-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ROoJKyYqZxUl2N0hlI/BVbMOHZHxkBuigpXb1B/YjWN0YbIqSpYbJ35Bs67LF2AI X3ycl6NeYa+07dFDGm4dnA== 0001094891-01-500061.txt : 20010502 0001094891-01-500061.hdr.sgml : 20010502 ACCESSION NUMBER: 0001094891-01-500061 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYBERMARK INTERNATIONAL CORP CENTRAL INDEX KEY: 0001092299 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-26919 FILM NUMBER: 1618259 BUSINESS ADDRESS: STREET 1: 359 ENFORD ROAD UNIT 1 STREET 2: RICHMOND HILL CITY: ONTARIO CANADA STATE: A6 ZIP: 00000 MAIL ADDRESS: STREET 1: 95 WEST BEAVER CREAK STREET 2: RICHMOND HILL CITY: ONTARIO CANADA STATE: A6 10KSB40 1 cybermark_10k-123100.txt ANNUAL REPORT FOR 12/31/00 Washington, D. C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 ------------------------------------------ [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- ----------------------- Commission file number 0-26919 ------------- CYBER MARK INTERNATIONAL CORP. ---------------------------------------- (Name of Small Business Issuer in Its Charter) Delaware N/A - ---------------------------------- --------------------------------- (State or Other Jurisdiction (I.R.S. Employer Identification No.) of Incorporation or Organization) 359 Enford Road, Unit 1 Richmond Hill, Ontario, Canada L4C 3G2 - ---------------------------------------- ---------------------- (Address of Principal Executive Offices) (Zip Code) Issuer's telephone number: (905) 770-4602 ---------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.0001 per share Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No |_| --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year: $17,253 The aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which it was sold or the average of the asked and bid price on March 31, 2001, was $1,053,797. At March 31, 2001, 18,758,600 shares of issuer's Common Stock were outstanding. PART I ITEM 1. DESCRIPTION OF BUSINESS. General Because of the lack of operating capital and absence of product sales, we have not had active business operations during fiscal year 2000. We believe that if we had the economic resources, we would be able to manufacture virtual reality game equipment that would be economically accepted and develop our array of games for use with the equipment. This is based on certain products that were developed in the past and which we commercialized to a limited degree. Virtual reality is an emerging technology which attempts to fully immerse the user in an interactive computer generated environment. The participant in a virtual reality experience interacts with the system through a series of sophisticated sensors which are both input and output devices. Input devices include data gloves which track hand positions and configurations and body suits which sense the entire orientation of the virtual reality participant. Output devices include complex head mounted displays and surround-sound audio systems. The result is an illusion to the participant that he is surrounded by three-dimensional computer generated objects. From its initial beginnings merely thirty years ago, virtual reality is evolving into many applications including those in the fields of industry, architecture, medicine, science and entertainment. We believe that virtual reality technology is developing in a manner similar to the personal computer where it was initially thought there were limited applications and its purpose was limited to specific tasks. Although entertainment promises the most potential, we believe that many other uses will be developed as the technology is refined and more readily available at commercially competitive prices. Corporate History We were incorporated under the laws of the State of Delaware on June 9, 1998, to serve as a holding company for CM300. CM300 was incorporated under the laws of the Province of Ontario on January 1996, and became our wholly owned subsidiary on the same day that we were incorporated. All of our business operations are conducted through the CM300 Corporation, our wholly owned subsidiary. Products and Services Although we are not manufacturing or selling any products at this time, based on designs and our past operating experience we believe we could produce the virtual reality systems and games described below. Cobra System The Cobra System is an immersive virtual reality system generated by computer. In 1998 and 1999, we developed a second generation system. The Cobra System pod incorporates a cross platform capability which allows it to use PC based games adapted from systems such as Nintendo 64, Sony and Sega. The pod uses 18 1/2 square feet of space and weighs about 150 pounds. It may be constructed from modular parts making it portable and easily repairable. The pod is designed with built in instructional videos and token, card, coin or bill verification to reduce the need for dedicated operational personnel for each or a limited number of pods as is the case with many competing products. The six games available for use with the Cobra System are: o Tresspasser o Heavy Gear II o Soldier of Fortune 2 o Quake II; o Decent Free Space Battle Pack; and o Unreal Tournament. The above games were developed in 1998 - 1999, and we believe they would need updating to be commercially viable at this time or in the near future. Because maintaining and expanding the variety of games available for use in this type of entertainment equipment is essential to their continued appeal, it is anticipated that if we again market the Cobra System, we will have to develop additional games and new versions of old games for use with the Cobra System. Virtual Speedway The Virtual Speedway is a real time virtual reality (as opposed to computer generated) system based on miniature models and motion video. To achieve a true sense of motion and involvement, a virtual race, the Virtual Speedway uses a miniature race track measuring 40 by 20 feet. Up to six race cars, built to scale, are equipped with miniature television cameras and transmitters to replicate the kind of television coverage in use at race tracks. Next to the track, there are six control consoles equipped with a steering wheel, accelerator and reverse pedals and a head mounted device with reception capability and optics. The player's view, from the car mounted camera, "literally" places the participant inside the car as they race around the track. The Virtual Speedway is fully developed and was commercially available for the first time in November 1997. We believe that to achieve greater commercialization of the Virtual Speedway, we must further develop it with a remote system. The proposed remote system, as yet untested in real-time situations, will enable players to race against each other from remote, off-site locations. Any remote station can participate in any race. The intent is that the tracks, cars and computer will be situated in one central location. Up to 24 control consoles (play stations) per track will be dispersed throughout specific geographic territories in bars, entertainment centers, theaters and the like. We anticipate the completion of development of the VS300, with these aspects, will depend on our ability to obtain the additional financing needed to