AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 5, 2005
REGISTRATION NO. 333-122727
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ZONE 4 PLAY, INC.
(Name of small business issuer in its charter)
NEVADA 5812 98-0374121
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
103 Foulk Road
Wilmington, DE 19803
(302) 691-6177
(Address and telephone number of principal executive offices)
103 Foulk Road
Wilmington, DE 19803
(Address of principal place of business or intended principal place of business)
Shimon Citron, Chief Executive Officer
Zone 4 Play, Inc.
103 Foulk Road
Wilmington, DE 19803
(302) 691-6177
(Name, address and telephone number of agent for service)
COPIES TO:
Edwin L. Miller, Jr., Esq.
Howard E. Berkenblit, Esq.
Zysman, Aharoni, Gayer & Co./Sullivan & Worcester LLP
One Post Office Square
Boston, MA 02109
Tel: 617-338-2800
Fax: 617-338-2880
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
From time to time after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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 this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED APRIL 5, 2005
ZONE 4 PLAY, INC.
UP TO 2,788,198 SHARES OF COMMON STOCK
This prospectus relates to the public offering of an aggregate of up to
2,788,198 shares of common stock which may be sold from time to time by the
selling stockholders of Zone 4 Play, Inc. named in this prospectus. Of these
shares, 78,200 shares of common stock are issuable upon exercise of warrants
held by the selling stockholders.
The shares of common stock are being registered to permit the selling
stockholders to sell the shares from time to time in the public market. The
stockholders may sell the shares through ordinary brokerage transactions,
directly to market makers of our shares or through any other means described in
the section entitled "Plan of Distribution" beginning on page 11. We cannot
assure you that the selling stockholders will sell all or any portion of the
shares offered in this prospectus.
We have paid the expenses of preparing this prospectus and the related
registration expenses.
Our common stock is traded on the Over-The-Counter Bulletin Board under the
symbol "ZFPI.OB". The last reported sales price for our common stock on March
31, 2005, was $1.80 per share.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 2.
No underwriter or person has been engaged to facilitate the sale of shares
of common stock in this offering.
We may amend or supplement this prospectus from time to time by filing
amendments or supplements as required. You should read the entire prospectus and
any amendments or supplements carefully before you make your investment
decision.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE
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Prospectus Summary 1
Risk Factors 2
Forward Looking Statements 9
Use of Proceeds 9
Selling Stockholders 9
Plan of Distribution 11
Market for Common Equity and Related Stockholder Matters 12
Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Business 18
Description of Property 29
Legal Proceedings 29
Management 30
Executive Compensation 32
Certain Relationships and Related Transactions 33
Security Ownership of Certain Beneficial Owners and Management 33
Description of Securities 34
Indemnification for Securities Act Liabilities 35
Legal Matters 36
Experts 36
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 36
Additional Information 36
Index to Consolidated Financial Statements F-1
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "RISK
FACTORS" section, the financial statements and the notes to the financial
statements. As used throughout this prospectus, the terms "Zone4Play," "we,"
"us," and "our" refer to Zone 4 Play, Inc. and its subsidiaries.
ZONE 4 PLAY, INC.
Zone4Play develops interactive games technology that provides an end-to-end
solution for multiple platforms that allows service providers to deliver games
to their subscribers. Our software offers a single user\s account that enables
switching from one platform to another (e.g., from wireless to interactive
digital TV and vice versa) with the same user information. We have an R&D center
in Israel and marketing and support operations in the United Kingdom. Our
customers include cable and satellite television service providers, wireless
operators, Internet services providers and hospitality service providers. Among
our customers are AVAGO TV (Sky UK), NTL (UK), Telewest (UK), Cablevision (US),
Lodgenet (US), RCN (US), The Poker Channel (UK) and Eurobet (UK).
For the years ended December 31, 2004, 2003, 2002 and for the period from
April 2001 (date of inception) until December 31, 2001, we incurred net losses
of $1,920,877, $442,412, $487,716 and $6,638, respectively. At December 31,
2004, we had a working capital deficit of $385,993 and an accumulated deficit of
$2,957,668.
Our principal executive offices are located at 103 Foulk Road, Wilmington,
DE 19803 and our telephone number is (302) 691-6177.
THE OFFERING
Common stock outstanding before the offering 23,250,010
Common stock offered by selling stockholders Up to 2,788,198 shares. This number includes
78,200 shares of common stock issuable upon
exercise of outstanding warrants by the
selling stockholders.
Common stock to be outstanding after the offering Up to 23,328,210 shares.
Use of proceeds We will not receive any proceeds from the
sale of the common stock hereunder. We will
receive proceeds from any exercise of
outstanding warrants. See "Use of Proceeds"
for a complete description.
OTCBB Symbol ZFPI.OB
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RISK FACTORS
Our business involves a high degree of risk. Potential investors should
carefully consider the risks and uncertainties described below and the other
information in this prospectus before deciding whether to invest in shares of
our common stock. If any of the following risks actually occur, our business,
financial condition, and results of operations could be materially and adversely
affected. This could cause the trading price of our common stock to decline,
with the loss of part or all of an investment in our common stock.
RISKS RELATED TO OUR BUSINESS
OUR BRIEF OPERATING HISTORY MAKES OUR FUTURE SUCCESS UNCERTAIN.
We have a brief operating history. In 2001 we began our business of
developing, commercializing and marketing games software and technologies. We
are continuing to develop our business, enhance and extend our product suite and
build our organization. Our brief operating history makes our success uncertain.
As a result of our brief operating history, it is difficult to accurately
forecast our revenues, and we have limited meaningful historical financial data
upon which to base planned operating expenses and new business revenue.
WE HAVE INCURRED LOSSES SINCE OUR INCEPTION, AND THERE IS NO ASSURANCE THAT
PROFITABLE OPERATIONS, IF ACHIEVED, CAN BE SUSTAINED.
We have not yet realized a profit, and we do not expect to be profitable in
the near future. We cannot assure you that we will ever achieve profitability.
At December 31, 2004, we had an accumulated deficit of $2,957,668. We expect to
incur substantial costs that may not be offset by increased revenues. These
costs include the following: continued brand development, marketing and other
promotional activities; continued product development, upgrading and maintenance
of our software; increased administrative costs related to infrastructure and
business support systems, the expansion of our product offerings and the
continued enhancements to our technologies; and development of strategic
business relationships.
EVEN IF WE ACHIEVE A SUBSTANTIAL INCREASE IN OPERATING REVENUES, OUR OPERATING
RESULTS ARE LIKELY TO BE DIFFICULT TO PREDICT AND ARE LIKELY TO FLUCTUATE
SUBSTANTIALLY.
Our operating results are likely to fluctuate significantly due to a
variety of factors, many of which are outside of our control. Factors that may
harm our business or cause our operating results to fluctuate include the
following:
o the ability of customers to obtain players and grow their games business;
o the mix of games and other products developed by us;
o our inability to obtain new customers and strategic partners;
o our inability to adequately maintain, upgrade and develop our technologies;
o technical difficulties with respect to the use of our software;
o the ability of our competitors to offer new or enhanced games technologies,
services or products;
o price competition;
o adverse regulatory developments in the business of games for pay;
o our inability to license additional games from third parties; and
o the amount and timing of operating costs and capital expenditures relating
to commercializing our technologies.
LACK OF CONTINUED ACCEPTANCE OF OUR PRODUCTS WILL AFFECT OUR BUSINESS.
Poor market acceptance of our products or other unanticipated events may
result in lower revenues than anticipated, making anticipated expenditures on
development, advertising and promotion not feasible. Initially, our success may
be limited by our limited experience marketing games technologies, our limited
international marketing experience and our lack of brand recognition. We cannot
assure you that our technologies will continue to gain acceptance in the
marketplace or that we will earn sufficient revenues from licensing our products
to earn any profits.
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WE HAVE FINANCED OUR OPERATIONS PRIMARILY THROUGH THE SALE OF EQUITY SECURITIES
AND MAY BE UNABLE TO CONTINUE TO DO SO.
Since inception through December 31, 2004, we have incurred a cumulative
deficit of $2,957,668 and have raised net proceeds from the sale of equity
securities of approximately $2,173,932. We may need to continue to finance our
operations with the sale of equity securities. If we do so, our shareholders
will experience dilution to their percentage interest in the Company, which may
be substantial, and the new equity securities may have rights, preferences or
privileges senior to those of existing holders of our shares of common stock. If
we unable to obtain future financing, we may have to substantially curtail or
cease operations or find a merger partner on terms which, if available at all,
may be unfavorable.
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES FROM THREE CUSTOMERS, AND A
SIGNIFICANT PORTION OF OUR 2004 REVENUES WERE DERIVED FROM ONE-TIME
TRANSACTIONS.
As of December 31, 2004, we derived approximately 75% of our revenues from
three major customers: The Games Channel Limited (38%); Winner.com (UK) Ltd.
(26%); and RCN Telecom Services of Illinois LLC (11%). Our chief executive
officer, Shimon Citron, owns 60% of Winner.com (UK) Ltd., of which half of the
shares are being held as a trustee for other shareholders. Our revenues from
Winner.com (UK) Ltd. and RCN in that period were mostly derived from one-time
transactions (sale of software and a one-time license fee).
OUR REVENUE MODEL IS DEPENDENT UPON THE REVENUES OF OUR CUSTOMERS. IF OUR
TECHNOLOGY AND GAMES ARE NOT WIDELY ACCEPTED BY OUR CUSTOMERS' SUBSCRIBERS, OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL BE MATERIALLY AND ADVERSELY
AFFECTED.
We typically enter into agreements with our customers under which, they
offer our applications to subscribers and we receive a percentage of our
customers' related revenues. The subscribers are charged a one-time, monthly or
per-use subscription fee for the application. Our customers retain a percentage
of the fee and remit the balance to us. If our technology and games are not
widely accepted by our customers' subscribers, our financial condition and
results of operations will be materially adversely affected.
BECAUSE SOME OF OUR FINANCIAL ASSETS AND LIABILITIES ARE DENOMINATED IN
NON-DOLLAR CURRENCIES SUCH AS THE BRITISH POUND STERLING, AND BECAUSE OUR
FINANCIAL RESULTS ARE MEASURED IN DOLLARS, OUR RESULTS OF OPERATIONS COULD BE
HARMED AS A RESULT OF FLUCTUATIONS IN THE VALUE OF THE DOLLAR COMPARED TO THESE
OTHER CURRENCIES.
Approximately 53% of our revenues in 2004 were generated in currencies
other than the dollar, such as the British Pound Sterling. As a result, some of
our financial assets are denominated in these currencies, and fluctuations in
these currencies could adversely affect our financial results. In addition, we
incur and expect to continue to incur additional expenses in non-dollar
currencies. Therefore, some of our financial liabilities are denominated in
these non-dollar currencies. As a result, the aggregate translation adjustments
for the 2004 fiscal year were reported as a component of accumulated other
comprehensive income (losses) in shareholders equity.
Due to the fact that our financial results are measured in dollars, our
results could be harmed as a result of strengthening or weakening of the dollar
compared to these other currencies. Our results could also be adversely affected
if we are unable to guard against currency fluctuations in the future.
Accordingly, we may (or may not) enter into currency hedging transactions to
decrease the risk of financial exposure from fluctuations in the exchange rate
of the dollar against the British Pound Sterling or other currencies. These
measures, however, may not adequately protect us from future currency
fluctuations.
RAPID TECHNOLOGICAL CHANGES MAY ADVERSELY AFFECT OUR FUTURE REVENUES AND
PROFITABILITY.
The software industry is subject to rapid technological change. We need to
anticipate the emergence of new hardware and software technologies, assess their
market acceptance, and make substantial development and related investments. New
technologies in software programming or operations could render our technology
obsolete or unattractive to our customers, thereby limiting our ability to
recover development costs and potentially adversely affecting our future
revenues and profitability. Because a feature of our technology is its ability
to operate across platforms, we must continuously monitor the development of new
platforms and changes in existing platform technologies in order to keep our
software from becoming obsolete.
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WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
The interactive games industry is new, rapidly evolving and intensely
competitive. The competition among developers of games software is increasing
rapidly. Currently, we compete with a number of competitors, many of which have
similar product offerings. Many of our competitors have substantially greater
financial, marketing and other resources than us and offer a broader range of
services than us. Some of our competitors have longer operating histories and
have established customer relationships. The possibility of the very largest
software providers entering into new markets is always a competitive threat in
the software industry. Many of these software providers are known for their
aggressive marketing tactics.
Our competitors may be able to develop technologies more effectively or may
be able to license their technologies on more favorable terms given their larger
customer base. Competitors may also adopt more aggressive pricing or licensing
policies than us, which may hinder our ability to penetrate the market and
license our technologies.
In addition, increased competition is likely to result in price reductions,
reduced gross margins and an increased number of competitors competing for
market share, any of which could seriously harm our ability to generate revenues
and our results of operations. We expect competition to intensify in the future
because current and new competitors can enter our market with little difficulty,
and our competitors may sell their software at reduced prices.
WE ARE PARTIALLY DEPENDENT ON GAMES LICENSED FROM OTHER DEVELOPERS AND THE
PROPER FUNCTIONING OF THOSE GAMES.
Because some of our offerings incorporate software developed and maintained
by third parties, we are also dependent to a certain extent upon the proper
functioning of those products and on third parties' abilities to enhance their
current products, and to develop new products on a timely and cost-effective
basis.
OUR PRODUCTS WILL BECOME OBSOLETE IF WE DO NOT UPGRADE AND IMPROVE OUR PRODUCTS
AND DEVELOP NEW TECHNOLOGIES.
The success of our products and our ability to sublicense our technologies
and to develop a competitive advantage in the market will depend on our ability
to improve our products and develop new and innovative technologies. Our
operations will be at risk if our products are not continually upgraded and
improved. The high technology industry is characterized by a consistent flow of
new product and service offerings, which may render existing products and
services obsolete.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PREVENT OTHERS FROM INFRINGING ON OUR
TECHNOLOGIES.
Our success is heavily dependent upon proprietary technology. To protect
our proprietary technology, we rely principally upon copyright and trade secret
protection. There can be no assurance that the steps taken by us in this regard
will be adequate to prevent misappropriation or independent third-party
development of our technology. Further, the laws of certain countries in which
we intend to license our technologies or products may be inadequate to protect
us. We do not include in our software any mechanism to prevent or inhibit
unauthorized use, but we generally require the execution of an agreement that
restricts unauthorized copying and use of our products. If unauthorized copying
or misuse of our products were to occur, our business and results of operations
could be materially adversely affected.
While the disclosure and use of our proprietary technology, know-how and
trade secrets are generally controlled under agreements with the parties
involved, we cannot assure you that all confidentiality agreements will be
honored, that others will not independently develop similar or superior
technology, that disputes will not arise concerning the ownership of
intellectual property, or that dissemination of our proprietary technology,
know-how and trade secrets will not occur.
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INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD IMPAIR OUR
BUSINESS.
We believe that our products and technology do not infringe patents or
other proprietary rights of third parties. There can be no assurance, however,
that third parties will not claim that our current or future products infringe
such rights of third parties. We expect that software developers will
increasingly be subject to such claims as the number of products and competitors
providing games software and services grow and overlap occurs. Any such claim,
with or without merit, could result in costly litigation or require us to enter
into royalty or licensing agreements in order to obtain a license to continue to
develop and market the affected products. There can be no assurance that we
would prevail in any such action or that any license (including licenses
proposed by third parties) would be made available on commercially acceptable
terms, if at all. If we become involved in litigation over proprietary rights,
it could consume a substantial portion of our managerial and financial
resources, which could have a material adverse effect on our business and
financial condition.
OUR ABILITY TO LICENSE OUR TECHNOLOGY WILL BE ADVERSELY AFFECTED IF OUR
TECHNOLOGY'S SECURITY MEASURES FAIL.
Our technologies incorporate security and authentication protections
designed to allow licensees to protect certain personal information of players,
such as credit card numbers, player information and player account balances. We
cannot predict whether events or developments will result in a compromise or
breach of the technology we use to protect a player's personal information. If
the security measures in our software fail, licensees may lose many customers
and our ability to license our technologies will be adversely affected.
Furthermore, the servers and computer systems of licensees may be
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions, which could disrupt their operations and their ability to pay us
licensing fees. Any material failure of such systems may have a material affect
on our business. We may need to expend significant additional capital and other
resources to protect against a security breach or to alleviate problems caused
by any breaches. We cannot assure you that we can prevent all security breaches.
ERRORS OR DEFECTS IN OUR SOFTWARE PRODUCTS COULD DIMINISH DEMAND FOR OUR
PRODUCTS, INJURE OUR REPUTATION AND REDUCE OUR OPERATING RESULTS.
Our software products are complex and may contain errors that could be
detected at any point in the life of the product. We cannot assure you that
errors will not be found in new products or releases after shipment. This could
result in diminished demand for our products, delays in market acceptance and
sales, diversion of development resources, injury to our reputation or increased
service and warranty costs. If any of these were to occur, our operating results
could be adversely affected.
WE MAY NEED TO CHANGE THE MANNER IN WHICH WE INTEND TO CONDUCT A PORTION OF OUR
BUSINESS IF GOVERNMENT REGULATION INCREASES.
A portion of our business involves the licensing of software used to
conduct games for pay, or gambling, over the Internet. We do not, however,
operate any casinos or otherwise directly engage in this business. The
regulation of the gambling industry is complex, intensive and constantly
changing. The adoption or modification of laws or regulations relating to
Internet gambling could adversely affect the manner in which we currently
conduct this portion of our business. Many countries are currently struggling
with issues surrounding Internet gambling. More specifically, they are
considering the merits, limitations and enforceability of prohibition,
regulation or taxation of wagering and games transactions that are transacted
over the Internet. There are significant differences of opinion and law. In
addition, the growth and development of the market for online commerce may lead
to more stringent consumer protection laws that may impose additional burdens on
us. Laws and regulations directly applicable to games, communications or
commerce over the Internet are becoming more prevalent.
The law of the Internet, however, remains largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws such as those governing intellectual property,
privacy, libel and taxation apply to the Internet. In order to comply with new
or existing laws regulating online commerce, we may need to modify the manner in
which we do business, which may result in additional expenses. We may need to
hire additional personnel to monitor our compliance with applicable laws.
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We are not aware of any regulations or laws that prohibit the development
and the licensing of Internet games software that may potentially be used in
violation of applicable statutes. It is possible that our planned activities,
even though we do not intend to operate Internet casinos or otherwise directly
engage in the gambling business, may be alleged to violate an applicable statute
based on an interpretation of the statute or based on a future change of law or
interpretation or enforcement policy. Such allegations could result in either
civil or criminal proceedings brought by governmental or private litigants. As a
result of such proceedings, we could incur substantial litigation expense,
fines, diversion of the attention of key employees, and injunctions or other
prohibitions preventing us from engaging in various anticipated business
activities. Such an outcome would have a material adverse effect on our business
and our results of operations.
BECAUSE WE INTEND TO OPERATE IN MULTIPLE INTERNATIONAL MARKETS, WE ARE SUBJECT
TO ADDITIONAL RISKS.
We currently sell our software products in a number of countries and we
intend to enter additional geographic markets. Our business is subject to risks,
which often characterize international markets, including:
o potentially weak protection of intellectual property rights;
o economic and political instability;
o import or export licensing requirements;
o trade restrictions;
o difficulties in collecting accounts receivable;
o longer payment cycles;
o unexpected changes in regulatory requirements and tariffs;
o seasonal reductions in business activities in some parts of the world, such
as during the summer months in Europe;
o fluctuations in exchange rates; and
o potentially adverse tax consequences.
