AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 18, 2007
REGISTRATION NO. 333-133820
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST EFFECTIVE 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 (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
103 Foulk Road
Wilmington, DE 19803
(302) 691-6177
(Address and telephone number of principal executive offices)
Uri Levy, Acting Chief Executive Officer
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.
Z.A.G./S&W 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 any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
EXPLANATORY NOTE
This Post-Effective Amendment No. 1 to Form SB-2 is being filed to include
information from the Registrant's Annual Report on Form 10-KSB, filed with the
Commission on March 30, 2007, and the Registrant's Quarterly Report on form
10-QSB for the period ending March 31, 2007, filed with the Commission on May
21, 2007.
ZONE 4 PLAY, INC.
UP TO 20,103,243 SHARES OF COMMON STOCK
This prospectus relates to the public offering of an aggregate of up to
20,103,243 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, 10,497,485 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 14. 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 but we will not receive any proceeds from the sale of our
shares by the selling stockholders.
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 July 9,
2007 was $0.09 per share.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 3.
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.
The date of this prospectus is July 18, 2007.
TABLE OF CONTENTS
Page
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Prospectus Summary 1
Risk Factors 3
Forward Looking Statements 12
Use of Proceeds 12
Selling Stockholders 12
Plan of Distribution 16
Legal Proceedings 17
Directors and Executive Officers 17
Security Ownership of Certain Beneficial Owners and Management 19
Description of Securities 21
Indemnification for Securities Act Liabilities 21
Business 22
Management's Discussion and Analysis of Financial Condition and
Results of Operations 39
Description of Property 47
Certain Relationships and Related Transactions 47
Market for Common Equity and Related Stockholder Matters 47
Executive Compensation 49
Legal Matters 51
Experts 51
Additional Information 51
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 contained elsewhere in this prospectus, the financial
statements and the notes to the financial statements. As used throughout this
prospectus, the terms "Zone4Play,", the "Company," "we," "us," and "our" refer
to Zone 4 Play, Inc. and its subsidiaries.
ZONE 4 PLAY, INC.
We are a software and technology developer and provider to companies that
service the interactive gaming industry, delivering cross-platform systems that
are built for mass participation gaming over mobile devices, TV and the
internet. Our software provides and supports play-for-fun and play-for-real
interactive games. We offer five core solutions to companies that offer
play-for-real gaming, namely:
(i) Multiplayer blackjack tournaments, or Blackjack Software: 24/7 availability
of a variety of blackjack tournaments games based on a peer-to-peer technology
allowing users to compete against each other and not against the "house".
(ii) Mobile gaming: the provision of services on mobile devices, including fixed
odds games, multiplayer games, sports betting services, scratch cards and
exchange betting.
(iii) Interactive TV gaming: the provision of software and technology currently
supporting fixed odds games.
(iv) Participating TV gaming: the provision of services via the interaction of
television broadcasts and mobile text messages, IVR (interactive voice response)
lines or Java interaction.
(v) Online gaming: the provision of fixed odds and casino games over the
internet.
We also provided marketing services related to our Blackjack Software business
and potentially other games thorough our subsidiary Get21 Limited, or Get21,
which used Golden Palace Ltd. for the full operation of the service which
includes payment, processing, customer support, fraud and collusion prevention
and other services.
Effective July 15, 2007, we have decided to cease the marketing services
provided for gaming applications marketing activities due to cash flow
difficulties.
We have recently re-prioritized our operations and currently plan to focus on
two products: the Winner Channel and our Blackjack Software.
Our technology allows our customers to generate additional revenue from their
existing infrastructure and user base by allowing a subscriber to switch from
one platform, such as Interactive TV, mobile, internet or participating TV to
another platform using a single account with the same account balance and user
information. In addition, our technology allows mobile service providers, TV
broadcasters and channels to provide additional content, as well as an increased
variety of services, to their customers.
Our shares of common stock are currently traded on the OTC Bulletin Board under
the trading symbol "ZFPI.OB".
Our principal executive offices are located at 103 Foulk Road, Wilmington, DE
19803 and our telephone number is (302) 691-6177.
1
THE OFFERING
Common stock outstanding
before the registration 32,304,448
Common stock offered by
selling stockholders Up to 20,103,243 shares. This number
includes 10,497,485 shares of common stock
issuable upon exercise of outstanding
warrants by the selling stockholders.
Common stock to be outstanding
after the offering Up to 42,801,933 shares.
Use of proceeds We will not receive any proceeds from the
sale of the common stock hereunder. We will
receive proceeds from the exercise of
outstanding warrants. See "Use of Proceeds"
for a complete description.
OTCBB Symbol ZFPI.OB.
2
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
Our business involves a high degree of risk, and our securities are highly
speculative. 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.
IF WE ARE UNABLE TO OBTAIN FINANCING NECESSARY TO SUPPORT OUR OPERATIONS, WE MAY
BE UNABLE TO CONTINUE AS A GOING CONCERN.
We have generated revenues since inception but they were not an adequate source
of cash to fund future operations. Historically we have relied on private
placement issuances of equity.
It is likely that we will need to raise additional working capital to fund our
ongoing operations and growth. The amount of our future capital requirements
depends primarily on the rate at which we increase our revenues and
correspondingly decrease our use of cash to fund operations. Cash used for
operations will be affected by numerous known and unknown risks and
uncertainties including, but not limited to, our ability to successfully market
our products and services and the degree to which competitive products and
services are introduced to the market. As long as our cash flow from operations
remains insufficient to completely fund operations, we will continue depleting
our financial resources and seeking additional capital through equity and/or
debt financing. If we raise additional capital through the issuance of debt,
this will result in increased interest expense. If we raise additional funds
through the issuance of equity or convertible debt securities, the percentage
ownership of our company held by existing stockholders will be reduced and those
stockholders may experience significant dilution. In addition, new securities
may contain rights, preferences or privileges that are senior to those of our
common stock.
There can be no assurance that acceptable financing to fund our ongoing
operations can be obtained on suitable terms, if at all. If we are unable to
obtain the financing necessary to support our operations, we may be unable to
continue as a going concern. In that event, we may be forced to cease operations
and our stockholders could lose their entire investment in our company.
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
March 31, 2007, we had an accumulated deficit of $14,756,203. 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.
3
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 in marketing online gaming technologies,
our limited international marketing experience and our lack of brand
recognition.
Our Blackjack Software licensing fees revenue model will be dependent upon the
revenues of our customers. If our technology and games are not widely accepted
by our future customers' subscribers, our financial condition and results of
operations will be materially and adversely affected.
We typically enter into agreements with our new 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. It is expected that our customers will
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.
WE HAVE FINANCED OUR OPERATIONS PRIMARILY THROUGH THE SALE OF EQUITY SECURITIES
AND MAY BE UNABLE TO CONTINUE TO DO SO.
Since inception through March 31, 2007, we have incurred a cumulative deficit of
$14,756,203 and have raised net proceeds from the sale of equity securities of
approximately $12,945,961. 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 us, 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.
For example, in March 2006, we raised an aggregate of $6,520,000 through the
sale of 8,234,485 units comprising of one share of our common stock and one
warrant, to certain accredited investors. 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.
4
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES FROM A LIMITED NUMBER OF
CUSTOMERS.
In 2006, we derived approximately 84% of our revenues from three major
customers: Golden Palace Ltd (51%); Two Way TV Australia (21%) and Two Way Media
Ltd (12%).
ERRORS OR DEFECTS IN OUR SOFTWARE PRODUCTS COULD DIMINISH DEMAND FOR OUR
PRODUCTS 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.
MOBILE GAMING, INTERACTIVE TV GAMING AND PARTICIPATING TV GAMING ARE NEW
PLATFORMS AND MAY NOT GAIN POPULARITY.
The market for our products and platforms on which they operate may not grow.
Consumer behavior may change and consumers may lean towards technologies and/or
leisure activities which are not within our sphere of activity.
WE ARE EXPOSED TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES.
A significant portion of our business is conducted outside the United States.
Although a majority of our revenues are transacted in U.S. Dollars, we are
exposed to currency exchange fluctuations in other currencies such as the
British pound and the New Israeli Shekel. Moreover, a portion of our expenses in
Israel and UK are paid in Israeli currency (NIS) and pounds, which subjects us
to the risks of foreign currency fluctuations. Our primary expenses paid in NIS
are employee salaries and lease payments on our Israeli facilities.
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.
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.
5
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.
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.
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 those
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 occur. 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.
6
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 that 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 the Internet and otherwise. 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.
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 currently do not 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.
7
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, especially Uri Levy,
our acting Chief Executive Officer and Chief Financial Officer, the loss of any
of whom could have an adverse affect on the financial performance of our
business. Even though we have an employment agreement with Mr. Levy, we cannot
assure you that he will continue his service with us.
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.
8
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 19% 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.
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.
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.
9
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. Furthermore, during July and August of
2006 there have been hostilities between Israel and the Hezbollah terrorist
organization operating in Lebanon, and the north of Israel has been hit by
rockets launched from Lebanon. 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.
10
IT COULD BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST OUR OFFICERS, OUR
DIRECTORS AND US.
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.
11
FORWARD-LOOKING STATEMENTS
The statements contained in this prospectus that are not historical facts are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and other federal securities laws. Such
forward-looking statements may be identified by, among other things, the use of
forward-looking terminology such as "believes," "intends," "plan" "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 our markets and business outlook 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 and in the "Risk Factors" section above 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, except as required by law, 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 issue 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 April 23, 2006, 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) through the December 1,
2003 Stock Purchase Agreement, pursuant to which we acquired 100% of the issued
and outstanding common stock of Zone 4 Play, Inc., a Delaware corporation; or
(2) pursuant to private transactions exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended, or the Securities Act,
that were completed on March 24, 2006, or the March 24, 2006 financing, pursuant
to which the Company sold an aggregate of 6,234,485 units at a price of $.725
per unit for aggregate gross proceeds of $4,520,000. Each unit is comprised of
one share of our common stock and a warrant to purchase one share at an exercise
price of $1.125 per share for a period of 36 months; or (3) pursuant to private
transactions exempt from registration pursuant to Section 4(2) of the Securities
Act, that were completed on March 30, 2006, or the March 30, 2006 financing,
pursuant to which the Company sold an aggregate of 2,000,000 units sold at a
price of $1.00 per unit, for aggregate gross proceeds of $2,000,000. Each unit
is comprised of one share of our common stock and a warrant to purchase one
share at an exercise price of $1.35 per share for a period of 36 months; or (4)
as compensation for services rendered to us by our former Chief Executive
Officer and President, Shimon Citron; or (5) as consideration for advisory
services provided to us by Mr. Ori Sasson and Mr. Jonathan Medved. The
information provided in this section with respect to each selling stockholder
has been provided by those selling stockholders. We believe the selling
stockholders have sole voting and investment power over their shares of common
stock, except as indicated below. 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. To our knowledge, none of the selling stockholders
is a broker-dealer or an affiliate of a broker-dealer.
12
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED OWNED AFTER
PRIOR TO THE OFFERING TOTAL SHARES OFFERED (1) THE OFFERING (1)
------------------------ ------------------------- ------------------
NAME NUMBER PERCENT (2) NUMBER PERCENT (2) NUMBER PERCENT
----------------- ------ ----------- ------ ----------- ------ -------
Lilly Gold (3) 137,932 * 137,932 * 0 0%
Alan Franco (4) 27,586 * 27,586 * 0 0%
Taj Bayless (5) 275,864 * 275,864 * 0 0%
Adam L. Rothstein (6) 473,448 1.5% 303,448 * 170,000 *
Madison Value Ventures GPII (7) 689,656 2.1% 689,656 2.1% 0 0%
Walham Investments Group Inc. (8) 2,758,620 8.2% 2,758,620 8.2% 0 0%
Orinda Capital (9) 4,965,518 14.3% 4,965,518 14.3% 0 0%
Jonathan W. Medved (10) 275,862 * 275,862 * 0 0%
Merav Abbe Irrevocable Trust (11) 137,932 * 137,932 * 0 0%
Scot Cohen (12) 137,932 * 137,932 * 0 0%
Dave Games Invest Corporation Inc. (13) 2,758,620 8.2% 2,758,620 8.2% 0 0%
Smithfield Fiduciary LLC (14) 1,000,000 3.1% 1,000,000 3.1% 0 0%
Cranshire Capital L.P (15) 500,000 1.5% 500,000 1.5% 0 0%
Nancy Abbe Trust (16) 50,000 * 50,000 * 0 0%
Colman Abbe (17) 50,000 * 50,000 * 0 0%
Iroquois Master Fund Ltd. (18) 950,000 2.9% 950,000 2.9% 0 0%
Richard K. Abbe Custodian for Talia Abbe (19) 33,332 * 33,332 * 0 0%
Richard K. Abbe Custodian for Bennett Abbe (20) 33,334 * 33,334 * 0 0%
Richard K. Abbe Custodian for Samantha Abbe (21) 33,334 * 33,334 * 0 0%
Bruce Bernstein (22) 100,000 * 100,000 * 0 0%
Aroon Dalamal (23) 50,000 * 50,000 * 0 0%
Joshua Silverman (24) 50,000 * 50,000 * 0 0%
Scot Cohen (25) 100,000 * 100,000 * 0 0%
Phillip W. Mirabelli (26) 50,000 * 50,000 * 0 0%
WO Special Opportunities LLC (27) 1,000,000 3.1% 1,000,000 4.2% 0 0%
Shimon Citron (28) 2,864,323 8.9% 714,323 3.1% 2,150,000 6.7%
Citron Investments Ltd.(29) 1,863,000 5.5% 1,863,000 5.5% 0 0%
Pinchas Gershon (30) 2,706,950 8.4% 656,950 2.0% 2,050,000 6.4%
Ori Sasson (31) 200,000 * 200,000 * 0 0%
Jonathan W. Medved (32) 200,000 * 200,000 * 0 0%
TOTAL 24,473,243 57.2% 20,103,243 55.1% 4,370,000 13.5%
* 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 32,304,448 shares of common
stock outstanding as of April 23, 2006, together with securities exercisable or
convertible into shares of common stock within 60 days of April 23, 2006.
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
April 23, 2006 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 were acquired in the March 24, 2006 financing. Includes 68,966
shares issuable upon exercise of outstanding common stock purchase warrants.
(4) The shares were acquired in the March 24, 2006 financing. Includes 13,793
shares issuable upon exercise of outstanding common stock purchase warrants.
(5) The shares were acquired in the March 24, 2006 financing. Includes 137,932
shares issuable upon exercise of outstanding common stock purchase warrants.
(6) The shares were acquired in the March 24, 2006 financing. Includes 151,724
shares issuable upon exercise of outstanding common stock purchase warrants.
(7) The shares owned by Madison Value Ventures GPII were acquired in the March
24, 2006 financing. Jacob Gold makes the investment decisions on behalf of
Madison Value Ventures GPII and has voting control over the securities
beneficially owned by Madison Value Ventures GPII. Includes 344,828 shares
issuable upon exercise of outstanding common stock purchase warrants.
13
(8) The shares owned by Walham Investments Group Inc. were acquired in the March
24, 2006 financing. George Rosenberg, representing Occidental Trust Corporation,
makes the investment decisions on behalf of Walham Investments Group Inc. and
has voting control over the securities beneficially owned by Walham Investments
Group Inc. Includes 1,379,310 shares issuable upon exercise of outstanding
common stock purchase warrants.
(9) The shares owned by Orinda Capital were acquired in the March 24, 2006
financing. Ori Sasson makes the investment decisions on behalf of Orinda Capital
and has voting control over the securities beneficially owned by Orinda Capital.
Includes 2,482,759 shares issuable upon exercise of outstanding common stock
purchase warrants.
(10) The shares were acquired in the March 24, 2006 financing. Includes 137,931
shares issuable upon exercise of outstanding common stock purchase warrants.
(11) The shares owned by Merav Abbe Irrevocable Trust were acquired in the March
24, 2006 financing. Colman Abbe as a Trustee makes the investment decisions on
behalf of Merav Abbe Irrevocable Trust and has voting control over the
securities beneficially owned by Merav Abbe Irrevocable Trust. Includes 68,966
shares issuable upon exercise of outstanding common stock purchase warrants.
(12) The shares were acquired in the March 24, 2006 financing. Includes 68,966
shares issuable upon exercise of outstanding common stock purchase warrants.
(13) The shares owned by Dave Games Invest Corporation Inc. were acquired in the
March 24, 2006 financing. Mr. Emmanuel Aim makes the investment decisions on
behalf of Dave Games Invest Corporation Inc. and has voting control over the
securities beneficially owned by Dave Games Invest Corporation Inc. Includes
1,379,310 shares issuable upon exercise of outstanding common stock purchase
warrants.
(14) Highbridge Capital Management, LLC is the trading manager of Smithfield
Fiduciary LLC and has voting control and investment discretion over securities
held by Smithfield Fiduciary LLC, which were acquired in the March 30, 2006
financing. Glenn Dubin and Henry Swieca control Highbridge Capital Management,
LLC. Each of Highbridge Capital Management, LLC, Glenn Dubin and Henry Swieca
disclaims beneficial ownership of the securities held by Smithfield Fiduciary
LLC. Includes 500,000 shares issuable upon exercise of outstanding common stock
purchase warrants.
(15) The shares owned by Cranshire Capital L.P were acquired in the March 30,
2006 financing. Michael P. Kopin, president of Downsview Capital, Inc., the
general partner of Cranshire Capital L.P makes the investment decisions on
behalf of Cranshire Capital L.P and has voting control over the securities
beneficially owned by Cranshire Capital L.P. Includes 250,000 shares issuable
upon exercise of outstanding common stock purchase warrants.
(16) The shares owned by Nancy Abbe Trust were acquired in the March 24, 2006
financing. Colman Abbe makes the investment decisions on behalf of Nancy Abbe
Trust and has voting control over the securities beneficially owned by Nancy
Abbe Trust. Includes 25,000 shares issuable upon exercise of outstanding common
stock purchase warrants.
(17) The shares were acquired in the March 30, 2006 financing. Includes 25,000
shares issuable upon exercise of outstanding common stock purchase warrants.
(18) The shares owned by Iroquois Master Fund Ltd. were acquired in the March
30, 2006 financing. Joshua Silverman has voting and investment control over the
shares held by Iroquois Master Fund Ltd. Mr. Silverman disclaims beneficial
ownership of these shares. Includes 475,000 shares issuable upon exercise of
outstanding common stock purchase warrants.
14
(19) The shares were acquired in the March 30, 2006 financing. Richard K. Abbe
is custodian for Talia Abbe and has voting and investment control over the
securities beneficially owned by Talia Abbe. Includes 16,666 shares issuable
upon exercise of outstanding common stock purchase warrants.
(20) The shares were acquired in the March 30, 2006 financing. Richard K. Abbe
is custodian for Bennett Abbe and has voting and investment control over the
securities beneficially owned by Bennett Abbe. Includes 16,667 shares issuable
upon exercise of outstanding common stock purchase warrants.
(21) The shares were acquired in the March 30, 2006 financing. Richard K. Abbe
is custodian for Samantha Abbe and has voting and investment control over the
securities beneficially owned by Samantha Abbe. Includes 16,667 shares issuable
upon exercise of outstanding common stock purchase warrants.
(22) The shares were acquired in the March 30, 2006 financing. Includes 50,000
shares issuable upon exercise of outstanding common stock purchase warrants.
(23) The shares were acquired in the March 30, 2006 financing. Includes 25,000
shares issuable upon exercise of outstanding common stock purchase warrants.
(24) The shares were acquired in the March 30, 2006 financing. Includes 25,000
shares issuable upon exercise of outstanding common stock purchase warrants.
(25) The shares were acquired in the March 30, 2006 financing. Includes 50,000
shares issuable upon exercise of outstanding common stock purchase warrants.
(26) The shares were acquired in the March 30, 2006 financing. Includes 25,000
shares issuable upon exercise of outstanding common stock purchase warrants.
(27) The shares owned by WO Special Opportunities LLC were acquired in the March
30, 2006 financing. Morris Wolfson makes the investment decisions on behalf of
WO Special Opportunities LLC and has voting control over the securities
beneficially owned by WO Special Opportunities LLC. Includes 500,000 shares
issuable upon exercise of outstanding common stock purchase warrants.
(28) The shares owned by Shimon Citron were acquired pursuant to the December 1,
2003 Stock Purchase Agreement. Mr. Citron served as Chief Executive Officer and
President of the Company until May 8, 2007.
(29) Consists of shares of the Company's common stock issuable upon exercise of
a stock option which vests in the following manner: 1,500,750 shares on July 1,
2006, two equal installments of 155,250 shares, one vests on October 1, 2006 and
one vests on January, 1, 2007 and an installment of 51,750 shares on April 1,
2007. Citron Investments Ltd. is owned by Shimon Citron. This option was issued
to Citron Investments Ltd. in consideration for services provided by Mr. Citron
to us.
(30) The shares owned by Pinchas Gershon were acquired pursuant to the December
1, 2003 Stock Purchase Agreement.
(31) Includes 200,000 shares issuable upon exercise of outstanding common stock
purchase warrants. These warrants were issued to Ori Sasson in consideration for
his services as our advisor.
(32) Includes 200,000 shares issuable upon exercise of outstanding common stock
purchase warrants. These warrants were issued to Jonathan Medved in
consideration for his services as our advisor.
15
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.
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, 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.
16
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.
LEGAL PROCEEDINGS
On May 8, 2007, the board of directors removed Mr. Citron from his positions as
Chief Executive Officer and President of our company. The Chief Financial
Officer has been appointed as acting Chief Executive Officer and President of
the Company in addition to his current position as Chief Financial Officer. On
the same day Mr. Citron has filed a lawsuit against the Company and its
directors in the Israeli Labor Court, to prevent his dismissal.
DIRECTORS AND EXECUTIVE OFFICERS
The following table identifies our current executive officers and directors:
NAME AGE CAPACITIES IN WHICH SERVED IN CURRENT POSITION SINCE
Uri Levy 37 Acting Chief Executive Officer May 2007
Chief Financial Officer December 2003
Shimon Citron 51 Director 2001
Shlomo Rothman 61 Director February 2004
Oded Zucker 41 Director February 2004
Adiv Baruch 43 Director January 2006
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 appointed, 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. Directors are
elected by the stockholders or, in the event of vacancy, by the directors of the
Company.