continue with development. Markets The principal markets for the Cobra System are likely to be amusement arcades and family entertainment centers of which there are approximately 6,500 amusement arcades and 2,500 family entertainment centers in Canada and the United States. The principal markets for the Virtual Speedway are likely to be amusement parks, theme parks, shopping malls, bars and major exhibitions as well as amusement arcades and family entertainment centers. In years past we installed Cobra Systems in Canada, the United States, Denmark, Hungary, Ukraine, Lebanon, Brazil, Peoples Republic of China, Hong Kong, Malaysia and Guam. To date, we have installed Virtual Speedway systems in the United States on a summer seasonal basis in a limited number of locations. In the recent past, we have experienced slow acceptance of our virtual reality products. We believe the reason for this is the initial cost of our equipment is a considerable investment for our markets. Therefore, to commercialize our products we will have to develop new marketing techniques which will probably have to include financing to our customers. Alternatively, we may sell or license the technologies and designs and the games to others with greater financial capacity. In the past we have sought to create brand recognition for our group of products. Any new marketing will be oriented towards the entertainment industry. Demographic data, site assessment and competitive review are essential to the marketing success of the product. Manufacturing Our products are designed to be manufactured from a large number of components, approximately 85% of which are commercially available parts and the remainder of which are designed to be manufactured to specific requirements by outside 3 manufacturers. The use of modular construction and an open architecture of non-proprietary parts make repairs easy and quick. It is our intent to maintain more than one source for each of our major components, to the extent possible, although certain suppliers are currently the sole source of one or more items. No assurance can be given that the necessary components will be available from the current sources, however, we also believe that our products may be better constructed than those of our competitors resulting in longer useful lives and less repair problems. We employ our own programmer to maintain quality control. From time to time, we outsource programming. Research and Development We expensed $9,149 on research and development activities in 2000 and $133,896 in 1999. These expenses were for the purpose of developing the second generation Cobra System. We have budgeted to spend approximately $200,000 in 2001, but this amount will depend entirely on obtaining financing for that purpose, among others. To the extent that outside financing is not available, research and development expenses will be reduced or curtailed, which will affect product enhancement and development. Without additional product development, we will not have any revenues. Competition Our products compete directly with video games and similar amusement arcade and park entertainments. We compete with companies such as Sega, Midway, Nintendo and Atari. These and other entities with competing products have substantially greater financial resources, manufacturing and marketing capabilities, research and development staff and production facilities than we do. No assurance can be given that these competitors and potential competitors will not develop technology and/or products that will be as or more advanced and affordable than the ones we produce. We intend to compete on the basis of price, our program of development of new games and the quality of our products which result in longer useful lives and higher profit margins. In addition, we believe that our products generally require no operational staff, resulting in substantial savings for the entertainment facility which is another competitive factor. Employees We currently have three employees, of which one is a senior executive and one is a programmer. ITEM 2. DESCRIPTION OF PROPERTIES. Our executive offices are located at 359 Enford Road, Unit 1, Richmond Hill, Ontario, Canada L4C 3G2 and our telephone number is (905) 707-3441. We rent this space for our offices and manufacturing/ assembly facilities. We believe that our current office and other facilities are adequate to meet our needs into the near future. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our common stock became eligible for quotation on the OTC Bulletin Board on February 14, 2000, under the symbol "CMKI". On August 25, 2000, we issued a stock dividend of one share for each share of common stock outstanding on August 11, 2000. The following table sets forth, for the periods indicated, the high and low unpriced quote trades for our common stock as reported on the OTC 4 Bulletin Board, without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. There has not been any electronic bid or asked quote. Period High($) Low($) ------ ------- ------ Fiscal 2000 First Quarter* 4.00 $3.00 Second Quarter 4.00 .375 Third Quarter 1.125 .219 Fourth Quarter .375 .125 Fiscal 2001 First Quarter** .270 .095 - ----------------------------- * From February 14, 2000. ** To March 31, 2001. Holders As of March 31, 2001, there were 24 holders of record of our common stock. On that date there were 18,758,600 shares of common stock outstanding. Dividends We have never declared or paid cash dividends on our common stock and we anticipate that all future earnings, if any, will be retained for working capital and business expansion. The payment of any cash dividends, if ever, will be at the sole discretion of our board of directors and will depend upon, among other things, future earnings, capital requirements, our financial condition and general business conditions. There can be no assurance that any cash dividends on our common stock will be paid in the future. We have announced the intention of the company to declare a ten-for-one stock dividend during the second fiscal quarter of 2001. To do this, the authorized capital will have to be increased by amendment to provide enough common stock for distribution. An amendment will require the approval of the majority of the outstanding shares of common stock. It is feasible that this approval may be made by the written consent of a limited number of persons. An increase in the number of shares outstanding is likely to have an adverse effect on the trading market and price of the common stock unless there is increased market interest or a significant improvement in the business and financial prospects of the company, of which there can be no assurance. The additional shares of common stock may also impair our ability to raise needed capital. Recent Sales of Unregistered Securities We have made the following sales of unregistered securities within the past fiscal year: 5
If Option, Consideration Received Warrant or and Description of Convertible Underwriting or Other Security, Discounts to Market Price Exemption from Terms of Afforded to Registration Exercise or Date of Sale Title of Security Number Sold Purchasers Claimed Conversion - ------------------ -------------------- ----------------- --------------------------- ------------------ ---------------- 4/18/00 Common Stock 800,000 For services rendered to 4(2) N/A CM 300 8/31/00 Common Stock 150,000 For services rendered to 4(2) N/A CM 300