IF WE ARE NOT ABLE TO MANAGE GROWTH OF OUR BUSINESS, OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS WILL BE NEGATIVELY AFFECTED.
We believe that rapid growth and expansion could cause significant strains
on our managerial, operational, financial and other resources. Any failure to
manage the anticipated growth and expansion of our business could have a
material adverse effect on our financial condition.
THE LOSS OF OUR KEY MANAGEMENT PERSONNEL MAY ADVERSELY AFFECT OUR BUSINESS.
We depend on a relatively small number of key employees, including Shimon
Citron, our Chief Executive Officer, Gil Levy, our Vice President of Research
and Development, and Shachar Schalka, our Chief Technology Officer, the loss of
any of whom could have an adverse affect on the financial performance of our
business. Even though we have employment agreements with certain of these
individuals, we cannot assure you that they will continue their service with the
Company. We currently do not maintain key-man life insurance on any of our
managers.
IF WE ARE UNABLE TO HIRE AND RETAIN SKILLED PERSONNEL, OUR BUSINESS AND
FINANCIAL RESULTS WILL BE NEGATIVELY AFFECTED.
Our success depends to a significant extent on our ability to identify,
hire and retain skilled personnel. The software industry is characterized by a
high level of employee mobility and aggressive recruiting among competitors for
personnel with technical, marketing, sales, product development and management
skills. We may not be able to attract and retain skilled personnel or may incur
significant costs in order to do so. If we are unable to attract additional
qualified employees or retain the services of key personnel, our business and
financial results could be negatively impacted.
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OUR OFFICERS, DIRECTORS AND FOUNDING SHAREHOLDERS CONTROL A SIGNIFICANT PORTION
OF OUR OUTSTANDING COMMON STOCK. ACCORDINGLY, OUR OUTSIDE SHAREHOLDERS MAY NOT
COLLECTIVELY OWN ENOUGH SHARES TO SIGNIFICANTLY INFLUENCE MATTERS THAT ARE VOTED
UPON BY OUR SHAREHOLDERS, INCLUDING THE ELECTION OF DIRECTORS.
Our officers, directors and founding shareholders own approximately 29% of
our issued and outstanding stock. We do not have cumulative voting in the
election of directors. Thus, purchasers of our common stock may not be able to
affect the election of any directors to our Board of Directors.
RISKS RELATED TO OUR COMMON STOCK
THE LIMITED MARKET FOR OUR SHARES WILL MAKE OUR STOCK PRICE MORE VOLATILE.
THEREFORE, YOU MAY HAVE DIFFICULTY SELLING YOUR SHARES.
The market for our common stock is limited and we cannot assure you that a
larger market will ever be developed or maintained. Currently, our common stock
is traded on the Over-The-Counter Bulletin Board. Securities traded on the OTC
Bulletin Board typically have low trading volumes. Market fluctuations and
volatility, as well as general economic, market and political conditions, could
reduce our market price. As a result, this may make it difficult or impossible
for our shareholders to sell our common stock. In addition, unlike NASDAQ and
the various international stock exchanges, there are few corporate governance
requirements imposed on OTC Bulletin Board-traded companies.
THERE ARE NO LOCK-UP OR OTHER RESTRICTIONS ON THE SALE OF OUR OUTSTANDING
COMMON STOCK. SALES BY EXISTING SHAREHOLDERS MAY DEPRESS OUR SHARE PRICE AND MAY
IMPAIR OUR ABILITY TO RAISE ADDITIONAL CAPITAL THROUGH THE SALE OF EQUITY
SECURITIES WHEN NEEDED.
We presently have 23,250,010 shares of common stock and no shares of
preferred stock issued and outstanding. Since we did not conduct a conventional
initial public offering, there are no contractual lock-up restrictions on the
sale of our outstanding common stock. Virtually all of our outstanding common
stock will be freely tradable pursuant to resale registration statements or
pursuant to Rule 144 under the Securities Act. The possibility that substantial
amounts of outstanding common stock may be sold in the public market ("market
overhang") may adversely affect prevailing market prices, if any shall then
exist, for our common stock. This could negatively affect the market price of
our common stock and could impair our ability to raise additional capital
through the sale of equity securities.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC, AND THE
TRADING MARKET IN OUR COMMON STOCK IS LIMITED. THIS MAKES TRANSACTIONS IN OUR
COMMON STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF YOUR SHARES.
The Securities and Exchange Commission has adopted Rule 3a51-1 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, Rule
15g-9 requires:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
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The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Securities and Exchange
Commission relating to the penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written statement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in its market
value.
Disclosure also has to be made about the risks of investing in penny stocks
in both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and the rights and remedies available to an
investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
RISKS RELATED TO OUR LOCATION IN ISRAEL
POTENTIAL POLITICAL, ECONOMIC AND MILITARY INSTABILITY IN ISRAEL MAY ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
Our principal offices and operations are located in Israel. Accordingly,
political, economic and military conditions in Israel directly affect our
operations. Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors. A state
of hostility, varying in degree and intensity, has led to security and economic
problems for Israel. Since October 2000, there has been an increase in
hostilities between Israel and the Palestinians, which has adversely affected
the peace process and has negatively influenced Israel's relationship with its
Arab citizens and several Arab countries. Such ongoing hostilities may hinder
Israel's international trade relations and may limit the geographic markets,
where we can sell our products. Furthermore, the United States Department of
State has issued advisories regarding travel to Israel, impeding the ability of
travelers to attain travel insurance. Any hostilities involving Israel or
threatening Israel, or the interruption or curtailment of trade between Israel
and its present trading partners, could adversely affect our operations.
OUR RESULTS OF OPERATIONS COULD BE NEGATIVELY AFFECTED BY THE OBLIGATIONS OF OUR
PERSONNEL TO PERFORM MILITARY SERVICE.
Our operations could be disrupted by the absence for significant periods of
one or more of our executive officers, key employees or a significant number of
other employees because of military service. Some of our executive officers and
some of our male employees in Israel are obligated to perform military reserve
duty, which could accumulate annually from several days to up to two months in
special cases and circumstances. The length of such reserve duty depends, among
other factors, on an individual's age and prior position in the army. In
addition, if a military conflict or war occurs, these persons could be required
to serve in the military for extended periods of time. Any disruption in our
operations as the result of military service by key personnel could harm our
business.
UNDER CURRENT ISRAELI LAW, WE MAY NOT BE ABLE TO ENFORCE COVENANTS NOT TO
COMPETE AND THEREFORE MAY BE UNABLE TO PREVENT OUR COMPETITORS FROM BENEFITING
FROM THE EXPERTISE OF SOME OF OUR FORMER EMPLOYEES.
Israeli courts have required employers seeking to enforce non-compete
undertakings against former employees to demonstrate that the former employee
breached an obligation to the employer and thereby caused harm to one of a
limited number of legitimate interests of the employer recognized by the courts
such as, the confidentiality of certain commercial information or a company's
intellectual property. We currently have non-competition clauses in the
employment agreements of most of our employees. The provisions of such clauses
prohibit our employees, if they cease working for us, from directly competing
with us or working for our competitors. In the event that any of our employees
chooses to work for one of our competitors, we may be unable to prevent our
competitors from benefiting from the expertise of our former employees obtained
from us, if we cannot demonstrate to the court that a former employee breached a
legitimate interest recognized by a court and that we suffered damage thereby.
- 8 -
IT COULD BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST OUR OFFICERS, OUR
DIRECTORS AND US.
Except for one director, Mr. Sean Ryan, all of our executive officers and
directors are non-residents of the United States, and virtually all of our
assets and the assets of these persons are located outside the United States.
Therefore, it could be difficult to enforce a judgment obtained in the United
States against us or any of these persons.
FORWARD-LOOKING STATEMENTS
The statements contained in this prospectus that are not historical facts
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements may be identified
by, among other things, the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy that involve risks and uncertainties. In particular, our statements
regarding the potential growth of the markets are examples of such
forward-looking statements. The forward-looking statements include risks and
uncertainties, including, but not limited to, the growth of the interactive game
market and other factors, including general economic conditions and regulatory
developments, not within our control. The factors discussed herein and expressed
from time to time in our filings with the Securities and Exchange Commission
could cause actual results and developments to be materially different from
those expressed in or implied by such statements. The forward-looking statements
are made only as of the date of this filing, and we undertake no obligation to
publicly update such forward-looking statements to reflect subsequent events or
circumstances.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the sale price of any common stock we sell to the selling
stockholders upon exercise of outstanding warrants. We expect to use the
proceeds received from the exercise of the warrants, if any, for general working
capital purposes.
SELLING STOCKHOLDERS
The following table sets forth the common stock ownership of the selling
stockholders as of March 31, 2005, including the number of shares of common
stock issuable upon the exercise of warrants held by the selling stockholders.
The selling stockholders acquired their securities (1) pursuant to private
transactions exempt from registration pursuant to Section 4(2) of the Securities
Act, that was completed on January 27, 2005, pursuant to which the company sold
an aggregate of 2,659,998 shares of common stock for aggregate gross proceeds of
$3,989,999; or (2) as compensation for services rendered to us in transactions
made pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act. Other than as set forth in the following table, the selling
stockholders have not held any position or office or had any other material
relationship with us or any of our predecessors or affiliates within the past
three years.
- 9 -
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING TOTAL SHARES OFFERED (1) AFTER THE OFFERING (1)
--------------------- ------------------------ ----------------------
NAME NUMBER PERCENT (2) NUMBER PERCENT (2) NUMBER PERCENT
---- ------ ----------- ------ ----------- ------ -------
Benchmark Consulting Inc. (3) 50,000 * 50,000 * 0 0%
Charles Beeler 50,000 * 50,000 * 0 0%
David Sappir 500,000 2.11% 500,000 2.10% 0 0%
Erinch R. Ozada 16,666 * 16,666 * 0 0%
First New York Securities (4) 200,000 * 200,000 * 0 0%
Graham Partners (5) 266,666 1.12% 266,666 1.12% 0 0%
Haystack Capital LP (6) 300,000 1.26% 300,000 1.26% 0 0%
Ivy MA Holdings Limited (7) 100,000 * 100,000 * 0 0%
Punk, Ziegel & Company, L.P. (8) 78,200 * 78,200 * 0 0%
Sagiv Shiv 10,000 * 10,000 * 0 0%
Sedna Partners LP (9) 79,827 * 79,827 * 0 0%
Sedna Partners (QP) LP (10) 57,568 * 57,568 * 0 0%
Thomas H. Peterson 50,000 * 50,000 * 0 0%
Woodmont Investments Ltd. (11) 29,271 * 29,271 * 0 0%
WPG Software Fund (12) 1,000,000 4.21% 1,000,000 4.20% 0 0%
TOTAL 2,788,198 2,788,198
* Less than 1%.
(1) Assumes that all securities registered will be sold and that all
shares of common stock underlying the warrants will be issued.
(2) Applicable percentage ownership is based on 23,250,010 shares of
common stock outstanding as of March 31, 2005, together with
securities exercisable or convertible into shares of common stock
within 60 days of March 31, 2005. Beneficial ownership is determined
in accordance with the rules of the SEC and generally includes voting
or investment power with respect to securities. Shares of common stock
that are currently exercisable or exercisable within 60 days of March
31, 2005 are deemed to be beneficially owned by the person holding
such securities for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(3) The shares owned by Benchmark Consulting Inc. were acquired as
compensation pursuant to a consulting contract. Neil Hecht makes the
investment decisions on behalf of Benchmark Consulting Inc. and has
voting control over the securities beneficially owned by Benchmark
Consulting Inc.
(4) Judy Finger and Doug Topkis make the investment decisions on behalf of
First New York Securities and have voting control over the securities
beneficially owned by First New York Securities. First New York
Securities, which is a broker-dealer, has informed us that it acquired
its shares of common stock in the ordinary course of business and, at
the time of the acquisition thereof, it had no agreements or
understandings, directly or indirectly, with any person to distribute
the shares of common stock. To the extent that we become aware that
First New York Securities did not acquire its shares of common stock
in the ordinary course of business or did have such an agreement or
understanding, we will file a post-effective amendment to the
registration statement of which this prospectus forms a part to
designate such affiliate as an "underwriter" within the meaning of the
Securities Act.
- 10 -
(5) Monica Graham makes the investment decisions on behalf of Graham
Partners and has voting control over the securities beneficially owned
by Graham Partners.
(6) Judy Finger and Doug Topkis make the investment decisions on behalf of
Haystack Capital LP and have voting control over the securities
beneficially owned by Haystack Capital LP.
(7) Judy Finger and Doug Topkis make the investment decisions on behalf of
Ivy MA Holdings Limited and have voting control over the securities
beneficially owned by Ivy MA Holdings Limited.
(8) Consists of 78,200 shares of common stock issuable upon exercise of
outstanding common stock purchase warrants, 25,000 of which have an
exercise price of $0.80 per share and 53,200 of which have an exercise
price of $1.50 per share. Bill Punk makes the investment decisions on
behalf of Punk, Ziegel & Company, L.P. and has voting control over the
securities beneficially owned by Punk, Ziegel & Company, L.P. Punk,
Ziegel & Company, L.P. acted as the placement agent in connection with
the transactions described under "Description of Securities - January
2005 Financing;", for which it received a warrant to purchase up to
53,200 shares of common stock with an exercise price of $1.50 per
share, a warrant to purchase up to 25,000 shares of common stock with
an exercise price of $0.80 per share and an additional $123,650 in
cash. Punk, Ziegel & Company, L.P., which is a broker-dealer, has
informed us that it acquired its warrants and any underlying shares of
common stock in the ordinary course of business and, at the time of
their acquisition thereof, it had no agreements or understandings,
directly or indirectly, with any person to distribute the warrants or
any underlying shares of common stock. To the extent that we become
aware that Punk, Ziegel & Company, L.P. did not acquire their warrants
or underlying shares of common stock in the ordinary course of
business or did have such an agreement or understanding, we will file
a post-effective amendment to the registration statement of which this
prospectus forms a part to designate such affiliate as an
"underwriter" within the meaning of the Securities Act.
(9) Rengan Rajaratnam makes the investment decisions on behalf of Sedna
Partners LP and has voting control over the securities beneficially
owned by Sedna Partners LP.
(10) Rengan Rajaratnam makes the investment decisions on behalf of Sedna
Partners (QP) LP and has voting control over the securities
beneficially owned by Sedna Partners (QP) LP.
(11) Rengan Rajaratnam makes the investment decisions on behalf of Woodmont
Investments Ltd. and has voting control over the securities
beneficially owned by Woodmont Investments Ltd.
(12) Ben Taylor and George Boyd make the investment decisions on behalf of
WPG Software Fund and have voting control over the securities
beneficially owned by WPG Software Fund.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 of the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if it deems the purchase price to be
unsatisfactory at any particular time.
- 11 -
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then existing market
price. We cannot assure that all or any of the shares offered in this prospectus
will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act, or the rules and regulations
thereunder. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders, but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. To our knowledge, the
selling stockholders have not entered into any agreement with a prospective
underwriter and there is no assurance that any such agreement will be entered
into.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholder defaults on a
margin loan, the broker may, from time to time, offer and sell the pledged
shares.
The selling stockholders and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such Act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. All of these limitations may affect the marketability of the shares.
If a selling stockholder notifies us that it has a material arrangement
with a broker-dealer for the resale of the common stock, then we may be required
to amend the registration statement of which this prospectus is a part, and file
a prospectus supplement to describe the agreements between the selling
stockholder and the broker-dealer.
We and the selling stockholders have each agreed to indemnify the other
against certain liabilities, including certain liabilities arising under the
Securities Act, or, in the alternative, that each party will be entitled to
contribution in connection with those liabilities. We will bear all fees and
expenses incurred in connection with the registration of the securities, except
that selling stockholders will pay all broker's commissions and, in connection
with any underwritten offering, underwriting discounts and commissions.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR SECURITIES
Our common stock began quotation on the Over-The-Counter Bulletin Board
during the third quarter of 2003, and is currently quoted under the symbol
"ZFPI.OB". The following sets forth the high and low bid quotations for the
common stock since the third quarter of 2003. These quotations reflect prices
between dealers, do not include retail mark-ups, markdowns, and commissions and
may not necessarily represent actual transactions. The prices are adjusted to
reflect all stock splits.
- 12 -
HIGH LOW
---- ---
FISCAL YEAR ENDING DECEMBER 31, 2005
------------------------------------
First Quarter (through March 31) $1.86 $1.16
FISCAL YEAR ENDED DECEMBER 31, 2004
-----------------------------------
First Quarter Ended March 31, 2004 $1.13 $0.60
Second Quarter Ended June 30, 2004 $1.08 $0.35
Third Quarter Ended September 30, 2004 $0.95 $0.51
Fourth Quarter Ended December 31, 2004 $1.72 $0.83
FISCAL YEAR ENDED DECEMBER 31, 2003
-----------------------------------
First Quarter Ended March 31, 2003 --- ---
Second Quarter Ended June 30, 2003 --- ---
Third Quarter Ended September 30, 2003 $0.07* $0.01*
Fourth Quarter Ended December 31, 2003 $1.01 $0.27
* Adjusted to reflect a 10:1 stock split effected on September 26, 2003.
As of March 1, 2005, there were 87 stockholders of record of our common
stock.
DIVIDEND POLICY
Historically, we have not declared or paid any cash dividends on our common
stock. Any future determination to pay dividends on our common stock will depend
upon our results of operations, financial condition and capital requirements,
applicable restrictions under any contractual arrangements and such other
factors deemed relevant by our Board of Directors.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table shows information with respect to each equity
compensation plan under which our common stock is authorized for issuance as of
December 31, 2004.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED UPON WEIGHTED AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A)
------------- ------------------- ------------------- -----------------------
(A) (B) (C)
------------------- ------------------- -----------------------
EQUITY COMPENSATION PLANS APPROVED -0- -0- -0-
BY SECURITY HOLDERS
EQUITY COMPENSATION PLANS NOT 1,460,000 $.60 3,540,000
APPROVED BY SECURITY HOLDERS
TOTAL 1,460,000 $.60 3,540,000
2004 GLOBAL SHARE OPTION PLAN
On November 23, 2004, our Board of Directors adopted a 2004 Global Share
Option Plan. The 2004 Global Share Option Plan is intended to provide incentives
to our employees, directors and consultants by providing them with opportunities
to purchase shares of our common stock. Under the terms of the 2004 Global Share
Option Plan, it is effective as of November 23, 2004 and terminates at the end
of ten years from such date. We have reserved 5,000,000 authorized but unissued
shares of common stock to be issued under the 2004 Global Share Option Plan.
- 13 -
Our Board of Directors is authorized to administer the 2004 Global Share
Option Plan. In doing so, our Board of Directors may: (i) designate optionees;
(ii) determine the terms and provisions of respective option agreements (which
need not be identical) including, but not limited to, the number of shares to be
covered by each option, provisions concerning the time or times when and the
extent to which the options may be exercised and the nature and duration of
restrictions as to transferability or restrictions constituting substantial risk
of forfeiture; (iii) accelerate the right of an optionee to exercise, in whole
or in part, any previously granted option; (iv) interpret the provisions and
supervise the administration of the 2004 Global Share Option Plan; (v) determine
the fair market value of shares issuable under the 2004 Global Share Option
Plan; (vi) designate the type of options to be granted to an optionee; and (vii)
determine any other matter which is necessary or desirable for, or incidental
to, the administration of the 2004 Global Share Option Plan.
On December 31, 2004, we issued an aggregate of 1,460,000 options under the
2004 Global Share Option Plan to various employees, directors and consultants.
1,300,000 of these options are exercisable at a price of $0.55 per share and
160,000 of such options are exercisable at $1.00 per share. All of the options
expire on December 31, 2014.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements included herewith. This discussion should not be
construed to imply that the results discussed herein will necessarily continue
into the future, or that any conclusion reached herein will necessarily be
indicative of actual operating results in the future. Such discussion represents
only the best present assessment of our management.
