exercisable warrants.
(5) Includes 581,666 shares held directly by Mr. Whalley and 225,000
shares underlying currently exercisable warrants.
(6) Does not include 100,000 shares which will vest during June 2004.
32
(7) Includes 5,484,614 shares held directly by Newmarket; 1,740,000 shares
underlying warrants held by Newmarket; and 1,500,000 shares underlying
options held by Newmarket.
33
SELLING SHAREHOLDERS
The securities being offered hereby are 45,660,002 shares being offered
for resale by certain shareholders. Of those shares, the selling shareholders
currently hold 40,017,002. Up to 5,643,000 shares are issuable upon exercise
of warrants and options held by the selling shareholders. The shares are
being offered for the account of shareholders in the table below and their
donees or pledgees.
The following table sets forth information concerning the selling
shareholders, including:
* the maximum number of shares currently held to be offered;
* the number of shares issuable upon exercise of warrants or options;
* the number of shares offered by each selling shareholder.
We have no knowledge of the intentions of any selling shareholder to actually
sell any of the securities listed under the columns "Shares Offered." There
are no material relationships between any of the selling shareholders and GWIN
other than as disclosed below.
Ownership Before Offering
----------------------------------------
Shares
Number of Issuable
Shares on Exer-
Currently cise of
Held to be Warrants Shares
Selling Shareholder Offered or Options Offered
- ------------------- ---------- ---------- ----------
Hanny Abdelnour 313,333 50,000 363,333
African Trading & Forfaiting Ltd. 2,000,000 0 2,000,000
Goeran Appelgren 100,000 0 100,000
Margaret A. Archer 100,000 0 100,000
Roger Aspey-Kent (1) 225,000 358,000 583,000
B G C Trench 80,000 0 80,000
Mikael Bartroff 133,333 0 133,333
Ahmet Bayratar 106,667 0 106,667
Bos Antigua 200,000 0 200,000
Steve Brady 210,000 0 210,000
Ian Bundock 333,333 0 333,333
Leo Burghount 431,414 0 431,414
Robert Buthker 30,000 75,000 105,000
Caroline Canwell 264,167 0 264,167
S. Canwell 264,167 0 264,167
Stuart Canwell 500,000 179,000 679,000
S. Canwell on behalf of
Max Robert Stuart Canwell 106,667 0 106,667
Marco Castaldo 0 25,000 25,000
Michael Chamier 250,000 125,000 375,000
Russell Chance 266,667 0 266,667
Brent Clapacs & Patrice Clapacs
Family Trust 104,716 0 104,716
Lynn Clarke 26,000 0 26,000
M. H. Clarke 27,333 0 27,333
Steve Cohen 833,333 270,000 1,103,333
Peter Davies 20,000 0 20,000
Eagle Consulting 50,000 0 50,000
34
Eclips Ventures International 250,000 0 250,000
Ibrahim Eitani & Masimeh Daghar
Jt Ten 133,333 0 133,333
Patrick El-Fadel 100,000 0 100,000
Mustafa Erhan 126,667 0 126,667
Martin Evans 266,667 0 266,667
Harry Fellows 66,667 0 66,667
Edward J. Fishman & Jane Nelson
Fishman, Trustees 472,756 0 472,756
Anthony Fletcher 150,000 0 150,000
John Flynn 216,000 0 216,000
Danielle Forsgren 149,985 0 149,985
Fox and Three Hounds Capital
Partners 250,000 0 250,000
1,940,000
Foxdale Consulting Ltd. 157,507 0 157,507
Anthony Gibbs 308,667 0 308,667
Wilheim Giertsen 83,333 67,000 150,333
Giancarlo Giordano 233,333 0 233,333
Bruce Glasco 33,333 0 33,333
George Glasco 33,333 0 33,333
Diana Gough 788,334 0 788,334
Valerie Greenhalgh 75,000 0 75,000
Magnus Gundersen 500,000 0 500,000
John Herbert 266,667 0 266,667
Andrew Highman 26,667 0 26,667
Phil Holland 400,000 0 400,000
Alan Hollis 133,333 0 133,333
Hillary Jamal 66,667 0 66,667
Ingl Johansson 50,000 0 50,000
Kerlee Intervivos Trust (2) 3,505,802 0 3,505,802
Gert Kristensson 100,000 0 100,000
Laurus Master Fund Ltd. 1,500,000 400,000 1,900,000
Victor Lundie 333,333 0 333,333
Torben Maersk 1,000,000 0 1,000,000
Bruce McGowan 66,667 0 66,667
Gerard McGrath 202,154 0 202,154
Mark McVeigh 1,066,666 0 1,066,666
Paul Melton 106,667 0 106,667
Douglas R. Miller (2) 36,568 0 36,568
Peter Motion 33,333 0 33,333
Peter J.A. Motion 33,334 0 33,334
Thomas Muehlbauer 0 400,000 400,000
George Najm 666,667 0 666,667
Laurens Narraina 500,000 0 500,000
Nerine Trust Co. Ltd. TTEE
FBO The Anchor Trust 1,000,000 0 1,000,000
Newmarket Investments plc 5,484,614 3,240,000 8,724,614
Alfonso Pannone 200,000 0 200,000
Richard Parris 100,000 179,000 279,000
Hannu Pelttari 75,000 0 75,000
Brian Perry 666,666 0 666,666
Ann Teunissen Phipps 430,000 0 430,000
Post Kirby Noonan & Sweat LLP 16,665 50,000 66,665
Quikcap Corp. 136,995 0 136,995
S. J. Ralph & S. A. Ralph 161,806 0 161,806
Andy Roberts 43,333 0 43,333
Wayne Allyn Root (3) 5,947,262 0 5,947,262
Mark Shoptaugh 666,667 0 666,667
Richard Smallbone 53,333 0 53,333
Raymond Smith 140,000 0 140,000
35
Mohamad Khaled Tabbah 60,000 0 60,000
Catherine Tate 106,093 0 106,093
Robert Tetlow 567,334 0 567,334
Sarah Tetlow 133,333 0 133,333
Tom Teunissen 33,333 0 33,333
Tracy Todd 105,333 0 105,333
Dave Townend 20,000 0 20,000
Barry Trench 20,000 0 20,000
Harry Teunissen 66,667 0 66,667
Alex Tuppman 65,333 0 65,333
Richard Tuppman 33,333 0 33,333
Jean Pierre Van der Broeck 1,000,000 0 1,000,000
Chris Van Kordelaar 33,333 0 33,333
Timothy M. Whalley (4) 325,000 225,000 550,000
Sarah Wild 753,333 0 753,333
Sarah Wild TTEE 106,666 0 106,666
---------- --------- ----------
Total 40,017,002 5,643,000 45,660,002
___________________
(1) Roger Aspey-Kent is a director of the Company.
(2) Douglas R. Miller is the beneficiary of Kerlee Intervivos Trust. Mr.
Miller is President, COO and a director of the Company.
(3) Wayne Allyn Root is Chairman, CEO and a director of the Company.
(4) Timothy M. Whalley is a director of the Company.
The beneficial ownership of the selling shareholders after the offering
would be zero, except for the following persons:
Beneficial Ownership
After Offering
---------------------------
Number of Percent
Shares Held of Class
-------------- --------
Roger Aspey-Kent 131,666 *
Timothy Michael Whalley 256,666b *
The information concerning the selling shareholders may change from time
to time and will be set forth in supplements to this prospectus.
36
PLAN OF DISTRIBUTION
The selling shareholders and their successors, including their
transferees, pledgees or donees of their successors, may sell the common stock
directly to purchasers or through underwriters, broker-dealers or agents, who
may receive compensation in the form of discounts, concessions or commissions
from the selling holders or the purchasers. These discounts, concessions or
commissions as to any particular underwriter, broker-dealer or agent may be in
excess of those customary in the types of transactions involved.
The common stock may be sold in one or more transactions at fixed prices,
at prevailing market prices at the time of sale, at prices related to the
prevailing market prices, at varying prices determined at the time of sale, or
at negotiated prices. These sales may be effected in transactions, which may
involve crosses or block transactions:
- on any national securities exchange on which the common stock
may be listed, or U.S. inter-dealer system of a registered national
securities association on which the common stock may be listed or
quoted at the time of sale;
- in the over-the-counter market;
- in transactions otherwise than on these exchanges or systems or
in the over-the-counter market; or
- through the writing of options, whether the options are listed on
an options exchange or otherwise.
In connection with the sale of the common stock or otherwise, the selling
shareholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume.
The aggregate proceeds to the selling shareholders from the sale of the
common stock offered by them will be the purchase price of the common stock
less discounts and commissions, if any. Each of the selling shareholders
reserves the right to accept and, together with their agents from time to
time, to reject, in whole or in part, any proposed purchase of common stock to
be made directly or through agents. We will not receive any of the proceeds
from this offering.
In order to comply with the securities laws of some states, if
applicable, the common stock may be sold in these jurisdictions only through
registered or licensed brokers or dealers. In addition, in some states the
common stock may not be sold unless they have been registered or qualified for
sale or an exemption from registration or qualification requirements is
available and is complied with.
The selling shareholders and any underwriters, broker-dealers or agents
that participate in the sale of the common stock may be "underwriters" within
the meaning of Section 2(11) of the Securities Act. Any discounts,
commissions, concessions or profit they earn on any resale of the shares may
be underwriting discounts and commissions under the Securities Act. Selling
shareholders who are "underwriters" within the meaning of Section 2(11) of the
Securities Act will be subject to the prospectus delivery requirements of the
Securities Act. The selling shareholders have acknowledged that they
understand their obligations to comply with the provisions of the Exchange Act
and the rules thereunder relating to stock manipulation, particularly
Regulation M.
37
In addition, any securities covered by this prospectus that qualify for
sale pursuant to Rule 144 of the Securities Act may be sold under Rule 144
rather than pursuant to this prospectus. A selling shareholder may not sell
any common stock described in this prospectus and may not transfer, devise or
gift these securities by other means not described in this prospectus.
To the extent required, the specific common stock to be sold, the names
of the selling shareholders, the respective purchase prices and public
offering prices, the names of any agent, dealer or underwriter, and any
applicable commissions or discounts with respect to a particular offer will be
set forth in an accompanying prospectus supplement to, if appropriate, a post-
effective amendment to the registration statement of which this prospectus is
a part.
We will pay all of the expenses incurred in connection with the
registration of the common stock.