17
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS
URI LEVY, ACTING CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER. Mr. Levy
joined us as Chief Financial Officer in December 2003. On May 8, 2007, Mr. Levy
was appointed Acting Chief Executive Officer in addition to his position as
Chief Financial Officer. Prior to joining us, Mr. Levy was Vice President,
Finance of Loram Ltd., a company engaged in the business of real estate, from
June 2002 until December 2003, and as a controller of EasyRun Communications
Software Systems from 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, Israel.
SHIMON CITRON, DIRECTOR. Mr. Citron founded Zone4Play in 2001 and he has held
the positions of Chief Executive Officer and director since Zone4Play's
inception and until May 8, 2007 when he ceased to be Chief Executive Officer.
From 1999 to 2001, Mr. Citron was the founder and President of Gigi Media Ltd.,
a private company based in Israel engaged in the business of the development of
Internet search engines. From 1994 to 1999, he managed his own private
investments in a number of startup companies in Israel.
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 Chief Executive Officer 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 in Israel, 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 also 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.
ADIV BARUCH, DIRECTOR. Mr. Baruch is the President and Chief Executive Officer
of BOS Better On-Line Solutions Ltd. In addition, Mr. Baruch is actively
involved as the Chairman of the Israeli Export Institute Hi-Tech and Telecom
Division. Prior to joining BOS Mr. Baruch served as Executive Vice President
Business Development of Ness Technologies, the largest IT firm in Israel, and is
considered one of the founding members of the company. Mr. Baruch is also a
former partner and active director of IPEX, acquired by Ness. Mr. Baruch has
served in the capacity of founder, executive, and director for several IT
companies and Internet start-ups, and was significantly involved in the M&A
process and in assisting these companies in their global expansion.
AUDIT COMMITTEE FINANCIAL EXPERT
During fiscal 2006, our Audit Committee was comprised of Mr. Rothman and Mr.
Adiv Baruch. Using the NASDAQ stock market marketplace rules definition of an
independent director, our board of directors determined that Shlomo Rothman and
Adiv Baruch both qualify as independent directors. Our board of directors has
determined that Mr. Rothman and Mr. Baruch both satisfy the definition of an
"audit committee financial expert" as set forth in Item 401(e) of Regulation S-B
promulgated by the SEC. Our Audit Committee held one (1) meetings during fiscal
year 2006.
18
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of common stock as of March 29, 2007 by each person known to us to own
beneficially more than 5% of the total number of shares of our common stock
outstanding as of such date, each of our directors, and the officers named in
the summary compensation table under the heading "Executive Compensation" of
this prospectus; and all executive officers and directors as a group.
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP(2) OF CLASS(3)
5% BENEFICIAL OWNERS AND CHIEF EXECUTIVE OFFICER:
Uri Levy (4) 300,000 *
Shimon Citron (5) 5,221,772 15.3%
Pini Gershon 2,706,950 8.4%
Sedna Capital (6)
200 Park Avenue, 39th Floor
New York, NY 10166 1,858,768 5.8%
Orinda Capital (7)
11 El Sueno, Orinda, CA 94563 4,965,518 14.3%
Walham Investments Group Inc (8)
c/o Patton Moreno and Asvat (BVI) Ltd.
P.O. Box 3174, Road Town, Tortola,
British Virgin Islands 2,758,620 8.2%
Dave Games Invest Corporation Inc.(9)
c/o 24 Ramban Street, Jerusalem, Israel 2,758,620 8.2%
Smithfield Fiduciary LLC (10)
ayman Islands, British West Indies 2,064,200 6.4%
OTHER DIRECTORS:
Ronen Zadok (11) 80,109 *
Liron Edrey (12) 80,109 *
Adiv Baruch (13) 264,087 *
Shlomo Rothman 128,174 *
Oded Zucker 128,174 *
All directors and current executive officers as a
group (8 persons) (14) 6,585,878 16.9%
19
* Less than 1%
(1) Unless otherwise provided, all addresses are c/o Zone 4 Play, Inc. at the
address set forth on the cover page of this annual report on Form 10-KSB.
(2) Except as otherwise indicated, all shares are beneficially owned and sole
investment and voting power is held by the persons named.
(3) Applicable percentage of ownership is based on 32,319,301 shares of our
common stock outstanding as of the March 29, 2007, plus any common stock
equivalents and options or warrants held by such holder which are presently or
will become exercisable within 60 days after the Record Date.
(4) Includes warrants to acquire 300,000 shares.
(5) Includes an option to purchase 1,863,000 shares at an exercise price of
$1.15 per share. Also includes 494,449 shares owned by Yariv Citron, son of
Shimon Citron. Yariv Citron has reached the age of 18 and Mr. Citron disclaims
any beneficial ownership of Yariv Citrons's shares.
(6) Paul Yook and Rengan Rajaratnam are the managing members of Sedna Capital
Management LLC and report shared investment power over these shares, plus 5,500
shares of common stock over which Rengan Rajaratnam reports sole voting and
investment power. The information is based solely on a Schedule 13G/A filed with
the Securities and Exchange Commission by the beneficial owner on February 14,
2007, describing the holdings of the beneficial owner as of December 31, 2006.
(7) Includes warrants to acquire 2,482,759 shares.
(8) Includes warrants to acquire 1,379,310 shares. The information is based
solely on a Schedule 13G filed with the Securities and Exchange Commission by
the beneficial owner on August 14, 2006, describing the holdings of the
beneficial owner as of December 31, 2006.
(9) Includes warrants to acquire 1,379,310 shares. The information is based
solely on a Schedule 13G filed with the Securities and Exchange Commission by
the beneficial owner on January 22, 2007, describing the holdings of the
beneficial owner as of March 20, 2006.
(10) Includes warrants to acquire 500,000 shares. Smithfield Fiduciary LLC is
the beneficial owner of and shares the voting and investment power with respect
to 500,000 shares of our common stock and warrants to purchase an additional
500,000 shares of our common stock. Highbridge International LLC is the
beneficial owner of and shares the voting and investment power with respect to
1,564,200 shares of our common stock. In addition, each of Highbridge
International LLC, Highbridge Master L.P., Highbridge Capital Corporation,
Highbridge Capital L.P., Highbridge GP, Ltd., Highbridge GP, LLC, Highbridge
Capital Management, LLC, Glenn Dubin and Henry Swieca may be deemed the
beneficial owner of the 500,000 shares of our common stock and warrants to
purchase an additional 500,000 shares of our common stock owned by Smithfield
Fiduciary LLC and 1,564,200 shares of our common stock owned by Highbridge
International LLC. The information is based solely on a Schedule 13G/A filed
with the Securities and Exchange Commission by the beneficial owner on February
14, 2007, describing the holdings of the beneficial owner as of December 31,
2006.
(11) Ronen Zadok resigned from our board on May 8, 2007.
(12) Liron Edrey resigned from our board on July 11, 2007.
(13) Includes warrants to acquire 200,000 shares.
(14) See preceding footnotes. On May 15, 2007, Haim Tabak was removed from his
position as Chief Operating Officer.
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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, as amended,
which has been filed as an exhibit to the registration statement of which this
prospectus is a part.
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 June 14, 2007, we had
32,319,031 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.
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.
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.
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.
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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.
BUSINESS
OVERVIEW
We are a software and technology developer and provider to companies that
service the interactive gaming industry, delivering cross-platform systems that
are built for mass participation gaming over mobile devices, TV and the
internet. Our software provides and supports play-for-fun and play-for-real
interactive games. We offer five core solutions to companies that offer
play-for-real gaming, namely:
(i) Multiplayer blackjack tournaments ("Blackjack Software"): 24/7 availability
of a variety of blackjack tournaments games based on a peer-to-peer technology
allowing users to compete against each other and not against the "house".
(ii) Mobile gaming: the provision of services on mobile devices, including fixed
odds games, multiplayer games, sports betting services, scratch cards and
exchange betting.
(iii) Interactive TV gaming: the provision of software and technology currently
supporting fixed odds games.
(iv) Participating TV gaming: the provision of services via the interaction of
television broadcasts and mobile text messages, IVR (interactive voice response)
lines or Java interaction.
(v) Online gaming: the provision of fixed odds and casino games over the
internet.
We also provided marketing services related to our Blackjack Software thorough
our subsidiary Get21 Limited ("Get21"), which used Golden Palace Ltd for the
full operation of the service which includes payment, processing, customer
support, fraud and collusion prevention and other services. Effective July 15,
2007, we have decided to cease the marketing services provided for gaming
applications marketing activities due to cash flow difficulties.
We have recently re-prioritized our operations and currently plan to focus on
two products: the Winner Channel and our Blackjack Software .
Our technology allows our customers to generate additional revenue from their
existing infrastructure and user base by allowing a subscriber to switch from
one platform, such as Interactive TV, mobile, internet or participating TV to
another platform using a single account with the same account balance and user
information. In addition, our technology allows mobile service providers, TV
broadcasters and channels to provide additional content, as well as an increased
variety of services, to their customers.
We were incorporated under the laws of the State of Nevada on April 23, 2002, as
Old Goat Enterprises, Inc. (the "Predecessor"). On February 1, 2004, the
Predecessor issued the shareholders of Zone 4 Play, Inc., a Delaware corporation
("Zone4Play Delaware"), 10,426,190 shares of common stock, in consideration for
the entire share capital of Zone4Play Delaware. Immediately after the issuance,
the shareholders of Zone4Play Delaware held 58% of the issued and outstanding
share capital of the Predecessor, and subsequently changed its name to Zone 4
Play, Inc., a Nevada corporation. The transaction was accounted for as a reverse
acquisition, whereby the Predecessor was treated as the acquired company and
Zone4Play Delaware as the acquirer. The historical financial statements of
Zone4Play 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 Delaware. On
April 27, 2005, pursuant to an agreement with NetFun Ltd., we increased our
ownership percentage of the issued and outstanding share capital of MIXTV Ltd.
from 50.1% to 100%. On July 11, 2006, we formed a wholly owned subsidiary in the
Isle of Man, named Gaming Ventures plc ("Gaming"). Gaming has two wholly owned
subsidiaries, RNG Gaming Limited ("RNG") and Get21, both of which are Isle of
Man companies.
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On July 12, 2006, Zone4Play Delaware and Gaming entered into an agreement under
which our wholly owned subsidiary Gaming purchased from Zone4Play Delaware all
right, title and interest in its intellectual property rights and assets related
to its newly developed Blackjack Software on a "going concern" and "as is"
basis, in exchange for a secured promissory note in the principal amount of
$2.25 million. The purchase price was based on an appraisal report made by an
independent appraiser. This promissory note has a term of five years. Principal
is payable in five equal annual installments of $450,000 and carries an annual
interest of US Libor +1.5%. On July 17, 2006, Gaming entered into an agreement
with RNG under which Gaming assigned all of its rights in the Blackjack Software
to RNG in consideration for all outstanding and issued ordinary shares of RNG.
The purpose of RNG is to exploit the Blackjack Software and related intellectual
property and further develop this software and potentially other gaming
software. RNG is expected to license its software to third parties in exchange
for revenue shares and license fees.
Get21's business model was to provide marketing services related to the BJ
Software business and potentially other games. Get21 has outsourced to Golden
Palace the full operation of the service which includes payment, processing,
customer support, fraud and collusion prevention and other services.
Effective July 15, 2007, we have decided to cease the marketing services
provided for gaming applications marketing activities due to cash flow
difficulties.
On September 14, 2006, Gaming, RNG, and Golden Palace Limited ("Golden Palace"),
entered into an agreement, which was amended on January 10, 2007, under which
Golden Palace has agreed to invest $600,000 in RNG in return for 20% of the
ordinary shares of RNG. Pursuant to terms of this agreement, Golden Palace has
an option to acquire an additional 30% of the ordinary shares of RNG (but not
more than 50% of RNG or more than the amount owned by Gaming) at a price of
$100,000 per each additional percentage interest of the ordinary shares of RNG,
if the option is exercised on or before September 14, 2008; $180,000 per each
additional percentage interest of the ordinary shares of RNG, if the option is
exercised upon RNG becoming a public traded company or upon the completion of a
private placement of securities for consideration of not less than $4,000,000 to
third parties, at a company valuation of $18,000,000. . Such option can be
exercised by Golden Palace during a period commencing on the date of the
agreement and terminating upon the earliest of: (1) September 14, 2008; (2) RNG
becoming a public company; or (3) completion by RNG of a private placement for
securities for consideration of not less than $4,000,000 by third parties, at a
company valuation of $18,000,000.
Concurrently, Gaming, RNG and Golden Palace entered into a shareholders
agreement under which Golden Palace has a right to appoint one of RNG's 4
directors (as long as Golden Palace owns 20% of RNG) and we have a right to
appoint the 3 other directors. Upon Golden Palace becoming an owner of 50% of
RNG, it will have the right to appoint an equal number of directors to the
number we are entitled to appoint.
On October 31, 2006, RNG and Golden Palace entered into a software license
agreement under which RNG has a granted Golden Palace a non transferable,
limited license to use, perform, present and operate RNG's Blackjack Software
for the purpose of displaying, managing and operating online gaming according to
the terms and conditions of the agreement. In return, Golden Palace has agreed
to pay RNG a total of $1,000,000 in license fees, integration costs, technical
support fees and advanced royalty fees, as well as additional royalty fees equal
to 15% of the fees charged by Golden Palace from players who participate in the
blackjack game. According to the terms of the agreement, the Blackjack Software
shall not be used in the U.S. and/or offered for use to U.S. residents, and
Golden Palace has agreed to take certain actions to ensure that the Blackjack
Software is unavailable for U.S. residents.
On November 9, 2006, Get21 and Golden Palace entered into a sublicense and
software agreement under which Golden Palace granted Get21 a world wide, non
exclusive, non transferable sublicense to user interface portion of the
multiplayer blackjack and poker gaming software ("Player Software") and to grant
players the right to use the Player Software. According to the terms of the
agreement, Get21 is responsible for performing all marketing and promotional
functions with respect to bringing players through the URL web address
www.get21.com and www.get21poker.com ("URL") to online gaming multiplayer
blackjack and poker rooms ("Gamerooms") which are operated by Golden Palace.
Get21 and Golden Palace shall share the revenues generated from players who
played in the Gamerooms through the URL according to the terms specified in the
agreement.
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Effective July 15, 2007, we have decided to cease the marketing services
provided for gaming applications marketing activities through our subsidiary
Get21 due to cash flow difficulties.
On August 4, 2006, Gaming filed with the Securities and Exchange Commission
("SEC") a registration statement on Form 20-F, which is now effective. As a
result, Gaming is now a separate reporting entity with the SEC that has the
reporting obligations of a foreign private issuer, despite it being our wholly
owned subsidiary. As disclosed in our Current Report on Form 8-K filed with the
SEC on June 20, 2006, we intend to declare a dividend of Gaming's shares on a
one-for-one pro rata basis to our shareholders as of a record date to be
determined by our Board of Directors.
Our shares of common stock are currently traded on the OTC Bulletin Board under
the trading symbol "ZFPI.OB".
THE MARKET
The interactive entertainment market has emerged as a result of the growth and
technological advancement in the communications industry. One of the key
segments of the interactive entertainment market is online gaming which has
experienced growth since its emergence in the early 1990s. Estimates and growth
rates of the online gaming market vary. The upper end of these estimates
suggests that the online gaming market generated gross winnings in excess of
US$10.0 billion in 2005. Nevertheless, estimates suggest that the penetration of
online gaming compared to traditional land-based gaming remains low. We believe
that growth in the online gaming market will be driven by the increased
availability of the internet and broadband connectivity, increased branding and
marketing efforts by online gaming operators, the availability of alternative
distribution platforms.
It is the anticipated expansion of alternative distribution platforms that we
are seeking to exploit with our software and technology. Internet gaming is the
most developed interactive gaming platform, and although still relatively new,
most interactive gaming operators already have an internet offering. In relation
to gaming, other platforms such as mobile applications, Interactive TV and
participating TV are still in their early stages and are the primary focus of
the Company.
ONLINE GAMING MARKET/MULTIPLAYER BLACKJACK TOURNAMENTS MARKET
Industry sources estimate that the global revenues of "brick-and-mortar casinos"
were $70 billion in 2004 and are expected to grow to $100 billion by 2009. With
additional revenues coming from sports betting and lotteries, the gaming market
generated an estimated $247 billion in 2004 and is expected to reach revenues of
over $300 billion by 2009. With $10 billion in revenues, the online gaming
market is estimated to have generated 4.6% of the global betting market revenues
in 2005 and is predicted to reach 7% of market revenues by 2009. Gaming market
revenues are expected to keep growing at a compound annual growth rate (CAGR) of
5% in coming years, while the online gaming market is expected by industry
sources to grow at a much more rapid pace of 20% to 25% to accumulate to an
estimated market size of $23 billion in 2009.
The online gaming market is divided into segments according to game types,
reflecting different gamer characters and tastes; however, some of the market
segments, such as blackjack, attract gamers of different gaming choices.
The P2P emerging segment, which currently includes mostly poker, is predicted to
grow from a market share of 22%, which reflects $1.44 billion in year 2005, to
38% and $9 billion by year 2009. (Poker reflects $6 billion.) Poker operators
are now targeting more casual gamers which are considered the mass market. As
more casual gamers and less affluent nations enter the poker players market ARPC
(Average Revenue Per Customer) per annum is expected to fall from an average of
$762 in 2004 to $619 in 2008. Consequently, poker operators are constantly
looking for new ways to attract casual players (U.S. and non-U.S. players) to
the international P2P networks on the one hand, while increasing the ARPC on the
other hand.
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P2P blackjack is simpler and more intuitive than poker and therefore may be more
attractive to casual gamers who do not play online poker.
Blackjack is the most popular casino game outside of the U.S. As part of the
poker network efforts to diversify their client portfolio risk, networks adjust
their offerings to new non-U.S. markets. Introducing another P2P game which
shares the proven poker revenue model on the same poker network is expected to
increase ARPC and allow network operators to better compete in the player
acquisition market. Better ARPC means more revenue sharing affiliate marketing
partners and better marketing budgets. These factors promote growth in the
particular P2P network. High network liquidity is the principal factor to
generate player trust and player interest. P2P poker showed a compound annual
growth rate of more then 334% in the four years since it emerged as an
independent market segment. We believe that blackjack has the potential to be
the most popular P2P game after poker.
The online gaming market is one of the fastest-growing and most profitable
online businesses. It has experienced rapid growth in recent years, fueled by
the growth of broadband penetration throughout the world, increasing consumer
confidence in the safety and security of online payment systems, increasing
customer demand, and ongoing investments by online gaming operators in product
development and marketing.
Online gaming has a number of advantages for players: it is convenient and
easily accessible at any time, day or night, and relatively anonymous. Casino
websites provide a wide variety of games, including free-play games that
encourage players to experience online gaming for the first time. According to
an industry research report, the worldwide market for online gaming has grown
from virtually no revenue in 1995 to approximately $6 billion in 2003 and
increased to over $8 billion in 2004. Forecasters expect this market to grow by
an additional 20% to 25% in each of 2005 and 2006. According to one specialist
gaming consultancy, the online gaming market will continue to grow rapidly in
the coming years, reaching $15 billion in 2007 and $22 billion in 2009.
MOBILE GAMING MARKET
Mobile gaming is in its infancy. However, as a distribution channel it is
beginning to finally emerge due to technological advancements (e.g., 3G) as well
as more robust relationships between the content originators, the operators and
the end user. As a result the availability and demand for interactive mobile
content such as news, sports and information services, images, and music, is
growing rapidly. Juniper Research estimates that the global mobile content
market was worth $10.3 billion in 2004 and is expected to rise to $59.1 billion
by 2009, a CAGR of 42%.
The growth of the mobile content market is largely being driven by the emergence
of innovative content providers providing a growing array of compelling content
to the end user. The emergence of this distribution channel and the potential
market opportunity that it offers - there are currently 1.5 billion global
mobile users - has not gone unnoticed by the gaming providers. As a result,
providers of gaming services, both online and land-based, are seeking ways to
exploit the mobile distribution platform for gaming, to add additional revenue
channels.
According to Juniper Research, the global mobile gambling market was worth $468
million in 2004. This represents less than 5% of the online gaming market.
However, Juniper Research estimates that mobile gaming revenues, even allowing
for limited growth in the US (due to regulatory constraints), are expected to
exceed $19 billion by 2009, almost on a par with online gaming. This translates
into an average annual growth rate of 110%.
Sports-betting is currently estimated to be the largest of the three sectors of
the mobile gaming market, representing 47% ($218 million). Juniper Research
estimates that the mobile lottery market, currently less than 25% of the total,
will be the biggest mobile gaming winner, rising to 40% of revenue by 2009. The
rationale for this assumption is the overall ubiquity of lotteries amongst the
adult population and the general government apathy towards lotteries versus
other forms of gambling, resulting in them becoming established more quickly in
a greater number of markets. We believe that with the advent of next generation
network technologies (e.g, 3G) and more advanced graphic technologies on
handsets, mobile gaming services will become more akin to the gambling
experiences offered online.
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INTERACTIVE TV MARKET
Interactive TV enables two-way communications using a television as a display.
Uses include entertainment, information retrieval, education and shopping. One
of the consequences of the growth of Interactive TV is that interactive
entertainment channels and services are becoming increasingly popular. These
channels and services create new forms of revenue streams that are driven not
exclusively from traditional advertising but primarily from the monetization of
the interactivity, for example, paying to play games and wagering on games.
PARTICIPATING-TV MARKET
The emergence of cellular infrastructure has given solutions for issues like
always-on connectivity and availability, and provided with potentially good
answers for questions of dependence of availability on location and timing. The
convergence of wireless and TV serving technologies has created a rare
opportunity for the `Cellularifiaction of TV' - enabling enhanced and enriched
TV experience. This convergence of cross media content provides the ability to
embed additional program data such as home audience cellular-based interaction
into live feeds or prerecorded shows and programs.
Wireless entertainment and communications have grown in very rapid pace in
certain European countries. Wireless operators are evaluating key application
services and new content while TV and new media producers are excited about
reaching their audiences in new ways.
Cross Media formats represent challenges to broadcasters as well as producers.
New content formats that cross over the broadband web, linear or interactive
television and fixed or mobile devices typically come packaged with software
tools, content management tools and other elements that require going beyond the
regular television program buying and selling that the broadcasters are used to
dealing with.
SMS texting and other user interactions in response to television programming or
to influence television programming have gained a lot of popularity lately.
Entertainment, sports and Fixed-Odds services will be at the heart of demand for
such services. `Getting the audience involved' experience lets viewers interact
with one another or with content associated with reality shows, regular shows,
advertisement or fixed-odds games by sending in messages that are displayed or
accumulated on the television screen.