OVERVIEW
Our financial statements are stated in United States Dollars (US$) and are
prepared in accordance with United States generally accepted accounting
principles.
You should read the following discussion of our financial condition and
results of operations together with the audited financial statements and the
notes to audited financial statements included elsewhere in this filing. This
discussion contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results could differ materially from those anticipated
in these forward-looking statements.
OUR BUSINESS
We develop interactive games technology that provides an end-to-end
solution for multiple platforms that allows service providers to deliver games
to their subscribers. Our customers include cable and satellite television
companies, wireless operators, Internet service providers and hospitality
service providers. Among our customers are AVAGO TV (Sky UK), NTL (UK), Telewest
(UK), Cablevision (US), Lodgenet (US), RCN (US), The Poker Channel (UK) and
Eurobet (UK).
Our customers typically enter into revenue-sharing agreements with us,
under which they use our technology to offer games to their subscribers and pay
us a percentage of the revenues or income generated from those games.
We devote substantially all of our efforts toward conducting research,
development and marketing of our technology. In the course of these activities,
we have sustained operating losses and expect such losses to continue in the
foreseeable future. To date, we have not generated sufficient revenues to
achieve profitable operations or positive cash flow from operations. On December
31, 2004, we had a working capital deficit of $385,993 and an accumulated
deficit of $2,957,668. There is no assurance that profitable operations, if ever
achieved, will be sustained on a continuing basis. During the year ended
December 31, 2004, we derived 75% of our revenues from three major customers.
- 14 -
We refer in this discussion to the fiscal years ended December 31, 2004 and
December 31, 2003, as "2004," and "2003," respectively.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with U.S.
GAAP. In connection with the preparation of the financial statements, we are
required to make assumptions and estimates about future events, and apply
judgments that affect the reported amounts of assets, liabilities, revenue,
expenses and the related disclosure. We base our assumptions, estimates and
judgments on historical experience, current trends and other factors that
management believes to be relevant at the time the consolidated financial
statements are prepared. On a regular basis, management reviews our accounting
policies, assumptions, estimates and judgments to ensure that our financial
statements are presented fairly and in accordance with U.S. GAAP. However,
because future events and their effects cannot be determined with certainty,
actual results could differ from our assumptions and estimates, and such
differences could be material.
Our significant accounting policies are discussed in Note 2 of the notes to
the consolidated financials statements, "Significant Accounting Policies".
REVENUE RECOGNITION
We account for our revenues from revenue sharing agreements and software
licenses in accordance with the provisions of SOP 97-2, "Software Revenue
Recognition," issued by the American Institute of Certified Public Accountants
and as amended by SOP 98-9 and related interpretations. We may exercise judgment
and use estimates in connection with the determination of the amount of revenue
sharing to be recognized in each accounting period.
We assess whether collection is probable at the time of the transaction
based on a number of factors, including the customer's past transaction history
and credit worthiness. If we determine that the collection of the fee is not
probable, we may defer the fee and recognize revenue at the time collection
becomes probable, which is generally upon the receipt of cash.
We may enter into licensing agreements from time to time where we sell our
software. Revenues from the sale of software are recognized in accordance with
Statement of Position 81-1 "Accounting for Performance of Construction - Type
and Certain Production - Type Contracts" based on the percentage of completion
method over the period from signing of the license through the customer
acceptance. The percentage of completion is measured by monitoring progress
using records of actual time incurred to date in the project compared with the
total estimated project requirements, which corresponds to the costs related to
earned revenues. Estimates of total project requirements are based on prior
experience of customization, delivery and acceptance of the same or similar
technology and are reviewed and updated regularly by management. After delivery,
if uncertainty exists about customer acceptance of the software, license revenue
is not recognized until acceptance. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are first
determined in the amount of the estimated loss on the entire contract.
FOREIGN CURRENCY
The U.S. dollar is the functional currency of the Company. A part of our
revenues and a portion of our expenses are transacted in U.S. dollars and our
assets and liabilities together with our cash holdings are predominately
denominated in U.S. dollars. However, the majority of financial transactions of
our UK subsidiary Zone4Play (UK) Limited are in British Pound Sterling.
Management believes that the British Pound Sterling is the functional currency
of Zone4Play (UK) Limited. Accordingly, the financial statements of Zone4Play
(UK) Limited have been translated into U.S. dollars. All balance sheet accounts
have been translated using the exchange rates in effect at the balance sheet
date. Statement of operations amounts have been translated using the average
exchange rate for the period. The resulting translation adjustments are reported
as a component of accumulated other comprehensive loss in shareholders' equity.
Increases in the volatility of the exchange rates of the British Pound Sterling
versus the U.S. dollar could have an adverse effect on the expenses and
liabilities that we incur when translated into U.S. dollars.
- 15 -
As a result of such currency fluctuations and the conversion to U.S.
dollars for financial reporting purposes, we may experience fluctuations in our
operating results on an annual and a quarterly basis going forward. We have not
in the past, but may in the future, hedge against fluctuations in exchange
rates. Future hedging transactions may not successfully mitigate losses caused
by currency fluctuations.
ACCOUNTING FOR INCOME TAXES
Significant judgment is required in determining our worldwide income tax
expense provision. In the ordinary course of a global business, there are many
transactions and calculations where the ultimate tax outcome is uncertain. Some
of these uncertainties arise as a consequence of cost reimbursement arrangements
among related entities, the process of identifying items of revenue and expense
that qualify for preferential tax treatment and segregation of foreign and
domestic income and expense to avoid double taxation. Although we believe that
our estimates are reasonable, the final tax outcome of these matters may be
different than the one which is reflected in our historical income tax
provisions and accruals. Such differences could have a material effect on our
income tax provision and net income (loss) in the period in which such
determination is made.
Our accounting for deferred taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("Statement 109"), involves the
evaluation of a number of factors concerning the realization of our deferred tax
assets. In concluding that a valuation allowance is required, we primarily
consider such factors as our history of operating losses and expected future
losses in certain jurisdictions and the nature of our deferred tax assets.
Management currently believes that it is more likely than not that the deferred
tax regarding the carryforward of losses and certain accrued expenses will not
be realized in the near future.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED
DECEMBER 31, 2003
REVENUES AND COST OF REVENUES
Total revenues for 2004 increased by 39% to $768,624 from $553,707 in 2003.
Revenues from sales of software applications for 2004 increased by 230% to
$572,624 from $173,707 in 2003. Revenues from one-time sales of software
applications to related parties decreased by 48% to $196,000 in 2004 compared to
$380,000 in 2003. The increase in revenues from software applications was due to
new contracts, mainly in the United Kingdom. Also, in 2004, we had revenues from
our US customers, such as Cablevision, Lodgenet, and RCN, with whom we did not
have any engagement in 2003. The revenues from one-time sales of software
applications to related parties in 2004 derived from the delivery of software to
related parties from orders that were placed during 2002. Going forward, we
expect that revenues from the sale of software applications to related parties
will be nominal.
Cost of revenues for 2004 decreased by 34% to $127,944 from $194,904 for
2003. Gross profit increased by 79% for 2004 to $640,680 from $358,803 in 2003.
The decrease in cost of revenues for 2004 is mostly attributable to a one-time
software application agreement, which included customization of the software,
which required allocation of certain research and development expenses to cost
of sales.
RESEARCH AND DEVELOPMENT
Research and development expenses for 2004 increased by 167% to $1,347,960
from $504,153 for 2003. The increase in research and development expenses is
primarily attributable to an increase in the hiring of technical employees
during 2004, an increase in salary expenses, increased in other expenses
allocated to the research and development department due to the growth of the
research and development department and the joint venture agreement with NetFun
Ltd. with regard to our mobile TV messaging subsidiary, MixTV Ltd., and
amortization of deferred compensation related to warrants, which were granted to
employees in the research and development department in 2004.
- 16 -
SALES AND MARKETING
Sales and marketing expenses for 2004 increased by 319% to $607,511 from
$144,919 for 2003. The increase in sales and marketing expenses during 2004 is a
result of increased marketing efforts, mainly in the United Kingdom and the
United States, using our Israeli marketing team, which increased in size in
2004. Sales and marketing expenses consist mainly of labor costs, trade shows,
travel expenses to the United Kingdom and the United States, and amortization of
deferred compensation related to options which were granted to the relevant
employees in 2004.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for 2004 increased by 421% to $565,190
from $108,471 for 2003. The increase in general and administrative expenses is
primarily attributable to the recruitment of employees, additional legal and
audit expenses associated with being a reporting company in the U.S., investor
relations expenses and amortization of deferred compensation related to options
which were granted to the relevant employees on 2004.
NET LOSS AND NET LOSS PER SHARE
We incurred a net loss of $1,920,877 ($0.102 per share), in 2004 compared
to a net loss of $442,412 ($0.039per share) in 2003. The increased net loss is
primarily attributable to our increased operating expenses. The weighted average
number of shares of common stock outstanding at December 31, 2003 was 10,426,190
shares versus 18,831,765 shares at December 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31 2004, our total current assets were $364,353, and our
total current liabilities were $750,346. At December 31, 2004, we had a working
capital deficit of $385,993 and an accumulated deficit of $2,957,668. We finance
our operations with a combination of securities issuances and revenues from
product sales. As discussed below, we completed a private placement in January
2005 for aggregate gross proceeds of $4.0 million.
In April 2004, we completed a $1.2 million private placement, consisting of
units offered at a price of $0.80 per unit, with each unit comprised of one
share of common stock and two common stock purchase warrants. One warrant is
exercisable for 24 months at a price of $1.85 per share and one warrant is
exercisable for 36 months at a price of $2.50 per share. The private placement
agreement was signed with a group of institutional and other accredited
investors.
On August 17, 2004, we completed a $1.0 million private placement of common
stock and warrants. The private placement consisted of units offered at a price
of $1.00 per unit, with each unit comprised of one share of common stock and two
common stock purchase warrants. One warrant is exercisable for 24 months at a
price of $2.00 per share and one warrant is exercisable for 36 months at a price
of $2.50 per share. The private placement agreement was signed with a group of
institutional and other accredited investors.
On January 27, 2005, we completed a private placement of 2,659,998 shares
of common stock for aggregate gross proceeds of $4.0 million. As required, on
February 11, 2005, before February 17, 2005 deadline, we filed with the
Securities and Exchange Commission a registration statement covering the resale
of the common stock. If such registration statement is not declared effective on
or before May 3, 2005, then we must pay to the investors liquidated damages
equal to 1.5% of the aggregate purchase price paid by them.
Our management believes that we have sufficient funds to operate for the
next 12 months, with additional funds anticipated from the performance of
agreements that we have entered with our current customers, and from contracts
that we expect to execute in the near future. Nonetheless, we may raise
additional funds through equity financings in order to broaden our financial
strength and liquidity.
On March 10, 2005, we entered into a Stock Purchase Agreement with NetFun
Ltd. under which the Company will acquire the remaining minority interests in
MixTV Ltd., for consideration of 625,000 shares of common stock of the Company.
As a result of the Agreement, on the closing date, which will take place in
April 2005, the Company will hold the entire interest in MixTV Ltd.
- 17 -
OUTLOOK
We believe that our future success will depend upon our ability to enhance
our existing products and solutions and introduce new commercially viable
products and solutions addressing the demands of the evolving markets. As part
of the product development process, we work closely with current and potential
customers, distribution channels and leaders in our industry to identify market
needs and define appropriate product specifications. Our current anticipated
levels of revenue and cash flow are subject to many uncertainties and cannot be
assured. In order to have sufficient cash to meet our anticipated requirements
for the next twelve months, we may be dependent upon our ability to obtain
additional financing. The inability to generate sufficient cash from operations
or to obtain the required additional funds could require us to curtail
operations.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
results of operations, liquidity or capital expenditures.
BUSINESS
OVERVIEW
We develop interactive games technology that provides an end-to-end
solution for multiple platforms, interactive TV, mobile phones and the Internet,
allowing service providers to deliver games to their subscribers. Our technology
provides play-for-fun interactive games and play-for-real gaming.
Our customers include cable and satellite television companies, wireless
operators, Internet service providers and hospitality service providers. Among
our customers are AVAGO TV (Sky UK), NTL (UK), Telewest (UK), Cablevision (US),
Lodgenet (US), RCN (US), The Poker Channel (UK) and Eurobet (UK).
Our technology allows service providers to generate additional revenue from
their existing infrastructure and subscriber base, and allows a subscriber to
switch from one platform, such as interactive TV (iTV), wireless or Internet, to
another platform using a single account with the same virtual account balance
and user information. To our knowledge, our technology is unique in its ability
to utilize a single account to play a game on different platforms. With this
capability, our technology increases the variety of services that our customers
can offer.
Our customers typically enter into revenue-sharing agreements with us under
which they use our technology to offer games to their subscribers and pay us a
percentage of the revenues generated from those games.
We were incorporated under the laws of the State of Nevada on April 23,
2002, as Old Goat Enterprises, Inc. On February 1, 2004, Old Goat Enterprises,
Inc. issued the shareholders of Zone 4 Play, Inc., a Delaware corporation,
10,426,190 shares of common stock, in consideration for the entire share capital
of Zone 4 Play, Inc. Immediately after the issuance, the shareholders of Zone 4
Play, Inc. held 53% of the issued and outstanding share capital of Old Goat
Enterprises, Inc., and subsequently changed its name to Zone 4 Play, Inc., a
Nevada corporation. The transaction was accounted for as a reverse acquisition,
whereby Old Goat was treated as the acquired company and Zone 4 Play, Inc.
(Delaware) as the acquirer. The historical financial statements of Zone 4 Play,
Inc. (Delaware) became our historical financial statements. We conduct our
operations through our wholly owned subsidiaries, Zone4Play (Israel) Ltd., an
Israeli corporation incorporated in July 2001, Zone4Play (UK) Limited, a United
Kingdom corporation incorporated in November 2002 and Zone4Play, Inc., a
Delaware corporation. We also own 50.1% of the issued and outstanding share
capital of MixTV Ltd., which is a leading developer of mobile messaging TV
technologies that are revolutionizing the television viewing experience by
enabling massive multi-player participation on prerecorded and live television
programs. Based on our agreement with NetFun Ltd., the holder of the minority
interest in MixTV Ltd., we will own 100% of the issued and outstanding share
capital of MixTV Ltd. in April 2005.
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INDUSTRY BACKGROUND
The interactive games market is currently divided into four different
platforms, interactive TV, wireless applications, the Internet and SMS-TV.
INTERACTIVE TELEVISION
Interactive television (iTV) enables a viewer to interact with TV content,
respond to an ad or access internet-based services. For example, viewers can
take part in a TV program, play games, make purchases and even send text
messages and emails, all through their television set.
As part of the evolving growth of interactive TV, interactive entertainment
channels and services are becoming increasingly popular. These channels and
services create new forms of revenue streams that are driven not from
traditional advertising but the monetization of the interactivity -- for
example, paying to play games, search cinema listings and gambling.
WIRELESS
Wireless mobile is by far the largest media audience in history. With 1.7
billion subscribers, the wireless medium promises to reach a far broader
audience than radio, TV or the Internet. Today there is a critical mass of
download-capable, color handsets in the hands of consumers, and almost 100% of
these phones are capable of interacting and responding in real-time. Wireless
mobile offers a unique opportunity to establish a one-to-one relationship with
an audience. The demand for games and other interactive wireless content such as
news, sports and information services, images, and music, is booming, and
according to industry analysts, is playing an increasingly dominant role in
wireless phone usage.
Wireless operators closely guard their customer base and prefer to maintain
"walled garden strategies"; i.e., complete control over the subscriber's access
to wireless services. After initial forays into the development of wireless
content in-house, most wireless operators are increasingly realizing that their
core expertise is not in the development of content and services, but in
providing the platform and provision of such services. As a result, wireless
operators are increasingly beginning to adopt a more flexible strategy.
Currently wireless operators encourage the development of independent
wireless content providers to supply innovative and compelling content. In
return, mobile operators will benefit from increased customer loyalty due to the
improved user service experience, rising wireless phone usage and increased data
traffic, as well as a share of the related revenues, while avoiding the
investment and risk involved in developing content and services.
Wireless entertainment has evolved from the basic cell phone to the
sophisticated, full color, multi-player and interactive high quality wireless
games of today. While the wireless medium may not offer quite as many features
or be as visually impressive as console or PC games, we believe that wireless
gaming will develop a growing following because of its convenience and other
factors. Wireless entertainment also includes emerging mobile betting and
gambling. We believe that the wireless gambling market will emerge as a
significant opportunity like web-based gambling.
SMS-TV MARKET
The convergence of wireless and TV technologies enables an enhanced and
enriched TV experience by providing the ability to embed additional program
data, such as home audience cellular-based interaction, into live feeds or
prerecorded shows and programs.
SMS texting and other user interactions that can respond to or influence
television programming have recently gained significant popularity.
Entertainment, sports and fixed-odds services will be at the heart of demand for
such services. The "getting the audience involved" experience lets viewers
interact with one another or with content associated with reality shows, regular
shows, advertisements or fixed-odds games by sending in messages that are
displayed or accumulated on the television screen.
SMS interaction has been a significant success in Europe and Asia for
several years, and recently has been making in-roads in the U.S.
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A major and growing share of SMS is channeled to the emerging world of
SMS-TV due to the ongoing innovative and creative development of content
enabling the usage of mobile text messaging with TV broadcast content. For
example, using the SMS channel for voting has proved particularly popular in
Europe. O2 UK revealed recently that more than 200,000 votes were cast via
premium SMS within one hour for the TV show Popstars - The Rivals.
THE INTERACTIVE ENTERTAINMENT MARKET
The interactive entertainment market has emerged as a result of the rapid
growth and significant technological advancement in the communications industry.
Service providers are launching new data services, including downloadable games,
ring tones and images, to drive revenues and retain subscribers. They invest
heavily in technology to take advantage of advanced networks and next-generation
devices, including 3G mobile phones and new set-top cable and satellite boxes.
Our primary markets include:
o Interactive TV (interactive cable and satellite television
companies, television channels, and television programs), or iTV
- Our iTV packages have been deployed by cable and satellite TV
companies around the world, including Cablevision and RCN in the
US, and SKY, Telewest and NTL in the UK.
o Wireless service providers - We provide online games and support
SMS, WAP, J2ME, PDA and 3G technologies. We offer a single user
account feature which allows a user to utilize the wireless
platform to play the same games on other platforms, including iTV
and the Internet, under a single account with the same virtual
account balance and user information.
o Internet service providers - Our products are being deployed by
ISP's (such as UPC (Holland and Austria)) and are available for
IPTV (Internet Protocol TV based on technologies such as xDSL and
FTTx) to offer our interactive games platform solutions.
o Hospitality service providers (games on demand) - Our products
are currently deployed by LodgeNet (US), a hotel in-room service
provider platform. The hotel can offer its customers interactive
games using their in-room TV and remote control.
Within the interactive entertainment market, we serve two market segments:
o PLAY FOR FUN - Includes service providers offering interactive
games that do not involve the direct transfer of money between
the service provider and the subscriber. This is a rapidly
growing market which holds great potential and opportunities for
innovative gaming applications providers. Our solutions for the
play for fun market include Zone4Play branded skill games,
multi-player games, trivia games, casino games and sports games.
We also develop customized games for our customers. Additionally,
we provide content licensed from third-party developers such as
Slingo and Game Universe.
o PLAY FOR REAL - Includes service providers that operate
interactive gaming and gambling applications which involve
monetary transactions between the service provider and the
subscriber. Industry trends indicate that this market will
continue to grow and offer subscribers a broad range of access
possibilities to place real-money bets. This market is heavily
regulated. Our current operations in this market are conducted
exclusively in the United Kingdom.