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward-Looking Statements When used in this Form 10-KSB and in our future filings with the Commission, the words or phrases "will likely result," "management expects" or "we expect," "will continue," "is anticipated," "estimated" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We have no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements. Qualified Opinion Our independent auditors have qualified their opinion on our financial statements included in this Annual Report on Form 10-KSB. Their opinion states that the financial statements were prepared assuming that the company will continue as going concern. They further mention that the company has suffered significant losses from operations, has breached loan covenants and has deficiencies in working capital and stockholder equity. The accountants state that there is substantial doubt about the company's ability to continue as a going concern. We need capital to continue in business. If we are unable to obtain capital, we will have to curtail our operations and explore other business options, including selling our assets or combining with another company that may or may not use the products we have developed to date. We have no arrangements at this time which will assure the future of the company at any level. Sales We had sales of $151,184 for the fiscal year 1999 and sales of $6,184 for the fiscal year 2000. The lack of sales was the result of dislocation in the market for virtual reality entertainment products caused by the bankruptcy of a major producer. This bankruptcy caused some to question whether virtual reality will be a viable entertainment medium. As a result of the business failure, there was substantial discounting of its existing inventory which affected our ability to sell and maintain the selling price of the Cobra System. To offset this unfavorable market condition, we began limited development of the second generation of the Cobra System. 6 Cost of Sales The cost of sales for the fiscal year 2000 was $7,704 and for the fiscal year 1999 was $126,888. Expenses Our expenses for the fiscal year 1999 were $481,184 and for the fiscal year 2000 were $1,353,331. The principal reason for the increase in expenses is the losses incurred as a result of the disposal of equipment and an accrual for lease payments through the end of the lease term in the amount of $111,394 and $116,454, respectively. There were some savings in certain categories of expenses, but these were insufficient to off-set the increase in other expenses. In the fiscal year 2000, we expensed $9,149 for research and development. In the fiscal year 1999, we expensed $133,896 for research and development. As a result of decreased sales and lack of revenues, research and development in 2000 was significantly reduced. Other expenses increased in from $0 in year 1999 to $27,347 in year 2000. This increase is primarily due to a payment made in the amount of $23,762 pursuant to a guaranty by the Company of a third party obligation. Office and general expenses increased from $15,930 in year 1999 to $60,353 in year 2000. This increase is primarily the result of fees paid in connection with the terms of a loan to the Company and stock administration fees. Consulting fees increased from $8,215 in year 1999 to $44,010 in year 2000. This increase is a result of the increased use of consultants in connection with business development. Of this amount $15,369 in consulting fees were paid to Joseph Byck, an executive officer of the Company. Losses We had a loss of $366,223 for the fiscal year 1999 and of $1,343,782 for the fiscal year 2000. The principal reasons for the significant increase in losses was a significant reduction in sales revenue and a significant increase in wages and benefits expenses resulting from an accrual for the issuance of stock options with an exercise price below the closing price on the day of issuance, and a loss of $227,848 for disposal of equipment and property. The net loss per share for fiscal year 1999 was $.03 and for fiscal year 2000 was $.11; however, there were additional shares outstanding for the later period as a result of issuances and the stock dividend of August 25, 2000. Liquidity and Capital Requirements Our working capital deficiency at December 31, 2000, was $601,028. Our working capital requirements since incorporation have been funded by the sale of securities from time to time, borrowings (including bank overdrafts) and revenues from sales. The proceeds of these financings were used to fund losses and for developmental activities. At December 31, 2000, we had aggregated debt and loans from shareholders of $457,922. At December 31, 2000, we had $34,877 in demand loans due to a bank with interest at the bank prime rate plus 1 3/4% per annum. This loan is secured by a general security agreement. Of the outstanding debt, $117,694 at December 31, 2000, was a business development loan from The Business Development Bank of Canada. This loan bears interest at the rate of 5% above the floating base interest rate charged by the bank. The loan is repayable at the rate of $2,739 per month and matures December 2002. We must also pay a fee to the bank of .1942% per annum, until December 2002 which aggregated $12,925 in the fiscal year ended December 31, 2000. This loan is secured by a pledge of all the assets of CM300 and shareholder guarantees. We have a term loan with the Royal Bank of Canada. The outstanding principal amount at December 31, 2000, was $29,300. We pay interest at 3% over the bank's prime rate, and the loan matures in May 2000. This loan is secured by a general pledge of the assets of CM300 and shareholder guarantees. 7 We have a loan payable on demand to Candove Corporation in the amount of $200,000 bearing interest at 10%. Candove has the right at any time to convert any or all of the debt into our common stock at a conversion rate equal to one common share for each $.50 of debt. We are in negotiations to change the conversion rate to be applied to this loan. It is anticipated that the loan will be converted during the second fiscal quarter of 2001. In addition, in order to induce Candove Corporation to make the loan, we issued to it 800,000 shares of common stock. We require additional financing to continue in business and to develop our products. Funds are required for product research and development, manufacturing and production, marketing activities and operating expenses. If we do not obtain funding, we will not be able to continue our business. Management cannot determine how long we will require to fund operational losses and our other activities with funds from the sale of securities and credit arrangements. Management believes the amount of funds required now and in the future will be substantial. Except as discussed above, we currently have no sources of financing, including bank or private lending sources, or equity capital sources. No assurance can be given that we will be able to develop sources of financing in the future when funds are needed