Television is a highly effective medium through which to market mobile
entertainment services, which are now a significant part of the mobile content
sector. Research and Markets forecasts that the mobile content market will
generate in the region of $78 billion in revenues worldwide by 2007, up from
$16.7 billion in 2003. A number of companies produce and broadcast interactive
formats. These operators focus on the sale of their formats and/or on buying
airtime to promote them. They tend to focus on a single genre such as
interactive quiz shows and formats and do not have the extensive portfolio of
live interactive formats.
The growth of special interest cable and satellite television channels in the
digital broadcast environment has resulted in audiences and revenues being
spread over an increasing number of channels. For example, in the UK, one of the
most competitive markets in the world, Ofcom issued 162 new licenses to
broadcast television services in 2004, and over 370 channels are now available
to UK audiences. Competition for customers is thus intense and, as a result,
traditional television broadcasting models, which are based on advertising
revenue, are coming under pressure. Broadcasters are seeking to find new ways of
winning audience share and generating revenue streams, while seeking to reduce
the operational costs of providing new formats and services. Among early
participation television applications, voting and polling demonstrated the
potential of the new medium. This is evidenced by the success of programs such
as Big Brother and Pop Idol.
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The market has grown rapidly since its inception. In 2003, the 900 million
messages sent in the European SMS-TV market generated an estimated $400 million
shared by broadcasters, mobile operators, and technology providers. According to
a report in the McKinsey Quarterly (McKinsey & Company), the addition of SMS
boosts the viewership of popular free-to-air television shows by up to 20
percent and can encourage ratings growth of approximately 50 to 100 percent for
niche cable and satellite channels.
OUR BUSINESS
PLAY-FOR-REAL
We currently provide five core solutions for play-for-real gaming mobile gaming,
interactive TV gaming, participating TV gaming, online gaming and multiplayer
blackjack tournaments gaming. We also provide marketing services to our
Blackjack Software in order to attract online gamblers to gambling websites.
Though we continue to operate in all of these areas, we recently decided to
focus primarily on the Winner Channel and on our Blackjack Software related
marketing services.
MULTIPLAYER TOURNAMENTS BLACKJACK
Our indirect subsidiary RNG has signed a non-exclusive license agreement with
industry leader Golden Palace Ltd to offer non-U.S. customers the Blackjack
Software service. The agreement allows for Golden Palace poker players to be
integrated into a single E-Cash wallet, to enhance the cross-marketing
opportunities between Golden Palace poker players and the new multiplayer
blackjack tournament service. As a result, Golden Palace online poker players
will be able to participate in the game by using their existing account without
the need to re-register. We intend to further develop the Blackjack Software,
and we intend to develop other products in the future. We have developed a
patent application for the Blackjack Software which is currently pending with
the U.S. Patent and Trademark Office.
Get21, our other indirect subsidiary has launched online multiplayer Blackjack
tournaments to non-U.S. players. The Get21 service (www.get21.com), allowed
Internet users to participate in multiplayer Blackjack tournaments rather than
playing against the 'house'. Get21 used the services of Golden Palace Ltd under
a service agreement to provide operating services to non-US players and to share
the same players' community. In exchange for these services, Golden Palace
received a minority percentage share of net revenues generated by Get21's
multiplayer Blackjack tournaments.
Effective July 15, 2007, we have decided to cease the marketing services
provided for gaming applications marketing activities due to cash flow
difficulties.
MOBILE GAMING
Mobile gaming is in its infancy. However, as a distribution channel, mobile is
beginning to gain momentum due to handset and network technological advancements
(e.g. 3G) as well as user acceptance. We are at the forefront of this market,
extending interactive gaming technologies to the mobile world and enabling
gaming service providers to do the same.
Our mobile solutions are compatible with in excess of 100 different mobile
handsets. We offer both proprietary white label games as well as popular branded
games that our software specifically adapts to work on the mobile platform. The
game applications interface with Java, SMS, WAP and Brew protocols. Our mobile
solutions offer high levels of security integrating state of the art SSL
encrypted protocols and encryption keys allowing secure access to account
management features, such as deposits and withdrawals. By combining our
server-based solution ("ZoneITS") with our mobile solution, we are able to
deliver a complete cross-operator/cross-media environment - i.e. real time
interaction between mobile, iTV, satellite and online based gaming operations -
enabling a single-account, cross platform gaming experience.
Our current offerings to our mobile gaming operator customers include certain
fixed odds games (such as roulette, dice, keno, hi-lo), virtual horseracing,
casino games and exchange betting.
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We offer an end-to-end (server side and clients), plug-and-play, trusted and
unique gaming solution for the mobile device market empowering:
o Gaming operators, willing to extend their existing services to the
next generation gambling medium; and
o New gaming operators willing to adopt the mobile device medium as
their primary gambling offering
Our customers for our play-for-real mobile gaming solutions are based in the
U.K. where fixed odds betting is permitted if conducted by a licensed bookmaker.
We have entered into a revenue-sharing agreement with Eurobet, which is a one of
the largest book makers in the world, to provide fixed odds games via mobile
devices. This service was officially launched in October 2005 and offers dice,
keno, hi-lo and slots to existing Eurobet/Coral customers. We also provide fixed
odds games on mobile devices to Two Way Media (operator of the Winner Channel,
an interactive gaming TV channel in the U.K.), under a revenue-sharing agreement
.. We have also launched new mobile betting service for Betfair users. Betfair
supports 100,000 active users each week and is the world's leading betting
exchange operator processing 5 million bets per day. The software is available
to Betfair users under the brand 'Layback' and will provide access to Betfair's
markets to players via mobile and PDA devices. This will enhance the 'anywhere,
anytime' mobile betting experience for existing Betfair users, as well as for
new customers to the Betfair exchange.
INTERACTIVE TV GAMING
iTV is evolving as a valuable distribution channel to enable gaming operators to
reach their customers in the comfort of their own living rooms. Our iTV
technology solution is compatible with 8 different global standards (including
Open TV, TV/Scientific Atlanta, Microsoft TV, Liberate and NDS Core) that are
operated on the largest middleware systems for either cable satellite or IPTV
operators. As such we estimate that our iTV solution can reach approximately 85%
of the iTV market. Our iTV technology has been deployed in the UK on Sky, NTL
and Telewest (Through Two Way Media operator of the Winner Channel) to provide
interactive fixed odds games on TV on a revenue-sharing basis and by major cable
and satellite service providers in the US, such as Cablevision Echostar and RCN.
Our iTV portfolio includes fixed odds and casino games (including Keno, Hi Lo,
Dice, Roulette, Blackjack, Virtual Horse racing and several Slots versions),
lottery and scratch cards as well as offering of multiplayer Texas Hold'em
Poker, Blackjack and Bingo.
PARTICIPATING TV GAMING
We have developed technology that uses SMS, interactive voice recognition (IVR)
lines and Java-based applications to bring interactive gaming to subscribers
without a return path and enables the seamless delivery of interactive gaming
services to analogue, digital, terrestrial, cable and satellite viewers without
any reliance on the set-top box. We believe that our Participation TV solution
is a real differentiator, opening up a completely new medium for interactive
gaming. Our patent pending Participation TV solution uses SMS, mobile phone Java
based applications and IVR lines to bring interactive gaming to subscribers
regardless of the availability of a return-path and without any reliance on the
set top box. It therefore offers an interactive gaming service to analogue,
digital, terrestrial, cable or satellite TV viewers, therein significantly
extending the potential market opportunity of the TV distribution channel as
well as providing the opportunity to generate additional revenue from telephone
and wireless data traffic.
The broadcasting component integrated with the Company's server component offers
an end-to-end solution. Integration of all fixed odds activities takes place on
the back-end systems between the Company and the gaming operator's back office.
Our portfolio of applications for launching real gambling channels includes
fixed odds games, all of which are stand-alone interactive applications or are
overlaid on broadcast programs. Currently the Company offers fixed odds games
(roulette, hi-lo, dice and keno) and racing (horse racing, motor racing and
greyhound racing), and a new version of poker enabling, for the first time, TV
viewers to play any version of poker for real money. In addition, it enables TV
viewers to participate in poker TV shows by betting during each hand on the
results of the game.
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Our solutions are being broadcast on several channels in the UK though our
agreement with Two Way Media (operator of the Winner Channel), such as Cellcast,
Teletext and more.
ONLINE GAMING
We offer an online gaming solution to fully complement our existing product and
service solutions. The market for online gaming is already significant and
software developers in this market are well entrenched. Our ability to offer an
online solution is invaluable as it is able to demonstrate our ability to offer
a fully interoperable cross platform solution, that we believe is unique in the
market. We provide end-to-end online gaming solutions, including branded and
white label front end, middleware and back office solutions. The service
includes extensive applications for Casino and fixed odds games, Lottery and
scratch card services as well as Multi player games. We provide end-to-end
online gaming solutions, including branded and white label front end, middleware
and back office solutions. The service includes extensive applications for
Casino and fixed odds games, Lottery and scratch card services, as well as Multi
player games.
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS
In 2006, we derived approximately 84% of our revenues from three major
customers: Golden Palace Ltd(51%); Two Way TV Australia (21%) and Two Way Media
Ltd (12%).
OUR STRATEGY
We have recently re-prioritized our operations and currently plan to focus on
two products: the Winner Channel and our Blackjack Software.
Our aim is to strengthen our position as a developer of gaming technology to the
mobile, Interactive TV, participating TV and internet markets with particular
emphasize on the development of the Blackjack Software. The development of a
diversified portfolio of high quality, innovative applications is critical to
the business. We intend to:
o DOMINATE THE MULTIPLAYER BLACKJACK TOURNAMENTS MARKET. Our new solution is
intended to enable gaming operators to supply their users with a scalable
multiplayer service, based on our technologies.
o DEVELOP INNOVATIVE APPLICATIONS. We continue to devote significant
resources to the development of high-quality, innovative applications and
work with skilled content developers. As the interactive gaming landscape
continues to evolve, we intend to extend our cross-platform solutions to
accommodate advancements in network and device technology.
o EMPHASIZE OUR BRANDED TECHNOLOGY. We intend to broaden our applications to
enhance the end user's experience, thereby offering our customers (e.g.
mobile phone networks) the opportunity to increase their subscribers
satisfaction, leading to a reduction in subscriber churn.
o WINNER CHANNEL PARTNERSHIP- We and Two Way Media Ltd, a leading interactive
television company, have announced the intention to form a privately held
company to house their consumer betting brand, 'The Winner Channel'. The
Winner Channel platform has been operating in the UK for a year and has
launched services on TV, mobile phones and the internet - providing
customers opportunities to be on all platforms from a single account. In
its first year of operation, the platform has established a strong presence
in the UK market. It operates its own brand and white label gambling
services for leading UK media companies including ntl:, the Sun Newspaper,
Channel 4, Five, Teletext and Flextech Television, among others.
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The two companies have used the past 12 months to establish the technical and
commercial infrastructure necessary to operate cross platform products. The new
vehicle intends to capitalize on this, focusing on high end entertainment TV
betting, using the television as the primary means of acquiring customers that
can then be monetized through its other platforms.
We believe that the UK Gambling Act 2005 discussed below under "Government
Regulation", scheduled to be implemented in September 2007, will allow the
provision of remote gaming services, which will benefit the Winner Channel and
us.
o EMPHASIZE OUR BUSINESS MODEL. We continue to highlight the revenue-share
model's collaborative features for our customers. We believe that the
revenue-share model incentivizes our customers to upgrade and enhance the
capabilities of their applications.
o FACILITATE DISTRIBUTION AND SUPPORT. We continually promote all of our
products in their relevant markets to enable the best market penetration
and customer support. We place emphasis on getting the product right and
supporting the product with the correct combination of technology,
distribution and support.
OUR COMPETITIVE STRENGTHS
We believe that our competitive strengths include:
o UNIQUE, FIRST TO MARKET, PATENT PENDING PEER TO PEER ("P2P") BLACKJACK
PRODUCT . Our P2P application is a unique product, first introduced to the
market by us. We have filed a patent application with the U.S. Patent and
Trademark Office with respect to the P2P application which is still
pending. One of its unique aspects is that it allows for constant gaming
opportunities and nonstop blackjack online events. A game is available
whenever a player is looking for one. Players do not play against the house
- players compete against each other allowing the most skillful player to
win. We expect to be one of the leading software providers in the
Multiplayer blackjack tournaments market.
o 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. 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. We have patent
pending proprietary multiplayer blackjack product and a patent-pending
participating TV solution.
o 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. We are first to market position in the participating TV gaming
market and have an early mover in the mobile gaming and in the online
multiplayer application market.
o 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.
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o RECURRING REVENUE-GENERATING BUSINESS MODEL. Our business strategy
emphasizes the collaborative nature of our approach to customers. We prefer
to enter into revenue-share agreements with our customers, rather than
license our technology. We believe this approach will continue to generate
revenue long after the technology's initial release. The market data we
collect from sales and usage of our applications also provides us with
valuable insight into carrier and subscriber preferences and guides the
development of future application.
OUR PRODUCTS AND TECHNOLOGY
We currently provide four layers of technology enabling the full range of
services required to supply gaming solutions across multiple platforms. The four
layers include: back office, game engines, middleware and front-end solutions.
Customers can select the full solution from front end to back office, or can
select a part of the service which is then integrated with their existing
offering.
MULTIPLAYER TOURNAMENTS BLACKJACK SOFTWARE
Blackjack's simple rules and extremely visible play permit players to enter the
game with little knowledge. At the same time, the unique blackjack tournament
rules add skill elements to the traditional blackjack game and therefore attract
professional and savvy players who implement complicated gaming strategies.
One of the unique aspects of our P2P application is that it allows for constant
gaming opportunities and nonstop blackjack online events. A game is available
whenever a player is looking for one. Players do not play against the house -
players compete against each other allowing the most skillful player to win.
Once a set number of players arrive, the game begins. Multi-table tournaments
consist of a number of 5-player tables, allowing bigger prizes and a more
exciting tournament.
We developed the Blackjack Software with the assistance of professional
blackjack players. We believe that our new multi-player blackjack application
may be an attractive product for major online casinos and sports books. Our
blackjack product is the first on the market to combine a full range of
multi-player blackjack games: Multi-table Sit & Go tournaments; Single table Sit
& Go Tournaments; Heads-Up Blackjack; Blackjack Shootout tournaments; and daily
Blackjack Special Tournaments.
Each player has to pay the same amount of money, "a buy-in", and the house fee
in order to register for the game. The players choose the game with the amount
of rounds they prefer and enter the table. All players receive an equal amount
of chips. The chips are used as counters and are accumulated by beating the
computer-generated dealer's hand. Each player determines the amount of chips to
bet in every hand. The player who accumulates the most chips wins the pot.
BACK OFFICE - ZONEMAS
Our 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. Whether connecting to existing enterprise operations or
starting from scratch, our ZoneMAS is a robust, highly secure and cost-effective
back-office suite 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 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
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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.
GAME ENGINES
The game engine is responsible for the gaming operations and includes the rules
and logic of each game. The game engine includes a random number generator,
gaming statistics, odds and other characteristics that enable gaming operations.
Information from the game engine is displayed on the front end device that
serves as an application program interface (API). The game engine operates as a
separate server and communicates with the communications manager and the back
office. The game engine can function as a single player server or as a
multiplayer server.
o 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.
o MULTI-PLAYER GAMES SERVER. This server controls the multi-player games
developed by us. The server operates two types of games: games where
several players play against each other, like poker, and the server manages
the game tables and the tournaments; and games where drawings take place
every few minutes and can be observed by all participants, such as SMS TV.
MIDDLEWARE TECHNOLOGIES
We provide two middleware servers: ZoneITS, an interactive terminal server, and
MIXTV, a broadcast video server.
o ZONEITS. ZoneITS is a designated server that is located 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 architecture enables reliance on a single
uniform protocol between the mobile client and terminal. The server is
specifically designed to manage updated versions of handsets 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 architecture is designed to increase security and create an additional
buffer between the client and the server, making the content transferred
between mobile clients and the terminal uniformly encrypted. While no
system is completely secure, we have devised numerous security measures
designed to assist in the prevention of fraudulent activity and
unauthorized access to its systems. We work on a four tier security
protocol including obfuscation software (to deter copying of the software),
protocol encryption, client server monitoring, firewalls and logging
protections.
o MIXTV. Our products include games and virtual community tools to broadcast
live. Our solutions are predominantly designed as mass-multiplayer games,
with no limit to the number of players at one given moment. A wide spread
audience can play the same game throughout as many platforms as the channel
is deployed on. As these applications are video-streamed, they run on a
number of different broadcast networks: analogue, digital, terrestrial,
cable and satellite. This new patent-pending technology uses mobile text
messaging to bring interactive gaming communities to subscribers without a
return-path and creating a virtual community around the channel. The
delivery of participating/SMS-TV requires a suite of software and hardware
that delivers multi-mode solutions for broadcasters and other application
service providers, by integrating into the existing infrastructure of both
the broadcaster's control room and the operator's communications networks.
The system comprises two main components, MIXTV Entertainment Server and
MIXTV Director, that are together responsible for running the interactive
solution, collecting the audience input and delivering all of the data as a
video stream onto the television screen.
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FRONT END
Front end solutions have been developed for Interactive TV, mobile, internet and
participating/SMS-TV. The front end solution includes all of the customer
interface applications and is essentially the game the customers see on their
televisions, computers or mobile phones.
RESEARCH AND DEVELOPMENT
We strive to develop the latest software and technology for the gaming market,
and accordingly over 75% percent of our employees are involved in research and
development. Research and development expenses for 2005 and 2006 were
approximately $2,549,635 and $2,923,572 respectively, which represents
approximately 54 percent and 41 percent of our total operating expenses for 2005
and 2006, respectively. We believe that research and development is one of the
key reasons for our success and is crucial to our future prospects and it is our
intention to continue to invest heavily in research and development in order to
enhance our existing solutions and launch new products into the gaming market.
COMPETITION
The interactive gaming applications market is highly competitive and
characterized by frequent product introductions, new technologies and evolving
platforms. 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 believe
competition in the interactive gaming market will intensify. The current and
potential competition in the interactive gaming applications market includes
major media companies, traditional video game publishing companies, service
providers in interactive mobile, TV and internet markets, software applications
providers, content aggregators and other pure-play interactive entertainment
companies. Larger and more established companies are increasingly focused on
developing and distributing wireless applications that directly compete with us.
In addition, we expect that online gaming companies will themselves continue to
develop applications that allow their products and services to be available on
new distribution platforms.
MULTIPLAYER TOURNAMENTS BLACKJACK
Some of the leading software and system providers in the online gaming industry
operate their own gaming websites while still providing their proprietary gaming
systems to other operators. There are about 90 proprietary gaming systems
offered by some 120 software and system providers; however, the market is
dominated by 15 leading software vendors, including WorldGaming, MicroGaming,
Playtech, RealTime Gaming, Boss Media, and others.
Major software vendors may provide their proprietary gaming platforms to dozens
of operating websites simultaneously and have been offering a range of services
including: gaming software, customer support, back office systems, and payment
processing and hosting, allowing vendors to offer solutions ranging from
specific software to `plug and play' gaming platforms.
For small to mid-size operators, in-house development is usually inefficient;
therefore, in these cases, software licensing may often be the most appropriate
solution.
Using standard gaming engines that can be customized to client needs allows the
software vendors to offer their customer a distinctive user interface and
different `skins'. Although most competitors seek to offer new and innovative
games, there are practically only a few new games in the industry. The reason is
that most of the software vendors choose to get more market share by adding new
operators while focusing on developing back office functionalities, service and
support to their operators.
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Vendors generate revenue streams through software and support licensing as well
as customization, payment processing, hosting and other services that are partly
fixed but are mainly calculated as a percentage of each licensee's level of
activity.
P2P blackjack is a new concept that has been introduced by few operators,
including: Global Player Casino, Game Account (a skill game company),
blackjack.com, and RiverBelle Casino. All of these websites offer different
kinds of multi-player blackjack, but none of them offers a tournaments blackjack
application.
o MOBILE
We 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 in several
key respects by funding development, providing design input and quality
assurance for our applications, and owning the application copyright and thereby
increasing revenues from application sale. We consider the primary competitors
in the wireless market to be Chartwell Technologies, Boss Media, Micro Gaming,
Phantom Fiber, Probability Games and Mfuse.
o INTERACTIVE TV.
Currently, we consider the primary competitors in the Interactive TV market to
be Visiware (provider of Interactive TV solutions), Pixel Technologies (provider
of gaming solutions), Yoomedia (U.K.- based interactive entertainment provider),
Static2358 (gaming applications developer of the OpenTV platform and owner of
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).
o INTERNET.
There are numerous competitors in the internet market and we consider the
primary competitors in the internet service provider market to be online gaming
sites and outsourcing providers, such as Boss Media, Cryptologic, Orbis,
Microgaming, RTG and Playtech. Many of these companies have their own in-house
software developers and some have significantly greater capital resources and
personnel than the Company.
o PARTICIPATING TV.
Currently, to our knowledge, there are no competitors in the field of
participating TV gaming.
INTELLECTUAL PROPERTY
We own the key intellectual property rights in the software developed for use in
our operations. We rely on the protection of trademark, copyright and trade
secret laws, contractual obligations and license agreements with our employees,
customers, partners and others to protect our proprietary rights.
In order to protect our trademarks, we have registered "Zone 4 Play" as a trade
mark in the U.S. in respect of computer games software. We have also made
application for a U.S. trademark for "MIX TV."
We have also applied for patent protection in relation to our participating
solution and the methodology of our multiplayer blackjack products, and these
applications are currently being processed.
o On January 25, 2005, we filed a U.K. patent application entitled
"Broadcasted Games".
o On June 24, 2005, we filed a U.S. utility patent application entitled
"Multiplayer Card Tournaments and Methods" which was assigned to Gaming and
than to RNG.
o On December 22, 2005, we filed a U.K. patent application entitled "Face up
Holdem" which provides fixed odds wagering that employs computer-generated
card dealings and automatically calculates the odds associated with each
computer generated hand (CGH) to win a broadcasted poker game.
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GOVERNMENT REGULATION
The gaming industry is prohibited or restricted in some countries and highly
regulated in others. In a number of countries the legal position is uncertain.