38
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of GWIN, Inc. consists of 150,000,000
shares of common stock, $.0001 par value. All shares have equal voting rights
and are not assessable. Voting rights are not cumulative, and, therefore, the
holders of more than 50% of our common stock could, if they chose to do so,
elect all the Directors.
Upon liquidation, dissolution or winding up of GWIN, Inc., our assets,
after the payment of liabilities and any liquidation preferences on
outstanding preferred stock, will be distributed pro rata to the holders of
the common stock. The holders of the common stock do not have preemptive
rights to subscribe for any of our securities and have no right to require us
to redeem or purchase their shares. The shares of common stock presently
outstanding are, and the shares of common stock to be sold pursuant to this
offering will be, upon issuance, fully paid and nonassessable.
Holders of common stock are entitled to share equally in dividends when,
as and if declared by the board of directors of GWIN, Inc., out of funds
legally available therefor. We have not paid any cash dividends on our
common stock, and it is unlikely that any such dividends will be declared in
the foreseeable future.
TRANSFER AND WARRANT AGENT
Colonial Stock Transfer, 66 Exchange Place, Salt Lake City, Utah 84111,
serves as our Transfer Agent.
REPORTS TO STOCKHOLDERS
We plan to furnish our stockholders for each fiscal year with an annual
report containing financial statements audited by our independent certified
public accountants. Additionally, we may, in our sole discretion, issue
unaudited quarterly or other interim reports to our stockholders when we deem
appropriate.
PREFERRED STOCK
GWIN, Inc. is authorized to issue 5,000,000 shares of Preferred Stock,
$.0001 par value. The Preferred Stock may be issued in series from time to
time with such designation, rights, preferences and limitations as our board
of directors may determine by resolution. The rights, preferences and
limitations of separate series of Preferred Stock may differ with respect to
such matters as may be determined by the board of directors, including,
without limitation, the rate of dividends, method and nature of payment of
dividends, terms of redemption, amounts payable on liquidation, sinking fund
provisions (if any), conversion rights (if any), and voting rights. The
potential exists, therefore, that preferred stock might be issued which would
grant dividend preferences and liquidation preferences to preferred
shareholders over common shareholders. Unless the nature of a particular
transaction and applicable statutes require such approval, the board of
directors has the authority to issue these shares without shareholder
approval. The issuance of Preferred Stock may have the affect of delaying or
preventing a change in control of GWIN, Inc. without any further action by
shareholders. As of the date of this Prospectus, no Preferred Stock is
outstanding.
39
LEGAL MATTERS
The validity of the shares of common stock of GWIN, Inc. offered hereby
will be passed on for us by Krys Boyle, P.C., 600 17th Street, Suite 2700
South Tower, Denver, Colorado 80202.
EXPERTS
The balance sheets of GWIN, as of December 31, 2001 and July 31, 2002,
and the related statements of operations, changes in stockholders' equity
(deficit) and cash flows for the periods then ended, included in this
prospectus have been audited by Moore Stephens, P.C., independent auditors, as
stated in their report appearing herein (which report expresses an unqualified
opinion and includes an explanatory paragraph relating to our ability to
continue as a going concern). The balance sheet of GWIN as of July 31, 2003,
and the related statements of operations, changes in stockholders' equity
(deficit), and cash flows of GWIN for the year ended July 31, 2003, have been
audited by Demetrius & Company, L.L.C., independent auditors, as stated in
their report included herein (which report expresses an unqualified opinion
and includes an explanatory paragraph relating to the our ability to continue
as a going concern). Such financial statements of GWIN are included herein in
reliance upon the respective reports of such firms given upon their authority
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2, including exhibits, schedules and amendments, under
the Securities Act with respect to the shares of common stock to be sold in
this offering. This prospectus does not contain all the information included
in the registration statement. For further information about us and the
shares of our common stock to be sold in this offering, please refer to this
registration statement. Complete exhibits have been filed with our
registration statement on Form SB-2.
You may read and copy any contract, agreement or other document referred
to in this prospectus and any portion of our registration statement or any
other information from our filings at the Securities and Exchange Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You
can request copies of these documents, upon payment of a duplicating fee, by
writing to the Securities and Exchange Commission. Please call the Securities
and Exchange Commission at 1-800-SEC-0330 for further information about the
public reference room. Our filings with the Securities and Exchange
Commission, including our registration statement, are also available to you on
the Securities and Exchange Commission's web site, http://www.sec.gov.
We are subject to the information and reporting requirements of the
Securities Exchange Act of 1934, and file and furnish to our stockholders
annual reports containing financial statements audited by our independent
auditors, make available to our stockholders quarterly reports containing
unaudited financial data for the first three quarters of each fiscal year,
proxy statements and other information with the Securities and Exchange
Commission.
You may read and copy any reports, statements or other information on
file at the public reference rooms. You can also request copies of these
documents, for a copying fee, by writing to the Commission.
40
GWIN, INC.
FINANCIAL STATEMENTS
Page
Consolidated Balance Sheet at January 31, 2004 (Unaudited) ...... F-2
Consolidated Statements of Operations for the six month
periods ended January 31, 2004 and 2003 (Unaudited) ............. F-3
Consolidated Statements of Cash Flows for the six month
periods ended January 31, 2004 and 2003 (Unaudited) ............. F-4
Notes to Financial Statements ................................... F-5
Independent Auditor's Report .................................... F-8
Independent Auditor's Report .................................... F-9
Consolidated Balance Sheet - July 31, 2003 ...................... F-10
Consolidated Statements of Operations for the year ended
July 31, 2003, the seven months ended July 31, 2002, and the
year ended December 31, 2001 .................................... F-11
Consolidated Statements of Cash Flows for the year ended
July 31, 2003, the seven months ended July 31, 2002, and the
year ended December 31, 2001 .................................... F-12
Consolidated Statement of Stockholders' Equity for the year
ended July 31, 2003, the seven months ended July 31, 2002, and
the year ended December 31, 2001 ................................ F-13
Notes to Consolidated Financial Statements ...................... F-15
F-1
GWIN, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
January 31, 2004
ASSETS
Current assets:
Cash $ 34,470
Accounts receivable 242,002
------------
Total current assets 276,472
------------
Property & equipment (net) 66,786
Equipment held under capital leases (net) 10,712
Deposits & other assets 96,016
------------
Total assets $ 449,986
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt, less
unamortized discount of $29,764 $ 503,994
Accounts payable - related parties 287,681
Notes payable related parties 200,000
Deferred revenue 420,534
Accounts payable 580,444
Accrued settlement costs 182,806
Other accrued liabilities 24,817
------------
Total current liabilities 2,200,276
------------
Long term debt 51,053
------------
Total liabilities 2,251,329
------------
Stockholders' deficit:
Preferred stock - $0.0001 par value; 5,000,000
shares authorized; 9 shares issued and outstanding 0
Common stock - $0.0001 par value; 150,000,000 shares
authorized; 65,850,897 issued and outstanding 6,585
Additional paid in capital 22,687,876
Accumulated deficit (24,399,137)
Prepaid Expenses -Related Parties (96,667)
------------
Total stockholders' deficit (1,801,343)
------------
Total liabilities and stockholders' deficit $ 449,986
============
F-2
GWIN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six months ended
January 31,
2004 2003
----------- -----------
Net revenue - services $ 4,189,321 $ 4,336,783
Revenues - advertising 577,076 133,334
----------- -----------
Total revenues $ 4,766,397 $ 4,470,117
----------- -----------
Handicapping fees 172,074 184,444
Handicapping fees - related party 265,585 283,523
Advertising expense 1,579,199 2,202,707
Commissions 1,415,140 1,587,015
Salaries & wages 628,903 722,846
Professional fees 137,047 350,768
General and administrative 814,738 917,232
Non-recurring charges; bad debt expense 8,565 0
Depreciation expense 22,858 120,612
---------- -----------
Total operating expense 5,044,109 6,369,147
---------- -----------
Operating income (loss) (277,712) (1,899,030)
Non-cash financing costs 0 (73,170)
Interest (expense), including
amortization of debt discount (163,405) (529,952)
Other non-cash cost of financing (95,000) (708,360)
Interest (expense) - related parties (65,226) (52,093)
---------- -----------
Net (loss) (601,343) (3,262,605)
---------- -----------
Imputed non-cash dividend on
Series C Preferred Stock 0 (385,714)
---------- -----------
Net (loss) used in per share
calculation $ (601,343) $(3,648,319)
========== ===========
Basic and diluted (loss)
per share of common stock $ (0.01) $ (0.17)
========== ===========
Basic and diluted weighted
shares of common stock
outstanding 58,858,402 21,733,720
========== ==========
F-3
GWIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
January 31,
------------------------
2004 2003
--------- -----------
Cash flows - operating activities:
Net (loss) $(601,343) $(3,262,605)
Adjustments to reconcile net (loss) to net cash used in operations:
Depreciation 22,858 120,612
Services paid with warrants -- 30,000
Services & settlements paid with common stock and warrants 95,000 251,904
Interest expense - issuance of convertible debt -- 781,530
Interest expense - issuance of convertible debt (warrants portion) -- 426,412
Interest expense - amortization of debt discount 155,141 --
Amortization of Pre-paid Expenses - Related Parties 30,000 --
Decrease (increase) in:
Accounts receivable (204,529) (18,024)
Prepaid expenses 25,347 135,534
Other assets (75,066) 44,277
Increase (decrease) in:
Deferred revenue (94,893) 465,666
Accounts payable (12,138) (39,189)
Accounts payable - related parties (4,003) --
Accrued settlement costs 182,806 --
Other current liabilities (82,155) (162,826)
--------- -----------
Total adjustments 38,368 2,240,896
--------- -----------
Total cash (used in) operating activities (562,975) (1,021,709)
--------- -----------
Cash flows - investing activities:
Purchase of fixed assets (43,447) (22,488)
--------- -----------
Total cash used in investing activities (43,447) (22,488)
--------- -----------
Cash flows - financing activities:
Proceeds from issuance of long-term debt, net of discount 0 1,027,952
Payments on long-term debt & lease obligations (207,715) (186,760)
Proceeds from issuance of common stock 427,793 0
--------- -----------
Total cash provided by financing activities 220,078 841,192
--------- -----------
Net (decrease) in cash (386,344) (203,005)
Cash - beginning of the periods 420,814 324,786
--------- -----------
Cash - end of the periods $ 34,470 $ 121,781
========= ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: For the
six months ended January 31, 2004 and 2003, the Company paid $ 0 for taxes and
$41,583 for interest and $ 0 for taxes and $103,540 for interest,
respectively. The Company issued stock and warrants in payment for
professional services and settlement costs. For the six months ended January
31, 2004 and 2003, the amounts were $95,000 and $251,904, respectively. The
Company issued stock for the redemption of debt and the related accrued
interest in the amount of $1,625,559 and $0 in the six month periods ended
January 31, 2004 and 2003, respectively.