or on acceptable terms. If we do not obtain necessary funding, we will have to curtail aspects of our operations or cease operations altogether. There is no assurance that we will be able to continue our business in the future. The opinion of our auditors contains an explanatory paragraph regarding our ability to continue as a going concern. We have relied and will continue to rely on the sale of securities and borrowings to fund our operations and in certain circumstances, compensate vendors and consultants. If we engage in any acquisition transactions, we anticipate using securities for the purchase price. To the extent we are able, we will sell or issue debt and equity securities or combinations of the two. In connection with the sale of securities, we may have to issue warrants for common stock to induce persons to invest in the company. If we sell debt securities or borrow funds, the interest charges may have an adverse impact on working capital and cash flow. If we sell additional equity capital or issue common stock derivative securities, current investors will experience dilution, possibly at significant levels. We may grant security interests in our asset base, as we have done in the past. The existence of prior security interests or the size of the asset base will limit our ability to raise capital. In connection with a future financing, we may be required to effect a recapitalization which may have an adverse financial consequence on the stockholders. ITEM 7. FINANCIAL STATEMENTS. Index to Consolidated Financial Statements: Page ---- Independent Auditors' Report of Citrin Cooperman & Company, LLP........F-1 Consolidated Balance Sheets as of December 31, 2000 and 1999...........F-2 Consolidated Statements of Operations for the years ended December 31, 2000 and 1999.........................................F-3 Consolidated Statements of Stockholders' Deficiency for the years ended December 31, 2000 and 1999.........................F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2000 and 1999....................................F-5 Notes to Consolidated Financial Statements......................F-6 to F-11 8 INDEPENDENT AUDITORS' REPORT Board of Directors Cyber Mark International Corp. We have audited the accompanying consolidated balance sheets of Cyber Mark International Corp. as at December 31, 2000 and 1999 and the related consolidated statements of operations, stockholders' deficiency and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles 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 aforementioned consolidated financial statements present fairly, in all material respects, the financial position of Cyber Mark International Corp. as at December 31, 2000 and 1999 and the results of its operations and its cash flows for the years then ended in conformity with auditing standards generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 10 to the financial statements, the Company has suffered significant losses from operations, has breached certain loan convenants and has deficiencies in working capital and stockholders' equity. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 10. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Citrin Cooperman & Company, LLP ------------------------------------ CERTIFIED PUBLIC ACCOUNTANTS April 11, 2001 New York, New York F-1
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 2000 1999 ---------- --------- ASSETS Current assets: Cash and cash equivalents $ - $ 1,521 Investment tax credits receivable 90,226 163,208 Accounts receivable - 9,281 Inventory 16,775 24,479 Prepaid expenses and other current assets 5,919 5,004 ------------- ------------- Total current assets 112,920 203,493 Property and equipment - net 24,855 142,334 ------------- ------------- TOTAL ASSETS $ 137,775 $ 345,827 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Bank indebtedness $ 34,877 $ 48,503 Accounts payable and accrued liabilities 256,026 126,619 Loans payable 346,994 151,098 Advances from shareholder 76,051 77,641 ------------- ------------ Total current liabilities 713,948 403,861 ------------- ------------ Stockholders' deficiency: Capital stock 1,315 610 Additional paid in capital 1,520,397 740,367 Cumulative translation adjustment 4,301 (41,217) Accumulated deficit (2,102,186) (757,794) ------------- ------------ Total stockholders' deficiency (576,173) (58,034) ------------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 137,775 $ 345,827 ============= ============
See accompanying notes to financial statements. F-2 CYBER MARK INTERNATIONAL CORP. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999 ------------------- ------------------- Sales $ 6,184 $ 151,184 Cost of sales 7,704 126,888 ------------------- ------------------- Gross profit (loss) (1,520) 24,296 ------------------- ------------------- Expenses: Wages and benefits 813,938 66,698 Professional fees 80,756 52,070 Interest 41,081 25,373 Rent and occupancy 21,216 72,394 Office and general 60,353 15,930 Trade shows and events - 15,158 Marketing 6,713 22,191 Other expenses 27,347 - Telephone 7,052 10,374 Travel and entertainment - 4,865 Automobile - 7,583 Insurance 7,390 7,084 Consulting fees 44,010 8,215 Depreciation and amortization 6,478 39,353 Loss on lease abandonment 227,848 - Research and development 9,149 133,896 ------------------- ------------------- 1,353,331 481,184 ------------------- ------------------- Loss from operations (1,354,851) (456,888) Interest income 11,069 90,665 ------------------- ------------------- NET LOSS $(1,343,782) $ (366,223) =================== =================== Loss per share $ (0.11) $ (0.03) =================== =================== Weighted average shares outstanding 12,573,985 12,190,138 =================== ===================
See accompanying notes to financial statements. F-3
CYBER MARK INTERNATIONAL CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 Common Stock Additional Cumulative Comprehensive Total ------------------------- Paid In Accumulated Translation Income Stockholders' Shares Amount Capital Deficit Adjustment (Loss) Deficiency ------------ ---------- ------------ ------------ --------- --------------- ------------ Balance - January 1, 1999 6,064,300 $ 606 $ 720,371 $ (391,571) $ 4,283 $ 333,689 Common stock issued in private placement 40,000 4 19,996 20,000 Net loss (366,223) $ (366,223) Other comprehensive loss: Cumulative translation adjustment (45,500) (45,500) --------------- Total comprehensive loss $ (411,723) (411,723) ------------ ---------- ------------ ------------ --------- =============== ------------- Balance - December 31, 1999 6,104,300 610 740,367 (757,794) (41,217) (58,034) Stock split effected in the form of dividend 6,104,300 610 (610) Value of stock options granted 750,000 750,000 Common stock issued as fee for arranging financing with Candove Corporation 800,000 80 1,920 2,000 Common stock issued in exchange for software support 150,000 15 28,110 28,125 Net loss (1,343,782) $ (1,343,782) Other comprehensive income: Cumulative translation adjustment 45,518 45,518 --------------- Total comprehensive loss $ (1,298,264) (1,298,264) ------------ ---------- ------------ ------------ --------- =============== ------------- BALANCE - DECEMBER 31, 2000 13,158,600 $ 1,315 $1,520,397 $(2,102,186) $ 4,301 $ (576,173) ============ ========== ============ ============ ========= =============