In general terms, it is possible that, subject to the courts in the relevant
countries being able to establish jurisdiction, online gaming and our activities
in relation to it do or may constitute (in a manner and to a degree which varies
between countries) a breach of the applicable criminal and/or civil legislation
in the countries of residence of our registered players. This may potentially
expose us, and/or our officers and directors, to fines and other sanctions
(including imprisonment). That is why, we do not directly target individuals
residing in the United States and mainly target online markets in Europe. We
have no control over where and to residents of which country third party
operators to which we may license the Blackjack Software, market their games or
otherwise conduct operations, which can be all over the world.
Although the regulatory regime for land-based gaming operations is
well-established in many countries, the gaming laws in such countries will not
necessarily have been amended to take account of the internet, and the ability
to offer gaming services online. Consequently, there is uncertainty as to the
legality of online gaming in most countries. In several countries local
regulators are willing to license and regulate local and often state-owned
operators, but prohibit foreign operators, in some cases possibly to protect the
tax and gaming revenues of the relevant government. Authorities in certain
jurisdictions have taken indirect steps to restrict online gaming by seeking to
prevent or deter banks, payment processors, media providers and other suppliers
from transacting with and providing services to online gaming operators. The
application or enforcement (or threat of enforcement) of gaming laws or
regulations, or a change in sentiment by regulatory authorities on the enactment
of new legislation prohibiting or restricting online gaming or services used by
online gaming businesses or the taking of such indirect steps, may severely and
adversely impact the business and financial position of online gaming companies.
The legality of the customers themselves engaging in online gaming is also
uncertain in a number of countries.
Nonetheless, customers in such countries have proved willing to engage in online
gaming despite the fact that they may be prohibited by their domestic law from
doing so. If online gaming were liberalized, or licensed and regulated,
particularly in the U.S., online gaming companies would be likely to face
increased competition from large land-based operators and internet companies
that may not currently offer such services as a result of the regulatory
restrictions.
U.S. GAMING REGULATION
On October 13, 2006, President Bush signed into law the "Security and
Accountability for Every Port Act of 2006", which included the "Unlawful
Internet Gambling Enforcement Act of 2006" (the "Act"). The Act prohibits credit
card companies and other financial institutions from paying or receiving funds
for the purpose of internet gambling. The Act also authorizes state and federal
law enforcement officials to seek injunctions against persons who facilitate
illegal internet gambling. The Act requires the Department of the Treasury and
the Federal Reserve Board (FRB) to draft regulations to require each "designated
payment system" to identify and block these restricted transactions through the
establishment of policies and procedures.
The World Trade Organization (`WTO') has found that the U.S. legislative
position on internet gambling is in violation of US trade commitments and the
European Union's top financial regulator recently commented that the US position
was `protectionist'. Whether this may prompt further action by the European
Union (`EU') remains to be seen.
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INDIRECT PROHIBITION EFFORTS
U.S. laws are being used, or threatened to be used, by federal prosecutors,
state attorneys general and other authorities against third parties who provide
services to online gaming companies or who directly or indirectly facilitate
online gaming operators such as licensees, internet service providers, software
and technology providers, payment processors and internet portals to attempt to
impede the growth of online gaming in the U.S. or prohibit the provision of
services and supplies to the industry. These efforts may take various forms,
including requests that online service providers `cease and desist' from
offering a service within a particular jurisdiction, civil actions seeking to
enjoin a service and demand a refund of gaming proceeds originating from a
particular jurisdiction, or criminal indictments, alleging a violation of state,
federal and/or local law. These efforts which raise legal and moral concerns
about the industry may also have the effect of causing us to avoid dealing with
the online gaming industry.
There have recently been a number of legal developments associated with the
manner in which the business of gaming, and in particular, Internet gaming, is
treated in the UK and Continental Europe. Some of these developments can be
considered as positive and some as negative.
U.K. REGULATION OF ONLINE GAMING
On April 7, 2005, the UK Gaming Act 2005 (the "UK Act") was given Royal Assent.
The UK Act introduces fundamental reforms of current gaming legislation,
including online gaming. The UK Act envisages that a new single regulator, the
"Gaming Commission", would be formed and that the remaining provisions of the UK
Act will come into force from the second half of 2005 onwards, with the full
regime to be in place by September 2007.
All current legislation specifically relating to gaming, including online
gaming, none of which the we believe applies to our activities, will be repealed
when the UK Act comes into force and most entities involved in the provision of
gaming activities in the UK, including us, will be regulated by the Gaming
Commission. The Gaming Commission will have comprehensive powers which are set
out in the UK Act.
The UK Act makes provision for the licensing of online betting and gaming in the
UK, which is defined as "remote gaming". However, the UK Act does not clearly
specify what services and facilities will need to be licensed in the UK. There
is, however, specific provision in the UK Act relating to the use of "remote
gaming equipment", which is defined as including facilities for registration,
payment and the hosting of a random number generator in connection with gaming
businesses. Such definition is likely to include servers which host gaming
websites or gaming software. An operator and/or supplier of such equipment will
need to obtain a license in the UK or relocate all of the remote gaming
equipment used in connection with its licensed activities outside Great Britain.
The UK Act makes it illegal to supply, in the course of business, computer
software for remote gaming unless a license is held for such activity. As
players can download gaming software from our promoted websites, it is possible
that we may need to obtain a license, even though we neither own nor can alter
any of the gaming software to which we provide access. Whether the UK Act will
be interpreted in such a way as to require us to obtain a license for this
reason is, at present, unclear. This part of the UK Act dealing with the supply
of gaming software does not refer to any territorial application. Therefore, it
is conceivable that it may apply to any person who, although having no physical
presence in the UK, is deemed to supply gaming software from websites capable of
being accessed in the UK.
All gaming operators with remote gaming equipment in the UK will have to obtain
approvals and licenses from the Gaming Commission. We are not conducting any
gaming operations in the U.K. and currently do not intend to seek a license from
a Gaming Commission. We do intend, however, to provide marketing services to
licensed gaming operators by acting as affiliate of such gaming operators and
provide gambling marketing services in the U.K. to gaming operators through our
websites such as www.get21.com and according to the various marketing methods
described under the above heading: "Marketing Plan" under Item 4 of the
Registration Statement on Form 20-F, as amended, filed by Gaming on August 4,
2006. There can be no certainty that should such licenses be required by one of
our gaming operators, such gaming operator will be able to obtain such licenses
on terms which are adequate for us in respect of our activities. The costs
relating to such approvals and licenses and ongoing compliance with the new
regulatory framework are as yet unknown. There are also provisions in the UK Act
which restrict the ability to advertise in the UK unless the jurisdiction from
which the gaming operator supplies its services is in the European Economic Area
(which for these purposes specifically includes Gibraltar). It would also be
unlawful for us to advertise any online gaming operator which is based in the UK
and which does not have a license. As the licensing regime is not yet in
operation, there is no guarantee that, should our key clients seek licenses,
they will be granted.
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At this stage, the extent to which online gaming companies with UK activities
will be affected either by the UK Act or the regulatory framework it will
introduce is not clear. In this regard, it should be noted that the UK Act
proposes that the Secretary of State also be delegated broad additional powers,
including the power to determine what constitutes remote communications
equipment facilities. It is possible the Secretary of State will interpret such
terms widely.
We have been granted a U.K. bookmaker license to operate fixed odds games.
FRANCE AND GERMANY
France and Germany in particular appear to moving towards imposing greater
restrictions on internet gaming operators, both by virtue of proposed changes to
legislation and through heightened enforcement measures. It is possible that
adverse legal developments in these countries could have a material adverse
impact on our business and operation.
ITALY AND SPAIN
With respect to Italy and Spain, recent willingness to regulate certain forms of
internet gaming could be perceived as indicative of a liberalization of the
internet gaming industry as a whole in those countries. However, at present, the
form of regulation put forward by these jurisdictions has failed to create
attractive market conditions for our licensees. As such, notwithstanding the
fact that these markets may appear to be liberalizing, in practice, they have
not liberalized in a manner, or to a degree, that is helpful to our business and
operation.. The Company and its licensee remain at risk that Italy and Spain may
take aggressive action against parties whose operations at are not licensed
pursuant to the regulatory regimes established by these countries.
Countries such as Denmark and Sweden attempt to restrict the actions of gamblers
and aim to curtail the supply of gaming products and services by attempting to
limit such supply to domestic operators, often with links to the local
government.
In Sweden, as revenues from domestic lotteries (and for these purposes, card
games and other casino games are deemed to be lotteries) are only permitted to
be used for the benefit of the public, it is not possible for a private company
to obtain a license to operate an online gaming website. The Swedish Lottery Act
applies to lotteries arranged in Sweden. The Swedish government recently
considered amending the Lottery Act to prohibit foreign lotteries intended for
participants in Sweden, but concluded that such a prohibition would be difficult
to enforce. Since then, however, the Swedish government has announced that it
intends to reconsider a possible ban on foreign online gaming businesses which
operate in Sweden. Any resulting legislation may have an adverse impact on our
business and operations.
Under the Swedish Lotteries Act, it is illegal in Sweden to promote a foreign
operated gaming business. Promotion includes advertising in Swedish newspapers
and magazines, placing banners on Swedish websites and running other similar
advertising campaigns (the promotional activities undertaken by us to date would
fall into this category). Accordingly, we are unable to undertake specific
promotions in Sweden or to specifically target Swedish players and, as a result,
our ability to operate in Sweden is restricted.
Under Danish law, any online gaming business (as well as any marketing or
promotion of such business) aimed at the Danish market is illegal unless the
business concerned has been granted a license from the Danish Ministry of
Taxation. The extent to which a website is assessed as targeting the Danish
market depends on an overall assessment of the activities offered and the
content of the website concerned. Websites not specifically targeting the Danish
market (e.g. where the content is not in Danish, no payments and/or winnings are
calculated in Danish Kroner and no Danish language helpline is provided) will,
in general, not be encompassed by the Danish prohibition provided the relevant
websites are not hosted in Denmark. It is possible that the Danish Gaming Board
or other relevant authority may object to our future marketing activities. We
intend to take such steps as are required to ensure compliance with Danish law
if any such objections arise.
37
OTHER LAWS AND REGULATIONS
The application to us of existing laws and regulations relating to such issues
as taxation, quality of services, electronic contracting, consumer protection
and intellectual property ownership and infringement (to the extent that they
relate to internet businesses) is unclear. In addition, we may become subject to
new laws and regulations directly applicable to our activities. Any new
legislation applicable to us could expose us to substantial liability and
expenses necessary to comply with these laws and regulations. There is a risk
that criminal and civil proceedings, including class actions brought by or on
behalf of public entities or private individuals, could be initiated against our
company, our subsidiaries, our officers and directors, other members of our
company and their directors, and others involved in providing facilities to the
internet gaming industry.
EMPLOYEES
We have downsized our workforce and currently employ 17 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.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
audited and unaudited financial statements and notes thereto included elsewhere
in this prospectus. 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 present assessment by
our management.
OVERVIEW
The following discussion and analysis should be read in conjunction with the
audited financial statements and notes thereto included elsewhere in this annual
report. 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 present assessment by
our management.
Our financial statements are stated in United States Dollars (US$) and are
prepared in accordance with United States generally accepted accounting
principles (U.S. GAAP).
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. See "Cautionary Note Regarding
Forward-Looking Statements" elsewhere in this annual report.
OUR BUSINESS
We are a software and technology developer and provider to companies that
service the interactive gaming industry, delivering cross-platform systems that
are built for mass participation gaming over mobile devices, TV and the
internet. Our software provides and supports play-for-fun and play-for-real
interactive games (currently such play-for-real gaming solutions are only
provided in the United Kingdom where fixed odds gaming are permitted by licensed
bookmakers).
We enter into license and/or revenue-sharing agreements with our customers under
which the customers use our software and technology to offer games to their
subscribers and pay us a fixed fee and/or a percentage of the net revenues
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 March
31, 2007, we had a working capital surplus of $1,598,317 and an accumulated
deficit of $14,756,203. There is no assurance that profitable operations, if
ever achieved, will be sustained on a continuing basis. During the year ended
December 31, 2006, we derived 84% of our revenues from three major customers.
We refer in this discussion to the fiscal years ended December 31, 2006 and
December 31, 2005, as "2006," and "2005," respectively.
GOING CONCERN
We have generated revenues since inception but they were not an adequate source
of cash to fund future operations. Historically we have relied on private
placement issuances of equity.
It is likely that we will need to raise additional working capital to fund our
ongoing operations and growth. The amount of our future capital requirements
depends primarily on the rate at which we increase our revenues and
correspondingly decrease our use of cash to fund operations. Cash used for
operations will be affected by numerous known and unknown risks and
uncertainties including, but not limited to, our ability to successfully market
our products and services and the degree to which competitive products and
services are introduced to the market. As long as our cash flow from operations
remains insufficient to completely fund operations, we will continue depleting
our financial resources and seeking additional capital through equity and/or
debt financing. If we raise additional capital through the issuance of debt,
this will result in increased interest expense. If we raise additional funds
through the issuance of equity or convertible debt securities, the percentage
ownership of our company held by existing stockholders will be reduced and those
stockholders may experience significant dilution. In addition, new securities
may contain rights, preferences or privileges that are senior to those of our
common stock.
39
There can be no assurance that acceptable financing to fund our ongoing
operations can be obtained on suitable terms, if at all. If we are unable to
obtain the financing necessary to support our operations, we may be unable to
continue as a going concern. In that event, we may be forced to cease operations
and our stockholders could lose their entire investment in our company.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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
audited consolidated financials statements, "Significant Accounting Policies",
for the year ended December 31, 2006, included elsewhere in this prospectus.
IMPAIRMENT OF LONG-LIVED ASSETS:
Our long-lived assets are reviewed for impairment in accordance with Statement
of Financial Accounting Standard ("SFAS") 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 asset. If such asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value. As of December 31, 2006, no
impairment losses have been identified.
REVENUE RECOGNITION
We account for revenues from software applications agreements in accordance with
Statement of Position 97-2, "Software Revenue Recognition", as amended ("SOP
97-2"). The revenue from license fees is recognized when persuasive evidence of
an agreement exists, delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is fixed or
determinable and collectibility is probable.
SOP 97-2 specifies that extended payment terms in a licensing arrangement may
indicate that the license fees are not deemed to be fixed or determinable. If
the fee is not fixed or determinable, revenue is recognized as payments become
due from the customer unless collection is not considered probable then revenue
is recognized as payments are collected from the customer, provided that all
other revenue recognition criteria have been met.
40
The arrangements that include multiple elements are usually arrangements where
we sell software products and Post Contract Support (PCS). For these multiple
elements, SOP 97-2 requires that the fair value of each component in a multiple
element arrangement will be determined based on the vendor's specific objective
evidence (VSOE) for that element, and revenue is allocated to each component
based on its fair value. SOP 98-9 requires that revenue be recognized under the
"residual method" when VSOE does not exist for all the delivered elements, VSOE
of fair value exists for all undelivered elements, and all other SOP 97-2
criteria are met. Under the residual method, any discount in the arrangement is
allocated to the delivered elements. The specific objective evidence for the PCS
is established by the price charged on separate PCS renewal contracts. The
revenue associated with the delivered elements is recognized using the residual
method discussed above.
Revenues from software licenses that require significant customization,
integration and installation that take a short period of time to complete 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 the complete contract accounting method. After delivery, if
uncertainty exists about customer acceptance of the software, license revenue is
not recognized until acceptance. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are first determined, in
the amount of the estimated loss on the entire contract. As of December 31,
2006, no such estimated losses were identified.
We're entitled to royalties from revenue sharing arrangements upon sublicensing
of our products to end-users. Royalties from revenue sharing arrangements are
recognized when such royalties are reported to us.
FOREIGN CURRENCY
Our revenues are generated in U.S. dollars ("dollar"). In addition a substantial
portion of our costs are incurred in U.S. dollars. Our management believes that
the dollar is the primary currency of the economic environment in which we are
operate. Thus, our functional and reporting currency and certain of our
subsidiaries is the U.S. dollar.
Accordingly, monetary accounts maintained in currencies other than the dollar
are remeasured into U.S. dollars in accordance with SFAS No. 52, "Foreign
Currency Translation" ("SFAS No. 52"). All gains and losses of the remeasurement
of monetary balance sheet items are reflected in the consolidated statements of
operations as financial income or expenses as appropriate.
The financial statements of Zone4Play (UK) Limited, whose functional currency
has been determined to be its local currency, have been translated into dollars.
All balance sheet amounts have been translated using the exchange rates in
effect at each balance sheet date. Statement of operation amounts have been
translated using the average exchange rate prevailing during the period. The
resulting translation adjustments are reported as a separate component of
accumulated other comprehensive loss in shareholder's equity.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Effective January 1, 2006, we adopted the provisions of SFAS No. 123 (revised
2004), "Share-Based Payment" ("SFAS 123(R)"), which requires us to measure all
employee stock-based compensation awards using a fair value method and record
the related expense in the financial statements. We elected to use the modified
prospective method of adoption which requires that compensation expense be
recorded in the financial statements over the expected requisite service period
for any new options granted after the adoption of SFAS 123(R) as well as for
existing awards for which the requisite service has not been rendered as of the
date of adoption and requires that prior periods not be restated.
41
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 loss 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 SFAS 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 carry forward of
losses and certain accrued expenses will not be realized in the foreseeable
future.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FAS 109" ("FIN 48") This financial
interpretation clarifies the accounting for uncertainty in income taxes, and
prescribes a recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on various related matters
such as derecognition, interest and penalties and disclosure. As applicable to
us, the interpretation prescribed by FIN 48 became effective commencing January
1, 2007. We are currently evaluating the impact that the adoption of FIN 48
would have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
standard establishes a framework for measuring fair value and expands related
disclosure requirements; however, it does not require any new fair value
measurement. As applicable to us, this statement will be effective as of the
year beginning January 1, 2008. We are currently evaluating the impact that the
adoption of FAS 157 would have on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." This standard permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. As applicable to us, this statement will be
effective as of the year beginning January 1, 2008. We are currently evaluating
the impact that the adoption of FAS 159 would have on our consolidated financial
statements.
42
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2006 AND RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31,
2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
REVENUES AND COST OF REVENUES
Total revenues for the three months ended March 31, 2007 increased by 58% to
$290,833 from $184,361 for the three months ended March 31, 2006. The increase
in revenues is mainly due to a new contract with Golden Palace Ltd for the
license of our multiplayer tournaments blackjack, and for marketing services of
our website www.get21.com, We also increased our revenues from existing
customers such as Two Way Media Limited and Winner.com (UK) Ltd, through
increased penetration of our products .
Cost of revenues for the three months ended March 31, 2007 increased by 36% to
$133,166 from $97,616 for the three months ended March 31, 2006. The increase in
the cost of revenues is primarily attributable to costs related to the marketing
services provided by Get21.
Total revenues for 2006 increased by 56% to $1,656,379 from $1,062,420 in 2005.
The increase in revenues due to new contract with Golden Palace Ltd for the
license of our multiplayer tournaments blackjack, and for marketing services of
our website www.get21.com, and an increase in revenues from existing customers
such as Two Way TV Australia, Two Way Media Limited and Winner.com (UK) Ltd.,
and NDS Limited offset by licenses revenues to Cosmotrade Investment Ltd, CTE,
and Cablevision that we had in 2005, and a decrease in revenues from the Gaming
Channel.
Cost of revenues for 2006 increased by 42% to $426,052 from $299,958 for 2005.
Gross profit increased by 61% for 2006 to $1,230,327 from $762,462 in 2005. The
increase in the cost of revenues is attributable to amortization of the
technology which was acquired on April 2005 by acquiring the minority shares in
our SMS-TV subsidiary, MIXTV Ltd and to costs related to the marketing services
provided by our indirect subsidiary Get21 Ltd.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended March 31, 2007
increased by 10% to $739,037 from $673,454 for the three months ended March 31,
2006. The increase is primarily attributable to our continuing efforts in the
United Kingdom, which involve adapting our software to new systems and platforms
(ITV, mobile, internet, and participation TV by our subsidiary, MixTV Ltd.),
development of our multi player black jack tournaments application, recruitment
of employees, increased general and administrative expenses allocated to the
research and development department due to its growth, and due to decrease of
the $US dollar exchange rate to the New Israeli Shekel ("NIS"), which increased
the dollars amount of our NIS expenses.
Research and development expenses for 2006 increased by 15% to $2,923,572 from
$2,549,635 for 2005. The increase is primarily attributable to our new projects
in the United Kingdom, which involve adapting our software to new systems and
platforms (ITV, mobile, internet, and participation TV by our subsidiary, MixTV
Ltd.), development of our multi player black jack tournaments application,
recruitment of employees, increased general and administrative expenses
allocated to the research and development department due to its growth and due
to accounting charges related to stock options under SFAS 123(R).
SALES AND MARKETING
Sales and marketing expenses for the three months ended March 31, 2007 increased
by 270% to $627,872 from $169,795 for the three months ended March 31, 2006. The
increase in sales and marketing expenses is primarily attributable to our
marketing efforts through our get21.com site through Get21.
43
Sales and marketing expenses for 2006 increased by 202% to $2,618,371 from
$867,473 for 2005. The increase in sales and marketing expenses is primarily
attributable to a portion of the amortization of deferred compensation to stock
options granted to our Chief Executive Officer in the amount of $926,036 and to
accounting charges related to stock options under SFAS 123(R), and due to our
marketing preparations for the launch of our get21.com site through our indirect
subsidiary Get21
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended March 31, 2007
increased by 10% to $274,521 from $250,022 for the three months ended March 31,
2006. The increase in general and administrative expenses is primarily
attributable to amortization of stock-based compensation related to the general
and administrative department and directors and to our legal expenses.
General and administrative expenses for 2006 increased by 60% to $2,098,142 from
$1,308,735 for 2005. The increase in general and administrative expenses is
primarily attributable ,to salary increases, additional expenses in relation to
the possible admission of our shares to trade on AIM, a market operated by the
London Stock Exchange plc, to a portion of the amortization of deferred
compensation to stock options granted to our Chief Executive Officer in the
amount of $231,509, to expenses related to evaluation of the spin off of our
multi player black jack tournaments application and due to accounting charges
related to stock options under SFAS 123(R).
FINANCIAL EXPENSES, NET
Financial (income) expenses, net for 2006 were $9,181 compared to $94 financial
expenses. The increase in the financial income is primarily attributable to
interest received from bank deposits offset by bank fees and exchange rates
between the U.S. dollar and the NIS and the British pound.