OUR STRATEGY
Our goal is to become a leading global provider of interactive games
technology to the iTV, wireless and Internet markets. We believe that developing
a diversified portfolio of high quality, innovative applications is critical to
our business. We intend to:
o DEVELOP INNOVATIVE APPLICATIONS. We will continue to devote
significant resources to the development of high-quality,
innovative applications and work with the best content
developers. As the interactive entertainment landscape
continuously evolves, we expect to extend our cross-platform
solutions to accommodate advancements in network and device
technology.
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o EMPHASIZE ZONE4PLAY-BRANDED TECHNOLOGY. We plan to emphasize the
unique features of Zone4Play-branded applications, which
typically generate higher margins for us. We intend to broaden
our applications to highlight the community aspects of our
content, thereby offering our customers the opportunity to
increase subscriber satisfaction, leading to reduction in
subscriber turnover.
o LICENSE THIRD PARTY BRANDS. We will continue to license
well-known, third party brands and collaborate with major media
companies and other brand holders to introduce third party
branded applications. We believe that familiar titles facilitate
the adoption of our applications by our customers and their
subscribers, and create strong marketing opportunities.
o ESTABLISH A LEADING HOSTED ENVIRONMENT. We plan to leverage our
cross-platform capabilities to develop a hosted environment that
will allow customers to offer their subscribers the opportunity
to participate in multi-player games with subscribers from other
customers and on other platforms. We believe this approach will
draw subscribers to the multi-player community by offering an
established player base even to subscribers of new customers.
o EMPHASIZE OUR BUSINESS MODEL. We will continue to highlight our
revenue-share model's collaborative features for our customers,
the service providers. We believe the revenue-share model makes
us a partner in the technology effort, fully committed to
upgrading and enhancing the capabilities of our applications,
since we have an ongoing interest in the revenue they generate
for the customer and, ultimately, ourselves.
OUR COMPETITIVE STRENGTHS
We believe that our competitive strengths include:
PROPRIETARY, AWARD WINNING, TECHNOLOGY AND COMMITMENT TO RESEARCH AND
DEVELOPMENT. We invest in research and development to create applications and
technologies that incorporate the advanced capabilities of next-generation
networks. We have developed proprietary technologies that enable us to
distribute our solutions across different platforms. In 2002, our innovative
technology won first place at the "Neddies," an international competition for
iTV applications developers organized by NDS Ltd. We offer our cross-platform
technologies through revenue-sharing arrangements with our customers. The
cross-platform nature of our technologies allows us to remain neutral to the
network choices made by our customers, and enables our customers to reach a
larger number of subscribers.
CUSTOMER RELATIONSHIPS AND DISTRIBUTION CHANNELS ACROSS MULTIPLE PLATFORMS.
Service providers are our primary customers and the distributors of our
applications. Over the past two years, we have established agreements to
distribute our applications through major wireless operators, Internet service
providers, and cable and satellite companies. We believe that we are able to
build our distribution channels as a result of our focus on customer service,
the quality of our applications and our ability to deploy those applications on
a broad range of devices and networks. We believe that the time and difficulty
involved in building a global distribution channel represents a significant
barrier to entry for our potential competitors.
DIVERSE PORTFOLIO OF ORIGINAL AND LICENSED PROPERTIES. We publish a diverse
portfolio of interactive entertainment applications. Our applications span
multiple categories and are based on intellectual property that we create and
own and well-established brands that we license from third parties. We believe
that our approach to develop branded content for our platform has broad customer
appeal and reduces our reliance on any particular application. In addition to
introducing new applications, we continuously update our existing applications
to take advantage of enhanced functionality of new media platforms.
RECURRING REVENUE-GENERATING BUSINESS MODEL. Our business strategy
emphasizes the collaborative nature of our approach to customers. We prefer to
enter into revenue-share agreements with our customers, rather than license our
technology. We believe this approach will continue to generate revenue long
after the technology's initial release. The market data we collect from sales
and usage of our applications also provides us with valuable insight into
carrier and subscriber preferences and guides the development of future
application.
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OUR PRODUCTS AND TECHNOLOGY
Zone4Play's proprietary cross-system product line allows access to a
variety of platforms through a single user account. Thus, our focus on
inter-operability (iTV, Mobile, Internet) enables us to offer a choice of access
possibilities in one all-encompassing technology.
Zone4Play's products are comprised of an array of components. The customer
can select those components that are the most appropriate to be added.
Back-office, single/multi-player, game engines interface with cellular, SMS TV,
iTV and the Internet.
[Back Office Diagram]
ZONEMAS(TM) BACK OFFICE SUITE
Zone4Play's strategy is to provide gaming operators with all the software
tools they need to deploy gaming services to their customers in the most
efficient and lucrative manner. So whether connecting to existing enterprise
operations or starting from scratch, Zone4Play's ZoneMAS is a robust, highly
secure and cost-effective back-office suit that is specially designed to cater
to the dynamic needs of gaming operators.
ZoneMAS is an advanced cross-platform back office system that enables the
delivery of betting services on numerous interactive platforms such as the
Internet, mobile, iTV, and the groundbreaking broadcast TV, using a one-time
registration process and a single account. ZoneMAS supports fixed odds games,
lottery games, number games, bingo games and more. ZoneMAS is a cross platform
solution designed to meet these unique requirements. ZoneMAS includes advanced
marketing and advertising tools, including a bonus system mechanism, VIP system,
customer retention system, lifetime value mechanism, tournament systems, data
mining and an in-house affiliation system.
ZoneMAS advanced features include:
o Cross platform capabilities (Internet, mobile and iTV)
o Familiar web-based interface that enables access from any browser
o State-of-the-art security systems for sites include SSL Personal Key
management for every system access
o User-friendly interfaces and features
o Real-time reporting of trends, individual account analysis and
performance
o Marketing and advertising subsystems
o Full third party support via an application program interface.
- 22 -
GAME SERVERS
Stand-Alone Games Server
This server's function is to manage the game logic of fixed-odds betting.
The server supports the installation of games in a uniform protocol to connect
with the back-office and different customers' interfaces. We developed several
game engines for Roulette, Dice, Keno, Hi-Lo, Slots, Bingo-Keno, Horse Racing
and more which have been successfully deployed for several years at different
clients. The server also supports installation of games developed by third
parties.
Multi-Player Games Server
This server controls the multi-player games developed by us. The server
operates two types of games: (1) games where several players play against each
other, like Poker, and the server manages the game tables and the tournaments;
and (2) games where drawings take place every few minutes and can be observed by
all participants, such as SMS TV.
[Zone Games Engines Diagram]
MOBILE SOLUTION
We have extended our expertise with interactive gaming technologies to the
mobile world. Our mobile solutions include fixed odds games, casino games,
sports book services, lottery games and MP poker. Our mobile fixed odds games
are full applications residing on the handset and on top of the game
presentation layer. They allow access to account management features, such as
deposits and withdrawals, at any given time, ancillary to on-line account
management services on the web.
The game client application integrated together with the Zone4play server
component offers an end-to-end solution. Integration of all the fixed odds
activities then takes place on the back end systems between the Zone4Play server
and any third party bookmaker's back office. Game applications run on J2ME, Brew
and WAP platforms to deliver the best experience in regard to the platform's
inherent limitations.
Zone4Play's fixed odds portfolio includes the most popular games such as
Hi-Lo, Slots, Keno, Bingo, Roulette, Dice, Virtual Horseracing, and others - all
with user-friendly management features and full back-office support.
Zone4Play's lottery services portfolio includes games such as traditional
lottery, fixed odds lucky number games, pool games, Keno & Bingo, instant
tickets and scratch cards, profitability games, video lottery games and more -
all with user-friendly management features and full back-office support.
Mobile features include:
o Supports over 40 different handsets by Nokia, SE, Samsung and more
o Interfaces with Java, SMS, WAP and Brew protocols
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o Maximum security - all Zone4Play games integrate state-of-the-art SSL
encrypted protocols and encryption keys
o Game engine, presentation layer and bandwidth-saving download
mechanisms are all part of the package
o Cross-operator/cross-media environment - Zone4Play's server-based
solutions allow cooperation with iTV, satellite, and Internet-based
gaming operations enabling a single-account, cross-platform gaming
experience.
ZONEITS(R) SERVER (INTEGRATED GAMING MANAGEMENT PLATFORM)
ZoneITS is a designated server that resides on the customer's network and
handles all incoming requests from mobile handsets such as subscriber
registration, access to applications, and all Java-enabled interactivity. The
server's advanced proprietary architecture enables reliance on a single uniform
protocol between the mobile client and terminal.
The server is specially designed to manage updated versions of devices by
providing information about the client's memory status and other resources. This
allows all monitoring and repairs to take place in the server environment which
eliminates the need for changing the basic code on the Java client. The
proprietary architecture increases security and creates an additional buffer
between the client and the server, making the content transferred between mobile
clients and the terminal uniformly encrypted.
ITV SOLUTION
Our iTV products are proprietary set top box single screen stand-alone game
applications, multi-player games applications and branded iTV games under
exclusive agreements with Game Universe's SkillJam, the on-line skill game
provider for MSN Zone(TM) and Go.com, and Slingo, one of the most played online
games.
Zone4Play delivers:
o Fixed odds games service
o Sport betting services
o Lottery and scratch cards services
Our iTV solutions operate on any available middleware and can be deployed
by all cable, satellite and IPTV providers. Zone4Play has been deployed on Sky,
NTL and Telewest (all three UK platforms) and other TV platforms worldwide.
System components include:
o Client side application development
o Customer back-office application program interface - the back-office
handles all transactions and manages the balances of each user's
account. An approved application program interface was integrated into
the system design to perform smooth interaction with the system.
SMS-TV SOLUTION
Zone4Play has developed a system for television audiences by combining its
ability to deliver complete interactive applications with SMS-driven
interaction. The new technology enables the seamless delivery of sophisticated
interactive gaming services to TV viewers regardless of the availability of a
return path and without any reliance on the set-top box. The goal is to enable
fixed odds and lottery service providers to reach mass audiences by broadcasting
linear TV gaming applications, and to enable broadcasters to offer gaming
programming to their viewers.
This innovative solution, based on our patented technology, opens a
completely new medium for interactive gaming. The new technology uses mobile
text messaging to bring interactive gaming and communities to subscribers
without a return-path and creates an up-close, personal and "sticky" virtual
community around the channel.
- 24 -
Because the games broadcast as a video stream to a TV channel, SMS is the
interaction delivery platform for full cycle fixed odds game mechanism. The
broadcaster component integrated with the Zone4Play server component offer an
end-to-end solution. Integration of all fixed odds activities then takes place
on the back end systems between Zone4Play and the gaming operator's back office.
The portfolio of applications includes fixed odds games and lottery
services all as "stand alone" interactive applications or overlaid on broadcast
programs. All applications are enhanced with full community-based features. The
SMS Fixed Odds Portfolio includes: Roulette, Hi Lo, Virtual Horse Racing, Keno,
Dice and Virtual car racing.
SKILL GAMES SOLUTION
In the skill games field, players select their skill game of choice and pay
a tournament entry fee. The player who earns the highest score in the tournament
wins cash. Unlike casino games (which are mostly games of chance) the chance of
winning skill games varies with the user's skill level in that particular game.
Users have the option of competing against one person or participating in larger
tournaments where prizes will be bigger.
INTERNET SOLUTION
Our Internet products are mainly gaming-related and comprised of
single/multi-player applications. We offer to our clients several solutions:
stand-alone casino play-for-fun games, fixed odds games, multi-player Texas
Hold'em Poker, multi-player Bingo, and our proprietary multi-player Blackjack.
CROSS-PLATFORM SKILL GAMES SYSTEM
Zone4Play's cross-platform skill games solution integrates a cross-accounts
transaction system for enabling the delivery of skill games over mobile
handsets, iTV and the web.
OUR CUSTOMERS
The Company currently provides interactive applications to cable and
satellite companies, wireless service providers, website operators and the
hospitality industry.
In the field of cable and satellite, we enter into agreements with cable
and satellite companies and operators of television channels that provide
interactive games, as well as other television content providers. In these
agreements we provide our customers with unique state-of-the-art development
capabilities as well as off-the-shelf applications. Our applications are
play-for-real, play-for-fun packages, and SMS-TV applications (for fun and for
real) and generate revenue on a range of revenue models. Our preference is
always to enter into agreements with our customers that will provide us with a
percentage of net revenue generated by our customers, or a percentage of the net
income generated by our customers. However, we do enter into licensing
agreements from time to time where we charge a license fee for the use and/or
distribution of our applications. The term of our agreements is between one and
five years.
Similarly, in the field of wireless handheld devices, our strategy is to
enter into revenue share agreements that provide us with a stream of revenue
based on the success of our applications. Similar to iTV, these applications are
play-for-fun and/or play-for-real and generate revenue through the download of
applications by customers' end-users and/or premium telephony rates paid by
these end-users.
In the field of Internet applications, we believe we are a leader in the
creation and development of lifelike applications that enhance the user
experience. Zone4Play uses its extensive experience in the creation of web
applications and websites. The Company supplies full client and server side
applications, including advanced e-commerce and security modules.
In the hospitality industry, we also contract on a revenue share model and
receive recurring revenues from our customers.
Our customers are usually responsible for marketing and customer support,
and we provide the technology for the application (either client-side
application, or server-side application, or the back-office.)
- 25 -
Additionally, we enter into agreements with third parties for the
development of Zone4Play applications that make use of third party brand names,
trademarks, service marks and other intellectual property for use and deployment
on iTV platforms. Among our customers are Slingo Inc., providing Internet Slingo
games (cards and kids games), Game Universe Inc., adapting skill games and pay
per-use Internet games for iTV, as well as other prominent household brands.
Our iTV customers are primarily in the United States and the United
Kingdom.
Currently our major customers in the U.S. are:
o EchoStar Satellite LLC, an operator of direct broadcast satellite DBS
systems, to which we provide a multi-player interactive trivia bingo
game
o CSC Holdings, Inc. (Cablevision), to which we provide a package of
play-for-fun casino games. CSC charges its subscribers a fixed monthly
subscription fee. We also provide to CSC (through NDS Limited) other
games (such as pool, mini golf, slingo games) on other revenue models
such as pay-per-day, pay-per-play, or any hourly or day/week increment
basis for a fee
o RCN Telecom Services of Illinois, LLC, under which we supply certain
software applications for use in the Chicago area.
Currently our major customers in the UK are:
o Two Way media Limited, which operates fixed odds service on cable in
the UK under the name of Winner channel
o The Poker Channel Ltd., operator of a television channel providing
interactive games and other content, including poker and gambling
programming, teleshopping and content for the interactive games
service (also known as "The Poker Channel")
o The Gaming Channel Limited, which operates the gaming channel AVAGO.
We provide three play-for-real interactive television games. Other
games are provided on a play-for-fun model where viewers use
return-path telephony as the billing mechanism. We also provide
play-for-fun Texas Hold'em Multi Player Poker. In 2004 we derived 38%
of our revenues from the Gaming Channel Limited.
Our wireless customers are:
o The Gaming Channel Limited, to which we license certain mobile
software applications that allow play-for-real games on a
non-exclusive basis for distribution by Hutchison UK
o Eurobet UK Limited, to which we provide software for fixed odds and
casino mobile telephone applications which include the games Bingo,
Virtual Horse Racing, Dice, Keno, Hi-Lo and Slots
o Other customers that deploy our play-for-fun games, such as O2 (in the
UK), Mobistar, Orange (in Israel) and others.
Hospitality customers
Our only current customer is LodgeNet Entertainment Corporation, which we
granted a license to use and operate our solutions for Internet and flash-based
games in hotels in the U.S. that receive LodgeNet programming through the
LodgeNet entertainment-on-demand system. We provide Lodgenet with a casino games
package on a play-for-fun basis. We also provide:
o Fifteen new skill games (together with game universe) under four
subcategories (card games, tile games, puzzle games and word games) in
a designated section branded "Skill Jam."
o A stand-alone version of a Texas Hold'em Poker game
o Five Slingo kids games such as "Kids Bumper," "Circus tars,"
"Match'ums 4 Kids," "Slingo 4 Kids," and "Roni Blocks"
- 26 -
Dependence on Three Customers
In 2004, we derived approximately 75% of our revenues from three major
customers: The Games Channel Limited (38%); Winner.com (UK) Ltd. (26%); and RCN
Telecom Services of Illinois LLC (11%).
RESEARCH AND DEVELOPMENT
We spent $504,153 and $1,347,960 on research and development during 2003
and 2004, respectively. None of such amounts were borne directly by customers.
COMPETITION
The interactive entertainment applications market is highly competitive and
characterized by frequent product introductions, new technologies, and evolving
platforms in iTV, wireless and the Internet. As demand for applications
continues to increase, we expect new competitors to enter the market and
existing competitors to allocate more resources to develop and market their
applications. As a result, we expect competition in the interactive
entertainment market to intensify.
The current and potential competition in the interactive entertainment
applications market includes major media companies, traditional video game
publishing companies, service providers in the iTV, wireless and Internet
markets, iTV, wireless and Internet software applications providers, and other
pure-play interactive entertainment companies.
ITV MARKET
Currently, we consider our primary competitors in the iTV market to be
Visiware (provider of iTV solutions), Pixel technologies (provider of gaming
solutions), Yoomedia PLC (UK based interactive entertainment provider),
Static2358 (gaming applications developer of the OpenTV platform and owner the
"PlayJam" gaming channel),Visionik (developer of front-end gaming graphics and
presentation layers to the end-user and Betting Corp, which develops server and
gaming engines.
WIRELESS MARKET
The current and potential competition in the wireless entertainment
applications market includes major media companies, traditional video game
publishing companies, wireless carriers, wireless software providers and other
pure-play wireless entertainment companies. Larger, more established companies
are increasingly focused on developing and distributing wireless applications
that directly compete with us.
- 27 -
We also compete with wireless content aggregators, who combine applications
from multiple developers (and sometimes publishers) and offer them to carriers
or through other sales channels. We generally differentiate ourselves from
aggregators in several key respects. Unlike us, aggregators do not typically
fund development, provide design input or provide quality assurance for their
applications. Also, since aggregators usually do not own an application's
copyright, they often retain less than a majority of the revenues generated from
application sales. We consider our primary competitor in the wireless market to
be Chartwell Technologies and Mfuse Ltd. Chartwell Technologies is a well-known
brand for the development of Internet gambling sites. Chartwell is also
approaching the mobile market with its customized applications to mobile
devices. Mfuse is a provider of mobile gaming technology.
INTERNET
There are numerous competitors in the Internet play-for-fun market, and we
consider our primary competitors in the Internet service provider market to be
online gaming sites and outsource providers.
INTELLECTUAL PROPERTY
On September 14, 2004, we filed an application with the United States
Patent and Trademark Office for a patent on a multi-player Blackjack betting
game.
On March 10, 2005, we entered into an agreement to acquire from NetFun Ltd.
the entire interest in MixTV Ltd., a privately-owned company with proprietary
intellectual property in the field of SMS-TV. MixTV Ltd. has filed a patent
application in the UK related to broadcasted games.
GOVERNMENT REGULATION
Gaming regulations are based on policies that are concerned with, among
other things: (i) the prevention of unsavory or unsuitable persons from having a
direct or indirect involvement with gaming; (ii) the establishment and
maintenance of responsible accounting practices and procedures; (iii) the
maintenance of effective controls over the financial practices of licensees,
including the establishment of minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record keeping
and requiring the filing of periodic reports with the governing jurisdictions;
(iv) the prevention of cheating and fraudulent practices; and (v) the provision
of a source of government revenue through taxation and licensing fees.