See accompanying notes to financial statements. F-4 CYBER MARK INTERNATIONAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 2000 1999 ------ ------- Cash flows from operating activities: Net loss $(1,343,782) (366,223) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 6,478 39,353 Shares issued for services 30,125 - Loss on lease abandonment 111,394 - Value of stock options granted 750,000 - Changes in assets and liabilities: Investment tax credits receivable 68,102 101,946 Accounts receivable 7,526 4,877 Inventory 6,916 66,600 Prepaid expenses (1,120) 17,521 Accounts payable and accrued 137,618 56,195 ------------ ---------- Net cash used by operating activities (226,743) (79,731) ------------ ---------- Cash flows from investing activities: Purchase of property and equipment (392) - ------------ ---------- Net cash used by investing activities (392) - ------------ ---------- Cash flows from financing activities: Issuance of capital stock - 20,000 Loan payable proceeds 200,000 - Repayment of loans (17,709) (31,546) Advances from shareholder 1,261 5,927 Bank indebtedness 7,294 28,046 ------------ ---------- Net cash provided by financing activities 190,846 22,427 ------------ ---------- Effect of exchange rate changes on cash 34,768 (48,040) ------------ ---------- Decreases in cash and cash equivalents (1,521) (105,344) Cash and cash equivalents - beginning 1,521 106,865 ------------ ---------- CASH AND CASH EQUIVALENTS - ENDING $ - $ 1,521 ============ ==========
See accompanying notes to financial statements. F-5 CYBER MARK INTERNATIONAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation On July 2, 1998, the shareholders of The CM 300 Corp. ("CM300") exchanged all their issued common shares for common shares of Cyber Mark International Corp. ("Cyber"). The acquisition of CM300 by Cyber was a reverse takeover whereby CM300 was identified as the acquiring company. Cyber was incorporated in Delaware in June 1998, and prior to the acquisition Cyber was inactive. The consolidated financial statements include the accounts of the Company and its subsidiary after eliminating all intercompany accounts and transactions. Cash and cash equivalents The Company considers all highly liquid investments with a maturity of three months or less from time of purchase to be cash equivalents. Inventory Inventory is valued at lower of cost or market. Cost is determined on the first-in-first-out basis. Property and equipment Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful life of the assets, usually five years. For leasehold improvements, depreciation is provided on a straight-line basis over five years. 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 as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions. Financial instruments The Company considers the fair value of all financial instruments to be not materially different from their carrying value at year end. Translation of foreign currencies The Company uses the local currency as the functional currency and translates all assets and liabilities at year-end exchange rates, all income and expense accounts at average rates and records adjustments resulting from the translation in a separate component of common shareholders' equity. F-6 CYBER MARK INTERNATIONAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE 2 - PROPERTY AND EQUIPMENT ----------------------
Accumulated Depreciation and Cost Amortization Net Book Value ----------------------- ----------------- --------------- 2000 1999 2000 1999 2000 1999 ---- ---- ---- ---- ---- ---- Manufacturing equipment $ - $ 84,801 $ - $ 48,245 $- $ 36,556 Furniture and fixtures 12,336 12,336 8,287 7,212 4,049 5,124 Office and shop equipment 23,872 23,480 11,494 8,329 12,378 15,151 Entertainment equipment - 75,595 - 33,219 - 42,376 Moulds 14,932 14,932 6,504 4,267 8,428 10,665 Software 4,486 4,486 4,486 4,486 - - Leasehold improvements - 51,283 - 18,821 - 32,462 ------------ -------------------- -------- ----------- -------- $ 55,626 $266,913 $ 30,771 $124,579 $24,855 $142,334 ======= ======= ======= ======= ====== =======
Depreciation and amortization expense for the years ended December 31, 2000 and 1999 amounted to $6,478 and $39,353, respectively. During the year ended December 31, 2000, the Company incurred a loss of $111,394 on the abandonment of equipment and improvements and an accrual for lease payments through the remainder of the lease term of $116,454. NOTE 3 - BANK INDEBTEDNESS ----------------- The bank indebtedness is payable on demand, bears interest at the bank prime rate plus 1 3/4% per annum and is secured by a general security agreement and a postponement of claim signed by the shareholder. NOTE 4 - LOANS PAYABLE ------------- Business development loan bearing interest at a rate of 5% above the bank's daily floating base interest rate, repayable in monthly installments of $4,200 (Canadian) and matures December, 2002. The Company is required to pay the bank additional interest in the form of a royalty of 0.1942% on the combined sales of the Company. The royalty is payable monthly at the rate of one twelfth of .1942 percent of combined sales. Total royalties paid during 2000 and 1999 were $12,925 and $263, respectively. The loan is secured by a general security agreement, joint and several guarantees of the shareholders, assignment of shareholder loans, life insurance on the lives of the shareholders and assignment of property insurance. F-7 CYBER MARK INTERNATIONAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE 4 - LOANS PAYABLE (CONTINUED) ------------------------- 2000 1999 -------- -------- As discussed in Note 10, the Company has breached certain loan covenants as of December 31, 2000 and 1999 and therefore, the entire debt is classified as current at December 31, 2000 and 1999. $117,694 $122,227 Bank term loan bearing interest at the bank prime rate plus 3% per annum, repayable in monthly installments of $5,555 (Canadian), maturing May, 2000. The loan is now past due, but the bank has not renegotiated the terms nor demanded payment. The loan is secured by a general security agreement, postponement and assignment of claim signed by the shareholder and a guarantee in the amount of $100,000 by the shareholder. 29,300 28,871 Loan payable on demand to Candove Corporation ("Candove") bearing interest at 10%. Candove has the right at any time to convert any or all of the debt into common shares of the Company at a conversion rate equal to one common share for each $.50 of debt. In addition, the Company issued 800,000 shares of common stock to Candove as an inducement to them to make the loan to the Company. 200,000 - ------- -------- $346,994 $151,098 ======= =======
NOTE 5 - ADVANCES FROM SHAREHOLDER ------------------------- These advances are unsecured and non-interest bearing with no specific terms of repayment. NOTE 6 - CAPITAL STOCK ------------- 2000 1999 -------- -------- Authorized Issued ----------- ------- 500,000 None Preferenced shares, issuable in series, par value $.001 75,000,000 13,158,600 Common shares, par (2000) and (2000) and value $.0001 $ 1,315 $ 610 10,000,000 6,104,300 ======== ========= (1999) (1999)