NET LOSS AND NET LOSS PER SHARE
Net loss for the three months ended March 31, 2007 was $1,408,209 as compared to
net loss of $1,003,857 for the three months ended March 31, 2006. Net loss per
share for the three months ended March 31, 2007 was $0.045 as compared to $0.041
for the three months ended March 31, 2006. The net loss increased for the three
months ended March 31, 2006 mainly due to the increase in the operating expenses
and especially due to our marketing efforts through our get21.com site through
Get21 offset by the share of Golden Palace as the minority shareholder in the
loss of our indirect subsidiary RNG Gaming. Our weighted average number of
shares of common stock used in computing basic and diluted net loss per share
for the three months ended March 31, 2007 was 32,319,031 compared with
24,543,867 for the three months ended March 31, 2006. The increase was due to
the issuance of additional shares in two private placements in March 2006.
We incurred a net loss of $6,424,951 ($0.21 per share) in 2006 compared to a net
loss of $3,965,375 ($0.17 per share) in 2005. The increased net loss is
primarily attributable to our increased operating expenses. Our weighted average
number of shares of common stock outstanding at December 31, 2005 was 23,524,407
shares versus 30,400,789 shares at December 31, 2006. The increase is mainly
attributable to the issuance of 8,234,485 shares of our common stock which were
sold in two private placements in March 2006, to the issuance of 30,000 shares
of our common stock which were issued to a service provider pursuant to a
consulting contract and to 14,583 shares of our common stock issued pursuant to
an option exercises by employees.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2007, total current assets were $2,989,908 and total current
liabilities were $1,391,591. On March 31, 2007, we had a working capital surplus
of $1,598,317 and an accumulated deficit of $14,785,848. We finance our
operations and plan to continue doing so with a combination of stock issuances
and revenues from product sales. We had working capital of $1,598,317 on March
31, 2007 compared with a working capital of $2,756,780 on December 31, 2006.
Cash and cash equivalents on March 31, 2007 were $1,845,526, a decrease of
$1,173,756 from the $3,019,282 reported on December 31, 2006. The decrease in
cash is primarily attributable to the net loss in the three months ended March
31, 2007.
44
Operating activities used cash of $1,203,149 in the three months ended March 31,
2007. Cash used by operating activities in the three months ended March 31, 2007
results primarily from a net loss of $1,408,209, a $25,197 increase in accounts
receivable, offset by a $150,758 of stock based compensation ,$173,421 of
depreciation, of which $83,333 is related to amortization of acquired
technology, and the rest of which is related to computers, and other equipment
offset by decrease of $105,285 in accounts payable and $56,371 of increase in
minority interests in losses of subsidiaries due to the share of Golden Palace
as the minority shareholder in the loss of our indirect subsidiary RNG Gaming.
Operating activities used cash of $4,270,617 in the year ended December 31,
2006. Cash used by operating activities in the year ended December 31, 2006
results primarily from a net loss of $6,424,951, a $916,630 increase in account
receivables, offset by a $1,823,842 increase in amortization of deferred
compensation, $655,737 of depreciation and amortization, $471,862 increase in
accrued expenses and other liabilities, and $79,750 of compensation related to
issuance of common stock and warrants to a service providers.
Investing activities used cash of $10,935 in the three months ended March 31,
2007. Cash used by investing activities in the three months ended March 31, 2007
results from the purchase of computer and software equipment.
Investing activities used cash of $245,028 in the year ended December 31, 2006.
Cash used by investing activities in the year ended December 31, 2006 results
from the purchase of computer and software equipment and office furnishings.
Financing activities used cash amount of $39,949 during the three months ended
March 31, 2007. Cash used by financing activities for the three month period
ended March 31, 2007 results primarily from short term bank credit.
Financing activities generated cash of $6,932,615 during the year ended December
31, 2006. Cash provided by financing activities for the year ended December 31,
2006 results primarily from a stock issuance offset slightly by repayments of
short term loans.
On January 27, 2005, we completed a private offering to accredited investors
under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506
promulgated thereunder, pursuant to which we sold an aggregate of 2,659,998
shares of common stock, $0.01 par value per share, for aggregate gross proceeds
of $3,989,999. We agreed to prepare and file with the Securities and Exchange
Commission a registration statement covering the resale of the common stock on
or before February 17, 2005 for certain investors. The registration statement
became effective on April 29, 2005 and therefore no liquidated damages needed to
be paid.
On March 24, 2006, pursuant to Section 4(2) of the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder, we completed an offering
thatconsisted of 6,234,485 units sold at a price of $.725 per unit. Each unit is
comprised of one share of our common stock (the "March 24 Shares") and a warrant
to purchase one share at an exercise price of $1.125 per share for a period of
36 months ("March 24 Warrants"), to certain accredited investors ("March 24
Investors") for aggregate gross proceeds of $4,520,000.
On March 30, 2006, pursuant to Section 4(2) of the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder, we completed an offering
thatconsisted of 2,000,000 units sold at a price of $1.00 per unit. Each unit is
comprised of one share of our common stock ("March 30 Shares") and a warrant to
purchase one share at an exercise price of $1.35 per share for a period of 36
months (" March 30 Warrants"), to certain accredited investors ("March 30
Investors") for aggregate gross proceeds of $2,000,000.
We agreed to prepare and file with the Securities and Exchange Commission a
registration statement covering the resale of the March 24 Shares and March 30
Shares and the shares underlying the March 24 Warrants and March 30 Warrants.
The registration statement became effective on June 6, 2006 and therefore no
liquidated damages needed to be paid.
45
On September 14, 2006, Gaming, RNG, and Golden Palace Limited ("Golden Palace"),
entered into an agreement, which was amended on January 10, 2007, under which
Golden Palace has agreed to invest $600,000 in RNG in return for 20% of the
ordinary shares of RNG. Pursuant to terms of this agreement, Golden Palace has
an option to acquire an additional 30% of the ordinary shares of RNG (but not
more than 50% of RNG or more than the amount owned by Gaming) at a price of
$100,000 per each additional percentage interest of the ordinary shares of RNG,
if the option is exercised on or before September 14, 2008; $180,000 per each
additional percentage interest of the ordinary shares of RNG, if the option is
exercised upon RNG becoming a public traded company or upon the completion of a
private placement of securities for consideration of not less than $4,000,000 to
third parties, at a company valuation of $18,000,000. Such option can be
exercised by Golden Palace during a period commencing on the date of the
agreement and terminating upon the earliest of: (1) September 14, 2008; (2) RNG
becoming a public company; or (3) completion by RNG of a private placement for
securities for consideration of not less than $4,000,000 by third parties, at a
company valuation of $18,000,000 We currently hold 80% of RNG's share capital.
RNG is accounted under the equity method and accordingly we consolidate its
financial statements in which the minority interest represents Golden Palace
current holdings. We have recorded the call option granted to Golden Palace as a
derivative in the long -term liability section. The call option is being
measured at fair value and it is marked to market in accordance with "Accounting
for Freestanding Derivative Financial Instruments Indexed to, and Potentially
Settled in, the Stock of a Consolidated Subsidiary" (EITF 00-6).
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. We will attempt to reduce our operating expenses from $450,000 a
month to below $250,000 per month and have already downsized our workforce.
There can be no assurance that acceptable financing to fund our ongoing
operations can be obtained on suitable terms, if at all. If we are unable to
obtain the financing necessary to support our operations, we may be unable to
continue as a going concern. In that event, we may be forced to cease operations
and our stockholders could lose their entire investment in our company.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A majority 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 bulk of our expenses are
denominated in currencies other than the U.S. dollar, principally the British
pound and the Israeli NIS. Increases in the volatility of the exchange rates of
the British pound and the NIS versus the U.S. dollar could have an adverse
effect on the expenses and liabilities that we incur when remeasured into U.S.
dollars. We review our monthly expected non-U.S. dollar denominated expenditures
and look to hold equivalent non-U.S. dollar cash balances to mitigate currency
fluctuations and this has resulted in a foreign exchange expense of $14,332 and
$58,655 in 2005 and 2006, respectively.
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. We expect to continue to experience the effect of
exchange rate fluctuations on an annual and quarterly basis, and currency
fluctuations could have a material adverse impact on our results of operations.
46
We invest our cash in high grade certificates of deposits, U.S. government and
agency securities and corporate bonds. Cash held by foreign subsidiaries is
generally held in short-term time deposits denominated in the local currency.
Interest income and gains from bank deposits were $67,836 in 2006 and $14,238 in
2005.
We are exposed primarily to fluctuations in the level of U.S. interest rates. To
the extent that interest rates rise, fixed interest investments may be adversely
impacted, whereas a decline in interest rates may decrease the anticipated
interest income for variable rate investments.
We are exposed to financial market risks, including changes in interest rates.
We typically do not attempt to reduce or eliminate our market exposures on our
investment securities because the majority of our investments are short-term. We
do not have any derivative instruments.
DESCRIPTION OF PROPERTY
On August 31, 2004, we entered into an agreement to lease premises located at
Atidim Park in Tel-Aviv, Israel. This location consists of approximately 750
square meters of office space and the rent is approximately $7,500 per month, as
of December 31, 2006. The term of this lease is for five years beginning
December 1, 2004. The rent on this property increases once every 12 months by 5%
of the space rate ($0.70 per sq/ft). We do not own or lease any real property
elsewhere. In June 2006, we entered into an agreement to rent an additional 270
square meters at the same building on the same terms as the first agreement and
for the same period which was terminated on April 1, 2007. We believe that our
current space is adequate for our needs.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 2005, we entered into an Interactive Fixed Odds Betting Services
Agreement (the "Agreement") with Winner.Com (UK) Ltd. ("Winner") and Two Way
Media Limited ("TWM"). TWM, which establishes fixed odds betting services on
digital television, the Internet, mobile telecommunications networks and other
digital platforms, engaged us 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. Shimon Citron, our director and former Chief Executive Officer, is a
director and shareholder of Winner. Mr. Citron and his family beneficially own
60 percent of the outstanding shares in Winner. In 2006, we received $181,742
from TWM as a result of the Agreement. We did not receive any payments from Mr.
Citron, his family or Winner in connection with the Agreement.
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 as
reported on the Over-the-Counter Bulletin Board for each quarter in the last two
fiscal years and the first two quarters of fiscal year 2007. These quotations
reflect prices between dealers, do not include retail mark-ups, markdowns, and
commissions and may not necessarily represent actual transactions. The prices
are adjusted to reflect all stock splits.
HIGH LOW
First Quarter Ended March 31, 2007 $0.45 $0.16
Second Quarter Ended June 30, 2007 $0.17 $0.09
Third Quarter through July 12, 2007 $0.10 $0.09
FISCAL YEAR ENDED DECEMBER 31, 2006
First Quarter Ended March 31, 2006 $1.11 $0.45
Second Quarter Ended June 30, 2006 $1.17 $0.71
Third Quarter Ended September 30, 2006 $0.85 $0.60
Fourth Quarter Ended December 31, 2006 $0.65 $0.35
FISCAL YEAR ENDED DECEMBER 31, 2005
First Quarter Ended March 31, 2005 $1.84 $1.74
Second Quarter Ended June 30, 2005 $1.65 $1.48
Third Quarter Ended September 30, 2005 $1.20 $1.10
Fourth Quarter Ended December 31, 2005 $0.70 $0.68
As of June 30, 2007, there were 73 stockholders of record of our common
stock.
47
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 provides information about the securities authorized for
issuance under our equity compensation plans as of December 31, 2006. Our only
equity compensation is our 2004 Global Share Option Plan.
NUMBER OF SECURITIES
NUMBER OF SECURITIES TO WEIGHTED AVERAGE REMAINING AVAILABLE FOR FUTURE
BE ISSUED UPON EXERCISE OF EXERCISE PRICE OF ISSUANCE UNDER EQUITY
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, COMPENSATION PLANS (EXCLUDING
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS SECURITIES REFLECTED IN COLUMN (A))
------------- ------------------- ------------------- -----------------------------------
Equity compensation
plans approved by
security holders 7,653,046 $1.01 2,209,954
Equity compensation
plans not approved by
security holders -- -- --
Total 7,653,046 $1.01 2,209,954
2004 GLOBAL SHARE OPTION PLAN
At the annual meeting of our stockholders held on June 20, 2005, our
stockholders approved our 2004 Global Share Option Plan in substantially the
form attached to the proxy statement filed with the SEC on April 29, 2005. 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. The 2004 Global Share Option Plan was
effective as of its approval by our board of directors on 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.
On May 4, 2006, our board of directors approved an amendment to our 2004 Global
Share Option Plan, under which the number of shares reserved by us for the
purpose of the Plan was increased from 5,000,000 to 8,000,000.
48
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.
EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION IN FISCAL 2006
The following Summary Compensation Table sets forth information concerning
compensation during fiscal 2006 for services in all capacities awarded to,
earned by or paid to Mr. Citron, and Mr. Levy who served as our Chief Executive
Officer and Chief Financial Officer, respectively throughout the period. Mr.
Citron ceased to be our Chief Executive Officer on May 8, 2007. No other
executive officers who were serving as our executive officers at the end of
fiscal years 2006 received more than $100,000 in salary and bonus in fiscal
years 2006, and there were no individuals for whom disclosure would have been
provided but for the fact that the individual was not serving as an executive
officer at the end of fiscal years 2006.
NAME AND PRINCIPAL OPTION
POSITION YEAR SALARY BONUS AWARDS(1) TOTAL
------------------- -------- ---------- --------- --------- -------
Shimon Citron,
Chief Executive
Officer 2006 190,408 305,727 1,157,545 1,653,680
Uri Levy,
Chief financial
Officer 2006 114,318 -0- 111,130 225,448
(1) The dollar value recognized for the stock option awards was determined in
accordance with SFAS123(R). For a disclosure of the assumptions made in the
valuation please refer to footnote 2(i) in our financial statements filed under
this prospectus.
OPTION GRANTS IN FISCAL 2006
On April 3, 2006, pursuant to Section 4(2) of the Securities Act of 1933, as
amended, we issued to a company, which is owned by our then Chief Executive
Officer, an option to buy 1,863,000 shares of our common stock with an exercise
price of $1.15 per share in consideration for services provided by the Chief
Executive Officer to us. The option vests in the following manner: 1,500,750
shares on July 1, 2006, 155,250 shares on October 1, 2006, 155,250 shares on
January, 1, 2007 and 51,750 shares on April 1, 2007.
On April 3, 2006, we issued to our Chief Financial Officer 400,000 options
pursuant to our 2004 Global Share Option Plan. The option vests in sixteen equal
quarterly installments of 25,000 shares beginning on July 1, 2006.
On April 3, 2006, we issued to our then Chief Operating Officer 400,000 options
pursuant to our 2004 Global Share Option Plan. The option vests in sixteen equal
quarterly installments of 25,000 shares beginning on July 1, 2006.
49
COMPENSATION OF DIRECTORS
We have agreements with Shlomo Rothman and Oded Zucker, pursuant to which we
have agreed to pay each of these two directors a director's fee of $7,000 per
annum, payable in quarterly installments during the director's tenure on our
board. In addition, we have agreed to pay them $750 per board meeting and to
reimburse them for reasonable and necessary expenses incurred in connection with
attendance at meetings of the board of directors and other Zone4Play business.
In accordance with a resolution unanimously approved by our board of directors
on March 31, 2005, we granted to each of Messrs. Rothman and Zucker options to
purchase 192,261 shares of our common stock, in each case pursuant to and in
accordance with our 2004 Global Share Option Plan, as consideration for their
service on our board of directors. The options granted to Messrs. Rothman and
Zucker have an exercise price equal to $1.00 per share, have a term of ten (10)
years, and are exercisable in three equal annual installments commencing on May
1, 2005.
Upon his appointment as a director of our company, we also agreed to grant Adiv
Baruch an option to purchase up to 192,261 shares of our common stock under the
terms of our 2004 Global Share Option Plan ("Option") at an exercise price per
share of $1. The Option vests in three equal annual installments, whereby Mr.
Baruch 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 Mr. Baruch 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.
In April of 2006, in recognition of his services to us, we granted Adiv Baruch
an additional 200,000 options to purchase 200,000 shares of our common stock at
an exercise price of $0.725 per share for a period of 3 years.
On October 22, 2006, we granted to two of our non-employee directors, an option
under the terms of our 2004 Global Share Option Plan, to purchase 113,537 shares
of Common stock of our at an exercise price of $ 1.15 per share. Each director's
right to exercise such option will vest in 2 equal annual installments during a
period of three years commencing in 30.10.07 provided that our agreement with
such director does not terminate earlier
On December 7, 2006, we granted to two of our non-employee directors, an option
under the terms of our 2004 Global Share Option Plan, to purchase 192,261 shares
of our common stock at an exercise price of $1 per share. Each director's right
to exercise such option will vest in 3 equal annual installments during a period
of three years commencing in April 3, 2006, provided that our agreement with
such director does not terminate earlier..
The following table provides information regarding compensation earned by,
awarded or paid to each person for serving as a non-employee director during the
year ended December 31, 2006.
FEES EARNED OR OPTION
NAME PAID IN CASH AWARDS (1) TOTAL
----------------- ----------------- ------------------- ---------------
Shlomo Rothman (2) $ 7,000 77,097 84,097
Oded Zucker (3) $ 7,000 77,097 84,097
Adiv Barcuh (4) $ 0 20,925 20,925
Ronen Zadok (5) $ 0 9,598 9,598
Liron Edrey (6) $ 0 9,598 9,598
(1) The dollar value recognized for the stock option awards was determined in
accordance with SFAS123(R). For a disclosure of the assumptions made in the
valuation please refer to footnote 2(i) in our financial statements filed under
this prospectus.
(2) Mr. Shlomo Rothman had 305,798 options outstanding as of December 31, 2006.
50
(3) Mr. Oded Zucker had 305,798 options outstanding as of December 31, 2006.
(4) Mr. Adiv Baruch had 392,261 options outstanding as of December 31, 2006.
(5) Mr. Ronen Zadok had 192,261 options outstanding as of December 31, 2006.
Ronen Zadok resigned from our board on May 8, 2007.
(6) Mr. Liron Edery had 192,261 options outstanding as of December 31, 2006.
Liron Edrey resigned from our board on July 11, 2007.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
On December 31, 2003, Zone 4 Play (Israel) Ltd., a wholly-owned Israeli
subsidiary (the "Subsidiary") of our company, and Mr. Uri Levy, the Chief
Financial Officer of the Company (the "Executive") entered into an employment
agreement (the "Agreement"). Pursuant to the agreement the subsidiary agreed to
pay the Executive an initial base salary of NIS 15,000 for the first 3 months of
employment and thereafter NIS 20,000 per month. The Subsidiary shall also
contribute each month an amount equal to 13.33% of the Executive's monthly
salary as a managers' insurance for the benefit of the Executive and 2.5% of the
Executive's monthly salary for disability insurance. The Subsidiary shall also
contribute each month an amount equal to 7.5% of the Executive's monthly salary
as a Continuing Education Fund for the benefit of the Executive and shall grant
other benefits such as use of a car and cellular phone. On May 1, 2005 the
parties amended the agreement in which the Executive shall be entitled to a base
salary of NIS 25,000 as of May 1, 2005 and NIS 30,000 as of January 1, 2006.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for Zone 4
Play, Inc. by Z.A.G./S&W LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of Zone 4 Play, Inc. and its subsidiaries
as of December 31, 2006 and the for year then ended, appearing in this
Prospectus and the Registration Statement of which it is a part, have been
audited by Ziv Haft, a member of the BDO Network, independent registered public
accounting firm, as set forth in their report thereon appearing elsewhere
herein, and are included herein in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Zone 4 Play, Inc. and its subsidiaries
as of December 31, 2005 and 2004, and for each of the two years in the period
ended December 31, 2005, appearing in this Prospectus and the Registration
Statement of which it is part, have been audited by Kost Forer Gabbay &
Kasierer, a member of Ernst & Young Global, independent registered public
accounting firm , as set forth in their report thereon appearing elsewhere
herein, and are included herein in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
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 100 F Street, N.E., Washington, DC
20549. Copies of such material can be obtained from the Public Reference Section
of the SEC at 100 F Street, N.E., Washington, DC 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.
51
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.
52
ZONE 4 PLAY, INC.
AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
IN U.S. DOLLARS
Unaudited Interim Financial Statements For the Period Ended March 31, 2007
PAGE
------------
CONSOLIDATED BALANCE SHEETS F - 2 - F - 3
CONSOLIDATED STATEMENTS OF OPERATIONS F - 4
CONSOLIDATED STATEMENTS OF CASH FLOWS F - 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 6 - F - 10
Audited Financial Statements For the Period Ended December 31, 2006
PAGE
------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F - 11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F - 12
CONSOLIDATED BALANCE SHEETS F - 13 - F - 14
CONSOLIDATED STATEMENTS OF OPERATIONS F - 15
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY F - 16
CONSOLIDATED STATEMENTS OF CASH FLOWS F - 17 - F - 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 19 - F - 41
F - 1
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS
MARCH 31, DECEMBER 31
---------- ----------
2007 2006
---------- ----------
UNAUDITED AUDITED
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,845,526 $3,019,282
Trade receivables 876,455 1,005,161
Other accounts receivable, prepaid expenses , and related parties 267,927 164,648
---------- ----------
TOTAL current assets 2,989,908 4,189,091
---------- ----------
SEVERANCE PAY FUND 117,422 104,729
---------- ----------
PROPERTY AND EQUIPMENT, NET 619,887 699,040
---------- ----------
ACQUIRED TECHNOLOGY, NET 357,308 440,641
---------- ----------
Total assets $4,084,525 $5,433,501
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 2
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS
MARCH 31, DECEMBER 31
------------ ------------
2007 2006
------------ ------------
UNAUDITED AUDITED
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit $ 56,699 $ 16,750
Trade payables 331,057 436,342
Employees and payroll accruals 448,968 427,106
Accrued expenses and other liabilities 554,867 552,113
------------ ------------
TOTAL current liabilities 1,391,591 1,432,311
------------ ------------
Minority Interest 82,003 138,374
Call option 114,850 114,850
Accrued Severance pay 287,251 281,834
------------ ------------
TOTAL Long term liabilities 484,104 535,058
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY :
Common stock of $ 0.001 par value:
Authorized: 75,000,000 shares at March 31, 2007 and December 31,
2006; Issued and outstanding: 32,319,031 shares
at March 31, 2007 and December 31,2006, respectively 32,318 32,318
Additional paid-in capital 16,951,154 16,800,396
Accumulated other comprehensive loss (18,439) (18,588)
Deficit accumulated during the development stage (14,756,203) (13,347,994)
------------ ------------
TOTAL stockholders' equity 2,208,830 3,466,132
------------ ------------
TOTAL liabilities and stockholders' equity $ 4,084,525 $ 5,433,501
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F - 3
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS (EXCEPT SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2007 2006
----------- -----------
UNAUDITED
---------------------------
Revenues from software applications $ 290,833 $ 184,361
----------- -----------
Cost of revenues 133,166 97,616
----------- -----------
Gross profit 157,667 86,745
----------- -----------
Operating expenses:
Research and development 739,037 673,454
Selling and marketing 627,872 169,795
General and administrative 274,521 250,022
----------- -----------
Total operating expenses 1,641,430 1,093,271
----------- -----------
Operating loss 1,483,763 1,006,526
Financial expenses, net 4,827 2,669
----------- -----------
Other income 24,010 -
Minority interests in losses of subsidiaries 56,371 -
----------- -----------
Net loss $ 1,408,209 $ 1,003,857
=========== ===========
Basic and diluted net loss per share $ 0.044 $ 0.041
=========== ===========
Weighted average number of shares of Common stock
used in computing basic and diluted net loss
per share 32,319,031 24,543,867
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 4
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS
THREE MONTHS ENDED
MARCH 31,
----------------------------
2007 2006
----------- -----------
UNAUDITED
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,408,209) $(1,003,857)
Adjustments required to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 173,421 162,404
Increase in trade and other accounts receivable
prepaid expenses, and related parties 25,197 48,110
Stock-based compensation 150,758 179,643
Decrease in trade payables (105,285) (94,410)
Increase (decrease) in employees and payroll accruals 21,862 (5,738)
Decrease in accrued expenses and other liabilities 2,754 (26,684)
Accrued severance pay, net (7,276) 4,246
Minority interests in losses of subsidiaries (56,371)
Compensation related to issuance of common
stock to a service provider - 18,000
----------- -----------
Net cash used in operating activities (1,203,149) (718,286)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,935) (5,019)
----------- -----------
Net cash used in investing activities (10,935) (5,019)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares and warrants, net - 6,462,001
Short-term bank credit, net 39,949 (7,703)
----------- -----------
Net cash provided by financing activities 39,949 6,454,298
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 379 84
----------- -----------
Increase (decrease) in cash and cash equivalents (1,173,756) 5,731,077
Cash and cash equivalents at the beginning of the period 3,019,282 604,035
----------- -----------
Cash and cash equivalents at the end of the period $ 1,845,526 $ 6,335,112
=========== ===========
NON-CASH TRANSACTION
Purchase of property and equipment $ - $ 80,081
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 463 $ 680
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 1: GENERAL
a. Zone4Play Inc. ("the Company") was incorporated under the laws of the
State of Nevada on April 23, 2002 as Old Goat Enterprises, Inc. On
February 1, 2004, the Company acquired Zone4Play, Inc. ("Zone4Play
(Delaware))" (see b. below), which was incorporated under the laws of
the State of Delaware on April 2, 2001, and subsequently changed the
Company's name to Zone4Play, Inc., a Nevada corporation. The Company
develops and markets interactive games applications for Internet,
portable devices and interactive TV platforms.
The Company conducts its operations and business with and through its
subsidiaries, (1) Zone4Play (Delaware), (2) Zone4Play Limited, an
Israeli corporation incorporated in July 2001, which is engaged in
research and development and marketing of the applications, (3)
Zone4Play (UK) Limited, a United Kingdom corporation, incorporated in
November 2002, which is engaged in marketing of the applications, (4)
MixTV Ltd., an Israeli corporation which develops and markets
participation TV games applications., and (5) Gaming Ventures Plc
("Gaming") , a company incorporated in the Isle of Man .
The Company's shares of common stock are currently traded on the OTC
Bulletin Board under the trading symbol "ZFPI.OB."
b. The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The
Company has suffered losses from operations and negative cash flows
from operations since inception. For the three months ended March 31,
2007 the Company incurred a loss from operations of $1,408,209,
negative cash flows from operations of $1,203,149 and has accumulated
deficit of $14,756,203 as of March 31, 2007.
Despite its negative cash flows, the Company has been able to secure
financing in order to support its operation to date, based on shares
issuances. Management believes that, despite the financial hurdles and
funding uncertainties going forward, it has under development a
business plan that, if successfully funded and executed as part of a
financial restructuring can significantly improve operating results.
The consolidated financial statements do not include any adjustments
that may result from the outcome of this uncertainty.
c. According to the agreement between the Company and Zone4Play
(Delaware), the Company issued 10,426,190 shares of common stock to
the former holders of equity interest in Zone4Play (Delaware). The
acquisition has been accounted for as a reverse acquisition, whereby
the Company was treated as the acquiree and Zone4Play (Delaware) as
the acquirer, primarily because Zone4Play (Delaware) shareholders
owned a majority, approximately 58% of the Company's common stock,
upon completion of the acquisition. Immediately prior to the
consummation of the transaction, the Company had no material assets
and liabilities, hence the reverse acquisition is treated as a capital
stock transaction in which Zone4Play (Delaware) is deemed to have
issued the common stock held by the Company shareholders for the net
assets of the Company. The historical financial statements of
Zone4Play (Delaware) became the historical financial statements of the
Company.
F - 6
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 1:- GENERAL (CONT.)
d. 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
$ 14,756,203 as of March 31, 2007. There is no assurance that
profitable operations, if ever achieved, could be sustained on a
continuing basis.
The Company plans to continue to finance its operations with a
combination of stock issuance and private placements and revenues from
product sales.
e. Concentration of risk that may have a significant impact on the
Company:
The Company derived 94% of its revenues from four major customers (see
Note 4b).
NOTE 2: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments including
non-recurring adjustments attributable to reorganization and severance and
impairment considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2007 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2007. For further information, reference is made to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2006.
The interim condensed consolidated financial statements incorporate the
financial statements of the Company and all of its subsidiaries. All
significant intercompany balances and transactions have been eliminated on
consolidation.
The significant accounting policies applied in the annual consolidated
financial statements of the Company as of December 31, 2006 contained in
the Company's Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission ("SEC") on March 30, 2007, have been applied
consistently in these unaudited interim condensed consolidated financial
statements.
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES
a. The significant accounting policies applied in the annual consolidated
financial statements of the Company as of December 31, 2006 are
applied consistently in these consolidated financial statements.
b. These financial statements should be read in conjunction with the
audited annual financial statements of the Company as of December 31,
2006 and their accompanying notes.
F - 7
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. Accounting for stock-based compensation
Effective January 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised
2004) ("SFAS 123(R)"), "Share-Based Payment," and Staff Accounting
Bulletin No. 107 ("SAB 107"), which was issued in March 2005 by the
SEC. SFAS 123(R) addresses the accounting for share-based payment
transactions in which the Company obtains employee services in
exchange for equity instruments of the Company. This statement
requires that employee equity awards be accounted for using the
grant-date fair value method. SAB 107 provides supplemental
implementation guidance on SFAS 123(R), including guidance on
valuation methods, classification of compensation expense, income
statement effects, disclosures and other issues.
The following table shows the total stock-based compensation charge
included in the Consolidated Statement of Operations:
THREE MONTHS ENDED
MARCH 31,
---------------------
2007 2006
-------- --------
(UNAUDITED) (UNAUDITED)
-------- --------
Research and development expenses 57,777 79,887
Sales and marketing expenses 11,529 27,122
General and administrative expenses 81,452 72,634
-------- --------
Total $150,758 $179,643
======== ========
The fair value for these options was estimated at the grant date using
a Black-Scholes option pricing model as allowed Under SFAS 123(R).
A summary of the Company's share option activity to employees and
directors, and related information is as follows:
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
2007 2006
-------------------- --------------------
UNAUDITED UNAUDITED
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE
--------- ---- --------- ----
$ $
---- ----
Outstanding at the beginning of the year 7,653,046 1.01 2,194,522 0.68
Granted - - 192,261 1.00
Forfeited - - 40,000 0.70
--------- ---------
Outstanding at the end of the quarter 7,653,046 1.01 2,346,783 0.71
========= ==== ========= ====
Options exercisable at the end of the quarter 4,009,491 0.95 1,136,521 0.63
========= ==== ========= ====
F - 8
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Company applies Emerging Issues Task Force 96-18, "Accounting for
Equity Instruments that Are Issued to Other than Employees for
Acquiring or in Conjunction with Selling, Goods or Services" ("EITF
96-18") with respect to options and warrants issued to non-employees.
NOTE 4: SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION
Summary information about geographic areas:
The Company manages its business on the basis of one reportable segment
(see Note 1 for a brief description of the Company's business) and follows
the requirements of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information".
a. The following is a summary of operations within geographic areas,
based on the location of the customers:
THREE MONTHS ENDED
MARCH 31,
---------------------
2007 2006
-------- --------
TOTAL REVENUES
---------------------
England $ 88,891 $ 38,734
Australia 87,500 87,500
Antigua and Barbuda 74,863 -
United States 39,150 56,709
Others 429 1,418
-------- --------
$290,833 $184,361
======== ========
b. Major customer data as a percentage of total revenues:
THREE MONTHS ENDED
MARCH 31,
------------------
2007 2006
------- -------
Customer A 30% 47%
======= =======
Customer B 28% 14%
======= =======
Customer C 26% -
======= =======
Customer D 10% 21%
======= =======
F - 9
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 5: RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). This standard
establishes a framework for measuring fair value and expands related
disclosure requirements; however, it does not require any new fair value
measurement. As applicable to the Company, this statement will be effective
as of the year beginning January 1, 2008. The Company is currently
evaluating the impact that the adoption of SFAS. 157 would have on its
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." ("SFAS 159") This standard
permits entities to choose to measure many financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which
the fair value option has been elected are reported in earnings. As
applicable to the Company, this statement will be effective as of the year
beginning January 1, 2008. The Company is currently evaluating the impact
that the adoption of SFAS 159 would have on its consolidated financial
statements.
NOTE 6: SUBSEQUENT EVENTS
On May 8, 2007, the board of directors removed the Chief Executive Officer
and President from his positions. The Chief Financial Officer has been
appointed as acting Chief Executive Officer and President of the Company in
addition to his current position as Chief Financial Officer. On the same
day the CEO has filed a lawsuit against the Company and its directors in
labor court, to prevent his dismissal.
F - 10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF
ZONE4PLAY INC.
We have audited the accompanying consolidated balance sheet of Zone4Play
Inc. (the "Company") and its subsidiaries as of December 31, 2006 and the
related consolidated statement, of operations changes in stockholder's equity
and cash flows for the year ended December 31, 2006. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with 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 includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit 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, 2006 and the consolidated results of its
operations and cash flows for the year ended December 31, 2006, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 2I to the consolidated financial statements, the Company
changed the manner in which it accounts for share-based compensation effective
January 1, 2006 to conform with FASB Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment" In addition, as discussed in Note
1a to the consolidated financial statements, the Company ceased to report as a
development stage enterprise in accordance with SFAS No.7" Accounting and
Reporting by Development Stage Enterprises"
Tel Aviv, Israel
March 29 2007
/s/ Ziv Haft
------------
Ziv Haft
Certified Public Accountants (Isr.)
BDO Member Firm
F - 11
[ERNST & YOUNG LOGO]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF
ZONE4PLAY INC.
We have audited the accompanying consolidated balance sheets of Zone4Play
Inc. (the "Company") and its subsidiaries as of December 31, 2005 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the two years in the period ended December 31, 2005.
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
audits 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 includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2005 and the consolidated results of their
operations, and their cash flows for each of the two years in the period ended
December 31, 2005, in conformity with U.S. generally accepted accounting
principles
/S/ KOST FORER GABBAY & KASIERER
------------------------------------
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
April 10, 2006
F - 12
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
DECEMBER 31,
-------------------------
2006 2005
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,019,282 $ 604,035
Trade receivables 1,005,161 132,921
Other accounts receivable, prepaid expenses and related parties (Note 3) 164,648 120,186
----------- -----------
TOTAL current assets 4,189,091 857,142
----------- -----------
SEVERANCE PAY FUND 104,729 110,517
----------- -----------
PROPERTY AND EQUIPMENT, NET (Note 4) 699,040 724,828
----------- -----------
ACQUIRED TECHNOLOGY, NET (Note 5) 440,641 773,973
----------- -----------
Total assets $ 5,433,501 $ 2,466,460
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 13
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
DECEMBER 31,
----------------------------
2006 2005
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit (Note 6) $ 16,750 $ 17,747
Trade payables 436,342 430,037
Employees and payroll accruals 427,106 349,200
Accrued expenses and other liabilities 552,113 80,251
------------ ------------
TOTAL current liabilities 1,432,311 877,235
------------ ------------
LONG TERM LIABILITIES:
Minority Interest 138,374 -
Call option (Note 9.b.11) 114,850 -
Accrued Severance pay 281,834 304,545
------------ ------------
TOTAL long term liabilities 535,058 304,545
------------ ------------
TOTAL liabilities 1,967,369 1,181,780
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)
STOCKHOLDERS' EQUITY (Note 9):
Common stock of $ 0.001 par value:
Authorized: 75,000,000 shares at December 31, 2006 and 2005; Issued
and outstanding: 32,319,031 and 24,039,963 shares at December 31,
2006 and 2005, respectively 32,318 24,040
Additional paid-in capital 16,800,396 8,975,273
Deferred stock compensation - (774,952)
Accumulated other comprehensive loss (18,588) (16,638)
Accumulated deficit (13,347,994) (6,923,043)
------------ ------------
------------ ------------
TOTAL stockholders' equity 3,466,132 1,284,680
------------ ------------
TOTAL liabilities and stockholders' equity $ 5,433,501 $ 2,466,460
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F - 14
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
YEAR ENDED
DECEMBER 31,
--------------------------------------------
2006 2005 2004
------------ ------------ ------------
Revenues:
Sale of software applications $ 1,656,379 $ 1,062,420 $ 572,624
Sale of software applications to related parties - - 196,000
------------ ------------ ------------
Total revenues 1,656,379 1,062,420 768,624
Cost of revenues 426,052 299,958 127,944
------------ ------------ ------------
Gross profit 1,230,327 762,462 640,680
------------ ------------ ------------
Operating expenses:
Research and development 2,923,572 2,549,635 1,347,960
Selling and marketing 2,618,371 867,473 607,511
General and administrative 2,098,142 1,308,735 565,190
------------ ------------ ------------
TOTAL operating expenses 7,640,085 4,725,843 2,520,661
------------ ------------ ------------
Operating loss 6,409,758 3,963,381 1,879,981
Financial (Income) expenses, net (9,181) 94 40,896
------------ ------------ ------------
Loss before Taxes on Income 6,400,577 3,963,475 1,920,877
------------ ------------ ------------
Taxes on income - 1,900 -
------------ ------------ ------------
6,400,577 3,965,375 1,920,877
Minority interests in profits of subsidiaries 24,374 - -
------------ ------------ ------------
Net loss $ 6,424,951 $ 3,965,375 $ 1,920,877
============ ============ ============
Basic and diluted net loss per share $ 0.21 $ 0.169 $ 0.102
============ ============ ============
Weighted average number of common stock used in computing
basic and diluted net loss per share 30,400,789 23,524,407 18,831,765
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F - 15
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
ADDITIONAL DEFERRED
COMMON SHARE PAID-IN STOCK
STOCK CAPITAL CAPITAL COMPENSATION
----------- ------------- ----------- ------------
NUMBER AMOUNT
----------- -------------
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)
Issuance of shares to service provider on January 3, 2005 50,000 50 68,950 -
Issuance of shares and warrants, net on January 2005 2,659,998 2,660 3,843,996 -
Issuance of shares in respect of minority interest
acquisition in subsidiary on March 10, 2005 625,000 625 999,375 -
Issuance of shares to service provider on April 20, 2005 50,000 50 79,450 -
Grants of options to service provider on December 22, 2005 114,953 115 80,352 -
Deferred stock compensation - - 307,618 (307,618)
Amortization of deferred stock compensation - - - 516,215
Foreign currency translation adjustments - - - -
Net loss - - - -
----------- ------------- ----------- ------------
Balance as of December 31, 2005 24,039,963 24,040 8,975,273 (774,952)
=========== ============= =========== ============
Reclassification of deferred stock Compensation (774,952) 774,952
Issuance of shares to service provider in January 2006 30,000 30 17,970
Issuance of shares and warrants, net in March, 2006 8,234,485 8,234 6,346,856
Exercise of employees stock options 14,583 14 8,507
Issuance of warrants to service providers in December 2006 61,750
Stock - based compensation 1,823,842
Unrealized gain resulting from share issuance to minority
shareholders in a subsidiary 341,150
Foreign currency translation adjustments -
Net loss
----------- ------------- ----------- ------------
Balance as of December 31, 2006 32,319,031 $ 32,318 $16,800,396 $ -
=========== ============= =========== ============
ACCUMULATED TOTAL
OTHER TOTAL STOCKHOLDERS'
COMPREHENSIVE ACCUMULATED COMPREHENSIVE EQUITY
INCOME (LOSS) DEFICIT LOSS (DEFICIENCY)
------------- ------------ ------------- -------------
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)
Issuance of shares to service provider on January 3, 2005 - - 69,000
Issuance of shares and warrants, net on January 2005 - - 3,846,656
Issuance of shares in respect of minority interest
acquisition in subsidiary on March 10, 2005 - - 1,000,000
Issuance of shares to service provider on April 20, 2005 - - 79,500
Grants of options to service provider on December 22, 2005 - - 80,467
Deferred stock compensation - - -
Amortization of deferred stock compensation - - 516,215
Foreign currency translation adjustments (22,159) - (22,159) (22,159)
Net loss - (3,965,375) (3,965,375) (3,965,375)
------------- ------------ ------------- -------------
(3,987,534)
=============
Balance as of December 31, 2005 (16,638) (6,923,043) 1,284,680
============= ============ =============
Reclassification of deferred stock Compensation -
Issuance of shares to service provider in January 2006 18,000
Issuance of shares and warrants, net in March, 2006 6,355,090
Exercise of employees stock options 8,521
Issuance of warrants to service providers in December 2006 61,750
Stock - based compensation 1,823,842
Unrealized gain resulting from share issuance to minority
shareholders in a subsidiary 341,150
Foreign currency translation adjustments (1,950) (1,950) (1,950)
Net loss (6,424,951) (6,424,951) (6,424,951)
------------- ------------ ------------- -------------
$ (6,426,901)
=============
Balance as of December 31, 2006 $ (18,588) $(13,347,994) $ 3,466,132
============= ============ =============
The accompanying notes are an integral part of the consolidated financial
statements.
F - 16
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
YEAR ENDED
DECEMBER 31,
-----------------------------------------
2006 2005 2004
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,424,951) $(3,965,375) $(1,920,877)
Adjustments required to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 655,737 420,572 47,421
Increase in trade and other accounts receivable
and prepaid expenses (916,930) (35,924) (161,023)
Amortization of deferred compensation 1,823,842 516,215 302,251
Increase (Decrease) in trade payables (45,284) 178,496 173,994
Increase in employees and payroll accruals 77,906 14,754 172,559
Increase (decrease) in accrued expenses and other
liabilities 471,862 (107,913) (117,307)
Minority interests in profits of subsidiaries 24,374
Accrued severance pay, net (16,923) 48,645 77,606
Issuance of options and common stock as a
compensation to service providers 79,750 228,967 51,914
----------- ----------- -----------
Net cash used in operating activities (4,270,617) (2,701,563) (1,373,462)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (245,028) (672,475) (203,477)
----------- ----------- -----------
Net cash used in investing activities (245,028) (672,475) (203,477)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares in respect of reverse shell
acquisition (1) - - 4,391
Proceeds from Issuance of shares and warrants, net 6,355,090 3,846,656 2,173,932
Proceeds from exercise of stock option 8,521 - -
Short-term bank credit, net (996) 7,635 (26,741)
Issuance in subsidiary to a minority shareholders 570,000 - -
Repayment of short-term loans from stockholders and
related parties - (1,229) (483,066)
----------- ----------- -----------
Net cash provided by financing activities 6,932,615 3,853,062 1,668,516
----------- ----------- -----------
Effect of exchange rate changes on cash and cash
equivalents (1,723) (19,066) 2,618
----------- ----------- -----------
Increase in cash and cash equivalents 2,415,247 459,958 94,195
Cash and cash equivalents at the beginning of the
period 604,035 144,077 49,882
----------- ----------- -----------
Cash and cash equivalents at the end of the period $ 3,019,282 $ 604,035 $ 144,077
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 17
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
YEAR ENDED
------------------------------------------
2006 2005 2004
------------ ------------ ------------
NON-CASH TRANSACTION
Purchase of property and equipment $ 51,589 $ 35,146 $ -
============ ============ ============
Issuance of shares in respect of minority interest
acquisition in subsidiary $ - $ 1,000,000 $ -
============ ============ ============
Gain on realization of shareholdings $ 341,150 $ - $ -
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 2,041 $ 2,152 $ 13,691
============ ============ ============
(1) On February 1, 2004, the Company was acquired by Zone4Play Inc. (Nevada)
through a reverse shell purchase acquisition.
The accompanying notes are an integral part of the consolidated financial
statements.
F - 18
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 1: - GENERAL
a. Zone4Play Inc. ("the Company") was incorporated under the laws
of the State of Nevada on April 23, 2002 as Old Goat
Enterprises, Inc. On February 1, 2004, the Company acquired
Zone4Play, Inc. ("Zone4Play (Delaware))" (see c. below), which
was incorporated under the laws of the State of Delaware on
April 2, 2001, and subsequently changed the Company's name to
Zone4Play, Inc., a Nevada corporation. The Company develops
and markets interactive games applications for Internet,
portable devices and interactive TV platforms.
The Company conducts its operations and business with and
through its subsidiaries, (1) Zone4Play (Delaware), (2)
Zone4Play Limited, an Israeli corporation incorporated in July
2001, which is engaged in research and development and
marketing of the applications, (3) Zone4Play (UK) Limited, a
United Kingdom corporation, incorporated in November 2002,
which is engaged in marketing of the applications, (4) MixTV
Ltd., an Israeli corporation which develops and markets
participation TV games applications(see note 1d)., and (5)
Gaming Ventures Plc ("Gaming"), a company incorporated in the
Isle of Man (see note 1e).
The consolidated financial statements for prior years have
been presented as if the Company was considered to be a
development stage enterprise in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 7. In fiscal 2006
the Company ceased to report as a development stage
enterprise.