The online gambling industry is heavily regulated and suffers from a lack
of standardized gaming legislation and ad hoc application of existing
legislation. Very few jurisdictions have modern laws that specifically apply to
the interactive mediums in which people are currently wagering, and the
applicability of these laws is frequently unclear. Reports indicate that there
are approximately 1700 Internet gambling sites, and there are indications that
increased consolidation might balance against a significant increase in this
number.
The following classifications can be applied to jurisdictions and their
approach to interactive gambling:
o Jurisdictions that permit online bookmaking and casino services if
properly licensed. In these cases, licensees are obliged to pay some
form of taxation. Over 70 global jurisdictions currently regulate or
tolerate one or more types of online gambling, mainly Internet
gambling (e.g., the UK, various Caribbean and Central American
jurisdictions and others)
o Jurisdictions that neither license nor tax bookmaking and gambling
services but where enforcement is lax.
o Jurisdictions that prohibit online gambling and attempt to enforce
their laws. Online gambling is prohibited in most countries.
U.S. GAMBLING REGULATION
Gaming activities are strictly regulated in the United States. The U.S.
Department of Justice maintains that it is illegal to operate an Internet or
Interactive TV gambling service within the U.S., and also that it is illegal for
an offshore gambling service to accept bets from US citizens. Many states in the
U.S. also prohibit online gambling. Play-for-fun games are legal to play (e.g.,
kids, trivia, and parlor, arcade and sports games). These may be played through
iDTV channels/portals, mobile devices or the Web on a subscription fee basis. In
addition, many states permit online "games of skill" although there is
significant ambiguity as to which games fall into this category.
- 28 -
EUROPE AND ASIA PACIFIC (APAC) REGULATION
Currently no European country, other than the UK, allows on-line gambling.
Sports betting is widespread, however, and many governments operate online
lotteries. Revenues from sports betting are rapidly increasing and analysts
forecast that it will eventually drive governments to follow the UK.
A similar scenario is occurring in the Asia Pacific region. Japan, South
Korea, China and Australia do not permit online gambling; however, sports
betting is widespread. Some European companies (e.g., mobile carriers and iTV
broadcasters) have deployed Zone4Play's play-per-points business model which is
recognized as a play-for-fun version of the games generating significant
revenues through premium charge services.
UK REGULATION OF ONLINE GAMING
The UK has announced its intention to license and regulate online gaming by
British-based operators. This will require primary legislation and will form
part of the wider gambling reform. Consumers in the UK access a wide range of
overseas-based Internet sites offering casino and machine-type games. The
British government's aim is to create a regulatory environment within which
British operators can compete for a share of the global market for online
gaming, and which will provide consumers, both in the UK and abroad, with access
to a full range of licensed gambling sites. This process is currently under way,
in consultation with industry and other stakeholders.
Currently, the British government regulates fixed odds betting for real
money, which are non- casino games where the player uses no skill and the
player's intervention is once in each game. Fixed odds games can be played
online through interactive TV channels/portals, mobile devices and the Internet.
The games include sports betting applications (e.g., forms submission, line
balancing and sports games like virtual horse racing) and a number of fixed odds
games (e.g. Bingo, Keno, Hi-Lo, Slot machine, etc.). Fixed odds games on iTV
were launched in July 2002 in the UK and are available through Sky Active, Sky
WinZone and some branded sports betting sites on UK cable outlets.
The Company believes that it is likely that gaming regulation in the U.K.
will be liberalized over time.
EMPLOYEES
We currently employ 37 employees, all of whom work full-time. None of our
employees are covered by a collective bargaining agreement. We consider our
relations with our employees to be good.
DESCRIPTION OF PROPERTY
On August 31, 2004, we entered into an agreement to lease premises located
at Atidim Park, in Tel-Aviv. This location consists of approximately 6,250
square feet of office space and the rent is approximately $6,220 per month, as
of December 31, 2004. The term of this lease is for five years. The rent on this
property increases once every 12 months by 5% of the space rate ($0.70 per
sq/ft). The lease term began on December 1, 2004.
LEGAL PROCEEDINGS
We are not currently a party to, nor is any of our property currently the
subject of, any pending legal proceeding. None of our directors, officers or
affiliates is involved in a proceeding adverse to our business or has a material
interest adverse to our business.
- 29 -
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following are the names and certain information regarding or current
directors and executive officers:
NAME AGE POSITION
---- --- --------
Shimon Citron 49 Chief Executive Officer and Director
Uri Levy 35 Chief Financial Officer
Haim Tabak 57 Chief Operating Officer
Shachar Schalka 30 Chief Technology Officer
Gil Levi 32 Vice President, Research and Development
Idan Miller 33 Vice President, Marketing & Sales
Shlomo Rothman 58 Director
Oded Zucker 39 Director
Sean Ryan 36 Director
Officers are elected annually by the Board of Directors (subject to the
terms of any employment agreement), at our annual meeting, to hold such office
until an officer's successor has been duly appointed and qualified, unless an
officer sooner dies, resigns or is removed by the Board. Some of our directors
and executive officers also serve in various capacities with our subsidiaries.
There are no family relationships among any of our directors and executive
officers.
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS
SHIMON CITRON, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr. Citron founded our
company in 2001 and he has held the positions of Chief Executive Officer and
Director since inception. Mr. Citron is also the Chief Executive Officer and a
Director of each of our wholly owned subsidiaries in Israel and in the United
Kingdom. He has held these positions since 2001. From 1999 to 2001 Mr. Citron
was the founder and President of Gigi Media Ltd., a private company based in
Israel. From 1994 to 1999 he managed his own private investments in a number of
startup companies in Israel.
URI LEVY, CHIEF FINANCIAL OFFICER. Mr. Levy joined us as Chief Financial
Officer in December 2003. Prior to joining us, Mr. Levy was Vice President,
Finance of Loram Ltd. from June 2002 until December 2003, and as a controller of
EasyRun Communications Software Systems from January 1999 until June 2003. Mr.
Levy is a Certified Public Accountant in Israel and has a LL.M Degree from the
Bar Ilan University in Ramat Gan.
HAIM TABAK, CHIEF OPERATING OFFICER. Mr. Tabak joined us in January 2003 as
Chief Operating Officer. Prior to joining us, Mr. Tabak was General Manager of
Winner.com Ltd., Tel Aviv, Israel, a subsidiary of Winner.com, Inc. from March
2000 to December 2002. From January 1998 until December 1999, he held the
position of Chief Operating Officer for Transtech Systems Ltd., an IT logistics
solution provider located in Tel Aviv.
SHACHAR SCHALKA, CHIEF TECHNOLOGY OFFICER. Mr. Schalka was appointed as our
Chief Technology Officer in December 2001. Prior to joining us, Mr. Schalka held
various technical, programming and managerial positions with Gigi Media Ltd.
from September 2000 until November 2001.
GIL LEVI, VICE PRESIDENT OF RESEARCH & DEVELOPMENT. Mr. Levi was appointed
Vice President of Research and Development on June 2002. Prior to joining us,
Mr. Levi held the position of senior software programmer of Gigi Media Ltd. from
August 2000 until May 2002.
IDAN MILLER, VP MARKETING AND SALES. Mr. Miller joined Zone4Play in May
2004 with ten years of experience managing TV and Internet technology projects.
From 1998 to 2001 Idan was President and CEO of Oraios, a NYC based company that
developed e-Commerce, community and e-Gaming enabling technologies for the
Internet. Prior to Oraios (1997 - 1998) Idan was the MD of Zinc Media, a
development house for interactive applications. As such, Mr. Miller has worked
with some of the largest e-Commerce websites around the world. Idan served as VP
Marketing of Intech Capital, an investment house for Internet enterprises during
2001- 2002 and was Head of Business Development - iTV at NDS (A News Corp.
company specializing in TV solutions) from 2002 to 2004.
- 30 -
SHLOMO ROTHMAN, DIRECTOR. Mr. Rothman has been a member of our Board of
Directors since January 2004. Since February 2002, Mr. Rothman has been the
President and CEO of S.R. Consulting Ltd., a private company that provides
financial services, investment banking, mergers and acquisitions and project
financing. From 1987 until 2002, Mr. Rothman was Senior Deputy General Manager
of the First International Bank, a safra bank in Israel. From 1987 to 1999, he
was the Head of Marketing, Capital Markets and Investments Divisions of the
First International Bank. From 1999 until 2002, Mr. Rothman was the head of the
Retail and Commercial Banking Division of the First International Bank. Mr.
Rothman was a Director of the Tel Aviv Stock Exchange from 1989 until 2000 and a
Director of Maalot-Israeli Rating Co. from 1995 until 2000. He is currently a
Director of the Menorah-Gaon Investment House Ltd. and Edmond de
Rothschild-Portfolio Management Ltd., both located in Israel.
ODED ZUCKER, DIRECTOR. Mr. Zucker has been a member of our Board of
Directors since January 2004. Mr. Zucker has been the United Kingdom Senior Vice
President for Prudential Bache Inc. since 1995. He was also a co-founder of the
Israeli operations for Prudential Bache. Mr. Zucker is a registered
representative with the New York Stock Exchange and the NASD. Mr. Zucker is also
a Director of Nisko Projects Electronics and Communication Ltd., which currently
trades on the Tel Aviv Stock Exchange in Israel.
SEAN RYAN, DIRECTOR. Mr. Ryan was the Vice President, Music of
RealNetworks, Inc. between August 2003 and September 2004. Before joining
RealNetworks, from April 1999 until May 2001, Mr. Ryan served in various
positions with Listen.com, Inc. In May 2001, Mr. Ryan was elected as the Chief
Executive Officer of Listen.com and acted as a director of the company and of
its Japanese joint venture company until August 2003. Mr. Ryan holds a Master of
Business Administration degree from the Anderson School at UCLA.
EMPLOYMENT AGREEMENTS
On January 1, 2004, we entered into an employment agreement with Uri Levy
to act as our Chief Financial Officer. The base gross salary under the agreement
is approximately $3,333 per month for the first 90 days of the agreement and
$4,444 per month thereafter. Each monthly payment is adjusted to reflect changes
in the consumer price index as published on the date of payment. The agreement
does not have an expiration date, but may be terminated by either party at any
time upon 30 days written notice to the other party specifying the effective
date of termination. The agreement has a non-competition provision, which
provides that Mr. Levy shall not during the term of the agreement and for a
period of 12 months from the termination date, directly or indirectly engage in
certain activities that compete with us.
On April 1, 2004, we entered into an employment agreement with Haim Tabak
to act as our Chief Operating Officer. Beginning April 1, 2004, Mr. Tabak's base
gross salary is approximately $3,778 per month. The agreement does not have an
expiration date, but may be terminated by either party at any time upon 30 days
written notice to the other party specifying the effective date of termination.
The agreement has a non-competition provision, which provides that Mr. Tabak
shall not during the term of the agreement and for a period of 12 months from
the termination date, directly or indirectly engage in certain activities that
compete with us.
On April 1, 2004, we entered into an employment agreement with Shachar
Schalka to act as our Chief Technology Officer. Beginning April 1, 2004, Mr.
Schalka's base gross salary is $7,222 per month. The agreement does not have an
expiration date, but may be terminated by either party at any time upon 30 days
written notice to the other party specifying the effective date of termination.
The agreement has a non-competition provision, which provides that Mr. Schalka
shall not during the term of the agreement and for a period of 12 months from
the termination date, directly or indirectly engage in certain activities that
compete with us.
On April 1, 2004, we entered into an employment agreement with Gil Levi to
act as our Vice President of Research and Development. Beginning April 1, 2004,
Mr. Levi's base gross salary is $7,222 per month. The agreement does not have an
expiration date, but may be terminated by either party at any time upon 30 days
written notice to the other party specifying the effective date of termination.
The agreement has a non-competition provision, which provides that Mr. Levi
shall not during the term of the agreement and for a period of 12 months from
the termination date, directly or indirectly engage in certain activities that
compete with us.
On November 30, 2004, we entered into an employment agreement with Idan
Miller, under which Mr. Miller will serve as our subsidiary, Zone4Play (Israel)
Ltd.'s Senior Vice President of Marketing and Sales. Mr. Miller's base salary
under the agreement is $4,444 per month. In addition, within 90 days of the end
of each quarter beginning the first quarter of 2005, Zone4Play (Israel) Ltd.
will pay Mr. Miller an amount equal to 0.6% of Zone4Play (Israel) Ltd.'s
quarterly gross revenues. We also granted Mr. Miller an option to purchase
200,000 shares of our common stock at a purchase price per share of $0.55. The
option vests 1/8 every three months beginning July 1, 2004. In the event our
business is sold or merged within the vesting period, the option will become
immediately vested.
- 31 -
In addition, Mr. Miller will receive a fully vested option to purchase
additional shares of our common stock in the event the our revenues meet
specified benchmark amounts in excess of $5,000,000 for the calendar year ending
December 31, 2005. In the event an acquisition of our business is consummated
for a purchase price equal to or exceeding $100,000,000 before March 31, 2006,
in place of any revenue-based options that Mr. Miller may be entitled to, we
will grant Mr. Miller an option to purchase 180,000 shares of our common stock
at a purchase price equal to the market value of our common stock on the grant
date.
Mr. Miller will also receive a fully vested option to purchase additional
shares of our common stock in the event our revenues meet specified benchmark
amounts in excess of $10,000,000 for the calendar year ending December 31, 2006.
If an acquisition of our business is consummated for a purchase price equal to
or exceeding $200,000,000 before March 31, 2007, in place of any revenue-based
options that Mr. Miller may be entitled to, we will grant Mr. Miller an option
to purchase 180,000 shares of our common stock at a purchase price equal to the
market value of our common stock on the grant date.
Either party may terminate Mr. Miller's employment agreement at any time
upon 30 days written notice to the other party specifying the effective date of
termination. In the event of a termination by Zone4Play (Israel) Ltd., during
the period between such written notice and the effective date of termination,
Mr. Miller is entitled to compensation as described above plus all other
employee benefits under the employment agreement. In the event of a termination
by Mr. Miller, during the period between such written notice and the effective
date of termination, Mr. Miller is entitled to compensation as described above
but no other benefits under the employment agreement.
DIRECTORS' COMPENSATION
On January 1, 2004, we signed agreements with Shlomo Rothman and Oded
Zucker, two non-employee directors, under which we undertook to grant to each of
them options to purchase 192,261 shares of our common stock. In accordance with
a resolution unanimously approved by our Board of Directors on March 8, 2005,
the Board of Directors approved the option grants to Messrs. Rothman and Zucker
and also approved a grant to Mr. Ryan of an option to purchase 192,261 shares of
our common stock. Each option grant was made pursuant to and in accordance with
our 2004 Global Share Option Plan, as consideration for their service on our
Board of Directors and have an exercise price equal to, $1.00 per share in the
case of Messrs. Rothman and Zucker and $1.368 in the case of Mr. Ryan, have a
term of ten (10) years, and are exercisable in three equal annual installments
commencing on the first anniversary of the date of grant. In addition we agreed
to pay each of Messrs. Rothman, Zucker and Ryan while they serve as a member of
the Board, an annual director's fee of $7,000, payable in quarterly
installments, and $750 per board meeting.
We do not have any formal or informal arrangements or agreements to
compensate our employee directors for services they provide as members of our
Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the total
compensation that we have paid or that has accrued on behalf of our chief
executive officer and other executive officers with annual compensation
exceeding $100,000 during the years ending December 31, 2004, 2003 and 2002.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
-------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- ------------------------------ ------------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDER-LYING OTHER
NAME AND COMPEN- STOCK AWARD(S) OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SATION ($) ($) SARS (#) PAYOUTS ($) SATION ($)
----------- ------------- ---------- ------------ ----------------- ------------ ------------ -----------
Shimon Citron, Chief 2004 $60,000 -0- -0- -0- -0- -0- -0-
Executive Officer 2003 -0- -0- -0- -0- -0- -0- -0-
and Director 2002 -0- -0- -0- -0- -0- -0- -0-
- 32 -
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2002, we entered into a software development agreement with a
related party to sell credit card clearing software. From this agreement, we
generated one-time revenues in 2003 of $380,000. Our management believes that
the terms of this agreement were at least favorable as could have been obtained
from an unrelated third party.
In 2002, we signed an agreement in the amount of $296,500 with Winner.com
(UK) Ltd. to provide a software application. According to the agreement, we
received an advance payment in the amount of $196,000 from Winner.com (UK) Ltd.
Due to a dispute with Winner.com (UK) Ltd., the software application was not
delivered until the first quarter of 2004, when the dispute was resolved. Our
Chief Executive Officer, Shimon Citron, owns 60% of Winner.com (UK) Ltd., of
which half of the shares are being held as a trustee to other shareholders. Our
management believes that the terms of the agreement with Winner.com (UK) Ltd.
were at least as favorable as could have been obtained from an unrelated third
party.
In December 2002, we signed a line of credit loan agreement with Shimon
Citron, our Chief Executive Officer, in an amount of up to $500,000 for a term
of two years. The loan is in U.S. dollars and bears an annual interest rate of
1.5%. As of December 2003, we received $85,359 out of from the credit line. Our
management believes that this loan agreement is on terms at least as favorable
as could be obtained from an unrelated third party.
Under a lease that terminated August 31, 2004, we sublet office space
located at 3B Hashlosha St., Tel Aviv, 67060 Israel from Winner.com Israel
(1999) Ltd., which is a related party. Our management believes that this space
was rented on terms at least as favorable as could be procured from unrelated
third parties.
On February 22, 2005, the Company, Winner.Com (UK) Ltd., which is a related
party, and Two Way Media Limited ("TWM") entered into an Interactive Fixed Odds
Betting Services Agreement (the "Agreement"). TWM, which establishes fixed odds
betting services on digital television, the Internet, mobile telecommunications
networks and other digital platforms, engaged with the Company and Winner.Com
(UK) Ltd. to provide client-side game applications, server-side software for the
management of such platforms and project management support and technical
services using Winner's trademark and brand. Each party is entitled to a certain
profit share, based on the kind of platform pursuant to which the profit was
generated and the amount of profit generated.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 31, 2005
with respect to the beneficial ownership of the outstanding common stock by (i)
any holder of more than five (5%) percent; (ii) each of the named executive
officers and directors; and (iii) our directors and executive officers as a
group. Except as otherwise indicated, each of the stockholders listed below has
sole voting and investment power over the shares beneficially owned.
- 33 -
Percentage of Percentage of Common
Common Stock Common Stock Stock After Offering
Name of Beneficial Owner (1) Beneficially Owned (2) Before Offering (3) (4)
---------------------------- ---------------------- ------------------- --------------------
Shimon Citron (5) 3,258,772 14.0% 14.0%
Shlomo Rothman 64,087 * *
Oded Zucker 64,087 * *
Sean Ryan 10,000 * *
Pini Gershon 2,706,950 11.6% 11.6%
Weiss, Peck & Greer Investments, a
division of Robeco USA, LLC (6) 3,810,400 16.4% 16.3%
--------- ---- ----
All executive officers and directors as
a group (9 persons) 4,154,117 17.5% 17.5%
* Less than 1%
(1) Except as otherwise indicated, the address of each beneficial owner is
c/o Zone 4 Play, Inc., 103 Foulk Road, Wilmington, DE 19803.
(2) Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to
the shares shown. Except where indicated by footnote and subject to
community property laws where applicable, the persons named in the
table have sole voting and investment power with respect to all shares
of voting securities shown as beneficially owned by them.
(3) Based on 23,250,010 shares outstanding.
(4) Based on 23,328,210 shares outstanding, assuming that all securities
registered will be sold and that all shares of common stock underlying
warrants will be issued.