F-4
GWIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Organization and Operations
GWIN, Inc. (the "Company") is headquartered in Las Vegas, Nevada. The
Company primarily develops, produces and markets sports handicapping analysis
and information via television, radio and the Internet.
The Company is engaged in a highly seasonal business, with the majority
of sales related to football and basketball handicapping with a smaller amount
related to baseball handicapping. Due to this seasonality, quarterly results
may vary materially between the football, basketball, and baseball seasons,
with sales higher in the first and the second quarter of the Company's fiscal
year, and lower sales during the remainder of the year. The Company also
spends the majority of its advertising and promotional budgets during the
first and second quarter with only minimal advertising and promotional
expenditures during the remainder of the year.
In addition to revenues from the sales of handicapping analysis,
information, and advice, the Company also generates revenues from the sale of
advertising on its television, radio, and Internet shows and properties.
NOTE 2 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary in
order to make the interim financial statements not misleading have been
included. Results for the interim periods are not necessarily indicative of
the results that may be expected for the fiscal year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended July 31, 2003. The results of the three and six month periods ended
January 31, 2004 are not necessarily indicative of the results to be expected
for the full year ending July 31, 2004.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiary, Global Sports EDGE, as
well as several inactive subsidiaries. All significant inter-company accounts
and transactions have been eliminated in consolidation.
Earnings (Loss) Per Share - "Basic" earnings (loss) per share equals net
income divided by weighted average common shares outstanding during the
period. "Diluted" earnings per common share equals net income divided by the
sum of weighted average common shares outstanding during the period plus
common stock equivalents if dilutive. For the six months ended January 31,
2004 and 2003, the number of common stock equivalents excluded from the
calculation were 4,745,598 and 22,832,108 respectively.
Stock Options and Similar Equity Instruments - The Company has adopted
the disclosure requirements of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," for stock options
and similar equity instruments (collectively "Options") issued to employees
and directors; however, the Company will continue to apply the intrinsic value
based method of accounting for options issued to employees prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" rather than the fair value based method of accounting
prescribed by SFAS No. 123. SFAS No. 123 also applies to transactions in which
F-5
an entity issues its equity instruments to acquire goods and services from
non-employees. Those transactions must be accounted for based on the fair
value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. No options were
granted during the three and six month periods ended January 31, 2004 and
2003.
Revenue Recognition
Handicapping Service Agreements - Revenue from handicapping service
agreements is recognized ratably, as services are rendered in proportion to
the total services to be provided under the agreements. At January 31, 2004
the Company had received approximately $421,000 for handicapping services not
rendered by that date; this amount is classified as a component of current
liabilities on the Balance Sheet.
Advertising Agreements - Revenue from advertising agreements is
recognized over the term of the agreements based on individual showings of the
advertising in proportion to the total showings during the term of the
agreement. At January 31, 2004 the Company had received no payments for
advertising services not rendered by that date.
Operating Costs & Expenses - Handicappers' fees and sales
representatives' compensation and related expenses are charged to operations
as incurred because the Company believes these costs have no future economic
benefit.
Convertible Debentures - We previously entered into an agreement with
Newmarket Investments, plc ("Newmarket"), which provided that Newmarket invest
$1,200,000 in the Company in exchange for a convertible debenture. In October
2003, Newmarket converted $500,000 of the convertible debenture into 3,846,154
shares of common stock. In January 2004, Newmarket converted the remaining
balance of $700,000 of the convertible debenture into 5,384,615 additional
shares of common stock.
Convertible Preferred Stock - The Company has no convertible preferred
stock issued and outstanding at January 31, 2004 .
NOTE 3 - Going Concern
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates continuation
of the Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business.
The Company incurred a net loss of $601,343 for the six months ended
January 31, 2004 and has an accumulated deficit of $24,399,137 at January 31,
2004. The operating losses, as well as uncertain sources of financing, create
an uncertainty about the Company's ability to continue as a going concern.
Management of the Company plans to generate sufficient cash to support
operations by raising additional financing by selling shares of our common
stock through private offerings to accredited investors. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue
in existence.
NOTE 4 - Commitments
Legal Matters - In the normal course of business, the Company is exposed
to a number of asserted and unasserted potential claims. Management, after
review of amounts accrued and consultation with counsel, believes it has
meritorious defenses and considers that any additional liabilities from these
F-6
matters would not materially affect the financial position, liquidity or
results of operations of the Company. The Company is not currently a party to
any legal proceedings either as a defendant or as a plaintiff.
In March 2003, the Company renegotiated a payment schedule from a dispute
with a former landlord regarding the former corporate headquarters for the
Company. The Company agreed to make monthly payments of $15,000 until the
settlement is paid in full. The balance at January 31, 2004 is $172,806 and is
accounted for as a component of accounts payable.
NOTE 5 - Tax Expense
The Company has not accrued income tax expense for the periods ended
January 31, 2004 and 2003 at its statutory rates due to unused net operating
losses and acquired net operating losses.
F-7
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
GWIN, Inc.
We have audited the accompanying consolidated balance sheet of GWIN, Inc. and
subsidiary at July 31, 2003, and the related consolidated statements of
operations, cash flows and stockholders' deficit for the year ended July 31,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides 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 GWIN, Inc. and
subsidiary as of July 31, 2003, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the company will continue as a going concern. As discussed in Note 3 to
the consolidated financial statements, the Company has experienced losses from
operations, working capital deficiency and accumulated deficit that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/DEMETRIUS & COMPANY, L.L.C.
Wayne, New Jersey
November 6, 2003
F-8
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of GWIN, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' deficit, and cash flows for the seven month period ended July
31, 2002 and the twelve months ended December 31, 2001of GWIN, Inc. (formerly
Global Sports & Entertainment, Inc.), and subsidiary. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated statements of operations, stockholders'
deficit, and cash flows referred to above present fairly, in all material
respects, the results of their operations and their cash flows for the seven
month period ended July 31, 2002 and the twelve months ended December 31, 2001
in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated statements of operations, stockholders' deficit,
and cash flows referred to above have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 3 to the consolidated
financial statements, the Company has suffered a loss from operations, has a
working capital deficiency and accumulated deficit that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
October 11, 2002
F-9
GWIN, Inc.
Consolidated Balance Sheet
July 31, 2003
Assets
Current assets:
Cash $ 420,814
Accounts receivable 37,473
Prepaid expenses 25,347
------------
Total current assets 483,634
Property & equipment (net) 33,718
Equipment held under capital lease (net) 23,191
Deposits & other assets 147,617
------------
Total assets $ 688,160
============
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long term debt $ 577,664
Deferred revenue 515,427
Accounts payable 592,582
Notes & accounts payable - related parties 1,909,416
Other current liabilities 128,702
------------
Total current liabilities 3,723,791
Long term debt, less unamortized discount 216,053
------------
Total liabilities 3,939,844
Stockholders' deficit:
Convertible preferred stock (Par value $0.0001
per share; 5,000,000 shares authorized;
-0- shares issued and outstanding) 0
Common stock (Par value $0.0001 per share;
100,000,000 shares authorized; 52,375,492
shares issued and outstanding) 5,238
Additional paid in capital 20,540,872
Accumulated deficit (23,797,794)
------------
Total stockholders' deficit (3,251,684)
------------
Total liabilities and stockholders' deficit $ 688,160
============
F-10
GWIN, Inc.
Consolidated Statements of Operations
Seven Months Year Ended
Year Ended ended December 31,
July 31, 2003 July 31, 2002 2001
------------- ------------- ------------
Net revenue - services $5,720,582 $2,765,232 $3,083,314
Revenues - advertising 206,334 261,998 157,168
------------ ------------ ------------
Total revenues 5,926,916 3,027,230 3,240,482
------------ ------------ ------------
Handicapping fees 304,425 103,518 196,847
Handicapping fees - related party 350,000 160,739 227,155
Advertising expense 2,342,432 194,755 2,160,245
Compensation 3,009,837 1,463,067 2,024,074
Professional fees 532,354 868,148 556,201
General and administrative 1,624,464 864,629 1,238,880
Bad debt expense - TurfClub 0 0 377,000
Non-recurring charge 40,000 608,525 866,453
Depreciation expense 225,270 134,966 230,997
------------ ------------ ------------
8,428,782 4,398,347 7,877,852
------------ ------------ ------------
Operating loss (2,501,866) (1,371,117) (4,637,370)
Non-cash financing costs - penalty
shares - employment agreement (775,212) 0 0
Interest expense, including amortization
of debt discount (636,999) (459,008) (887,659)
Other non-cash cost of financing (2,701,676) (236,329) 0
Interest expense - related party (525,808) (8,989) (2,323)
------------ ------------ ------------
(Loss) before income taxes (7,141,561) (2,075,443) (5,527,352)
Income tax 0 0 0
------------ ------------ ------------
Net (loss) (7,141,561) (2,075,443) (5,527,352)
Imputed non-cash dividend on Series C
Preferred Stock (1,798,571) 0 (1,092,000)
------------ ------------ ------------
Net (loss) used in per share
calculation $ (8,940,132) $ (2,075,443) ( $6,619,352)
============ ============ ============
Basic and diluted (loss) per share of
common stock:
Net (loss) per share ($0.31) ($0.10) ($0.35)
============ ============ ============
Basic and diluted weighted average
number of shares of common stock
outstanding 28,444,000 20,240,472 18,801,491
============ ============ ============
F-11
GWIN, Inc.