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 $ 13,347,994 as of December 31, 2006. There is
no assurance that profitable operations, if ever achieved,
could be sustained on a continuing basis.
The Company plans to continue to finance its operations with a
combination of stock issuance and private placements and
revenues from product sales.
c. Acquisition of Zone4Play (Delaware):
According to the agreement between the Company and Zone4Play
(Delaware), the Company issued 10,426,190 Common stock to the
former holders of equity interest in Zone4Play (Delaware). The
acquisition has been accounted for as a reverse acquisition,
whereby the Company was treated as the acquiree and Zone4Play
(Delaware) as the acquirer, primarily because Zone4Play
(Delaware) shareholders owned a majority, approximately 58% of
the Company's Common stock, upon completion of the
acquisition. Immediately prior to the consumption of the
transaction, Zone4Play Inc. had no material assets and
liabilities, hence the reverse acquisition is treated as a
capital stock transaction in which Zone4Play (Delaware) is
deemed to have issued the Common stock held by the Company
shareholders for the net assets of the Company. The historical
financial statements of Zone4Play (Delaware) became the
historical financial statements of the Company.
F - 19
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 1: - GENERAL (CONT.)
d. In June 2004, the Company and NetFun Ltd. ("Netfun") formed a
new company named MIX TV Ltd ("MIX TV") in order to pursue the
marketing, deployment and support of the MIX TV system. The
controlling stake of 50.1% is held by the Company. NetFun had
a 20% share of the new company, which could had increased to
up to 49.9% as pre-defined two milestones: (a) Upon MIX TV
reaching its operational break-even, 10% of the shares will be
transferred to Netfun. (b) Upon repayment to the Company of
all the sums provided to MIX TV, 19.9% of the shares will be
transferred to Netfun. A trustee was holding the remaining
shares (29.9%). The Company provided capital for one year of
operating the new company, whereas NetFun delivered its
Intellectual Properties assets (MIX TV). MIX TV has commenced
its operations in July 2004 and generated losses as of
December 31, 2004 that had been consolidated in the company's
report since July 2004.
On March 10, 2005, the Company signed a stock purchase
agreement with NetFun, regarding which the closing took place
in April 2005. According to the Agreement, the Company
acquired the remaining minority interests held by NetFun of
49.9% in its consolidated subsidiary MIX TV, for a
consideration of 625,000 shares of Common stock of the
Company, which had a fair value of $ 1,000,000 based on the
average market price of the share around the announcement
date. As a result of the Agreement, the Company holds the
entire ownership interest in MIX TV. The acquisition was
accounted under the purchase method of accounting. The
purchase price has been attributed to MIX TV's technology. The
technology is amortized over its useful life which management
estimated to be three years. No other significant assets were
acquired and no other liabilities were assumed.
e. On July 11, 2006, the Company formed Gaming. Gaming conducts
its operations and business with and through its wholly-owned
subsidiaries: RNG Gaming Limited ("RNG"), an Isle of Man
corporation incorporated on July 12, 2006 which is engaged in
development of its software and licensing it to third parties,
and Get21 Limited ("Get21"), an Isle of Man corporation
incorporated on July 12, 2006 which is engaged in providing
marketing services of gaming applications. On August 4, 2006,
Gaming filed with the Securities and Exchange Commission
("SEC") a registration statement on Form 20-F, which is now
effective. As a result, Gaming is now a separate reporting
entity with the SEC that has the reporting obligations of a
foreign private issuer, despite it being the Company's wholly
owned subsidiary.
According to an agreement dated July 12, 2006 between Gaming
and Zone4Play (Delaware), Gaming purchased from Zone4Play
(Delaware) all right, title, and interest in its Intellectual
Property Rights and assets related to its Black Jack business
("BJ Business") on a "Going concern" and "As is" basis, in
exchange for a promissory note in the principal amount of
$2.25 million. The valuation was based on an appraisal report
made by an independent appraiser. This Promissory Note is in
effect for five years (60 months). Principal is paid in five
(5) equal annual installments of $450,000 each and is carrying
interest of $US Libor +1.5% per annum.
f. Concentration of risk that may have a significant impact on
the Company:
The Company derived 84% of its revenues in the year 2006 from
3 major customers (see Note 8b).
F - 20
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
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 most of its
subsidiaries are generated in U.S. dollars ("dollar").
Company's management believes that the dollar is the primary
currency of the economic environment in which the Company
operates. Thus, the functional and reporting currency of the
Company and certain of 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 operations as financial income or expenses as
appropriate.
The financial statements of Zone4Play (UK) Limited, whose
functional currency has been determined to be its local
currency, have been translated into dollars. All balance sheet
amounts have been translated using the exchange rates in
effect at each balance sheet dates. Statement of operation
amounts have been translated using the average exchange rate
prevailing during the period. The resulting translation
adjustments are reported as a separate component of
accumulated other comprehensive loss in stockholder's equity.
c. Principles of consolidation:
The consolidated financial statements include the accounts of
the Company and its subsidiaries. Intercompany transactions
and balances, have been eliminated upon consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that
are readily convertible to cash with original maturities of
three months or less.
F - 21
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
e. Property and equipment:
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 33
Electronic devices 15
Over the shorter of the lease term
Leasehold improvements or useful economic life
f. Impairment of long-lived assets:
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 asset. If such asset is considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds the
fair value. As of December 31, 2006, 2005 and 2004 no
impairment losses have been identified.
g. Acquired technology:
Acquired technology is amortized over its useful life using a
method of amortization that reflects the pattern in which the
economic benefits of technology is consumed or otherwise used
up. Acquired technology is amortized on a straight line basis
over a period of three years.
h. 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 Company'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.
F - 22
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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, 2006, 2005
and 2004 amounted to $ 133,517 $ 107,953 and $ 103,923,
respectively.
i. Accounting for stock-based compensation:
Effective January 1, 2006, the Company adopted the provisions
of Statement of Financial Accounting Standard No. 123 (revised
2004) ("SFAS 123R"), "Share-Based Payment," and Staff
Accounting Bulletin No. 107 ("SAB 107"), which was issued in
March 2005 by the SEC. SFAS 123R addresses the accounting for
share-based payment transactions in which the Company obtains
employee services in exchange for equity instruments of the
Company. This statement requires that employee equity awards
be accounted for using the grant-date fair value method. SAB
107 provides supplemental implementation guidance on SFAS
123R, including guidance on valuation methods, classification
of compensation expense, income statement effects, disclosures
and other issues.
SFAS 123R supersedes the Company's previous accounting for its
employee stock option plans using the intrinsic value-based
method of accounting prescribed under Accounting Principles
Board Opinion No. 25 and related interpretations ("APB 25")..
The Company elected to adopt the modified prospective
transition method permitted by SFAS 123R. Under such
transition method, the new standard has been implemented as
from January 1, 2006, with no restatement of prior periods to
reflect the fair value method of expensing share-based
compensation.
The Company has expensed compensation costs, net of estimated
forfeitures, applying the accelerated vesting method, based on
the grant-date fair value estimated in accordance with the
original provisions of SFAS 123, and previously presented in
the pro forma footnote disclosures. Results for prior periods
have not been restated as explained above. For the year ended
December 31, 2006, the Company recorded stock-based
compensation costs in the amount of $1,823,842. The total
unrecognized compensation cost on employee stock options
amounted to $1,639,544, at December 31, 2006, and is expected
to be recognized over a weighted average period of 3 years.
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:
YEAR ENDED DECEMBER 31,
---------------------------
2006 2005
------- -------
Dividend yield 0% 0%
Expected volatility 76% 63%
Risk-free interest rate 4.84 4.39%
Expected life (years) 6 years 3 years
Expected forfeiture 23% -
F - 23
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Company issues stock options to its employees, directors
and certain consultants and provides the right to purchase
stock pursuant to approved stock option and employee stock
purchase programs. Prior to the adoption of FAS 123R, the
Company elected to follow APB 25, in accounting for its stock
option plans. Under APB No. 25, when the exercise price of an
employee stock option is less than the market price of the
underlying stock on the date of grant, compensation expense is
recognized.
The following table illustrates the effect on net income and
earnings per share, assuming the Company had applied the fair
value recognition provisions of SFAS 123 (as amended by SFAS
148) to its stock-based employee compensation in prior years:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2005 2004
------------ ------------
Net loss, as reported $ 3,965,375 $ 1,920,877
Deduct: stock-based employee compensation - intrinsic
value 516,215 302,252
Add: Total stock-based employee compensation expense
determined under the fair value based method of SFAS No.
123 for all awards 684,921 367,660
------------ ------------
$ 4,134,081 $ 1,986,285
============ ============
Pro forma net loss
Net loss per share:
Basic and diluted - as reported $ 0.169 $ 0.102
============ ============
Basic and diluted - pro forma $ 0.176 $ 0.107
============ ============
The Company applies 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 and warrants issued to non-employees.
j. Revenue recognition:
The Company accounts for revenues from software applications
agreements in accordance with Statement of Position ("SOP")
97-2, "Software Revenue Recognition", as amended ("SOP 97-2").
The revenue from license fees is recognized when persuasive
evidence of an agreement exists, delivery of the product has
occurred, no significant obligations with regard to
implementation remain, the fee is fixed or determinable and
collectibility is probable.
SOP 97-2 specifies that extended payment terms in a licensing
arrangement may indicate that the license fees are not deemed
to be fixed or determinable. If the fee is not fixed or
determinable, revenue is recognized as payments become due
from the customer unless collection is not considered probable
then revenue is recognized as payments are collected from the
customer, provided that all other revenue recognition criteria
have been met.
F - 24
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The arrangements that include multiple elements are usually
arrangements where the Company sells software products and
Post Contract Support ("PCS"). For these multiple elements,
SOP 97-2 requires that the fair value of each component in a
multiple element arrangement will be determined based on the
vendor's specific objective evidence ("VSOE") for that
element, and revenue is allocated to each component based on
its fair value. SOP 98-9 requires that revenue be recognized
under the "residual method" when VSOE does not exist for all
the delivered elements, VSOE of fair value exists for all
undelivered elements, and all other SOP 97-2 criteria are met.
Under the residual method, any discount in the arrangement is
allocated to the delivered elements. The specific objective
evidence for the PCS is established by the price charged on
separate PCS renewal contracts. The revenue associated with
the delivered elements is recognized using the residual method
discussed above.
Revenues from software licenses that require significant
customization, integration and installation that take a short
period of time to complete 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 the complete contract accounting method.
After delivery, if uncertainty exists about customer
acceptance of the software, license revenue is not recognized
until acceptance. Provisions for estimated losses on
uncompleted contracts are made in the period in which such
losses are first determined, in the amount of the estimated
loss on the entire contract. As of December 31, 2006, 2005 and
2004, no such estimated losses were identified.
The Company is entitled to royalties from revenue sharing
arrangements upon sublicensing of the Company's products to
end-users. The Company recognizes royalties from revenue
sharing arrangements during the period based on reports
obtained from its customers through the reporting period on a
monthly basis.
k. Research and development costs:
Research and development costs are charged to the Statement of
Operations as incurred. SFAS No. 86 "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise
Marketed", 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.
F - 25
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
l. Income taxes:
The Company and its subsidiaries account for income taxes in
accordance with SFAS, "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.
m. Concentrations of credit risk:
Financial instruments that potentially subject the Company and
its subsidiaries to concentrations of credit risk consist
principally of cash and cash equivalents and trade
receivables. The majority of the Company's cash and cash
equivalents are invested in dollar instruments with major
banks in Israel, the United Kingdom and the United States.
Such cash and cash equivalents in the United States may be in
excess of insured limits and are not insured in other
jurisdictions. 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.
Trade receivables of the Company and its subsidiaries are
derived from sales to customers located primarily in the U.S.,
U.K. and Israel. 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 of credit risk such as foreign exchange
contracts, option contracts or other foreign hedging
arrangements.
n. 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.
o. Basic and diluted net loss per share:
Earnings (loss) per share ("EPS") were computed in accordance
with provisions of SFAS No. 128"Earnings per share" ("SAFS
128"). SFAS 128 requires the presentation of both basic and
diluted EPS.
Basic net earnings (loss) per share is computed based on the
weighted average number of common shares outstanding during
each year. Diluted earnings (loss) per share is computed based
on the weighted average number of common shares outstanding
during each year, plus dilutive potential common shares
considered outstanding during the year. For the years ended
December 31, 2006, 2005 and 2004, all the options and warrants
outstanding have been excluded from the calculations because
the effect on net loss per share would have been antidilutive.
F - 26
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
p. Gain on Realization of Shareholdings:
Gain on realization of shareholdings includes the results of
realization of the Company's shareholdings in investee arising
either from the sale of such shareholdings or from issuance of
stock by the investee to third parties, which is recognized in
accordance with the provisions of Staff Accounting Bulletin
No. 51 ("SAB 51") of the Securities and Exchange Commission
("SEC") or SAB Topic 5H. where the investee is a newly-formed,
in a process of research and development, start-up or
development Stage Company.
The Company charges such results to earnings, provided that
the conditions stipulated in SAB 51 for such recognition have
been met or into equity where SAB Topic H2 conditions have
been met.
p. Advertising Costs
The Company expenses advertising costs as incurred.
Advertising costs for the year ended December 31, 2006 were
$109,348. There were no advertising costs in prior years.
r. Impact of recently issued Accounting Standards:
In February 2006, the Financial Accounting Standards Board
("FASB") issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments, an Amendment of FASB Statements No. 133
and 140". This statement permits fair value measurement for
any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. This
statement is effective for all financial instruments acquired
or issued after the beginning of an entity's first fiscal year
that begins after September 15, 2006. The Company is currently
evaluating the impact of this statement, if any, on its
consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No 48 ("FIN
48"), "Accounting for Uncertainty in Income Taxes an
interpretation of SFAS No. 109." This financial interpretation
clarifies the accounting for uncertainty in income taxes, and
prescribes a recognition threshold and measurement attributes
for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on various related matters such
as derecognition, interest and penalties and disclosure. As
applicable to the Company, the interpretation prescribed by
FIN 48 will be effective commencing January 1, 2007. The
Company is currently evaluating the impact that the adoption
of FIN 48 would have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". This standard establishes a framework for
measuring fair value and expands related disclosure
requirements; however, it does not require any new fair value
measurement. As applicable to the Company, this statement will
be effective as of the year beginning January 1, 2008. The
Company is currently evaluating the impact that the adoption
of SFAS No. 157 would have on its consolidated financial
statements.
F - 27
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
In September 2006, the SEC issued Staff Accounting Bulletin
108, which expresses the Staff's views regarding the process
of quantifying financial statement misstatements. The bulletin
was effective as of the year beginning January 1, 2006. The
implementation of this bulletin had no impact on the Company's
consolidated financial statements.
In February 2007, the FASB issued FAS 159, "The Fair Value
Option for Financial Assets and Financial Liabilities." This
standard permits entities to choose to measure many financial
assets and financial liabilities at fair value. Unrealized
gains and losses on items for which the fair value option has
been elected are reported in earnings. As applicable to the
Company, this statement will be effective as of the year
beginning January 1, 2008. The Company is currently evaluating
the impact that the adoption of FAS 159 would have on its
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other
Postretirement Plans--An Amendment of FASB No. 87, 88, 106 and
132(R)" ("SFAS 158"). SFAS 158 requires that the funded status
of defined benefit postretirement plans be recognized on the
company's balance sheet, and changes in the funded status be
reflected in comprehensive income, effective fiscal years
ending after December 15, 2006. The adoption of this statement
did not have an impact on the consolidated financial
statements.
NOTE 3: - OTHER ACCOUNTS RECEIVABLE, PREPAID EXPENSES AND RELATED PARTIES
DECEMBER 31,
---------------------
2006 2005
--------- ---------
Government authorities $ 44,428 $ 19,220
Prepaid expenses and other 81,332 62,118
Related parties 38,888 38,848
--------- ---------
$ 164,648 $ 120,186
========= =========
F - 28
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 4: - PROPERTY AND EQUIPMENT, NET
DECEMBER 31,
-------------------------
2006 2005
----------- -----------
Cost:
Computers and peripheral equipment $ 1,184,446 $ 894,453
Leasehold improvements 34,814 34,781
Electronic devices 72,293 66,242
----------- -----------
1,291,553 995,476
----------- -----------
Accumulated depreciation:
Computers and peripheral equipment 563,617 256,612
Leasehold improvements 10,747 6,265
Electronic devices 18,149 7,771
----------- -----------
592,513 270,648
----------- -----------
Depreciated cost $ 699,040 $ 724,828
=========== ===========
Depreciation expenses were $ 321,865 $ 194,545 and $ 47,421 for the
years ended December 31, 2006, 2005 and 2004, respectively.
NOTE 5: - ACQUIRED TECHNOLOGY, NET
Acquired technology from the acquisition of the business from MIX TV
in April 2005 (see Note 1d).
DECEMBER 31,
-------------------------
2006 2005
----------- -----------
Cost $ 1,000,000 $ 1,000,000
Accumulated amortization 559,359 226,027
----------- -----------
Amortized cost $ 440,641 $ 773,973
=========== ===========
Depreciation expenses were $ 333,332 and $ 226,027 for the years
ended December 31, 2006, and 2005, respectively.
Estimated amortization expenses for the year ended:
AMORTIZATION
YEAR ENDING DECEMBER 31, EXPENSES
------------------------------- ------------
2007 $ 333,333
2008 107,308
------------
$ 440,641
============
F - 29
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 6: - SHORT-TERM BANK CREDIT
INTEREST RATE DECEMBER 31,
--------------------- ---------------------
2006 2005 2006 2005
--------- --------- --------- ---------
%
---------------------
Short-term bank credit linked to New
Israeli Shekel (NIS) 9.0-10.0 8.0-9.0 $ 16,751 $ 17,747
========= =========
(1) Total authorized credit lines $ 23,669 $ 21,725
========= =========
NOTE 7: - COMMITMENTS AND CONTINGENT LIABILITIES
Lease commitments:
The Company leases its facilities under lease agreements in Israel,
which will expire in December 2009. The rent of this property
increases once every 12 months by 5% of the space rate. Future
minimum commitments under non-cancelable operating leases as of
December 31, 2006 are as follows:
RENTAL OF
YEAR ENDING DECEMBER 31, PREMISES
----------------------------------- ----------
2007 $ 150,222
2008 155,650
2009 151,376
----------
$ 457,248
==========
Total rent and other attendant expenses for the years ended December
31, 2006, 2005 and 2004 were approximately $120,072, $ 86,100 and $
21,947, respectively.
NOTE 8: - GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
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".
The following is a summary of revenues within geographic
areas, based on customer's location:
YEAR ENDED DECEMBER 31,
---------------------------------------
2006 2005 2004
----------- ------------ ----------
Antigua and Barbuda $ 837,457 $ - $ -
United Kingdom 245,161 507,602 568,347
United States 220,003 340,392 154,606
Australia 350,000 175,000 -
Other 3,758 39,426 45,671
----------- ------------ ----------
$ 1,656,379 $ 1,062,420 $ 768,624
=========== ============ ==========
All long-lived assets are located in Israel at the Company's
premises.
F - 30
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 8: - GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS (CONT.)
b. Major customer data as percentage of total revenues:
2006 2005 2004
----------- ------------ ----------
Customer A 51% - -
Customer B - 21% 19% -
Customer C 12% 14% *) -
Customer D *) - 24% 38%
Customer E *) - 11% *) -
Customer F *) - 11% -
Customer G (related party) - - 26%
Customer h *) - *) - 11%
*) Represents an amount lower than 10%.
NOTE 9: - SHARE CAPITAL
a. Shareholders' rights:
The shares of common stock confer upon the holders the right
to elect the directors and to receive notice to participate
and vote in the stockholders meetings of the Company, and the
right to receive dividends, if and when declared.
b. Private placement:
1. 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 these issuances of shares totaling
10,426,190, as described in note 1c.
2. In April 2004, the Company completed a $ 1.2 million
private placement, consisting of 1,497,252 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.
According to the private placement, the Company has no
obligation to register the shares that would derive from
exercising the warrants.
F - 31
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 9: - SHARE CAPITAL (CONT.)
3. In April 2004, the Company issued 44,348 shares of
Common stock to a service provider, pursuant to his
service agreement. Expense in the amount of $ 39,914 was
recorded in the Company's statements of operations,
based on the market share price at the date of grant.
4. On August 17, 2004, the Company issued 22,222 shares of
Common stock to a service provider, pursuant to his
service agreement. Expense in the amount of $ 12,000 was
recorded in the Company's statements of operations,
based on the market share price at the date of grant.
5. 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.
According to the private placement, the Company has no
obligation to register the shares that would derive from
exercising the warrants.
6. On January 27, 2005, the Company completed a private
placement, pursuant to which it sold an aggregate of
2,659,998 shares of Common stock for aggregate gross
proceeds of $ 3,989,999, in two steps (January 3 and
January 27). In connection with the aforementioned
private placement the Company issued to its investment
bank 25,000 warrants exercisable until December 31, 2007
at a price of $ 0.80 per share, and 53,200 warrants
exercisable until December 31, 2007 at a price of $ 1.50
per share, in compensation for services related to this
investment.
7. On January 3, 2005 and April 20, 2005, the Company
issued 50,000 and 50,000 shares of common stock
respectively to a service provider, pursuant to a
consulting contract. Expenses in the amounts of $ 69,000
and $ 79,500, respectively, were recorded in the
Company's statements of operations, based on the market
share price at the date of grant.
8. On February 2, 2006, the Company issued 30,000 shares of
common stock to a service provider, pursuant to a
service agreement. Therefore, an expense in the amount
of $18,000 was recognized on the date of grant,
according to Emerging Issues Task Force ("EITF")96-18,
"Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services" ("EITF 96-18").
F - 32
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 9: - SHARE CAPITAL (CONT.)
9. On March 24, 2006, the Company completed a $4.5 million
private placement consisting of 6,234,485 units
consisting of one share of its common stock of $0.001
par value and one warrant to purchase one share of
common stock each. The purchase price per unit for the
common stock and the warrant was $0.725. Each warrant is
exercisable for 36 months at a price of $1.125 per
share. The Company agreed to prepare and file with the
SEC a registration statement covering the resale of the
common stock on or before May 9, 2006 for certain
investors. If such registration statement covering the
shares of common stock purchased by those certain
investors was not declared effective within 120 days
from the closing date, then the Company would have had
to pay those investors liquidated damages equal to 1%
per month of the aggregate purchase price paid by them
which would not exceed fifteen percent (15.0%) of the
aggregate purchase. On May 4, 2006 the Company filed a
registration statement covering the resale of the shares
and the shares underlying the warrants, which went
effective on June 6, 2006.