(5) Includes 494,449 shares owned by Yariv Citron, son of Shimon Citron.
(6) The address of Robeco USA, LLC is One New York Plaza, New York, NY
10004. The shares are held by Robeco USA, LLC for the discretionary
accounts of certain clients. Robeco USA, LLC expressly disclaims
beneficial ownership of such shares.
DESCRIPTION OF SECURITIES
The following description of our capital stock is a summary and is
qualified in its entirety by the provisions of our Articles of Incorporation,
with amendments, all of which have been filed as exhibits to our registration
statement of which this prospectus is a part.
DIVIDEND POLICY
Our proposed operations are capital intensive and we need working capital.
Therefore, we will be required to reinvest any future earnings in our
operations. Our Board of Directors has no present intention of declaring any
cash dividends, as we expect to re-invest all profits in the business for
additional working capital for continuity and growth. The future declaration and
payment of dividends will be determined by our Board of Directors after
considering the conditions then existing, including our earnings, financial
condition, capital requirements, and other factors.
CAPITAL STRUCTURE
Our authorized capital consists of 75,000,000 shares of common stock, par
value $.001 per share and no shares of preferred stock. As of March 31, 2005, we
had 23,250,010 shares of common stock outstanding. Stockholders: (i) have
general ratable rights to dividends from funds legally available therefore,
when, as and if declared by the Board of Directors; (ii) are entitled to share
ratably in all assets of the Company available for distribution to stockholders
upon liquidation, dissolution or winding up of the affairs of the Company; (iii)
do not have preemptive, subscription or conversion rights, nor are there any
redemption or sinking fund provisions applicable thereto; and (iv) are entitled
to one vote per share on all matters on which stockholders may vote at all
shareholder meetings. The common stock does not have cumulative voting rights,
which means that the holders of more than fifty percent of the common stock
voting for election of directors can elect one hundred percent of the directors
of the Company if they choose to do so.
- 34 -
APRIL 2004 FINANCING
On April 1, 2004, we sold 1,500,000 units of common stock and common stock
purchase warrants at a purchase price of $0.80 per unit, for an aggregate of
$1,200,000. Each unit consists of one share of our common stock and two common
stock purchase warrants. One warrant is exercisable for 24 months at a price of
$1.85 per share and one warrant is exercisable for 36 months at a price of $2.50
per share. The completed private placement consisted of an aggregate of
1,500,000 shares of the our common stock and 3,000,000 warrants.
AUGUST 2004 FINANCING
On August 17, 2004, we sold 1,000,000 units of common stock and common
stock purchase warrants at a purchase price of $1.00 per unit, for an aggregate
of $1,000,000. Each unit consists of one share of common stock and two common
stock purchase warrants. One warrant is exercisable for 24 months at a price of
$2.00 per share and one warrant is exercisable for 36 months at a price of $2.50
per share.
JANUARY 2005 FINANCING
On January 27, 2005, we completed a private offering to accredited
investors under Section 4(2) of the Securities Act, pursuant to which we sold an
aggregate of 2,659,998 shares of common stock for aggregate gross proceeds of
$3,989,999. We agreed to prepare and file with the SEC a registration statement
covering the resale of the common stock on or before February 17, 2005 for
certain investors. If such registration statement covering the shares of common
stock purchased by those certain investors is not declared effective on or
before May 3, 2005, then we must pay those investors liquidated damages equal to
1.5% of the aggregate purchase price paid by them.
NETFUN SHARE EXCHANGE TRANSACTION
On March 10, 2005, we entered into an agreement with NetFun Ltd., an
Israeli company, to issue 625,000 shares of our common stock, in consideration
for NetFun's minority interest in MixTV Ltd., an Israeli company. These shares
of common stock have not been issued yet and will be issued in April 2005.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Bylaws require that we indemnify and hold harmless our officers and
directors who are made a party to or threatened to be made a party to or is
involved in any action, suit, or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director or officer of Zone 4 Play, Inc. to the fullest extent permitted under
Chapter 78 of the Nevada Revised Statutes, as amended.
The State of Nevada permits a corporation to indemnify such persons for
reasonable expenses in defending against liability incurred in any legal
proceeding if:
(a) The person conducted himself or herself in good faith;
(b) The person reasonably believed:
(1) In the case of conduct in an official capacity with the
corporation, that his or her conduct was in the corporation's
best interests; and
(2) In all other cases, that his or her conduct was at least not
opposed to the corporation's best interests.
(c) In the case of any criminal proceeding, the person had no reasonable
cause to believe that his or her conduct was unlawful.
- 35 -
The indemnification discussed herein is not exclusive of any other rights
to which those indemnified may be entitled under the Articles of Incorporation,
any Bylaws, agreements, vote of stockholders, or otherwise, and any procedure
provided for by any of the foregoing, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of heirs, executors, and administrators of
such a person.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Zone 4 Play, Inc. by Zysman, Aharoni, Gayer & Co./Sullivan & Worcester LLP,
Boston, Massachusetts.
EXPERTS
Zone4Play's financial statements as of and for the periods ended December
31, 2004, and the related consolidated statements of operations, changes in
stockholders' deficiency and cash flows for each of the two years in the period
ended December 31, 2004 and for the period from April 2, 2001 (commencement of
operations) through December 31, 2004, included in this prospectus, have been
audited by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global,
independent registered public accountants, as stated in their report appearing
herein and are so included herein in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On February 5, 2004, we appointed Kost Forer Gabbay & Kasierer a member of
Ernst & Young, Global as our new principal independent accountants with the
approval of our Board of Directors. Accordingly, we dismissed Peach Goddard
Chartered Accountants on February 5, 2004. Peach Goddard acted as our principal
independent accountant since the inception of our company in April 2002.
During our recent fiscal year ended March 31, 2003, and the subsequent
interim period through February 5, 2004, the date of Peach Goddard's dismissal
and the date of Kost Forer Gabbay & Kasierer a member of Ernst & Young Global
appointment, there were no disagreements with Peach Goddard on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. The report on the financial statements prepared by Peach
Goddard for the fiscal year ended March 31, 2003 was, however, modified as to
uncertainty as the report contained a paragraph with respect to our ability to
continue as a going concern.
In connection with the fiscal year ended March 31, 2003, and the subsequent
interim period through February 5, 2004, Kost Forer Gabbay & Kasierer a member
of Ernst & Young Global was not consulted on any matter relating to accounting
principles to a specific completed or proposed transaction or the type of audit
opinion that might be rendered on our financial statements. In connection with
the fiscal year ended March 31, 2003, and the subsequent interim period through
February 5, 2004 preceding the change in accountants, Kost Forer Gabbay &
Kasierer a member of Ernst & Young Global did not provide any written or oral
advice that was an important factor considered by it in reaching any decision as
to the accounting, auditing or financial reporting issues.
ADDITIONAL INFORMATION
Zone4Play is subject to the informational requirements of the Securities
Exchange Act of 1934, and in accordance therewith files reports, proxy or
information statements and other information with the SEC. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of such material can be obtained from the
Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the SEC maintains a
web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the Commission's web site is http://www.sec.gov.
- 36 -
Zone4Play has filed with the SEC, a registration statement on Form SB-2
under the Securities Act with respect to the common stock being offered hereby.
As permitted by the rules and regulations of the SEC, this prospectus does not
contain all the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with respect to us and
the common stock offered hereby, reference is made to the registration
statement, and such exhibits and schedules. A copy of the registration
statement, and the exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the SEC at the addresses
set forth above, and copies of all or any part of the registration statement may
be obtained from such offices upon payment of the fees prescribed by the SEC. In
addition, the registration statement may be accessed at the SEC's web site.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete and, in each instance, reference is
made to the copy of such contract or document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference.
- 37 -
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ZONE 4 PLAY, INC.
PAGE
---------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F - 2
CONSOLIDATED BALANCE SHEET F - 3 - F - 4
CONSOLIDATED STATEMENTS OF OPERATIONS F - 5
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY F - 6
CONSOLIDATED STATEMENTS OF CASH FLOWS F - 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 8 - F -24
F - 1
[ERNST & YOUNG LOGO]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF
ZONE 4 PLAY, INC.
(A DEVELOPMENT STAGE COMPANY)
We have audited the accompanying consolidated balance sheet of Zone 4 Play,
Inc. (a development stage company) (the "Company") and its subsidiaries as of
December 31, 2004, and the related consolidated statements of operations,
changes in stockholders' deficiency and cash flows for each of the two years in
the period ended December 31, 2004 and for the period from April 2, 2001
(commencement of operations) through December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2004, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2004 and for the period from April 2, 2001 (commencement of
operations) through December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
March 29, 2005
Tel-Aviv, Israel /s/ KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F - 2
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
U.S. DOLLARS
DECEMBER 31,
2004
--------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $144,077
Trade receivables 176,210
Other accounts receivable and prepaid expenses 44,066
--------
TOTAL current assets 364,353
--------
SEVERANCE PAY FUND 58,403
--------
PROPERTY AND EQUIPMENT, NET 211,752
--------
TOTAL assets $634,508
========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 3
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
U.S. DOLLARS (EXCEPT SHARE DATA)
DECEMBER 31,
2004
-----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Short-term bank credit $ 10,112
Short-term loans from stockholders 1,229
Trade payables 251,541
Employees and payroll accruals 334,446
Accrued expenses and other liabilities 153,018
-----------
TOTAL current liabilities 750,346
-----------
LONG-TERM LIABILITIES
Accrued severance pay 203,786
-----------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' DEFICIENCY:
Common stock of $ 0.001 par value:
Authorized: 75,000,000 shares as of December 31, 2004; Issued and outstanding: 20,540,012 shares
as of December 31, 2004 20,540
Additional paid-in capital 3,595,532
Deferred stock compensation (983,549)
Accumulated other comprehensive income 5,521
Deficit accumulated during the development stage (2,957,668)
-----------
TOTAL stockholders' deficiency (319,624)
-----------
TOTAL liabilities and stockholders' deficiency $ 634,508
===========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 4
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS (EXCEPT SHARE DATA)
PERIOD FROM
APRIL 2, 2001
(COMMENCEMENT OF
OPERATIONS )
YEAR ENDED DECEMBER 31, THROUGH
-------------------------------- DECEMBER 31,
2004 2003 2004
----------- ----------- -----------
Revenues:
Sale of Software $ 572,624 $ 173,707 $ 811,528
One-time sale of software applications to related party 196,000 380,000 704,340
----------- ----------- -----------
Total revenues 768,624 553,707 1,515,868
Cost of revenues 127,944 194,904 420,040
----------- ----------- -----------
Gross profit 640,680 358,803 1,095,828
----------- ----------- -----------
Operating expenses:
Research and development 1,347,960 504,153 2,360,793
Selling and marketing 607,511 144,919 812,241
General and administrative 565,190 108,471 695,396
----------- ----------- -----------
TOTAL operating expenses 2,520,661 757,543 3,868,430
----------- ----------- -----------
Operating loss 1,879,981 398,740 2,772,602
Financial expenses 40,896 43,672 85,041
----------- ----------- -----------
Net loss $ 1,920,877 $ 442,412 $ 2,857,643
=========== =========== ===========
Basic and diluted net loss per share $ 0.102 $ 0.039
=========== ===========
Weighted average number of common stock used in computing
basic and diluted net loss per share 18,831,765 10,426,190
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
--------------------------------------------------------------------------------
U.S. DOLLARS (EXCEPT SHARE DATA)
ADDITIONAL DEFERRED
COMMON SHARE PAID-IN STOCK
STOCK CAPITAL CAPITAL COMPENSATION
------------ ------------ ------------ -----------
NUMBER AMOUNT
------------ ------------
Issuance common stock on April 2, 2001 10,426,190 $ 10,426 $ - $ -
Net loss - - - -
------------ ------------ ------------ -----------
Total comprehensive loss
Balance as of December 31, 2001 10,426,190 10,426 - -
Net loss - - - -
------------ ------------ ------------ -----------
Total comprehensive loss
Balance as of December 31, 2002 10,426,190 10,426 - -
Net loss - - - -
------------ ------------ ------------ -----------
Total comprehensive loss
Balance as of December 31, 2003 10,426,190 10,426 - -
Issuance of shares in respect of reverse shell
acquisition 7,550,000 7,550 86,450 -
Issuance of shares and warrants, net on April 1,
2004 1,497,252 1,497 1,196,300 -
Issuance of shares to service provider on April
5, 2004 44,348 45 39,869 -
Issuance of shares and warrants, net on August
17, 2004 1,000,000 1,000 975,135 -
Issuance of shares to service provider on August
17, 2004 22,222 22 11,978 -
Deferred stock compensation - - 1,285,800 (1,285,800)
Amortization of deferred stock compensation - - - 302,251
Foreign currency translation adjustments - - - -
Net loss - - - -
------------ ------------ ------------ -----------
Total comprehensive loss
Balance as of December 31, 2004 20,540,012 $ 20,540 $ 3,595,532 $ (983,549)
============ ============ ============ ===========
DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING THE TOTAL TOTAL
COMPREHENSIVE DEVELOPMENT COMPREHENSIVE STOCKHOLDERS'
INCOME STAGE INCOME (LOSS) DEFICIENCY
----------- ------------ ------------- ------------
Issuance common stock on April 2, 2001 $ - $ (10,416) $ (10,416) $ 10
Net loss - (6,638) (6,638) (6,638)
----------- ------------ ------------- ------------
Total comprehensive loss $ (17,054)
=============
Balance as of December 31, 2001 - (17,054) (6,628)
Net loss - (487,716) $ (487,716) (487,716)
----------- ------------ ------------- ------------
Total comprehensive loss $ (487,716)
=============
Balance as of December 31, 2002 - (504,770) (494,344)
Net loss - (442,412) $ (442,412) (442,412)
----------- ------------ ------------- ------------
Total comprehensive loss $ (442,412)
=============
Balance as of December 31, 2003 - (947,182) (936,756)
Issuance of shares in respect of reverse shell
acquisition - (89,609) 4,391
Issuance of shares and warrants, net on April 1,
2004 - - 1,197,797
Issuance of shares to service provider on April
5, 2004 - - 39,914
Issuance of shares and warrants, net on August
17, 2004 - - 976,135
Issuance of shares to service provider on August
17, 2004 - - 12,000
Deferred stock compensation - - -
Amortization of deferred stock compensation - - 302,251
Foreign currency translation adjustments 5,521 - $ 5,521 5,521
Net loss - (1,920,877) (1,920,877) (1,920,877)
----------- ------------ ------------- ------------
Total comprehensive loss $ (1,915,356)
=============
Balance as of December 31, 2004 $ 5,521 $ (2,957,668) $ (319,624)
=========== ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F - 6
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------
U.S. DOLLARS
PERIOD FROM
APRIL 2, 2001
(COMMENCEMENT
YEAR ENDED OF OPERATIONS)
DECEMBER 31, THROUGH
------------------------------ DECEMBER 31,
2004 2003 2004
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,920,877) $ (442,412) $(2,857,643)
Adjustments required to reconcile net loss to net cash used in
operating activities:
Depreciation 47,421 22,291 75,453
Loss from sale of property and equipment - 1,702 1,702
Increase in trade and other accounts receivable and prepaid
expenses (161,023) (42,563) (217,373)
Amortization of deferred compensation 302,251 - 302,251
Increase in trade payables 173,994 16,119 251,542
Increase in employees and payroll accruals 172,559 493 334,446
Increase in accrued expenses and other liabilities 126,193 18,601 153,017
Increase (decrease) in advance payments from customers (243,500) 47,500 -
Accrued severance pay ,net 77,606 23,779 145,383
Compensation related to issuance of common stock to a
service provider 51,914 - 51,914
----------- ----------- -----------
Net cash used in operating activities (1,373,462) (354,490) (1,759,308)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (203,477) (24,202) (288,907)
----------- ----------- -----------
Net cash used in investing activities (203,477) (24,202) (288,907)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares in respect of reverse shell acquisition (1) 4,391 - 4,391
Issuance of shares and warrants, net 2,173,932 - 2,173,942
Short-term bank credit, net (26,741) (94) 10,112
Receipt (repayment) of short-term loans from stockholders (483,066) 427,852 1,229
----------- ----------- -----------
Net cash provided by financing activities 1,668,516 427,758 2,189,674
----------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents 2,618 - 2,618
----------- ----------- -----------
Increase in cash and cash equivalents 94,195 49,066 144,077
Cash and cash equivalents at the beginning of the period 49,882 816 -
----------- ----------- -----------
Cash and cash equivalents at the end of the period $ 144,077 $ 49,882 $ 144,077
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 13,691 $ 4,571 $ 22,092
=========== =========== ===========
*) Represents an amount lower than $ 1.
(1) On February 1, 2004, the Company acquired Zone 4 Play, Inc. (Delaware)
through a reverse shell purchase acquisition (see Note 1c).
The accompanying notes are an integral part of the consolidated financial
statements.
F - 7
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 1:- GENERAL
a. Zone 4 Play, Inc. (the "Company") was incorporated under the laws of
the State of Nevada on April 23, 2002 as Old Goat Enterprises, Inc. On
February 1, 2004, the Company acquired Zone 4 Play, Inc. ("Zone 4 Play
(Delaware)" See note 1c), which was incorporated under the laws of the
State of Delaware on April 2, 2001, and subsequently changed the
Company's name to Zone 4 Play, Inc., a Nevada corporation. The Company
develops and markets interactive games applications for Internet,
portable devices and interactive TV platforms.
The Company conducts its operations and business with and through its
wholly-owned subsidiary, Zone 4 Play, (Delaware), and its wholly-owned
subsidiaries Zone 4 Play, Ltd., an Israeli company incorporated in
July 2001, which is engaged in research and development and marketing
of the applications, and Zone 4 Play, (UK) Limited, a United Kingdom
corporation, incorporated in November 2002, which is engaged in
marketing of the applications.
The Company's shares are currently traded on the OTC Bulletin Board
under the trading symbol "ZFPI.OB."
b. The Company and its subsidiaries are devoting substantially all of its
efforts toward conducting research, development and marketing of its
software. The Company's and its subsidiaries' activities also include
raising capital and recruiting personnel. In the course of such
activities, the Company and its subsidiaries have sustained operating
losses and expect such losses to continue in the foreseeable future.
The Company and its subsidiaries have not generated sufficient
revenues and have not achieved profitable operations or positive cash
flow from operations. The Company's accumulated deficit aggregated to
$ 2,957,668 as of December 31, 2004. There is no assurance that
profitable operations, if ever achieved, could be sustained on a
continuing basis.
The Company plans to continue to finance its operations with a
combination of securities issuances and revenues from product sales.
Subsequent to the balance sheet date (see Note 13a) the Company
completed a round of financing, with gross proceeds in the amount of $
3,989,999.
c. Acquisition of Zone 4 Play (Delaware):
According to the agreement between the Company and Zone 4 Play
(Delaware), the Company issued 10,426,190 shares of common stock to
the former holders of equity interests in Zone 4 Play (Delaware).
F - 8
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 1:- GENERAL (CONT.)
The acquisition has been accounted for as a reverse acquisition,
whereby the Company was treated as the acquiree and Zone 4 Play
(Delaware) as the acquirer, primarily because the shareholders of Zone
4 Play (Delaware) owned a majority, approximately 58% of the Company's
common stock, upon completion of the acquisition. Immediately prior
the consumption of the transaction Zone 4 Play, Inc. had no material
assets and liabilities, hence the reverse acquisition was treated as a
capital stock transaction in which Zone 4 Play (Delaware) is deemed to
have issued the common stock held by the Company's shareholders for
the net assets of the Company. The historical financial statements of
Zone 4 Play (Delaware) became the historical financial statements of
the Company.
d. Concentration of risk that may have a significant impact on the
Company:
During 2004, the Company derived most of its revenues from three major
customers (see Note 11).