Consolidated Statements of Cash Flows
Seven Months Year Ended
Year Ended ended December 31,
July 31, 2003 July 31, 2002 2001
------------- ------------- -----------
Cash flows - operating activities:
Net (loss) $(7,141,561) $(2,075,445) $(5,527,352)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 225,269 134,966 230,997
Services paid with warrants 1,293,444 390,492 18,333
Services and settlements paid with common stock 1,124,616 969,130 190,000
Interest expense - issuance of convertible
debt & penalty shares 329,558 127,203 757,090
Interest expense - issuance of convertible
debt (warrants portion) 0 276,922 71,995
Interest expense - amortization of debt discount 819,373 0 0
Effect of redemption of preferred stock 1,381,625 0 0
Decrease (increase) in:
Accounts receivable (27,464) 93,697 (103,706)
Prepaid expenses 110,187 (135,534) 0
Other assets 204,131 (28,857) (136,225)
Increase (decrease) in:
Deferred revenue 119,593 (427,091) 463,935
Accounts payable (256,602) 120,131 206,495
Accounts payable - related parties 223,847 0 85,000
Other current liabilities (1,215,001) (41,778) 1,371,573
----------- ----------- -----------
Total adjustments 4,332,576 1,479,281 3,155,487
----------- ----------- -----------
Net cash used in operating activities (2,808,985) (596,164) (2,371,865)
----------- ----------- -----------
Cash flows - investing activities:
Cash acquired in merger 0 0 5,964
Purchase of fixed assets (40,792) (14,818) 0
----------- ----------- -----------
Net cash provided by (used) in investing
activities (40,792) (14,818) 5,964
----------- ----------- -----------
Cash flows - financing activities:
Proceeds from issuance of convertible debt 0 791,500 870,000
Proceeds from issuance of notes payable -
related parties 950,000 0 166,666
Proceeds from issuance of long-term debt 25,000 0 0
Proceeds from issuance of preferred stock 0 0 1,324,000
Proceeds from conversion of warrants, debentures &
options 0 134,528 0
Payments on long-term debt & lease obligations (440,889) (34,863) (224,828)
Proceeds from issuance of common stock 2,411,694 0 200,000
----------- ----------- -----------
Net cash provided by financing activities 2,945,805 891,165 2,335,838
----------- ----------- -----------
Cash - beginning of the periods 324,786 44,603 74,666
Net increase (decrease) in cash 96,028 280,183 (30,063)
----------- ----------- -----------
Cash - end of the periods $ 420,814 $ 324,786 $ 44,603
=========== =========== ===========
Supplemental disclosures of cash flow
information - cash paid during the period
for:
Interest $ 57,790 $ 22,206 $ 60,897
Taxes $ 0 $ 0 $ 0
For supplemental disclosures of non-cash investing and financing activities
See Note [9] of financial statements
F-12
GWIN, INC.
Consolidated Statement of Stockholders' Deficit
Preferred Stock Common Shares
--------------- ------------- Discount-
No. of No. of Common Paid-In
Shares Amount Shares Amount Stock Capital
--------------- --------- ------------ ------------ ------------ ------------
Balance - December 31, 2000 3,807,484 $ 3,807 10,125,000 $ 10,125 $(10,125) $ 5,707,419
Shares of series B preferred
stock issued in reorgani-
zation 475,048 48 (48)
Recapitalization adjustment (3,807,484) (3,807) (10,125,000) (10,125) 10,125 3,807
Conversion of series B
preferred stock (475,048) (48) 14,845,241 1,485 (1,437)
Acquired equity of IMSCO
in reorganization 3,750,000 375 (113,779)
Issuance of series C pre-
ferred stock with
warrants for cash 64,000 6 1,323,994
Issuance of common stock
for services 200,000 20 189,980
Issuance of common stock
for cash 400,000 40 199,960
Issuance of warrants for services 240,000
Issuance of warrants with
debentures 719,232
Interest expense from issuance of
debentures 757,090
Net (loss) for the year ended
December 31, 2001:
Imputed non-cash dividend on
series C preferred stock 1,092,000
Balance - December 31, 2001 64,000 6 19,195,241 1,920 0 10,118,218
Issuance of common stock for
conversion of warrants and
options 309,546 30 221,294
Issuance of common stock and
warrants as payment for
services and settlements 1,672,145 167 1,423,620
Issuance of common stock for
conversion of debentures 108,771 11 76,553
Recorded value of warrants
issued with debentures 204,783
Net (loss) for the seven
months ended July 31, 2002
Balance - July 31, 2002 64,000 6 21,285,703 2,128 0 12,044,468
Interest expense from issuance
of debentures 889,052
Recorded value of warrants
issued with debentures 332,310
Imputed non-cash dividend
on series C preferred
stock 1,798,571
Issuance of warrants for
services 239,648
Issuance of common stock
for services - debt discount 600,000 60 59,940
Issuance of common stock and
warrants for redemption of
preferred stock (64,000) (6) 9,999,999 1,000 1,380,630
Issuance of common stock
for cash 16,483,633 1,648 2,410,045
Issuance of common stock for
payment for services,
settlements and penalty shares 3,806,157 382 1,322,028
Employee stock options 6,200
Issuance of common stock for
financing 200,000 20 57,980
Net (loss) for the year
ended July 31, 2003 ---------- -------- ---------- -------- -------- -----------
Balance - July 31, 2003 0 $ 0 52,375,492 $ 5,238 $ 0 $20,540,872
========== ======== ========== ======== ======== ===========
F-13
GWIN, INC.
Consolidated Statement of Stockholders' Deficit
(Continued)
Total
Accumulated Stockholders'
Deficit Deficit
------------ ------------
Balance - December 31, 2000 $(6,162,867) $(451,641)
Shares of series B preferred stock issued
in reorganization 0
Recapitalization adjustment 0
Conversion of series B preferred stock 0
Acquired equity of IMSCO in reorganization- (113,404)
Issuance of series C preferred stock with
warrants for cash 1,324,000
Issuance of common stock for services 190,000
Issuance of common stock for cash 200,000
Issuance of warrants for services 240,000
Issuance of warrants with debentures 719,232
Interest expense from issuance of
debentures 757,090
Net (loss) for the year ended December
31, 2001 (5,527,352) (5,527,352)
Imputed non-cash dividend on series C
preferred stock (1,092,000) 0
Balance - December 31, 2001 (12,782,219) (2,662,075)
Issuance of common stock for conversion
of warrants and options 221,324
Issuance of common stock and warrants as
payment for services and settlements 1,423,787
Issuance of common stock for conversion
of debentures 76,564
Recorded value of warrants issued with
debentures 204,783
Net (loss) for the seven months ended
July 31, 2002 (2,075,443) (2,075,443)
Balance - July 31, 2002 (14,857,662) (2,811,060)
Interest expense from issuance of
debentures 889,052
Recorded value of warrants issued with
debentures 332,310
Imputed non-cash dividend on series C
preferred stock (1,798,571) 0
Issuance of warrants for services 239,648
Issuance of common stock for services -
debt discount 60,000
Issuance of common stock and warrants for
redemption of preferred stock 1,381,624
Issuance of common stock for cash 2,411,693
Issuance of common stock for payment for
services, settlements and penalty shares 1,322,410
Employee stock options 6,200
Issuance of common stock for financing 58,000
Net (loss) for the year ended July 31, 2003 (7,141,561) (7,141,561)
------------ ------------
Balance - July 31, 2003 $(23,797,794) $(3,251,684)
============ ============
F-14
GWIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] ORGANIZATION AND CHANGES IN CONTROL OF COMPANY
Prior to July 11, 2001, the corporation was known as IMSCO Technologies, Inc.
["IMSCO" or the "Company"]. On July 11, 2001, Global Sports & Entertainment,
Inc., a Delaware corporation ["Global Sports"], completed a reverse
acquisition of the Company in which the Company acquired all of the
outstanding shares of Global Sports stock in exchange for a controlling
interest in IMSCO [the "Reorganization"]. As the Company was a public shell,
the transaction is shown as a recapitalization of the accounting acquiror,
Global Sports.
On August 27, 2001, Global Sports changed its name to Global SportsEDGE, Inc.
["EDGE"] and the Company changed its name to Global Sports & Entertainment,
Inc. [the "Company" or "Global"]. The Company also initiated a reverse stock
split of 1:4 and increased the number of authorized common shares to
50,000,000. All share numbers have been changed to reflect the reverse stock
split.
On August 22, 2002 the Company changed its name from Global Sports &
Entertainment, Inc. to GWIN, Inc. [the "Company" or "GWIN"] to settle a
lawsuit brought by the management of an unrelated corporation named Global
Sports, Inc.
The consolidated financial statements of the Company reflect the results of
operations of EDGE and GWIN from July 11, 2001 through December 31, 2001. The
financial statements prior to July 11, 2001 reflect the results of operations
and financial position of EDGE. Pro forma information on this transaction is
not presented as, at the date of this transaction, GWIN [formerly known as
IMSCO Technologies, Inc.] was considered a public shell and accordingly, the
transaction was not considered a business combination. GWIN is a Delaware
corporation located in Las Vegas, Nevada. The Company primarily develops,
produces and markets sports handicapping analysis and information via
television and the internet.
On May 23, 2002, the Company filed a Form 8-K to report that the Board of
Directors had approved a change in our fiscal year from a calendar year to one
beginning August 1 and ending July 31. That change was effective July 31,
2002.
The Company's Board of Directors approved an increase in the Company's
authorized shares from 50,000,000 to 100,000,000 on June 10, 2003 and a Form
14-C was filed on July 15, 2003 with majority stockholder approval. A
Definitive Information Statement Notice was mailed to the stockholders on
August 10, 2003.
The Company is engaged in a highly seasonal business, with the majority of
sales related to football and basketball handicapping. Due to this
seasonality, quarterly results may vary materially between the football and
basketball seasons [concentrated in the first and second fiscal quarters] and
the remainder of the year [the third and fourth fiscal quarters].
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its subsidiary, EDGE, as well as several
inactive subsidiaries. All significant inter-company accounts and transactions
have been eliminated in consolidation.
F-15
REVENUE RECOGNITION - Revenue is recognized as services are rendered. On July
31, 2003, the Company had received approximately $471,000 in payment for
handicapping services not rendered by that date. This amount is recorded as a
current liability.
Revenue from advertising agreements is recognized ratably over the period of
the agreements. As of July 31, 2003 deferred revenue from advertising
agreements was approximately $44,000. This amount is recorded as a current
liability.
OPERATING COSTS & EXPENSES - Handicappers' fees and sales representatives'
compensation and related expenses are charged to operations as incurred.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments, with a maturity of three months or less when purchased, to be
cash equivalents. At July 31, 2003, the Company did not have any cash
equivalents.
PROPERTY AND EQUIPMENT AND DEPRECIATION - Property and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from 3 to 5 years.
Routine maintenance and repair costs are charged to expense as incurred and
renewals and improvements that extend the useful life of the assets are
capitalized. Upon sale or retirement, the cost and related accumulated
depreciation are eliminated from the respective accounts and any resulting
gain or loss is reported as income or expense.