F-8 CYBER MARK INTERNATIONAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE 6 - CAPITAL STOCK (CONTINUED) ------------------------- During the year ended December 31, 2000, the Company effected a stock split n the form of a dividend for 6,104,300 shares. All share and per share information has been restated accordingly to reflect this change. Also in 2000, 800,000 shares were issued to Candove Corporation as an inducement to arrange financing for the Company, and 150,000 shares were issued for software support. These shares were recorded at the fair market value. During the year ended December 31, 1999, the Company issued 40,000 shares in private placements for $20,000. The Company adopted Performance Equity Plans for the granting of stock based awards to employees. The 1998 plan provides for awards for up to 520,000 shares of common stock and the 2000 plan provides for awards for up to 4,000,000 shares of common stock. During January 2001 the Company issued 4,000,000 shares under the 2000 Plan for services to be rendered. During January 2001, 200,000 shares were issued for services to be rendered. During February 2001, the Company issued 1,400,000 shares upon exercise of outstanding options. On March 8, 2001 the Board of Directors of the Company approved a 10-1 forward stock split. Before the stock split is concluded, the Company must take a number of actions in connection with amending its articles of incorporation and then determining the record and distribution dates. During 1998, options to purchase a total of 980,000 common shares at prices ranging from $.25 to $.625 per share were granted to certain employees. The options are exercisable until five years, for 800,000 common shares, and three years, for 180,000 common shares, from date of grant subject to certain conditions. During 2000, option to purchase 600,000 common shares were granted. Such options are at $.25 per share and are exercisable for five years. At December 31, 2000, all options are exercisable. Options expire as follows: Date Shares Exercise Price ---- ------ -------------- August 25, 2001 180,000 $ .50 December 31, 2001 400,000 .25 December 31, 2002 200,000 .50 December 31, 2003 200,000 .625 April 1, 2005 600,000 .25 ---------- 1,580,000 ========== The Company applies Accounting Principles Board Opinion No. 25 (Accounting for Stock Issued to Employees) and related interpretations in accounting for its stock option plans. Accordingly, no compensation expense is recognized when options are granted. F-9 CYBER MARK INTERNATIONAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE 6 - CAPITAL STOCK (CONTINUED) ------------------------- Had compensation expense been determined based on the fair market methodology prescribed SFAS No. 123 (Accounting for Stock-Based Compensation) issued by the Financial Accounting Standards Board in October, 1995, net earnings for 2000 would have been reduced by approximately $150,000 for options granted during 2000. The fair value for options granted during 2000 was estimated at $1.50 on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield 0%, volatility 282%, risk-free interest rate of 5% and an expected life of 5 years. NOTE 7 - INCOME TAXES ------------ The Company's deferred taxes as of December 31, are estimated as follows: 2000 ------------------------------- Canada U.S. Total -------- -------- ------- Net operating loss carryforward $621,000 $42,000 $663,000 Valuation allowance (621,000) (42,000) (663,000) ------- ------ ------- Net deferred tax asset $ - $ - $ - ========= ======= ======== 1999 ------------------------------- Canada U.S. Total -------- -------- ------- Net operating loss carryforward $388,000 $ 6,000 $394,000 Valuation allowance (388,000) (6,000) (394,000) ------- ----- ------- Net deferred tax asset $ - $ - $ - ======== ======= ========
A valuation allowance has been applied to offset the deferred tax asset in recognition of the uncertainty that such benefits will be realized. At December 31, 2000, the Company has available net operating loss carryforwards for U.S. tax reporting purposes of approximately $105,000 which is available to offset future taxable income, if any. This carryforward expires in 2019 and 2020. For Canadian income tax purposes, the Company has available net operating loss carryforward of approximately $1,389,000 which are available to offset future taxable income, if any. These carryforwards expire in 2004, 2005, 2006 and 2007. NOTE 8 - LOSS PER COMMON SHARE --------------------- Loss per common share is based on the weighted average number of common shares outstanding during each period. Loss per common share is the same for both basic and dilutive since stock options would be antidilutive and therefore not included in the calculation. F-10 CYBER MARK INTERNATIONAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE 9 - COMMITMENTS ----------- The Company is committed under various operating leases for occupied premises which expire in the year 2003. Future minimum annual payments (exclusive of taxes, insurance and maintenance costs) as of December 31, 1998 as are follows: 2001 $ 55,349 2002 52,154 2003 8,951 --------- $116,454 ========= This amount has been accrued at December 31, 2000 to reflect the Company's abandonment of the lease during 2000. Rent expense for the years ended December 31, 2000 and 1999 amounted to $21,216 and $72,394, respectively. NOTE 10 - GOING CONCERN -------------- As shown in the accompanying financial statements, the Company has incurred significant losses over the past two (2) years. In addition, as of December 31, 2000 and 1999, the Company has breached certain loan covenants and has deficiencies in working capital and stockholders' equity. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependent upon future profitability and its ability to obtain additional or alternative financial support from shareholders or others if required. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management's plans include continuing to actively pursue new revenue sources as well as obtaining financing through private placements of debt securities and long term financing. There can be no assurance that the Company will be able to fulfill these plans. F-11 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Our officers and directors are as follows: Name Age Position ---- --- -------- Samuel Singal 52 Chairman of the Board, Chief Operating Officer and sole Director Joseph Byck 68 Treasurer Monika Runge 25 Secretary Mr. Samuel Singal was our founder and the founder of our principal subsidiary, CM300. Mr. Singal has been our Chairman and Chief Operating Officer since 1998 and the President of CM300 since 1996. From 1994 until 1996, Mr. Singal was employed at Cybermind Systems, where he held the position of President. Mr. Joseph Byck has been the Marketing Director of CM300 since 1996. Mr. Byck has been our Treasurer since July 1999. From 1994 to 1999, Mr. Byck was the president of Herbs International Corp., a company that manufactures specialty herbal products related to the neutralizing effects of alcohol. Ms. Monika Runge has been employed by CM300 since February 1999. From February 1997 to date, Ms. Runge has been a student for a degree in business administration at York University, Ontario and from September 1996 to February 1997 she was a student at Trinity Western University in British Columbia. From May 1994 to September 1996, Ms. Runge held various positions with Cybermind Canada Inc. Board Meetings and Committees During the fiscal year ended December 31, 2000, our board of directors took unanimous written action on three occasions. The board did not hold any meetings. The board of directors has established no committees. Directors serve for a term of one year after election or until their earlier resignation or their successor is elected or appointed and qualified. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers, directors and persons who beneficially own more than ten percent of a registered class of our equity securities ("ten-percent shareholders") to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and ten-percent shareholders are also required to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms furnished to us, and written representations that no other reports were required, we believe that during the fiscal year ended December 31, 2000, all of our officers, directors and ten-percent shareholders complied with the Section 16(a) reporting Requirements. 9 ITEM 10. EXECUTIVE COMPENSATION. We currently do not pay a salary to Messrs. Singal or Byck. In lieu of compensation in fiscal year 2000 we paid consulting fees to Mr. Byck in the amount of $15,369. We pay a monthly salary of $1,280 to Ms. Runge. Option Grants No options were granted to executives in the fiscal year ended December 31, 2000. Remuneration of the Board of Directors A director who is an employee does not receive any compensation as a director. There is no plan in place for compensation of persons who are directors who are not our employees. Keyman Life Insurance We do not own life insurance covering the death of any officer, director or key employee. Employment Contracts None of our executive officers are employed under a written contract of employment. Stock Option Plans We have a Performance Equity Plan adopted in 1998 by the board which provides for the issuance of stock-based awards for up to 520,000 shares of common stock. The awards under this plan may be granted separately or together with other awards. The awards include only non-incentive stock options, stock bonuses and cash payment awards. Incentive stock options may only be granted to persons who are our employees. Other forms of awards may be granted to consultants, directors, employees and officers of the company. We have a Performance Equity Plan adopted in 2001 by the board which provides for the issuance of stock based awards for up to 4,000,000 shares of common stock. The awards under this plan may be granted separately or together with other awards. The awards include non-incentive stock options, stock bonuses, restricted stock and stock appreciation rights. The awards may be granted to consultants, directors, employees and officers of CyberMark and CM300. We have issued awards relating to 4,000,000 shares of common stock under this plan all of which have been exercised. We have also issued options outside the above plans to acquire up to 180,000 shares of common stock. 10 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth information as of April 5, 2001 information regarding the beneficial ownership of our common stock based upon the most recent information available to us for (i) those persons or group of persons known by us to beneficially own more than five percent (5%) of our voting securities, (ii) each director and director-nominee of Cyber Mark and (iii) all executive officers and directors as a group. Percent of Number of Shares Ownership of of Common Stock Common Stock Name of Beneficial Owner Beneficially* Owned Outstanding - ------------------------- ------------------- ------------ Samuel Singal. . . . . . . . . . . 7,666,000 (1) 41% Directors and officers as a group (1 person) . . . . . 7,666,000 41% - -------------------------------- * Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock issuable upon the exercise of options or warrants currently exercisable, or exercisable or convertible within 60 days, are deemed outstanding for computing the percentage ownership of the person holding such options or warrants but are not deemed outstanding for computing the percentage ownership of any other person. (1) The address for Mr. Singal is care-of Cyber Mark International Corp. at 359 Enford Road, Unit 1, Richmond Hill, Ontario, Canada L4C 3G2. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits Filed. See Exhibit Index appearing later in this Report. (b) Reports on Form 8-K. None. 11 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CYBER MARK INTERNATIONAL CORP. (Registrant) Dated: April 25, 2001 By: /s/ Samuel Singal ------------------------------------------- Name: Samuel Singal Title: President and Chief Operating Officer (Chief Operating Officer and Chief Financial Officer of the Registrant) 12 EXHIBIT INDEX
Incorporated Exhibit By Reference from No. in Number Description Document Document - ------- ----------- --------------- -------- 3.1 Certificate of Incorporation A 3.1 3.2 By-Laws A 3.2 4.1 Form of Common Stock Certificate A 4.1 10.1 1998 Performance Equity Plan A 10.1 10.2 2000 Performance Equity Plan B 4.2 10.3 Stock Option Agreement between James Runge and B 4.3 Registrant 10.4 Stock Option Agreement between Allan Fryman and B 4.4 Registrant 10.5 Stock Option Agreement between Israel Ellis and B 4.5 Registrant 10.6 Stock Option Agreement between Joseph Byck and B 4.6 Registrant 21 Subsidiaries of Registrant A 21.1 23 Consent of Citrin Cooperman & Company LLP, __ __ Filed independent auditors in respect of Form S-8 herewith 99 Risk Factors __ __ Filed herewith
- --------------------- A. Registrant's Registration Statement on Form 10-SB filed August 3, 1999 (File No. 0-26919). B. Registrant's Registration Statement on Form S-8 filed January 17, 2000 (File No. 333-53808). 13 EX-23 2 cybermark_ex23-123100.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Stockholders of Cyber Mark International Corp. We have issued our report dated April 11, 2001, accompanying the financial statements included on the Annual Report of Cyber Mark International Corp. on Form 10-KSB for the year ended December 31, 2000. We hereby consent to the incorporation by reference of said report in the Registration Statement of Cyber Mark International Corp. on Form S-8 (File No. 333-53808, effective January 16, 2001). /s/ Citrin Cooperman & Company, LLP May 1, 2001 EX-99 3 cybermark_ex99-123100.txt RISK FACTORS Exhibit 99.1 RISK FACTORS Our business is subject to numerous risks, including but not limited to those set forth below. Our operations and performance could also be subject to risks that do not exist as of the date of this report but emerge hereafter as well as risks that we do not currently deem material. Risks related to our operations Our auditors have expressed doubt about our ability to continue as a going concern. If we do not generate substantial revenue from sales and are also unable to obtain capital from other resources, we will have to significantly curtail our operations or halt them entirely. Our capital requirements for the development