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States ("U.S.
GAAP").
a. Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
b. Financial statements in U.S. dollars:
Most of the revenues of the Company and certain of its subsidiaries
are generated in U.S. dollars ("dollar"). In addition, a substantial
portion of the Company's and its subsidiaries costs are incurred in
dollars. Company's management believes that the dollar is the primary
currency of the economic environment in which the Company and its
subsidiaries operate. Thus, the functional and reporting currency of
the Company and its subsidiaries is the dollar.
Accordingly, monetary accounts maintained in currencies other than the
dollar are remeasured into U.S. dollars in accordance with Statement
of Financial Accounting Standard No. 52, "Foreign Currency
Translation" ("SFAS No. 52"). All transactions gains and losses of the
remeasurement of monetary balance sheet items are reflected in the
consolidated statements of income as financial income or expenses as
appropriate, and have not been significant to date for all years
presented.
F - 9
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The financial statements of the Company's subsidiary in the UK, whose
functional currency is not the dollar, have been translated into
dollars. All balance sheet accounts have been translated using the
exchange rates in effect at the balance sheet date. Statement of
operation amounts has been translated using the average exchange rate
for the year. The resulting aggregate translation adjustments were
reported as a component of accumulated other comprehensive income in
shareholders' equity.
c. Reclassification:
Certain amounts from prior years referring to reverse shell
acquisition have been reclassified to conform to current period
presentation.
d. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Intercompany transactions
and balances, have been eliminated upon consolidation.
e. Cash equivalents:
Cash equivalents are short-term highly liquid investments that are
readily convertible to cash with original maturities of three months
or less.
f. Property and equipment, net:
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method,
over the estimated useful lives of the assets, at the following annual
rates:
%
------------------------------------
Computers and peripheral equipment 20 - 33
Office furniture and equipment 6 - 15
Over the term of the lease or the
Leasehold improvements life of the asset, by the shorter of
The Company's long-lived assets are reviewed for impairment in
accordance with Statement of Financial Accounting Standard No. 144
"Accounting for the Impairment or Disposal of Long- Lived Assets"
("SFAS No. 144") whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. During 2004,and 2003,
no impairment losses have been identified.
F - 10
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
g. Severance pay:
The Company's liability for severance pay in respect to its Israeli
employees is calculated pursuant to Israeli severance pay law based on
the most recent salary of the employees multiplied by the number of
years of employment as of the balance sheet date. Israeli employees
are entitled to one month's salary for each year of employment, or a
portion thereof. The subsidiary's liability for its employees is fully
provided by monthly deposits with severance pay funds, insurance
policies and by an accrual. The value of these policies is recorded as
an asset in the Company's balance sheet.
The deposited funds may be withdrawn only upon the fulfillment of the
obligation pursuant to Israeli severance pay law or labor agreements.
The value of the deposited funds is based on the cash surrendered
value of these policies, and includes immaterial profits.
Severance expenses for the years ended December 31, 2004 and December
31, 2003 amounted to $ 103,923 and $ 37,674, respectively.
h. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Options Issued to Employees" ("APB 25")
and FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation" ("FIN 44") in accounting for its
employee stock option plans. Under APB 25, when the exercise price of
a stock option is less than the market price of the underlying stock
on the date of grant, compensation expense is recognized.
The Company had adopted the disclosure provisions of Financial
Accounting Standards Board Statement No. 148, "Accounting for
Stock-Based Compensation - transition and disclosure" ("SFAS No.
148"), which amended certain provisions of SFAS 123 to provide
alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based
employee compensation, effective as of the beginning of the fiscal
year. The Company continues to apply the provisions of APB No. 25, in
accounting for stock-based compensation.
The Company applies SFAS 123 and EITF 96-18 "Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services" with respect to
options issued to non-employees. SFAS 123 requires use of an option
valuation model to measure the fair value of these options at the
grant date.
F - 11
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Pro forma information regarding the Company's net losses and net
earnings (loss) per share is required by SFAS No. 123 and has been
determined as if the Company had accounted for its employee stock
options under the fair value method prescribed by SFAS No. 123.
Pro forma information under SFAS No. 123, is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2004 2003
---------- ------------
Net loss as reported $1,920,877 $ 442,412
Add - stock-based employee compensation - intrinsic value 302,251 -
Deduct - stock-based employee compensation -fair value 367,659 -
---------- ------------
Pro forma:
Net loss: $1,986,285 $ 442,412
========== ============
Loss per share:
Basic and diluted, as reported $ 0.102 $ 0.039
========== ============
Pro forma basic and diluted loss $ 0.105 $ 0.039
========== ============
Under SFAS No. 123, pro forma information regarding net loss and net
loss per share is required, and has been determined as if the Company
had accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 2004:
risk-free interest rates of 2%, with a dividend yields of 0% for the
year ended December 31, 2004, volatility factors of the expected
market price of the Company's common stock of $ 1.11, and a
weighted-average expected life of the option of 2.1 years.
i. Revenue recognition:
The Company generates revenues mainly from revenue sharing agreements
and from software license fee. The Company generates revenues through
its direct sales force.
The Company is entitled to revenues from revenue sharing arrangements
upon sublicensing of the Company's products to end-users. Revenues
from revenue sharing arrangements are recognized when such revenues
are reported to the Company.
The Company accounts for revenues from software applications
agreements in accordance with Statement of Position 97-2, "Software
Revenue Recognition", as amended ("SOP 97-2") and as amended by SOP
98-9 and related interpretations. Revenue from license fees is
recognized when persuasive evidence of an agreement exists, delivery
of the product has occurred, no significant obligations with regard to
implementation remain, the fee is fixed or determinable and
collectibility is probable.
F - 12
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Revenues from sale of software that require significant customization,
integration and installation are recognized in accordance with
Statement of Position 81-1, "Accounting for Performance of
Construction - Type and Certain Production Type Contracts" ("SOP
81-1"), using contract accounting on a completed contract method.
After delivery, if uncertainty exists about customer acceptance of the
software, license revenue is not recognized until acceptance.
Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are first determined, in the amount of
the estimated loss on the entire contract. During 2004 and 2003 no
such estimated losses were identified.
Estimated gross profit or loss from long-term contracts may change due
to changes in estimates resulting from differences between actual
performance and original forecasts. Such changes in estimated gross
profit are recorded in results of operations when they are reasonably
determinable by management, on a cumulative catch-up basis.
j. Research and development costs:
Research and development costs are charged to the Statement of
Operations as incurred. Statement of Financial Accounting Standard No.
86 "Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed" ("SFAS No. 86"), requires capitalization of
certain software development costs subsequent to the establishment of
technological feasibility.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs
incurred by the Company between completion of the working models and
the point at which the products are ready for general releases have
been insignificant. Therefore, all research and development costs have
been expensed.
k Income taxes:
The Company and its subsidiaries account for income taxes in
accordance with Statement of Financial Accounting Standards,
"Accounting for Income Taxes" ("SFAS No. 109"). This statement
prescribes the use of the liability method whereby deferred tax assets
and liability account balances are determined based on differences
between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. The Company and
its subsidiaries provide a valuation allowance, if necessary, to
reduce deferred tax assets to their estimated realizable value.
F - 13
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
l. Concentrations of credit risk:
Financial instruments that potentially subject the Company and its
subsidiaries to concentrations of credit risk consist principally of
cash and cash equivalents and trade receivables. The majority of the
Company's cash and cash equivalents are invested with major banks in
Israel, the United Kingdom and the United States. Management believes
that the financial institutions that hold the Company's investments
are financially sound and accordingly, minimal credit risk exists with
respect to these investments. Such cash and cash equivalents in the
United States may be in excess of insured limits and are not insured
in other jurisdictions. However, management believes that such
financial institutions are financially sound.
The Company's trade receivables as of December 31, 2004, are derived
mainly from sales to two organizations located in United Kingdom and
in the United states. The Company performs ongoing credit evaluations
of its customers and to date has not experienced any material losses.
The Company and its subsidiaries have no off-balance-sheet
concentration credit risk such as foreign exchange contracts, option
contracts or other foreign hedging arrangements.
m. Fair value of financial instruments:
The following methods and assumptions were used by the Company and its
subsidiaries in estimating their fair value disclosures for financial
instruments:
The carrying amounts of cash and cash equivalents, trade receivables,
other accounts receivable, short-term bank credit, short-term loans,
trade payables and other accounts payable approximate their fair value
due to the short-term maturity of such instruments.
n. Impact of recently issued accounting standard:
On December 16, 2004, the FASB issued Statement No. 123R (revised 2004
Share-Based Payment ("Statement 123R"), which is a revision of SFAS
No. 123, Generally, the approach in Statement 123(R) is similar to the
approach described in SFAS No. 123. However, SFAS No. 123 permitted,
but did not require, share-based payments to employees to be
recognized in income based on their fair values while Statement 123(R)
requires all share-based payments to employees to be recognized in
income based on their fair values. Statement 123(R) also revises,
clarifies and expands guidance in several areas, including measuring
fair value, classifying an award as equity or as a liability and
attributing compensation cost to reporting periods. The new standard
will be effective for the Company in the first interim period
beginning after June 15, 2005.
F - 14
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The impact of adoption of Statement 123(R) cannot be predicted at this
time because it will depend on levels of share-based payments granted
in the future. However, had the Company adopted Statement 123(R) in
prior periods, the impact of that standard would have approximated the
impact of Statement 123 as described in the disclosure of pro forma
net income and earnings per share in Note 2h to the Company's
consolidated financial statements.
NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
DECEMBER 31,
2004
--------
Government authorities $ 29,010
Prepaid expenses and other 15,056
--------
$ 44,066
========
NOTE 4:- PROPERTY AND EQUIPMENT, NET
Cost:
Computers and peripheral equipment $236,957
Leasehold improvements 9,992
Office furniture and equipment 40,906
--------
287,855
--------
Accumulated depreciation:
Computers and peripheral equipment 72,588
Leasehold improvements 395
Office furniture and equipment 3,120
--------
76,103
--------
Depreciated cost $211,752
========
NOTE 5:- SHORT-TERM BANK CREDIT
DECEMBER 31, 2004
---------------------------------
INTEREST RATE AMOUNT
--------------- ---------------
%
---------------
Short-term bank credit linked to New Israeli Shekel (NIS) NIS 8.2 $10,112
Total authorized credit lines $23,213
F - 15
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 6:- SHORT-TERM LOANS FROM STOCKHOLDERS
a. In December 2002, the Company signed a loan agreement with its
stockholder in an amount of up to $ 500,000, for a term of two years.
Up until December 2003, the Company obtained a total amount of $
85,359. In 2004, $ 84,130 of the loan was repaid. The loan is in U.S.
dollars and bears an annual interest rate of 1.5%.
b. The Company had received short-term loans from stockholders in Israel
and in the U.S. All loans were paid by the end of March 2004.
NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Lease commitments:
The Company leases its facilities under lease agreements in Israel,
which will expire in December 2009. Future minimum commitments under
non-cancelable operating leases as of December 31, 2004 are as
follows:
RENTAL OF
YEAR ENDING DECEMBER 31, PREMISES
--------------------------------- ---------------
2005 $ 77,967
2006 80,695
2007 83,561
2008 86,569
2009 84,200
---------------
$ 412,992
===============
Total rent and other attendant expenses for the years ended December
31, 2004 and December 31, 2003, were $ 21,947 and $ 19,570,
respectively.
b. Litigation:
In October 2002, the Company signed an agreement in the amount of $
296,500 with a related party and a third party to provide a software
application.
According to the agreement, the Company received an advance payment in
the amount of $ 196,000 from the third party.
Due to a dispute with the third party, the software application was
not delivered.
F - 16
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS (EXCEPT SHARE DATA)
NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
In March 2003, the Company and a related party filed a claim in the
Court of Law in the state of Israel against the third party. During
2004, the Company's reached a settlement with all the parties
involved. According to the settlement, each party dismissed its claim
and the Company provided the software application for the amount of $
196,000 instead of $ 296,500, which was presented as a one-time sale
of software application to a related party in the year ended December
31, 2004.
NOTE 8:- SHARE CAPITAL
a. Shareholders' rights:
The shares of common stock confer upon the holders the right to elect
the directors and to receive notice to participate and vote in
stockholders meetings of the Company, and the right to receive
dividends, if and when declared.
b. Private placement:
1. All common stock and per share stock amounts have been adjusted
to 10,426,190 common stock resulted from the acquisition
agreement, as described in note 1c.
2. In April 2001, upon commencement of operations, the Company
issued 104,314 shares of common stock of $ 0.001 par value in
consideration of $ 0.1 and in addition was obligated to issue
10,321,876 shares of its common stock to its founders. These
shares were issued in August 2003 (9,233,880 shares), in
September 2003 (734,371 shares) and in November 2003 (353,625
shares). All common stock and per share amounts have been
adjusted to give retroactive effect to the issuance of these
shares.
3. In April 2004, the Company completed a $ 1.2 million private
placement, consisting of approximately 1,500,000 shares of its
common stock of $ 0.001 par value and two warrants to purchase
one share of common stock each. One warrant is exercisable for 24
months at a price of $ 1.85 per share and one warrant is
exercisable for 36 months at a price of $ 2.50 per share. The
purchase price for each common stock and two warrants was $ 0.80.
The private placement agreement was signed with a group of
institutional and individual investors.
4. The Company has signed agreements with two non-employee
directors. As long as they serve as a member of the Board, the
Company shall pay each of the Directors a directors fee of $
7,000 per annum, payable in quarterly installments. Both
Directors shall be granted an option under the terms of the
Company's option plan , to purchase 192,261 shares of common
stock of the Company at an exercise price per share of $ 1. Each
Directors rights to exercise such option shall vest in three
equal annual installments during a period of three years
commencing in May 2004, provided that the Company's agreement
with such Director does not terminate earlier. The options were
granted in March 2005.
F - 17
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS (EXCEPT SHARE DATA)
NOTE 8:- SHARE CAPITAL (CONT.)
5. In April 2004, the Company issued 44,348 shares fully vested to a
service provider, regarding its service agreements. The Company
had accounted for its shares issued to the service provider under
the fair value method of SFAS No.123 and EITF 96-18. The fair
value of these shares was estimated using the Company's share
price at grant date
6. In June 2004, the Company and NetFun Ltd. ("NetFun") formed a new
company named MIXTV Ltd. ("MIXTV") in order to pursue the
marketing, deployment and support of the MIXTV system. The
controlling stake of 50.1% was held by the Company. NetFun had a
20% share of the new company, which could be increased to up to
49.9% as pre-defined two milestones: (a) upon MIXTV reaching its
operational break-even, 10% of the shares will be transferred to
NetFun and (b) upon repayment to the Company all the sums
provided to MIXTV, 19.9% of the shares will be transferred to
Netfun. A trustee held the remaining shares (29.9%). The Company
needed to provide capital to the new company for one year of
operations, and NetFun needed to deliver its intellectual
property assets (i.e., MIXTV software). MIXTV commenced
operations in July 2004 and generated losses as of December 31,
2004 that have been consolidated in the Company's financial
statements since inception. During March 2005, the Company
purchased the remaining shares of MIXTV (see Note 13d).
7. On August 17, 2004, the Company issued 22,222 shares fully vested
to a service provider, regarding its service agreements. The
Company had accounted for its shares to the service provider
under the fair value method of SFAS No. 123 and EITF 96-18. The
fair value issued of these shares was estimated using the
Company's share price at grant date.
8. On August 17, 2004, the Company completed a $ 1 million private
placement consisting of 1,000,000 shares of its common stock of $
0.001 par value and two warrants to purchase one share of common
stock each. One warrant is exercisable for 24 months at a price
of $ 2.00 per share and one warrant is exercisable for 36 months
at a price of $ 2.50 per share. The purchase price for each
common stock and two warrants was $ 1.
c. Dividends:
In the event that cash dividends are declared in the future, such
dividends will be paid in U.S. dollars. The Company does not intend to
pay cash dividends in the foreseeable future.
d. Stock option plans:
1. On November 23, 2004, the Company adopted a Global Share Option
Plan. The 2004 Global Share Option Plan is intended to provide
incentives to employees, directors and consultants by providing
them with opportunities to purchase shares of the Company's
common stock. The 2004 Global Share Option Plan is effective as
of November 23, 2004 and terminates ten years from such date. The
Company has reserved 5,000,000 shares of common stock for
issuance under the 2004 Global Share Option Plan.
F - 18
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS (EXCEPT SHARE DATA)
NOTE 8:- SHARE CAPITAL (CONT.)
The exercise price of the options granted under the plan may not
be less than the par value of the shares into which such options
are exercised. The options vest primarily over three years. Any
options that are forfeited or not exercised before expiration
become available for future grants.
2. A summary of the Company's option activity, and related
information is as follows:
YEAR ENDED DECEMBER 31,
----------------------------
2004
----------------------------
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
OPTIONS PRICE
--------- ---------
$
---------
Outstanding at the beginning of the year - -
Granted 1,460,000 0.60
--------- ---------
Outstanding at the end of the year 1,460,000 0.60
========= =========
Options exercisable 325,001 0.55
========= =========
The options outstanding as of December 31, 2004, have been
classified by ranges of exercise price, as follows:
WEIGHTED
OPTIONS WEIGHTED OPTIONS AVERAGE
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE EXERCISE
AS OF REMAINING AVERAGE AS OF PRICE OF
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER OPTIONS
PRICE (RANGE) 2004 LIFE (YEARS) PRICE 31, 2004 EXERCISABLE
--------------- ---------------- -------------- ------------- --------------- --------------
$ $ $
--------------- ------------- --------------
0.55 1,300,000 10 0.55 325,001 0.55
1.00 160,000 10 1.00 - -
--------- ----
1,460,000 10 0.6 325,001 0.55
========= ========= ==== ========= ====
Weighted average fair values of options whose exercise price is
less than market price of the shares at date of grant were $
1.13863 for 2004.
F - 19
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS (EXCEPT SHARE DATA)
NOTE 9:- RELATED PARTY TRANSACTIONS
a. During 2002, the Company entered into a software development agreement
with a related company to sell credit card clearing software. The
Company generated one-time revenues from this agreement in 2003, in a
total amount of $ 380,000.
b. In December 2002, the Company signed a loan agreement with its
stockholder in an amount of up to $ 500,000 for a term of two years.
The loan is in U.S. dollars and bears an annual interest rate of 1.5%.
As of December 2004, the Company used the amount of $ 1,229 out of
total credit line.
NOTE 10:- INCOME TAXES
a. Measurement of taxable income under the Income Tax Law (Inflationary
Adjustments), 1985:
Results for tax purposes of the Israeli subsidiary are measured in
terms of earnings in NIS, after certain adjustments for increases in
the Israeli Consumer Price Index ("CPI"). As explained in Note 2b, the
financial statements are measured in U.S. dollars. The difference
between the annual change in the Israeli CPI and in the NIS/dollar
exchange rate causes a further difference between taxable income and
the income before taxes shown in the financial statements. In
accordance with paragraph 9(f) of SFAS No. 109, the Israeli subsidiary
has not provided deferred income taxes on the difference between the
functional currency and the tax bases of assets and liabilities.
b. Reform in the Israeli tax system:
Until December 31, 2003, the regular tax rate applicable to income of
companies (which are not entitled to benefits due to "approved
enterprise", as described above) was 36%. In June 2004, an amendment
to the Income Tax Ordinance (No. 140 and Temporary Provision), 2004
was passed by the Israeli parliament, which determines, among other
things, that the corporate tax rate is to be gradually reduced to the
following tax rates: 2004 - 35%, 2005 - 34%, 2006 - 32% and 2007 and
thereafter - 30%.