BASIC AND DILUTED LOSS PER COMMON SHARE - The Company has adopted Statement of
Financial Accounting Standards ["SFAS"] No. 128, "Earnings Per Share." Under
SFAS 128, loss per common share is computed by dividing net loss available to
common stockholders by the weighted-average number of common shares
outstanding during the period. Shares issued in the reverse acquisition are
reflected as outstanding for all periods presented. In the Company's present
position, diluted loss per share is the same as basic loss per share.
Securities that could potentially dilute EPS in the future include the
issuance of common stock in settlement of notes payable and the exercise of
stock options and warrants. For the year ended July 31, 2003 and Seven Months
ended July 31, 2002and year ended December 31, 2001 the number of common stock
equivalents excluded from the calculation was 26,221,003, 16,429,558 and
14,281,245 respectively.
STOCK OPTIONS AND SIMILAR EQUITY INSTRUMENTS - The Company has adopted the
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," for stock options and similar equity instruments [collectively
"Options"] issued to employees and directors. However, the Company will
continue to apply the intrinsic value based method of accounting for options
issued to employees prescribed by Accounting Principles Board ["APB"] Opinion
No. 25, "Accounting for Stock Issued to Employees" rather than the fair value
based method of accounting prescribed by SFAS No. 123. SFAS No. 123 also
F-16
applies to transactions in which an entity issues its equity instruments to
acquire goods and services from non-employees. Those transactions must be
accounted for based on the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more reliably
measurable.
BENEFICIAL CONVERSION FEATURES - The Company has sold certain 5% three year
convertible debentures with a beneficial conversion feature [See Note 8]
representing a 50% imputed discount. The value of such features is recorded by
the Company as interest expense of $13,764, $757,090, and $-0- for the year
ended July 31, 2003, the seven-month period ended July 31, 2002, and the year
ended December 31, 2001, respectively.
INCOME TAXES - Pursuant to SFAS No. 109, "Accounting for Income Taxes," income
tax expense [or benefit] for the year is the sum of deferred tax expense [or
benefit] and income taxes currently payable [or refundable]. Deferred tax
expense [or benefit] is the change during the year in a company's deferred tax
liabilities and assets. Deferred tax liabilities and assets 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.
ADVERTISING EXPENSES - The Company expenses advertising costs as incurred.
Total advertising costs for the year ended July 31, 2003, the seven-month
period ended July 31, 2002, and the year ended December 31, 2001 amounted to
approximately $2,342,432, $194,755 and $2,160,245, respectively.
[3] GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate the continuation of
the Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business. For the year
ended July 31, 2003, the Company has a loss from operations of approximately
$2,502,000, a working capital deficiency of approximately $3,240,000 and an
accumulated deficit of approximately $23,798,000. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Consistent with its original business plan, management plans to secure
additional financing through equity issuances. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classification of liabilities that might
be necessary in the event the Company cannot continue in existence.
[4] CONCENTRATIONS OF CREDIT RISKS
The Company places its cash and cash equivalents with high credit quality
institutions to limit its credit exposure. At July 31, 2003 the Company had
approximately $380,000 in a financial institution that is subject to normal
credit risk beyond insured amounts. The Company routinely assesses the credit
worthiness of its customers before a sale takes place and believes its credit
risk exposure is limited. The Company performs ongoing credit evaluations of
its customers but does not require collateral or other security as a condition
of service.
F-17
[5] PROPERTY AND EQUIPMENT
The following details the composition of property and equipment:
Accumulated
At July 31, 2003 Cost Depreciation Net
-------- ------------ -------
Television Studio Set $151,601 $151,601 0
Office equipment & other 299,840 266,122 33,718
-------- -------- -------
TOTALS $451,441 $417,723 $33,718
======== ======== =======
Depreciation expense, excluding assets under capital lease obligations, for
the year ended July 31, 2003, seven-month period ended July 31, 2002 and the
year ended December 31, 2001 amounted to $100,098, $78,309, and $133,847,
respectively.
[6] DEPOSITS AND OTHER ASSETS
Deposits and other assets comprised the following:
July 31,
--------
2003
--------
Deposits with credit card processors $ 20,950
Pre-paid contract for financial services 126,667
--------
TOTAL $147,617
========
[7] LONG - TERM DEBT
Long - term debt is as follows:
July 31
---------
2003
---------
Convertible Debentures (5%) due August 31, 2004 $ 100,000
Convertible Note (16%) 494,364
Convertible Debentures (5%) due August 31, 2005 310,000
Capital leases 23,560
---------
Total 927,924
Less - amounts reflected as current liabilities (577,664)
---------
350,260
Less - unamortized debt discount (134,207)
---------
TOTAL LONG - TERM DEBT $ 216,053
=========
F-18
Long-term debt at July 31, 2003 matures as follows:
2004 $577,664
2005 212,608
2006 3,445
Thereafter --
--------
TOTAL $793,717
========
The 16% Convertible Note (in the original principal balance amount of
$750,000, of which $ 494,364 is due in the year ending July 31, 2004) may, at
the discretion of the Company, be repaid by the issuance of common stock of
the Company (See Note 9).
[8] RELATED PARTY NOTES & ACCOUNTS PAYABLE
Related party notes and accounts payable are as follows:
July 31,
2003
--------------------------
Convertible debt (5%) due August 31, 2003
Newmarket Investments, plc $1,200,000
John T. Manner 110,000
Wayne A. Root 50,000
Douglas R. Miller 16,667
-- $1,376,666
Unsecured standby credit facility from
Newmarket Investments, plc (16%), in
default at July 31, 2003 150,000
Unsecured bridge financing (12%), in
default at July 31, 2003
Timothy J. Keating 50,000
Wayne A. Root 50,000
-- 100,000
----------
1,626,666
Less - unamortized debt discount (26,097)
----------
Total Notes 1,600,569
Accrued interest 147,597
Handicapping fee payable to Wayne A. Root 161,250
----------
TOTAL NOTES & ACCOUNTS PAYABLE - RELATED PARTIES $1,909,416
[9] STOCKHOLDERS' DEFICIT
During the year ended July 31 2003 the following securities activity occurred:
COMMON STOCK AND WARRANTS-We issued 31,089,789 shares of Common Stock.
Included in this amount is 9,999,999 shares issued to the holders of the
Series C Preferred Stock for the redemption of 64,000 shares of Series C
Preferred Stock. 16,483,633 shares of Common Stock were issued as part of
equity offerings. Included in the 16,483,633 shares is the conversion of the
F-19
$190,000 convertible debt into 1,266,840 shares of Common Stock. The Company
issued 2,006,157 shares of Common Stock as payment for services, legal
settlements and penalty shares 2,400,000 shares for Key Man employment
longevity and 200,000 shares for financing activities.. The Company issued
1,648,633 warrants to the investment firm handling the equity placement and
issued 650,000 warrants in legal settlements.
The Company restructured an original $750,000 note with the Laurus Master Fund
["Laurus"] that carried a 13% interest rate and $50,000 in monthly payments,
to 16% interest rate and payments escalating from $10,000 a month to $73,000
per month. As of July 31, 2003 the principal balance was $494,364 with no
unpaid interest at that date.
The Company issued 3,000,000 options under the equity incentive plan filed in
a Form SB-2 Registration Statement filed on February 25, 2003. Included in
this amount, the Company has allocated 1,500,000 options to Newmarket
Investments, plc ("Newmarket") and 1,500,000 to Wayne Root. Both Mr. Root and
Mr. Simon Hayes of Newmarket are Directors of the Company. As of July 31,
2003, 1,500,000 of the options have been issued to Newmarket with a $0.50 per
share strike price and a three-year life. The options issued to Mr. Root were
cancelled with the renegotiation of his employment contract.
The employment contract effective July 31, 2003 with Mr. Root calls for the
issuance of 2,100,000 common shares over a 3 year period at a rate of 700,000
shares per year. Upon Board approval of his contract, Mr. Root surrendered all
of his then existing warrants and options.
Convertible Preferred Stock - In 2001, the Company sold 64,000 units
consisting of one share of Series C Convertible Preferred stock and one
warrant exercisable at $1.00 for an additional share of Series C stock for a
price of $1,500,000. The base conversion rate was adjusted in the quarter
ended October 31, 2001 and the resulting 50% imputed discount of $1,092,000
was charged to retained earnings (deficit) in a manner analogous to a
dividend. In the quarter ended October 31, 2002, there was an additional
adjustment to the conversion rate resulting from anti-dilution provisions in
the purchase agreement. The resulting 30% imputed discount of $318,714 was
charged to retained earnings (deficit) in a manner analogous to a dividend. In
April 2003 all of the Series C Convertible Preferred stockholders converted
their shares into 10,000,000 common shares. An imputed non-cash dividend
charge of $921,428 was recorded for the anti-dilution adjustment.
At July 31, 2003 there was no convertible preferred stock outstanding.
Convertible Debentures - In September 2002, we issued a convertible debenture
for $25,000 which can be converted into 50,000 shares of common stock and
warrants to purchase 50,000 shares of common stock at $1.25 per share. In
January, 2003 we entered into an agreement in principal with several
accredited investors from Europe to purchase 10% convertible debentures for an
aggregate face value of $190,026. In April 2003 the Company reached an
agreement with these investors to issue them 1,266,840 common shares in lieu
of the 10% convertible debentures contemplated under the earlier agreement. In
September, 2002, we entered into an agreement with Newmarket, an existing
convertible debenture holder, which provided that Newmarket invest an
additional $700,000 in the Company by amending the existing $500,000
convertible debenture held by Newmarket to reflect a principal amount of
$1,200,000. The anti-dilution provisions on the combined $1,200,000
convertible debenture provide that 5,802,199 additional shares be issued upon
conversion. The total Newmarket convertible debenture shares upon conversion
will be 9,230,769. In addition, the Company agreed to exchange an existing
warrant held by Newmarket to acquire 1,000,000 shares of common stock at $1.00
F-20
per share for a warrant to acquire 3,000,000 shares of common stock at $0.13
per share. This warrant expires on August 31, 2005. The costs associated with
the issuance of the new warrants and the adjustment of the conversion rate on
the $1,200,000 principal amount are reported as non-cash financing costs of
$708,360 in the financial statements for the year ended July 31, 2003. The CEO
of Newmarket is a Director of the Company.