and commercialization of our technology, and our general operations have been and will continue to be significant. Historically, we have been dependent on financings to fund our development and working capital needs. As of December 31, 2000, we had only nominal cash and cash equivalents. We do not believe that our existing capital resources will be sufficient to support our operations in 2001. Accordingly, we will have to seek additional sources of capital through one or more activities, including the sale of debt or equity securities and/or the sale of assets. If we are unable to access sources of capital when and as required, we would have to severely restrict our operations or halt them entirely. The opinion of our auditors contains an explanatory paragraph regarding our ability to continue as a going concern. We have experienced large losses during our development and, without market penetration of our products and improvements to our operating margins, we will not achieve profitability. Since inception, we have incurred large net losses as set forth in the financial information included elsewhere in this report. We anticipate that we will continue to incur losses. We will not achieve profitable operations until we successfully obtain new sites for our product and generate revenues from these sources that are sufficient to offset the substantial up-front expenditures and operating costs associated with developing and commercializing our products. We may never be able to accomplish these objectives. It will be difficult for you to evaluate us based on our past performance because we are a relatively new company with a limited operating history. We have been engaged in the commercial sale of our virtual reality equipment and games for a relatively short period of time and, accordingly, have only limited financial results on which you can evaluate our company and operations. We are subject to, and may not be successful in addressing, the risks typically encountered by new enterprises and companies operating in the rapidly evolving computer oriented marketplace, including those risks relating to: o the failure to develop brand name recognition and reputation; o the failure to achieve market acceptance of our products; and o an inability to grow and adapt our business and technology to evolving consumer demand. Given our relatively limited resources, we may not be able to effectively compete in our target markets. These markets are characterized by competition and rapidly changing technology and alternative computer oriented entertainment. Our competitors include companies such as Sega, Midway, Nintendo and Atari. Our competitors have significantly greater financial and operating resources compared to us. Our ability to compete will be dependent on our ability to obtain financing, enhance and upgrade our technology in a timely manner and to effectively offer our target customers attractive and exciting products. In addition to our own technology, we use the technology of others in the creation of our products. Although our proprietary technology is the foundation of our products, we also use the technology of other companies in the creation and delivery of our products. Accordingly, any delay or termination by any of these third-party providers in the provision of their technologies to us because our failure or perceived inability to pay such vendors or otherwise could cause a disruption in the commercial distribution of our own products. Further, any material increases in the prices these providers charge us for use of their technologies could force us to increase the prices we charge for our own products or possibly make the creation and distribution of our products no longer economically feasible or desirable. We cannot assure you that any of these companies will continue to provide their technology to us in an efficient, timely and cost-effective manner. An interruption in or termination in our access to any necessary third party technologies, and our subsequent inability to make alternative arrangements in a timely manner, if at all, would have a material adverse effect on our business and financial condition. In order to be successful, we must be able to enhance our existing technology and products and develop and introduce new products and services to stimulate and respond to changing market demand. The development and enhancement of products entails significant risks, including: o the inability to effectively adapt new technologies to our business; o the inability to develop, introduce and market any produce and product enhancements successfully or on a timely basis; and o the nonacceptance by the market of such virtual reality products. Risks related to our common stock Possible issuances of our capital stock would cause dilution to our existing shareholders. While we currently have approximately 18,758,600 shares of common stock outstanding, we are authorized to issue up to 75,000,000 shares of common stock. Therefore, we will be able to issue a substantial number of additional shares without obtaining shareholder approval. In the event we elect to issue additional shares of common stock in connection with any financing, acquisition or otherwise, current shareholders could find their holdings substantially diluted, which means they will own a smaller percentage of our company. We have announced our intention to issue additional stock as a stock dividend on a ten for one basis. The issuance of these shares is subject to stockholder approval of an amendment to our certificate of incorporation. These shares, if issued, may have an adverse effect on the trading market and price of the common stock and may impair our ability to raise additional capital. 2 No cash dividends have been paid on our common stock. To date, we have not paid any cash dividends on our common stock and we do not expect to declare or pay dividends on the common stock in the foreseeable future. In addition, the payment of cash dividends may be limited or prohibited by the terms of any future loan agreements. The market price of our common stock is very volatile. The price of our common stock historically has been subject to wide price fluctuations. In addition, historically, the daily volume of our shares traded on the OTC Bulletin Board has been relatively small. Therefore, our shareholders may not always be able to sell their shares of common stock at the time they want or at the most advantageous price. We are subject to "penny stock" regulations which may adversely impact the liquidity and price of our common stock. Our common stock is deemed a "penny stock." Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information on penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, broker-dealers who sell such securities to persons other than established customers and accredited investors (generally, those persons with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse), the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These requirements could reduce the level of trading activity, if any, in the secondary market for our common stock. As a result of the foregoing, our shareholders may find it more difficult to sell their shares. 3 -----END PRIVACY-ENHANCED MESSAGE-----