F - 20
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 10:- INCOME TAXES (CONT.)
c. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company and its subsidiaries'
deferred tax assets are as follows:
DECEMBER 31
---------------------------------
2004 2003
----------- -----------
Operating loss carry forward $ 985,723 $ 327,293
Reserves and allowances 33,628 38,350
----------- -----------
Net deferred tax asset before valuation allowance 1,019,351 365,643
Valuation allowance (1,019,351) (365,643)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
On December 31, 2004, the Company and its subsidiaries have provided
valuation allowances of $ 1,019,351 in respect of deferred tax assets
resulting from tax loss carryforwards and other temporary differences.
Management currently believes that since the Company and its
subsidiaries have a history of losses it is more likely than not that
the deferred tax regarding the loss carryforwards and other temporary
differences will not be realized in the foreseeable future. The change
in valuation allowance was $ 653,708.
d. Net operating losses carryforwards:
The Company has accumulated losses for tax purposes as of December 31,
2004, in the amount of $ 2,718,284 which may be carried forward and
offset against taxable income, and which expires during the years
2021-2023.
Utilization of U.S. net operating losses may be subject to substantial
annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses before
utilization.
The Israeli subsidiary, a subsidiary of Zone 4 Play (Delaware) in
Israel, has accumulated losses for tax purposes as of December 31,
2004, in the amount of approximately $ 141,209, which may be carried
forward and offset against taxable income in the future, for an
indefinite period.
Zone 4 Play (Delaware) , a subsidiary of the Company, has accumulated
losses for tax purposes as of December 31, 2004, in the amount of
approximately $ 1,873,272, which may be carried forward and offset
against taxable income, and which expires during the years 2021-2023.
F - 21
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 10:- INCOME TAXES (CONT.)
MIXTV Ltd, an Israeli subsidiary of the Company, has accumulated
losses for tax purposes as of December 31, 2004, in the amount of
approximately $ 56,067, which may be carried forward and offset
against taxable income in the future, for an indefinite period.
e. The main reconciling items between the statutory tax rate of the
Company and the effective tax rate are the non-recognition of the
benefits from accumulated net operating losses carry forward among the
various subsidiaries worldwide due to the uncertainty of the
realization of such tax benefits.
f. Loss before taxes is comprised as follows:
DECEMBER 31
-------------------------------
2004 2003
---------- ----------
Domestic $1,759,724 $ 283,522
Foreign 161,153 158,890
---------- ----------
$1,920,877 $ 442,412
========== ==========
NOTE 11:- SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION
a. Summary information about geographic areas:
The Company manages its business on the basis of one reportable
segment (see Note 1 for a brief description of the Company's business)
and follows the requirements of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information".
b. The following is a summary of operations within geographic areas,
based on customer's location:
YEAR ENDED DECEMBER 31
--------------------------
2004 2003
-------- --------
TOTAL REVENUES
--------------------------
United Kingdom $568,347 $153,857
United States 154,606 -
Israel 34,822 5,687
Cyprus - 380,000
Holland and other 10,849 14,163
-------- --------
$768,624 $553,707
======== ========
F - 22
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS (EXCEPT SHARE DATA)
NOTE 11:- SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION (CONT.)
c. Major customer data as percentage of total revenues:
DECEMBER 31,
------------------------
2004 2003
---------- ----------
Customer A 38% 23%
========== ==========
Customer B (related party) - 69%
========== ==========
Customer C - -
========== ==========
Customer D (related party) - -
========== ==========
Customer E (related party) 26% -
========== ==========
Customer F 11% -
========== ==========
d. All of long-lived assets are located in Israel at the Company's
premises.
NOTE 12:- FINANCIAL EXPENSES
YEAR ENDED
DECEMBER 31,
------------------------
2004 2003
------- -------
Financial expenses:
Interest, bank charges and fees $18,067 $19,918
Foreign currency translation differences 17,307 23,754
------- -------
$35,374 $43,672
======= =======
NOTE 13:- SUBSEQUENT EVENTS
a. Private placement:
On January 27, 2005, the Company completed a private offering to
accredited investors under Section 4(2) of the Securities Act,
pursuant to which it sold an aggregate of 2,659,998 shares of common
stock for aggregate gross proceeds of $3,989,999. The Company agreed
to prepare and file with the SEC a registration statement covering the
resale of the common stock on or before February 17, 2005 for certain
investors. If such registration statement covering the shares of
common stock purchased by those certain investors is not declared
effective on or before May 3, 2005, then the Company must pay those
investors liquidated damages equal to 1.5% per month of the aggregate
purchase price paid by them.
Pursuant to the aforementioned private placement the Company issued to
its investment bank 25,000 warrants exercisable until December 31,
2007 at a price of $.80 per share, and 53,200 warrants exercisable
until December 31, 2007 at a price of $1.50.
F - 23
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 13:- SUBSEQUENT EVENTS (CONT.)
b. On January 3, 2005, the Company issued 50,000 shares fully vested of
common stock to service provider pursuant to a consulting contract.
c. On February 15, 2005, the Company has signed an agreement with
non-employee director. Pursuant to the terms of the agreement, the
Company will pay an annual director's fee of $ 7,000, payable in
quarterly installments and an additional $ 750 per each board meeting.
In addition, the Company agreed to grant an option to purchase up to
192,261 shares of common stock of the Company under the terms of the
Company's option plan. The exercise price for the shares subject to
the option is $ 1.368 per share of common stock of the Company on the
date of the grant. The option vests in three equal annual
installments, whereby the director has the right to purchase 1/3 of
the shares subject to the option at the expiration of the first,
second and third year, respectively, from the date of the agreement,
provided that the director remains a member of the board of directors
at such time. In the event of a termination of the agreement for cause
at any time, the option, to the extent not exercised, shall terminate
and be cancelled and non-exercisable.
d. On February 22, 2005, the Company signed an agreement with Two Way
Media Limited ("TWM") and a related party- Winner.Com (UK) Limited
("Winner") to enter into an Interactive Services Agreement (the
"Agreement"). TWM, engaged with the Company and Winner to provide
client-side game applications, server-side software for the management
of such platforms and project management support and technical
services using Winner's trademark and brand. Each party is entitled to
a certain profit share, based on the kind of platform pursuant to
which the profit was generated and the amount of profit generated.
e. On March 10, 2005, the Company signed a stock purchase agreement ("the
Agreement") with NetFun Ltd. ("NetFun"), under which the Company
acquired the remaining minority interests in MIXTV Ltd. ("MIXTV"), for
a consideration of 625,000 shares of common stock of the Company. As a
result of the Agreement, the Company holds the entire ownership
interest of MIXTV (see also Note 8b(6)).
F - 24
UP TO 2,788,198
SHARES OF
COMMON STOCK
OF
ZONE 4 PLAY, INC.
PROSPECTUS
The date of this prospectus is __________, 2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Bylaws require that we indemnify and hold harmless each of our officers
and directors who are made a party to or threatened to be made a party to or is
involved in any action, suit, or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director or officer of Zone 4 Play, Inc. to the fullest extent permitted under
Chapter 78 of the Nevada Revised Statutes, as amended.
The State of Nevada permits a corporation to indemnify such persons for
reasonable expenses in defending against liability incurred in any legal
proceeding if:
(a) The person conducted himself or herself in good faith;
(b) The person reasonably believed:
(1) In the case of conduct in an official capacity with the
corporation, that his or her conduct was in the corporation's
best interests; and
(2) In all other cases, that his or her conduct was at least not
opposed to the corporation's best interests.
(c) In the case of any criminal proceeding, the person had no reasonable
cause to believe that his or her conduct was unlawful.
The indemnification discussed herein is not exclusive of any other rights
to which those indemnified may be entitled under the Articles of Incorporation,
any Bylaws, agreement, vote of stockholders, or otherwise, and any procedure
provided for by any of the foregoing, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of heirs, executors, and administrators of
such a person.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
Nature of Expense AMOUNT
----------------- ------
SEC registration fee $482.41
Accounting fees and expenses $500.00*
Legal fees and expenses 8,000.00*
----------
TOTAL $*8,982.41
==========
* Estimated
II - 1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to a Stock Purchase Agreement dated December 1, 2003, we issued
10,426,191 shares of common stock to 21 individuals and entities in
consideration for all of the issued and outstanding capital stock of Zone 4
Play, Inc., a Delaware corporation.
In March 2004, we issued 44,348 shares of common stock to The Equity Group
Inc., a New York corporation, pursuant to a consulting contract.
On April 1, 2004, we sold 1,500,000 units of common stock and common stock
purchase warrants at a purchase price of $0.80 per unit, for an aggregate of
$1,200,000. Each unit consists of one share of our common stock and two common
stock purchase warrants. One warrant is exercisable for 24 months at a price of
$1.85 per share and one warrant is exercisable for 36 months at a price of $2.50
per share. The completed private placement consisted of an aggregate of
1,500,000 shares of our common stock and 3,000,000 warrants.
In August 2004, we issued 22,222 shares of common stock to PortfolioPR
Inc., a New York corporation, pursuant to a consulting contract.
On August 17, 2004, we sold 1,000,000 units of common stock and common
stock purchase warrants at a purchase price of $1.00 per unit, for an aggregate
of $1,000,000. Each unit consists of one share of common stock and two common
stock purchase warrants. One warrant is exercisable for 24 months at a price of
$2.00 per share and one warrant is exercisable for 36 months at a price of $2.50
per share.
On December 31, 2004, we issued an aggregate of 1,460,000 options under our
2004 Global Share Option Plan to various employees, directors and consultants.
1,300,000 of these options are exercisable at a price of $0.55 per share and
160,000 of such options are exercisable at $1.00 per share. All of the options
expire on December 31, 2014.
On January 3, 2005, we sold 50,000 shares of common stock to Benchmark
Consulting Inc., a New York corporation, pursuant to a consulting contract.
On January 3, 2005, we sold an aggregate of 2,483,332 shares of common
stock to nine accredited investors for aggregate gross proceeds of $3,724,999.
On January 27, 2005, we sold an aggregate of 176,666 shares of common stock
to four accredited investors for aggregate gross proceeds of $264,999.
On February 10, 2005, we issued to Punk, Ziegel & Company, L.P. warrants to
purchase up to 78,200 shares of common stock, of which 25,000 shares have an
exercise price of $0.80 per share and 53,200 shares have an exercise price of
$1.50 per share. These warrants were issued pursuant to a certain placement
agent agreement dated August 9, 2004.
On March 10, 2004, we entered into an agreement to issue to NetFun Ltd., an
Israeli company, 625,000 shares of our common stock, in consideration for the
NetFun's minority interest in MixTV Ltd. These shares of common stock have not
yet been issued and will be issued in April 2005.
All of the above issuances and sales were deemed to be exempt under
Regulation S, Regulation D Rule 701 and/or Section 4(2) of the Securities Act.
No advertising or general solicitation was employed in offering the securities.
The offerings and sales were made to a limited number of persons, all of whom
were accredited investors, business associates of ours or our executive
officers, and transfer was restricted by us in accordance with the requirements
of the Securities Act.
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ITEM 27. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------------------ -- ------------------------------------------------------------------------------------------------
2.1 Stock Purchase Agreement dated December 1, 2003 between Zone4play, Inc. and Old Goat
Enterprises, Inc. (incorporated by reference to Form 8-K/A filed on April 5, 2004)
3.1 Articles of Incorporation (incorporated by reference to Form SB-2 (File No. 333-9356) filed
on June 27, 2002)
3.2 Certificate of Amendment to Articles of Incorporation (incorporated by reference to Form 8-K
filed on February 6, 2004)
3.3 Bylaws (incorporated by reference to Form SB-2 (File No. 333-91356) filed on June 27, 2002)
4.1 Registration Rights Agreement dated December 31, 2004 by and among Zone 4 Play, Inc. and each
of the purchasers signatory thereto (incorporated by reference to Form 8-K filed on January 7,
2005)
4.2 Registration Rights Agreement dated January 27, 2005 by and among Zone 4 Play, Inc. and each
of the purchasers signatory thereto (incorporated by reference to Form 8-K filed on January
27, 2005)
5.1 Opinion and Consent of Zysman, Aharoni, Gayer & Co./Sullivan & Worcester LLP *
10.1 Director Appointment Agreement of Oded Zucker dated January 1, 2004 (incorporated by reference
to Form 10-QSB filed on August 16, 2004)
10.2 Director Appointment Agreement of Shlomo Rothman dated January 1, 2004 (incorporated by
reference to Form 10-QSB filed on August 16, 2004)
10.3 Employment Agreement with Uri Levy dated January 1, 2004 (incorporated by reference to Form
SB-2 (File No. 333-120174) filed on November 3, 2004)
10.4 Employment Agreement with Haim Tabak dated April 1, 2004 (incorporated by reference to Form
SB-2 (File No. 333-120174) filed on November 3, 2004)
10.5 Employment Agreement with Shachar Schalka dated April 1, 2004 (incorporated by reference to
Form SB-2 (File No. 333-120174) filed on November 3, 2004)
10.6 Employment Agreement with Gil Levi dated April 1, 2004 (incorporated by reference to Form SB-2
(File No. 333-120174) filed on November 3, 2004)
10.7 Employment Agreement with Idan Miller dated May 1, 2004 (incorporated by reference to Form
SB-2 (File No. 333-120174) filed on November 3, 2004)
10.8 Lease Agreement dated August 31, 2004 between Zone4Play Israel, Ltd. and Atidim Ltd.
(incorporated by reference to Amendment No. 1 to Form SB-2 (File No. 333-120174) filed on
December 21, 2004)
10.9 Joint Venture Agreement, dated June 1, 2004, by and between Zone4Play and Netfun, Ltd.
(incorporated by reference to Form 10-QSB filed on August 16, 2004)
10.10 Joint Distribution Agreement, dated April 21, 2004, by and between Game Universe Inc. and
Zone4Play, Inc. (incorporated by reference to Amendment No. 1 to Form SB-2 (File No.
333-120174) filed on December 21, 2004)
10.11 Distribution Agreement, dated June 21, 2004, by and between Zone4Play, Inc. and Slingo Inc.
(incorporated by reference to Amendment No. 1 to Form SB-2 (File No. 333-120174) filed on
December 21, 2004)
10.12 Marketing Agreement, dated August 12, 2004, between Bluestreak Technology, Inc. and Zone4Play,
Inc. (incorporated by reference to Amendment No. 1 to Form SB-2 (File No. 333-120174) filed on
December 21, 2004)
10.13 Agreement, dated August 8, 2004, between The Gaming Channel Limited and Zone4Play (UK) Ltd.
(incorporated by reference to Amendment No. 1 to Form SB-2 (File No. 333-120174) filed on
December 21, 2004)
10.14 Interactive Service Agreement, dated November 6, 2003, by and between Zone4Play, Inc. and RCN
Telecom Services of Illinois, LLC (incorporated by reference to Form 8-K filed on December 20,
2004)
10.15 Casino Games Supply and License Subcontract Agreement, dated October 1, 2003, between NDS
Limited and Zone4Play, Inc. (incorporated by reference to Form 8-K filed on December 20, 2004)
II - 3
10.16 Interactive Television Content Service Agreement, dated March 10, 2003, between Two Way TV
Limited, Zone4Play (CY) Limited and Zone4Play Israel Ltd. (incorporated by reference to Form
8-K filed on December 20, 2004)
10.17 Agreement of Novation made on September 8, 2003 between Two Way TV, Ltd., Zone 4 Play (CY)
Ltd., Zone4Play (Israel) Ltd., and Zone 4 Play (UK) Ltd. (incorporated by reference to Form
8-K filed on December 20, 2004)
10.18 Game Licensing Agreement, dated January 8, 2004, by and between Zone 4 Play, Inc. and LodgeNet
Entertainment Corporation (incorporated by reference to Form 8-K filed on December 20, 2004)
10.19 Content License Agreement, dated August 24, 2004, by and between CSC Holdings, Inc. and Zone 4
Play, Inc. (incorporated by reference to Amendment No. 1 to Form SB-2 (File No. 333-120174)
filed on December 21, 2004)
10.20 Interactive Affiliation Agreement dated November 18, 2004 by and between Zone 4 Play, Inc. and
EchoStar Satellite LLC (incorporated by reference to Form 8-K filed on November 30, 2004)
(confidential treatment was granted by the securities and exchange commission)
10.21 Employment Agreement with Idan Miller dated November 30, 2004 (incorporated by reference to
Form 8-K filed on November 30, 2004)
10.22 2004 Global Share Option Plan (incorporated by reference to Form 8-K filed on November 30,
2004)
10.23 Amendment Agreement by and between Zone4Play, Inc. and LodgeNet Entertainment Corporation
dated as of December 14, 2004 (incorporated by reference to Form 8-K filed on December 30,
2004)
10.24 Agreement made as of January 17, 2005 between Eurobet UK Limited and Zone4Play (UK) Limited
(incorporated by reference to Form 8-K filed on January 24, 2005)
10.25 Agreement made as of January 24, 2005 between The Poker Channel Ltd. and Zone 4 Play, Inc.
(incorporated by reference to Form 8-K filed on January 27, 2005)
10.26 Securities Purchase Agreement dated December 31, 2004 among Zone 4 Play, Inc. and each
purchaser identified on the signature pages thereto (incorporated by reference to Form 8-K
filed on January 7, 2005)
10.27 Securities Purchase Agreement dated January 27, 2005 among Zone 4 Play, Inc. and each
purchaser identified on the signature pages thereto (incorporated by reference to Form 8-K
filed on January 27, 2005)
10.28 Director Appointment Agreement of Sean Ryan dated February 15, 2004 (incorporated by reference
to Form 8-K filed on February 22, 2005)
10.29 Interactive Fixed Odds Betting Services Agreement dated February 22, 2005, among Zone 4 Play,
Inc., Winner.Com (UK) Limited and Two Way Media Limited (incorporated by reference to Form 8-K
filed on February 28, 2005)
10.30 Stock Purchase Agreement dated March 10, 2005, between Zone 4 Play, Inc. and Netfun Ltd.
(incorporated by reference to Form 8-K filed on March 14, 2005)
16.1 Letter from Peach Goddard Chartered Accountants dated February 5, 2004 (incorporated by
reference to Form 8-K filed on February 6, 2004)
21.1 List of Subsidiaries (incorporated by reference to Form SB-2 (File No. 333-120174) filed on
November 3, 2004)
23.1 Consent of Zysman, Aharoni, Gayer & Co./Sullivan & Worcester LLP (See Exhibit 5) *
23.2 Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global *
* Filed herewith.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act;
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(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. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective 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 the 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.
(4) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(5) For determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or Rule 497(h) under the Securities
Act as part of this Registration Statement as of the time the Commission
declared it effective.
(6) For determining any liability under the Securities Act, treat each such
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration Statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Tel-Aviv, Israel on April 4, 2005.
ZONE 4 PLAY, INC.
By: /s/ Shimon Citron
---------------------
Shimon Citron,
President, Chief Executive Officer
and Director
In accordance with the requirements of the Securities Act of 1933, this
amendment to the Registration Statement was signed by the following persons in
the capacities and on the dates stated:
SIGNATURE TITLE DATE
--------- ----- ----
/S/ Shimon Citron President, Chief Executive Officer April 4, 2005
------------------ (Principal Executive Officer) and
Shimon Citron Director
/S/ Uri Levy Chief Financial Officer and April 4, 2005
------------------ Principal Financial and Accounting
Uri Levy Officer
* Director April 4, 2005
------------------
Shlomo Rothman
* Director April 4, 2005
------------------
Oded Zucker
------------------ Director -------------
Sean Ryan
* By: /s/ Uri Levy
------------------
Uri Levy
Attorney-in-fact
II - 6