OPTIONS AND WARRANTS AT JULY 31, 2003
STOCK OPTIONS Weighted-Average
Shares Exercise Price
--------- --------------
Outstanding at July 11, 2001
(see Note 1) 2,194,246 $2.22
---------- -----
Outstanding at December 31, 2001 2,194,246 2.22
Exercised (33,830) 1.41
---------- -----
Outstanding at July 31, 2002 2,160,416 2.24
Granted 3,310,000 .48
Exercised 0 --
Canceled (1,985,429) .73
---------- -----
OUTSTANDING AT JULY 31, 2003 3,484,987 $1.22
========== =====
EXERCISABLE AT JULY 31, 2003 3,484,987 $1.22
========== =====
The following table summarizes information about stock options at July 31,
2003:
Weighted Average Outstanding and Exercisable Stock Options
Remaining Weighted-Average
Exercise Prices Shares Contractual Life Exercise Price
- --------------- --------- ---------------- --------------
$0.01 - $1.50 3,298,522 1 year $0.89
$6.00 - $7.50 186,465 2 years $7.04
The Black-Scholes option valuation model was developed for use in estimating
the fair value of options. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility.
WARRANTS Weighted-Average
Shares Exercise Price
------ --------------
Outstanding at July 31, 2002 9,174,775 $1.06
Granted 4,698,633 .22
Exercised 0 --
Canceled (1,512,528) 1.00
----------- -----
OUTSTANDING AT JULY 31, 2003 12,360,880 $.74
----------- -----
EXERCISABLE AT JULY 31, 2003 12,360,880 $.74
----------- -----
F-21
The following table summarizes information about warrants at July 31, 2003:
Weighted Average Outstanding and Exercisable Warrants
Remaining Weighted-Average
Exercise Prices Warrants Contractual Life Exercise Price
- --------------- --------- ---------------- --------------
$0.01 - $1.00 9,806,890 2 years $0.50
$1.01 - $2.00 2,461,491 1 year $1.40
$3.01 - $4.00 92,500 1 year $4.00
The Black-Scholes option valuation model was developed for use in estimating
the fair value of warrants. In addition, warrant valuation models require the
input of highly subjective assumptions including the expected stock price
volatility.
On June 18, 2002, stockholders of the Company approved an Equity Incentive
Plan (the "Plan"). Under the Plan, a sub-committee of the Board of Directors
is authorized to grant, at its discretion, options to purchase shares of
common stock at a set price greater than market price as of the date of the
grant. The Company has reserved 3,000,000 shares for issuance under the Plan.
At July 31, 2003, one option granting the right to purchase 1,500,000 of these
shares at $0.50 per share was issued to a Director and creditor of the
Company. Another option granting the right to purchase 1,500,000 million of
these shares was issued to the CEO of the Company during the year ended July
31, 2003, but was surrendered prior to July 31, 2003. The Company issued
310,000 options to employees to purchase shares at $0.27 per share expiring
July 31, 2006. The Plan has the rights to 1,190,000 shares, for which no
options have been granted, which are available at July 31, 2003.
At July 31, 2003 the Company had a total of 10,375,136 shares underlying its
convertible debentures and these shares are included in the fully diluted
shares outstanding of 78,596,495.
PRO FORMA DISCLOSURE OF THE COMPENSATION COST FOR STOCK OPTION PLANS - As
permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to continue to measure stock-based compensation using the
intrinsic value approach under APB Opinion No. 25, the former standard. If the
former standard for measurement is elected, SFAS No. 123 requires supplemental
disclosure to show the effects of using the new measurement criteria.
Had compensation cost for stock options been determined based on the fair
value at the grant date for awards for the year ended July 31, 2003, the seven
month period ended July 31, 2002 and the year ended December 31, 2001
consistent with the provisions of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
F-22
The seven
month period Year ended
Year ended ended July December 31,
July 31, 2003 31, 2002 2001
------------- ------------ ------------
Net (loss) - as reported $(8,940,132) $(2,075,443) $(6,619,352)
Net (loss) - pro forma $(8,994,075) $(2,075,443) $(6,619,352)
Basic earnings per share -
as reported $ (.31) $ (.10) $ (.35)
Diluted earnings per share -
as reported $ (.31) $ (.10) $ (.35)
Basic earnings per share -
pro forma $ (.32) $ (.10) $ (.35)
Diluted earnings per share -
pro forma $ (.32) $ (.10) $ (.35)
[10] PROVISION FOR INCOME TAXES
The operating loss carry forwards at July 31, 2003, [assuming all operating
loss carry forwards will be available] amount to approximately $17,000,000.
Such loss carry forwards will expire as follows: approximately $6,000,000 in
2020, $5,000,000 in 2021 and $2,000,000 in 2022 and $7,000,000 in 2023. At
July 31, 2003 based on the amount of operating loss carry forwards, the
Company would have had a deferred tax asset of approximately $6,800,000.
Because of the uncertainty that the Company will generate income in the future
sufficient to fully or partially utilize these carry forwards, a valuation
allowance of $6,800,000 has been established. This allowance includes an
increase of $2,680,000 related to operations during the year ended July 31,
2003. Accordingly, no deferred tax asset is reflected in these financial
statements.
As part of the reverse acquisition (Note 1), the Company acquired net
operating losses of IMSCO of approximately $10,640,000. Pursuant to Section
382 of the Internal Revenue Code, utilization of these losses will be limited
to approximately $285,000 subject to a maximum annual utilization of
approximately $15,000 per year through 2021. At July 31, 2003, the Company
would have a deferred tax asset of approximately $97,000 from these acquired
losses.
Because of the uncertainty that the Company would generate income in the
future sufficient to fully or partially utilize these carry forwards, a
valuation allowance of $97,000 has been established. Accordingly, no deferred
tax asset is reflected in these financial statements.
[11] CHANGE IN FISCAL YEAR.
As described in Note 1, the Company adopted a new fiscal year effective July
31, 2002.
[12] NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
The Company does not anticipate the adoption of recently issued accounting
pronouncements to have a significant on the Company's results of operations,
financial position or cash flows.
[13] COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES - The Company is the lessee of office and computer equipment
under four (4) capital leases expiring within the next two (2) years. These
F-23
capital leases are collateralized by the related assets. The liabilities under
capital leases are recorded at the present value of the net future minimum
lease payments and the assets are recorded at the purchase price which
approximates fair market value on the date of the purchase.
Following is a summary of property held under capital leases:
Accumulated
Cost Depreciation Net
At July 31,2003 ------ ------------ -------
Office Fixtures and Equipment $336,460 $313,270 $23,190
Depreciation of assets under capital leases charged to expense for the year
ended July 31, 2003, the seven-month period ended July 31, 2002, and the year
ended December 31, 2001 was $125,171 $56,660, and $97,130, respectively.
Minimum future lease payments under capital leases are included as a component
of long-term debt (see note 7). Payments for each of the next three fiscal
years and in the aggregate are:
2004 (August 1, 2003 - July 31, 2004) $ 11,336
2005 11,034
2006 3,445
Thereafter --
--------
Total Minimum Lease Payments $ 25,815
Less: Amount Representing Interest (2,255)
--------
$ 23,560
Present Value of Net Minimum Lease Payments $ 23,560
Less: Current Portion (9,691)
LONG-TERM PORTION $13,869
OPERATING LEASES - At July 31, 2003, the Company has two operating leases for
office space that expire in November 2003 and January 2006. One lease grants
an option for renewal for an additional three (3) years. The leases have
monthly payment obligations of $1,837 and $9,659, increasing annually, based
on the CPI.
Approximate minimum future rental payments under non-cancelable operating
leases having remaining terms in excess of one year as of July 31, 2003 are as
follows:
Year ending Operating
July 31, Leases
- ----------- ----------
2004 $ 115,906
2005 119,383
2006 122,965
2007 0
2008 0
Thereafter 0
---------
Total $ 358,254
=========
F-24
Rent expense for the year ended July 31, 2003, the seven-month period ended
July 31, 2002, and the year ended December 31, 2001 was approximately
$155,000, $138,000 and $145,000, respectively, and was charged to operations.
EMPLOYMENT AGREEMENTS - On July 31, 2003, the Company entered into a two-year
employment agreement with Wayne Allyn Root pursuant to which Mr. Root is
serving as the Company's Chief Executive Officer and Chairman of the Board of
Directors. His compensation includes: (a) a base salary of $175,000 per year
for the first year and 10% of the Company's operating income for the second
year, provided that in no event will the base salary fall below $175,000 per
year or exceed $250,000; (b) handicapping fees during the first year equal to
10% of Mr. Root's handicapping fees received by the Company, not to exceed a
maximum of $350,000 per year, and handicapping fees during the second year
equal to the greater of $450,000 or 20% of the Company's operating income for
that fiscal year; and (c) a performance bonus in the second year equal to 25%
of the amount in the Company's performance pool; (d) a restricted stock grant
in the amount of 2,100,000 shares of the Company's common stock where the
stock vests at the rate of 700,000 shares per year with the first 700,000
shares vesting on July 31, 2003; (e) compensation in the event of a change in
ownership or control of the Company, either friendly or hostile, which
includes a minimum annual base salary of $250,000, the handicapping fee of 12%
versus the 10% described above, and the ceiling will be removed, and all
unvested shares will immediately vest; and other employee benefits provided to
senior executives of the Company. The agreement also includes an agreement to
indemnify Mr. Root, non-compete provisions and provision regarding payments in
the event of termination of Mr. Root's employment. As consideration for the
issuance of the 2,100,000 restricted shares, Mr. Root surrendered all written
options and warrants which were issued to him prior to July 31, 2003.
[14] LEGAL MATTERS
In the normal course of business, the Company is exposed to a number of
asserted and unasserted potential claims. At the present time, management,
after review of amounts accrued and consultation with counsel, believes it has
meritorious defenses and considers that any additional liabilities from these
matters would not materially affect the financial position, liquidity or
results of operations of the Company.
In March 2003 the Company negotiated a payment schedule to settle a dispute
with a former landlord regarding the former corporate headquarters of the
Company. The Company agreed to make monthly payments of $15,000 until the
settlement is paid in full. The balance at July 31, 2003 is $337,805 and is
accounted for as a component of accounts payable. The Company also issued
warrants to purchase 200,000 shares of common stock to the leaseholder as a
component of the settlement. The associated warrant cost of $63,236 was
charged to non-cash cost of financing.
[15] FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted Statement of Financial Accounting Standards ["SFAS"] No.
107, "Disclosure About Fair Value of Financial Instruments," which requires
disclosing fair value, to the extent practicable, for financial instruments
which are recognized or unrecognized in the balance sheet. The fair value of
the financial instruments disclosed herein is not necessarily representative
of the amount that could be realized or settled, nor does the fair value
amount consider the tax consequences of realization or settlement.
In assessing the fair value of these financial instruments, the Company used a
variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
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cash and cash equivalents, related party and trade and notes payable, it was
assumed that the carrying amount approximated fair value for the majority of
these instruments because of their short maturities.
The fair value of long-term debt is based upon current rates at which the
Company could borrow funds with similar remaining maturities. It was assumed
that the carrying amount approximated fair value for these instruments.
[16] SUBSEQUENT EVENTS
At October 31, 2003 the Company has $100,000 borrowed under a standby credit
facility (see note 8), which was in default. On October 10, 2003 Newmarket
Investments, plc ("Newmarket") made demand for payment.
On October 15, 2003 the Company and Newmarket reached agreement whereby the
Company redeemed $500,000 of convertible debt held by Newmarket. To redeem
this convertible debt the Company issued 3,846,154 shares of common stock at a
value of $0.13 per share.
Three directors have resigned at the end of their respective terms. This
leaves three vacancies on the Board of Directors, which the Company will fill
as soon as practicable. The three directors that have resigned are; John T.
Manner, Timothy J. Keating, and Simon Hayes. The following individuals, Mr.
James Baxter, Mr. Timothy Whalley and Mr. Robert Seale have been nominated to
serve as directors until the election of directors at the next Annual
Shareholders' meeting; each appointment will become effective upon the
acceptance by the nominee.
F-26
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
We have adopted provisions in our certificate of incorporation that limit
the liability of our directors for monetary damages in breach of their
fiduciary duty as directors, except for liability that cannot be eliminated
under the Delaware General Corporation Law. Delaware law provides that
directors of a company will not be personally liable for monetary damages for
breach of their fiduciary duty as directors, except for liability for:
* any breach of their duty of loyalty to us or our stockholders;
* acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
* unlawful payment of a dividend or unlawful stock repurchase or
redemption, as provided by Section 174 of the Delaware General
Corporation Law; or
* any transaction from which the director derived an improper
personal benefit.
Any amendment or repeal of these provisions requires the approval of the
holders of shares representing at least two-thirds of our shares entitled to
vote in the election of directors, voting as one class.
Our certificate of incorporation and bylaws also provide that we will
indemnify our directors and officers to the fullest extent permitted by
Delaware law. We believe that the limitation of liability provision in our
certificate of incorporation will facilitate our ability to continue to
attract and retain qualified individuals to serve as directors and officers.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the offering, all of which are to be borne by
the Company, are as follows:
SEC Filing Fee ................................ $
Printing Expenses ............................. 1,000.00
Accounting Fees and Expenses .................. 1,000.00
Legal Fees and Expenses ....................... 20,000.00
Blue Sky Fees and Expenses .................... 1,000.00
Miscellaneous .................................
----------
Total .................................... $
==========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the last three years we sold securities listed below that were not
registered under the Securities Act of 1933.
II-1
In connection with our reorganization in July 2001, we agreed to issue an
aggregate of 475,048 shares of our restricted Series B preferred stock. Each
share of our Series B preferred stock was automatically convertible upon the
completion of a one-for-four reverse stock split. In connection with this
reorganization, we issued 4,800 shares of our Series B preferred stock to an
unaffiliated party in payment of its finder's fee for introducing the company
to the shell with which it commenced the merger and reorganization. The
issuance was conducted pursuant to Section 4(2) of the 1933 Act and Rule 506.
No general solicitation, offering or sale was conducted in connection with the
issuance of shares. On August 27, 2001, each outstanding share of our Series B
preferred stock was converted into 31.25 shares of common stock.
Concurrent with our reorganization in July 2001, we sold 64,000 units to
one accredited investor for a gross proceed of $1,500,000. Each unit consisted
of one restricted share of the Series C preferred stock and one warrant to
purchase one restricted share of the Series C preferred stock at an exercise
price of $31.25 expiring on July 5, 2004. Each share of the Series C preferred
stock was convertible into 46.875 shares of our common stock. The issuance was
conducted pursuant to Section 4(2) of the 1933 Act and Rule 506. We paid a
finder's fee of $150,000 to Keating Investments, LLC, an affiliated entity,
for the introduction service rendered in connection with this transaction. No
general solicitation, offering or sale was conducted in connection with the
issuance of shares.
During 2002, both we and the unit holders recognized that the terms of
the warrant and the intentions of the parties more accurately reflected a
conversion of the warrant directly into common stock, rather than conversion
to Series C Preferred Stock and subsequent conversion into common stock. Our
primary basis for this conclusion was the fact that the warrant holders did
not receive the anti-dilution protection to which Series C Preferred
shareholders are entitled, and, upon further inquiry, it became clear that we
did not intend, nor did the unit holders expect, to receive such anti-dilution
rights, or any other rights to which Series C Preferred shareholders are
entitled. Both we and the unit holders believe that this was an error in
drafting, and the current warrants do not reflect the intentions of the
parties.
Accordingly, on November 26, 2002, we requested that the entire class of
unit holders, which consisted of 4 individuals or entities, submit the
warrants issued as part of the units. In exchange, we conducted a pro-rata
replacement of the warrants with Series C warrants directly convertible into
common stock. Each new Series C warrant is exercisable for 31.25 shares of
common stock at an exercise price of $1.00, and does not contain any anti-
dilution provisions. No general solicitation, offering or sale was conducted
in connection with the warrant exchange.
In August and September of 2001, we issued an aggregate of $836,667
principal amount of our 5% convertible debentures with attached common stock
purchase warrants to six investors in a private placement offering conducted
by certain of our directors and officers. One investor, Newmarket Investments,
plc, purchased $500,000 of the debentures. The debentures were immediately
convertible into common stock at a conversion price of $0.50 per share (after
giving effect to an adjustment from the original conversion price of $0.75 per
share) and were automatically convertible into common stock on August 31,
2003. Each debenture was accompanied by a detachable warrant to purchase an
additional number of shares of our common stock equal to the principal amount
of the debenture purchased divided by $0.50 at an exercise price of $1.00 per
share. The warrants are exercisable until August 31, 2004. The purchasers of
these debentures were provided with certain registration rights. The issuance
was conducted pursuant to Section 4(2) of the 1933 Act and Rule 506. No
general solicitation, offering or sale was conducted in connection with the
issuance of the securities.
II-2
In September 2001, we issued a warrant to purchase 600,000 shares of
common stock to Keating Investments, LLC, an accredited investor, in
consideration for services to be rendered pursuant to a financial advisory
agreement. The warrant entitles the holder to purchase 600,000 shares of
common stock at an exercise price of $0.10 per share until September 10, 2006.
We also issued to other consultants warrants to purchase a total of 517,848
shares of common stock at exercise prices ranging from $0.75 to $1.50. These
issuances were made in reliance on Section 4(2) of the 1933 Act.
In September 2001, we sold 400,000 shares of our restricted common stock,
together with a warrant to purchase an additional 400,000 shares of our
restricted common stock to one accredited investor for a purchase price of
$200,000. The warrant entitles the holder to purchase 400,000 shares of common
stock at an exercise price of $1.00 per share exercisable until August 31,
2004. The issuance was conducted pursuant to Section 4(2) of the Securities
Act of 1933 and Rule 506. There were no brokers or finders employed in the
transaction, and no general solicitation, offering or sale was conducted in
connection with the issuance of shares.
From May to September of 2002, we issued an aggregate of $200,000 in
principal amount of our 5% convertible debentures with attached warrants to
purchase an aggregate of 400,000 shares of common stock, exercisable at $1.25
per share and expiring on August 31, 2005, to five accredited investors in a
private placement offering conducted by certain of our directors and officers.
The debentures were immediately convertible into common stock at a conversion
price of $0.50 per share and will automatically convert into common stock on
August 31, 2004. The purchasers of these debentures were provided with certain
registration rights. The issuance was conducted pursuant to Section 4(2) of
the 1933 Act and Rule 506. One finder was employed in this transaction, and no
general solicitation, offering or sale was conducted in connection with the
issuance of the securities.
On June 27, 2002, we issued a 13% convertible note to an accredited
investor for consideration of $750,000 and a warrant to purchase 250,000
shares of our common stock. The note is immediately convertible into common
stock at a conversion price of $0.80 per share. The warrant is exercisable
until June 27, 2007 at exercise prices of $0.88, $1.04 and $1.20. The
purchaser of the note was provided certain registration rights. The issuance
was conducted pursuant to Section 4(2) of the 1933 Act and Rule 506. One
finder was employed in this transaction, and no general solicitation, offering
or sale was conducted in connection with the issuance of the securities.
Between the time of our reverse merger on July 11, 2001 to September 10,
2002, we have issued an aggregate of 1,200,000 shares of common stock, and
warrants exercisable into 529,000 shares of common stock with a weighted
average exercise price of $0.50, in settlement of various debts and actual or
pending litigation to 4 entities or individuals. The shares were valued at
fair market value at the time of each settlement. Each and all of these
investors were accredited investors within the definition of the Securities
Act of 1933, as amended. The issuances were conducted pursuant to Section
4(2) of the Securities Act of 1933 and Rule 506. There were no brokers or
finders employed in the transaction, and no general solicitation, offering or
sale was conducted in connection with the issuance of shares.
In September and October 2002, we issued 159,039 shares of common stock
to two persons as payment for services and issued 136,995 shares to one person
in payment of the settlement reached in the TurfClub.com matter. In December
2002, we issued 600,000 shares of common stock to Keating Partners in a
warrant redemption transaction and issued to Keating Partners a warrant for
400,000 shares in payment of services valued at $85,000. All of the above
securities were issued pursuant to the exemption provided by Section 4(2) of
the Securities Act of 1933, as amended, and the appropriate restrictive legend
was placed on the securities.
II-3
In September 2002, we entered into an agreement with Newmarket
Investments, plc ("Newmarket") which provided that Newmarket invest an
additional $700,000 by amending the existing Convertible Debenture held by
Newmarket to reflect a principal amount of $1,200,000. As a result of the
anti-dilution provisions of the convertible debenture, the total number of
shares which Newmarket could obtain on conversion of the $1,200,000 debenture
was 9,230,769 shares. In addition, the Company agreed to exchange an existing
warrant held by Newmarket to acquire 1,000,000 shares of common stock at $1.00
per share for a warrant to acquire 3,000,000 shares of common stock at $.13
per share. This warrant expires on August 31, 2005.
During the three months ended April 30, 2003, we issued a total of
10,541,472 shares of common stock to the four persons to redeem all of the
outstanding shares of Series C Preferred Stock. 3,000,000 of these shares
were registered in our SB-2 registration statement that was declared effective
during February 2003, and the balance of the shares were restricted. We also
issued a total of 346,650 shares to six persons for services and payables
worth $102,160, and we issued warrants to purchase 650,000 shares to three
persons to settle liabilities valued at $163,103. All of the above securities
were issued pursuant to the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended, and the appropriate restrictive legend was
placed on the securities.
During the eight months ended July 31, 2003, we sold an aggregate of
16,472,660 shares of common stock at a price of $.15 per share to 72 persons
living outside of the United States, in reliance on the exemption provided by
Regulation S promulgated under the Securities Act of 1933, as amended. The
shares were sold to investors introduced by a Netherlands investment banking
firm which we paid a fee of 12% of the principal amount of the shares sold.
We also issued warrants to persons designated by the investment banker to
purchase 1,648,363 shares of common stock in reliance on Section 4(2) of the
Securities Act of 1933, as amended, and the appropriate restrictive legend was
placed on the warrant certificates.
During the three months ended July 31, 2003, we issued 700,000 restricted
shares of common stock to Wayne Allyn Root, our CEO, pursuant to his new
employment agreement dated July 31, 2003. In the agreement we agreed to issue
a total of 2,100,000 shares which vest at the rate of 700,000 shares per year
with the first 700,000 shares vesting immediately. These shares were issued
pursuant to the exemption provided by Section 4(2) of the Securities Act of
1933, as amended, and the appropriate restrictive legend was placed on the
certificate.
During the three months ended July 31, 2003, we issued 100,000 restricted
shares to Newmarket Investment plc as consideration for the extension of its
standby credit facility. We also issued a total of 20,000 restricted share to
two persons as payment for consulting services valued at $5,800, and we issued
200,000 restricted shares to an employee as a longevity bonus. In addition,
we issued 100,000 restricted shares to our Netherlands investment banking firm
as a performance bonus for the shares it sold in the Regulation S offering
referred to above. All of these shares were issued pursuant to the exemption
provided by Section 4(2) of the Securities Act of 1933, as amended. The
appropriate restrictive legend was placed on all of the certificates.
During the three months ended October 31, 2003, we issued 4,697,272
shares of common stock to 6 convertible note holders pursuant to the
II-4
conversion of $386,667 of convertible debt and $38,892 of accrued interest.
We also issued 3,846,154 shares of common stock to Newmarket Investments plc
pursuant to its conversion of $500,000 of its convertible debenture. All of
these shares were issued pursuant to the exemption provided by Section 4(2) of
the Securities Act of 1933, as amended, and the appropriate restrictive legend
was placed on the certificates.
During the three months ended October 31, 2003, we sold 2,968,518 shares
of common stock to 17 persons living outside of the United States, in reliance
on the exemption provided by Regulation S promulgated under the Securities Act
of 1933, as amended. The shares were sold to investors introduced by a
Netherlands investment banking firm which we paid a fee of 12% of the
principal amount received for the shares.
During the three months ended October 31, 2003, we issued 200,000 shares
of common stock to one person as payment for services valued at $50,000.
These shares were issued pursuant to the exemption provided by Section 4(2) of
the Securities Act of 1933, as amended, and the appropriate restrictive legend
was placed on the certificate.
During the three months ended January 31, 2004, we issued a total of
5,384,615 shares of common stock to Newmarket Investments plc pursuant to the
conversion of its $700,000 convertible debentures. 523,077 of these shares
were registered in our SB-2 registration statement that was declared effective
during February 2003. We also issued 225,000 shares to three persons for
services valued at $45,000. All of these shares were issued pursuant to the
exemption provided by Section 4(2) of the Securities Act of 1933, as amended,
and the appropriate restrictive legend was placed on the certificates.
During April 2004 we issued 1,190,625 shares to Wayne Allyn Root, the
Company's Chairman and President, and 200,000 shares to the assignee of Mr.
Root as payment for $111,250 in commissions which was owed to Mr. Root. The
shares were issued pursuant to the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended, and the appropriate restrictive legend was
placed on the certificates.
During February and March 2004, we sold an aggregate of 8,578,750 shares
of common stock at a price of $.08 per share to 27 persons living outside of
the United States, in reliance on the exemption provided by Regulation S
promulgated under the Securities Act of 1933, as amended. The shares were
sold to investors introduced by a Netherlands investment banking firm which we
paid a fee of 12% of the principal amount of the shares sold. We also issued
500,000 shares of common stock to five persons designated by the investment
banker in reliance on Section 4(2) of the Securities Act of 1933, as amended,
and the appropriate restrictive legend was placed on the warrant certificates.
During April 2004, we also issued a total of 629,800 shares of common
stock to two persons as payment for indebtedness and we issued 26,664 shares
to the three independent directors as payment for their directors fees for a
meeting held during February 2004. All of these shares were issued pursuant
to the exemption provided by Section 4(2) of the Securities Act of 1933, as
amended, and the appropriate restrictive legend was placed on the
certificates.
ITEM 27. EXHIBITS.
The following Exhibits are filed as part of this Registration Statement
pursuant to Item 601 of Regulation S-B:
II-5
Number Description
- ------ -----------
2. Agreement and Plan of Reorganization dated July 6, 2001
between Global Sports & Entertainment, Inc. and Turfclub.com,
Inc. (1)
3.1 Certificate of Incorporation of GWIN, as amended (9)
3.2 Bylaws of GWIN (5)
4.1 Certificate of Designations of Series C Preferred Stock and
Series C Stock Purchase Agreement (1)
4.2 Form of Indenture representing 5% Convertible Debentures (1)
4.3 Form of Indenture representing 13% Convertible Debentures (4)
4.4 Form of Common Stock Purchase Warrant included with 5%
Convertible Debenture Units (4)
5 Opinion of Krys Boyle, P.C. regarding the legality of the
securities being registered - Filed herewith electronically
10.1 Financial Advisory Agreement dated September 10, 2001 between
the GWIN and Keating Investments, LLC (1)
10.2 Executive Services Agreement dated December 6, 1999 between GWIN
and Mr. Miller (1)
10.3 Executive Services Agreement dated December 6, 1999 between GWIN
and Mr. Root (1)
10.4 Sports Personality Agreement dated March 2, 2000 between GWIN and
Mr. Root (1)
10.5 Term sheet with British Bloodstock Agency, dated August 21,
2002 (4)
10.6 Agreement describing voting agreement between Mr. Manner and
Mr. Root regarding Mr. Keating's board rights (2)
10.7 Common Stock Purchase Warrant issued to Keating Investments,
LLC (1)
10.8 Debenture Purchase Agreement dated September 19, 2001
between GWIN and Mr. Root (1)
10.9 5% Convertible Debenture dated September 19, 2001 issued to
Wayne Allyn Root (1)
10.11 Common Stock Purchase Warrant issued to Mr. Root (1)
10.12 Debenture Purchase Agreement dated August 31, 2001 between
GWIN and Mr. Manner (1)
10.13 5% Convertible Debenture dated September 19, 2001 issued
to Mr. Manner (1)
II-6
10.14 Common Stock Purchase Warrant issued to Mr. Manner (1)
10.15 Common Stock Purchase Warrant dated September 4, 2001
between GWIN and Keating Partners, L.P. (1)
10.16 Common Stock Purchase Warrant issued to Keating Partners,
L.P. (1)
10.17 Promissory Note dated October 23, 2000 issued to Mr. Root (1)
10.18 Letter Agreement dated July 5, 2001 between GWIN and
Keating Investments, LLC (1)
10.19 Series C Preferred Stock Purchase Agreement dated July 10,
2001 between Trilium Holdings Ltd. and the Company (1)
10.20 Promissory Note dated November 12, 2001 issued to Mr.
Keating. (3)
10.21 Promissory Note dated November 12, 2001 issued to Mr. Root. (3)
10.22 Securities Purchase Agreement dated June 29, 2002 between
Laurus Master Fund, Ltd. and GWIN (4)
10.23 2002 Equity Incentive Plan (6)
10.24 Employment Agreement with Wayne Allyn Root dated July 31,
2003 (8)
21.1 List of Subsidiaries (4)
23.1 Consent of Krys Boyle, P.C. - Contained in Exhibit 5
23.2 Consent of Moore Stephens, P.C., Certified Public Accountants -
Filed herewith electronically
23.3 Consent of Demetrius & Company, LLC, Certified Public
Accountants - Filed herewith electronically
- ----------------------
(1) Incorporated by reference to the similarly described exhibit included
with the registrant's Quarterly Report for quarter ended September 30,
2001 filed with the SEC on November 19, 2001.
(2) Described in Exhibit 2.1
(3) Incorporated by reference to the similarly described exhibit included
with the registrant's Annual Report for the year ended December 31, 2001
filed with the SEC on April 1, 2002 and amended on May 15, 2002.
(4) Incorporated by reference to the similarly described exhibit included with
the registrant's registration statement on Form SB-2, 333-99599, filed on
September 13, 2002.
(5) Unavailable in electronic format, but will be mailed upon request free of
charge.
(6) Incorporated by reference to the Registrants Definitive
Information Statement filed with the SEC on July 21, 2002.
II-7
(7) Incorporated by reference to GWIN, Inc. annual report on Form 10-K for
the year ended July 31, 2002, as filed with the SEC on October 28, 2002.
(8) Incorporated by reference to GWIN, Inc. annual report on Form 10-K for
the year ended July 31, 2003, as filed with the SEC on November 10, 2003.
(9) Incorporated by reference to GWIN, Inc. Form 10-Q for the quarter ended
January 31, 2004, as filed with the SEC on March 11, 2004.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned small business issuer will:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2, and authorized this
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Las Vegas, State of Nevada, on the 19th day of
April 2004.
GWIN, INC.
By: /s/ Wayne Allyn Root
Wayne Allyn Root, Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Wayne Allyn Root Chairman and Chief April 19, 2004
Wayne Allyn Root Executive Officer
/s/ Douglas R. Miller Chief Operating April 19, 2004
Douglas R. Miller Officer and Director
/s/ Jeff Johnson Chief Financial April 19, 2004
Jeff Johnson Officer (Principal
Financial and
Accounting Officer)
/s/ Roger Aspey-Kent Director April 19, 2004
Roger Aspey-Kent
/s/ Robert L. Seale Director April 19, 2004
Robert L. Seale
/s/ Timothy Michael Whalley Director April 19, 2004
Timothy Michael Whalley
/s/ Roger L. Harrison Director April 19, 2004
Roger L. Harrison