10. On March 30, 2006, the Company completed a $2.0 million
private placement consisting of 2,000,000 units
consisting of one share of its common stock of $0.001
par value and one warrant to purchase one share of
Common stock each. The purchase price per unit for the
common stock and the warrant was $1. Each warrant is
exercisable for 36 months at a price of $1.35 per share.
The Company agreed to prepare and file with the SEC a
registration statement covering the resale of the common
stock on or before May 15, 2006 for certain investors.
If such registration statement covering the shares of
common stock purchased by those certain investors was
not declared effective within 120 days from the closing
date, then the Company would have had to pay those
investors liquidated damages equal to 1% per month of
the aggregate purchase price paid by them which would
not exceed fifteen percent (15.0%) of the aggregate
purchase. On May 4, 2006 the Company filed a
registration statement covering the resale of the shares
and the shares underlying the warrants, which went
effective on June 6, 2006.
11. On April 3, 2006 the Company issued to one of its
non-employee directors an option to purchase up to
200,000 shares of common stock of the Company under the
terms of the Company's option plan ("Director Option").
The exercise price for the shares subject to the
Director Option is $ 0.725 per share of common stock of
the Company. The option is fully vested. This
transaction was recorded in accordance with EITF 96-18.
12. On April 27, 2006, the Company issued to two of its
advisors warrants to purchase a total of 200,000 shares
of the Company's common stock with an exercise price of
$1.00 per share. . This transaction was recorded in
accordance with EITF 96-18.
13. On May 15, 2006, the Company issued to one of its
advisors a warrant to purchase a total of 200,000 shares
of the Company's common stock with an exercise price of
$1.35 per share. This transaction was recorded in
accordance with EITF 96-18.
F - 33
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 9: - SHARE CAPITAL (CONT.)
14. On June 6, 2006, the Company issued to its financial
advisor a warrants to purchase a total of 110,345 shares
of the Company's common stock with an exercise price of
$1.00 per share, and a warrant to purchase 40,000 shares
of the Company's common stock with an exercise price of
$1.35 per share. This transaction was recorded in
accordance with EITF 96-18.
15. On September 14, 2006, Gaming, RNG, and Golden Palace
Ltd. ("Golden Palace"), entered into an agreement under
which Golden Palace agreed to invest $600,000 in RNG in
return for 20% of the ordinary shares of RNG.. The
Company posted a gain of $341,150 resulting from this
issuance in accordance with SAB Topic 5H. According to
the SAB, realization of a gain is not assured where the
subsidiary is a newly-formed, in a process of research
and development, start-up or development Stage Company.
In such situations, the change in the holding company's
proportionate share of the subsidiary equity resulting
from the additional equity raised by the subsidiary
should be accounted for as an equity transaction and no
gain will be recognized. Accordingly, the Company
charged a gain of $341,150 into equity.
Pursuant to terms of this agreement, Golden Palace has
an option, that can be exercised upon the occurrence of
certain events as defined in the agreement, to acquire
an additional 30% of the ordinary shares of RNG (but not
more than 50% of RNG or more than the amount owned by
Gaming) at a price of $100,000 per each additional
percentage interest of the ordinary shares of RNG.
Concurrently, Gaming, RNG and Golden Palace entered into
a shareholders agreement under which Golden Palace has a
right to appoint one of RNG's 4 directors (as long as
Golden Palace owns 20% of RNG) and Gaming has a right to
appoint the 3 other directors. Upon Golden Palace
becoming an owner of 50% of RNG, it will have the right
to appoint an equal number of directors to the number we
are entitled to appoint. At issuance date, the Company
recorded the call option granted to Golden Palace as a
derivative against additional paid in capital. . The
call option is being measured at fair value and it is
marked to market in accordance with "Accounting for
Freestanding Derivative Financial Instruments Indexed
to, and Potentially Settled in, the Stock of a
Consolidated Subsidiary" ("EITF 00-6 ").
16. On December 7, 2006, the Company granted 250,000
warrants to service providers. Therefore, an expense in
the amount of $61,750 was recognized on the date of
grant, according to EITF 96-18.
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.
F - 34
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 9: - SHARE CAPITAL (CONT.)
d. Stock option plans:
1. On November 23, 2004, the Company adopted the 2004
Global Share Option Plan (the "2004 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. 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. The Company has
reserved 5,000,000 authorized but unissued shares of
common stock to be issued under the 2004 Global Share
Option Plan. On May 4, 2006, our board of directors
approved an amendment to our 2004 Global Share Option
Plan under which the number of shares reserved by us for
the purpose of the Plan was increased from 5,000,000 to
8,000,000.
The exercise price of the options granted under the
plans may not be less than the nominal 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. On December 31, 2004, the board of directors issued an
aggregate of 1,460,000 options under the 2004 Global
Share Option Plan to various employees. 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.
3. On December 30, 2005, the board of directors issued an
aggregate of 370,000 options under the 2004 Global Share
Option Plan to various employees. All of these options
are exercisable at a price of $ 0.70 per share. All of
the options expire on December 31, 2015.
4. On February 15, 2005, the Company signed an agreement
with a 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 options were forfeited during 2005.
5. On March 31, 2005, the Company granted to two of its
non-employee directors, 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 of $ 1
per share. Each director's right to exercise such option
will vest in three equal annual installments during a
period of three years commencing in May 2005, provided
that the Company's agreement with such director does not
terminate earlier. The Company recorded in 2005 deferred
stock compensation in the amount of $ 307,618 in respect
of those options.
F - 35
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 9: - SHARE CAPITAL (CONT.)
6. On January 15, 2006, the Company signed an agreement
with a new non-employee director. Under which the
Company granted an option to purchase up to 192,261
shares of common stock of the Company under the terms of
the Company's option plan ("Option"). The exercise price
for the shares subject to the Option is $1 per share of
common stock of the Company on the date of 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
termination of the agreement for cause at any time, the
Option, if not exercised, shall terminate and be
cancelled and non-exercisable. During the reported
period the Company recognized an expense of $20,925
according to SFAS 123(R).
7. On April 3, 2006, pursuant to Section 4(2) of the
Securities Act of 1933, as amended, The Company issued
to a company, which is owned by the Company's Chief
Executive Officer, an option to buy 1,863,000 shares of
the Company's common stock with an exercise price of
$1.15 per share in consideration for services provided
by the Chief Executive Officer to the Company. The
option vests in the following manner: 1,500,750 shares
on July 1, 2006, 155,250 shares on October 1, 2006,
155,250 shares on January, 1, 2007 and 51,750 shares on
April 1, 2007. During the reported period the Company
recognized an expense in the amount of $1,157,545
according to SFAS 123(R). The Company used the graded
vesting attribution method for these options.
8. On October 22, 2006, the Company granted to two of its
non-employee directors, an option under the terms of the
Company's option plan, to purchase 113,537 shares of
Common stock of the Company at an exercise price of $
1.15 per share. Each director's right to exercise such
option will vest in 8 equal annual installments during a
period of two years commencing in October 2006 provided
that the Company's agreement with such director does not
terminate earlier.
9. On December 7, 2006, the Company granted to two of its
non-employee directors, 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 of $
1.00 per share. Each director's right to exercise such
option will vest in 12 equal annual installments during
a period of three years commencing in April 2006,
provided that the Company's agreement with such director
does not terminate earlier.
F - 36
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 9: - SHARE CAPITAL (CONT.)
14. A summary of the Company's share option activity to
employees and directors, and related information is as
follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------
2006 2005
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE
---------- -------- ---------- --------
$ $
-------- --------
Outstanding at the 2,194,522 0.68 1,460,000 0.60
beginning of the year
Granted 7,106,857 1.01 946,783 0.96
Exercised 14,583 0.58 - -
Forfeited 1,633,750 0.99 212,261 1.33
---------- ----------
Outstanding at the end of
the year 7,653,046 1.01 2,194,522 0.68
========== ==== ========== ====
Options exercisable at the
end of the year 3,471,864 0.95 979,852 0.63
========== ==== ========== ====
Weighted-average fair value
of options granted during
the year $ 0.52 $ 0.82
========== ==========
o The fair value of each option granted is estimated
on the date of grant, using the Black-Scholes
option-pricing model with the following weighted
average assumptions: dividend yield of 0% for all
years: expected volatility: 2006 - 76%, 2005 -
63%' risk-free interest rate: 2006 - 4.84% and
2005 - 4.39%' and expected life: 2006 - 6 years
and 2005 3 years.
o The expected volatility is based on the historical
volatility of the Company's stock. The risk-free
interest rate assumption is based on observed
interest rates appropriate for the expected term
of the stock options granted. As permitted by SAB
107, the Company used the simplified method to
compute the expected option term for options
granted in 2006. The dividend yield assumption
reflects the expected dividend yield based on
historical dividends. Pre-vesting forfeiture rates
were estimated based on pre-vesting forfeiture
experience
F - 37
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 9: - SHARE CAPITAL (CONT.)
The options outstanding as of December 31, 2006, 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 31, OPTIONS
PRICE 2006 LIFE (YEARS) PRICE 2006 EXERCISABLE
-------- ------------ ------------ -------- ------------ -----------
$ $ $
-------- -------- -----------
0.55 1,034,167 8.5 0.55 953,334 0.55
0.575 1,640,000 10 0.575 67,083 0.575
0.70 132,500 9 0.70 62,500 0.70
1.00 1,081,305 8.5 1.00 407,947 1.00
1.15 3,765,074 9.43 1.15 1,981,000 1.15
------------ ------------
7,653,046 0.92 3,471,864 0.95
============ ============ ======== ============ ===========
NOTE 10: - RELATED PARTY TRANSACTIONS
a. 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, entered into an agreement
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.
b. During the year 2004 the Company sold software application as
part of its regular course of business one of its related
parties.
c. In the fourth quarter of 2006, since the Company's revenues
exceeded $750,000, the base salary of the Company's Chief
Executive Officer has increased to $15,000 a month effective
February 1, 2004 as agreed in the employment agreement signed
with the Chief Executive Officer. As a result, the Company has
recorded an allowance on behalf of this liability in the
amount of $305,727.
NOTE 11: - INCOME TAXES
a. Measurement of taxable income under the Income Tax Law
(Inflationary Adjustments), 1985:
Results for tax purposes of the Israeli subsidiaries 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
subsidiaries have not provided deferred income taxes on the
difference between the functional currency and the tax bases
of assets and liabilities.
F - 38
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 11: - INCOME TAXES (CONT.)
Israeli tax reform:
On January 1, 2003, a comprehensive tax reform took effect in
Israel. Pursuant to the reform, resident companies are subject
to Israeli tax on income accrued or derived in Israel or
abroad. In addition, the concept of "controlled foreign
corporation" was introduced, according to which an Israeli
company may become subject to Israeli taxes on certain income
of a non-Israeli subsidiary if the subsidiary's primary source
of income is passive income (such as interest, dividends,
royalties, rental income or capital gains). The tax reform
also substantially changed the system of taxation of capital
gains.
b. loss before taxes on income:
YEAR ENDED DECEMBER 31,
---------------------------------------
2006 2005 2004
----------- ----------- -----------
Domestic $ 2,498,758 $ 3,267,999 $ 1,759,724
Foreign 3,901,819 695,476 161,153
----------- ----------- -----------
$ 6,400,577 $ 3,963,475 $ 1,920,877
=========== =========== ===========
c. Taxes on income:
Taxes on income consist of the following:
Current:
Domestic $ - $ - $ -
Foreign - 1,900 -
----------- ----------- -----------
Taxes on income $ - $ 1,900 $ -
=========== =========== ===========
d. 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:
YEAR ENDED DECEMBER 31,
-----------------------------------------
2006 2005 2004
------------ ------------ -----------
Operating loss carryforward $ 3,360,291 $ 2,226,194 $ 985,723
Tax withholding 10,255 -
Foreign 76,062 22,629 33,628
------------ ------------ -----------
Deferred tax asset before valuation
allowance 3,436,353 2,259,078 1,019,351
Valuation allowance (3,436,353) (2,259,078) (1,019,351)
------------ ------------ -----------
Net deferred tax asset $ - $ - $ -
============ ============ ===========
F - 39
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 11: - INCOME TAXES (CONT.)
On December 31, 2006, the Company and its subsidiaries have
provided valuation allowances of $ 3,367,733 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 $ 1,108,555.
e. Net operating losses carryforwards:
The US subsidiaries have accumulated losses for tax purposes
as of December 31, 2006, in the amount of $ 8,390,654 which
may be carried forward and offset against taxable income, and
which expires during the years 2022 through 2025.
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.
Zone4Play (Israel) Ltd., has accumulated losses for tax
purposes as of December 31, 2006, in the amount of
approximately $ 231,666 which may be carried forward and
offset against taxable income in the future, for an indefinite
period.
MIX TV Ltd an Israeli subsidiary of the Company has
accumulated losses for tax purposes as of December 31, 2006,
in the amount of approximately $ 682,789 which may be carried
forward and offset against taxable income in the future, for
an indefinite period.
Gaming, an Isle of Man subsidiary of the Company has
accumulated losses for tax purposes as of December 31, 2006,
in the amount of approximately $ 233,355 which may be carried
forward and offset against taxable income in the future, for
an indefinite period.
Get21 an Isle of Man subsidiary of the Company has accumulated
losses for tax purposes as of December 31, 2006, in the amount
of approximately $ 864,616 which may be carried forward and
offset against taxable income in the future, for an indefinite
period.
f. 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.
g. Tax rates:
Taxable income of Israeli subsidiaries is subject to tax at
the rate of 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009
and 25% in 2010 and thereafter.
F - 40
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 11: - INCOME TAXES (CONT.)
h. Income taxes on non-Israeli subsidiaries:
Non-Israeli subsidiaries are taxed according to the tax laws
in their respective country of residence.
Israeli income taxes and foreign withholding taxes were not
provided for on undistributed earnings of the Company's
foreign subsidiaries. The Company intends to reinvest these
earnings indefinitely in its foreign subsidiaries. If these
earnings were distributed to Israel in the form of dividends
or otherwise, the Company would be subject to additional
Israeli income taxes (subject to an adjustment for foreign tax
credits) and foreign withholding taxes.
NOTE 12: - FINANCIAL EXPENSES
YEAR ENDED DECEMBER 31,
---------------------------------
2006 2005 2004
--------- --------- ---------
Financial (Income) expenses:
Interest, bank charges and fees, net $ (67,836) $ (14,238) $ 18,067
Foreign currency translation differences 58,655 14,332 22,829
--------- --------- ---------
$ (9,181) $ 94 $ 40,896
========= ========= =========
F - 41
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 registration of the securities:
NATURE OF EXPENSE AMOUNT
----------------- ------
SEC registration fee $ 1,828.38
Accounting fees and expenses $ 500.00*
Legal fees and expenses 10,000.00*
-----------
TOTAL $*12,328.38
===========
* 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 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 April 20, 2005, we sold 50,000 shares of common stock to Benchmark Consulting
Inc., a New York corporation, pursuant to a consulting contract.
On April 27, 2005, pursuant to an agreement with NetFun Ltd, dated March 10,
2005, under which the Company increased its ownership percentage of the issued
and outstanding share capital of MixTV Ltd. From 50.1% to 100%, the Company
issued Netfun Ltd. 625,000 shares of common stock of the Company, par value
$.001 per share.
On March 24, 2006, we completed an offering that consisted of 6,234,485 units
sold at a price of $.725 per unit to certain accredited investors for aggregate
gross proceeds of $4,520,000. Each unit is comprised of one share of our common
stock and a warrant to purchase one share at an exercise price of $1.125 per
share for a period of 36 months.
On March 28, 2006, pursuant to an agreement between the Company and Ori Sasson
and Jonathan Medved, the Company issued to each of Mr. Medved and Mr. Sasson as
advisors of the Company a warrant to purchase 200,000 of the Company's shares of
common stock with an exercise price of $1.00 per share.
On March 30, 2006, we completed an offering that consisted of 2,000,000 units
sold at a price of $1.00 per unit to certain accredited investors for aggregate
gross proceeds of $2,000,000. Each unit is comprised of one share of our common
stock and a warrant to purchase one share at an exercise price of $1.35 per
share for a period of 36 months.
II - 2
On April 3, 2006, we issued Citron Investments Ltd., which is owned by Shimon
Citron, an option to buy 1,863,000 shares of the Company's common stock in
consideration for services provided by Mr. Citron to the Company. The option
vests in the following manner: 1,500,750 shares on July 1, 2006, two equal
installments of 155,250 shares, one vests on October 1, 2006 and one vests on
January, 1, 2007 and an installment of 51,750 shares on April 1, 2007.
All of the above issuances and sales were deemed to be exempt under Regulation
S, Regulation D 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.
II - 3
ITEM 27. EXHIBITS
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- ------------------------------------------------------------
2.1 Stock Purchase Agreement dated December 1, 2003 between Zone
4 play, Inc. and Old Goat Enterprises, Inc. (incorporated by
reference to the Company's Current Report on Form 8-K/A
filed with the Securities and Exchange Commission on April
5, 2004).
3.1 Composite copy of the Company's Articles of Incorporation as
amended on February 5, 2004. (incorporated by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission on April
11, 2006).
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the
Company's Form SB-2 (File No. 333-91356) filed with the
Securities and Exchange Commission on June 27, 2002).
4.1 Registration Rights Agreement dated January 3, 2005 by and
among the Company and a list of purchasers identified in the
signature pages of this agreement (incorporated by reference
to Exhibit 4.2 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission 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 Exhibit 4.2 to the
Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 27, 2005).
4.3 Registration Rights Agreement dated March 20, 2006 between
the Company and certain accredited investors (incorporated
by reference to Exhibit 4.1 to the Company's Current Report
on Form 8-K filed with the Securities and Exchange
Commission on March 24, 2006).
4.4 Form of Stock Purchase Warrant (incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on March
24, 2006).
4.5 Registration Rights Agreement dated March 29, 2006 between
the Company and certain accredited investors (incorporated
by reference to Exhibit 4.1 to the Company's Current Report
on Form 8-K filed with the Securities and Exchange
Commission on March 31, 2006).
4.6 Form of Stock Purchase Warrant (incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on March
31, 2006).
5.1 Opinion and Consent of Z.A.G/S&W LLP (incorporated by
reference to Exhibit 5.1 to the Company's registration
statement number 333-133820 on Form SB-2 filed with the
Securities and Exchange Commission on May 4, 2006).
10.1 Director Appointment Agreement of Oded Zucker dated January
1, 2004 (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-QSB filed with the
Securities and Exchange Commission on August 16, 2004).
10.2 Director Appointment Agreement of Shlomo Rothman dated
January 1, 2004 (incorporated by reference to Exhibit 10.4
to the Company's Quarterly Report on Form 10-QSB filed with
the Securities and Exchange Commission on August 16, 2004).
10.3 Agreement, dated August 8, 2004, between The Gaming Channel
Limited and Zone4Play (UK) Ltd. (incorporated by reference
to Exhibit 10.13 to Amendment No. 1 to the Company's Form
SB-2 (File No. 333-120174) filed with the Securities and
Exchange Commission on December 21, 2004).
10.4 Content License Agreement, dated August 24, 2004, by and
between CSC Holdings, Inc. and Zone 4 Play, Inc.
(incorporated by reference to Exhibit 10.19 to Amendment No.
1 to the Company's Form SB-2 (File No. 333-120174) filed
with the Securities and Exchange Commission on December 21,
2004).
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10.5 Securities Purchase Agreement dated January 3, 2005 by and
among the Company and a list of the purchasers identified on
the signature pages thereto (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on January
7, 2005).
10.6 Agreement dated January 17, 2005 between Eurobet UK Limited
and Zone Play (UK) Limited (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on January
24, 2005).
10.7 Agreement dated January 24, 2005 between The Poker Channel
Ltd. And Zone4Play Inc. (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on January
27, 2005).
10.8 Interactive Fixed Odds Betting Services Agreement dated
February 22, 2005 by and among Zone4Play Inc. Winner.Com
(UK) Limited and Two Way Media Limited (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission
on February 28, 2005).
10.9 Agreement, dated January 17, 2005 between Eurobet UK Limited
and Zone4Play (UK) Limited (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K/A
filed with the Securities and Exchange Commission on April
28, 2005).
10.10 Securities Purchase Agreement dated January 27, 2005 among
the Company and the purchasers identified on the signature
pages thereto (incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 27, 2005).
10.11 Director Appointment Agreement of Sean Ryan dated February
15, 2005 (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 22, 2005).
10.12 Stock Purchase Agreement dated March 10, 2005 by and between
the Company and Netfun Ltd. (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on March
14, 2005).
10.13 License Agreement, dated April 21, 2005, by and between
Zone4Play (UK) Limited and Cosmotrade Investments Limited
(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 27, 2005).
10.14 Amended Employment Agreement with Uri Levy dated May 1, 2005
(incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-QSB filed with the Securities
and Exchange Commission on August 9, 2005).
10.15 Amended Employment Agreement dated July 25, 2005, by and
between Zone 4 Play (Israel) Ltd. and Mr. Shimon Citron.
(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 27, 2005).
10.16 Agreement, dated August 17, 2005 between Two Way TV
Australia Limited and Zone 4 Play, Inc., (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission
on August 23, 2005).
10.17 Securities Purchase Agreement dated March 20, 2006 between
the Company and certain accredited investors (incorporated
by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K filed with the Securities and Exchange
Commission on March 24, 2006).
10.18 Securities Purchase Agreement dated March 29, 2006 between
the Company and certain accredited investors (incorporated
by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K filed with the Securities and Exchange
Commission on March 31, 2006).
10.19 Director Appointment Agreement dated as of January 15, 2006
by and between Zone 4 Play, Inc. and Adiv Baruch
((incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 18, 2006).
10.20 A Summary of Directors Ongoing Compensation (incorporated by
reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-KSB filed with the Securities and Exchange
Commission on April 11, 2006).
10.21 Sample Agreement under the Company's 2004 Global Option
Share Plan (incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on April 11, 2006).
II - 5
10.22 Master Services Agreement dated April 17, 2006, by and among
Zone4Play, Inc., Two Way Media Limited and Ladbrokes
E-Gaming Limited, and Statement of Work dated April 17, 2006
issued by Ladbrokes E-Gaming Limited (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission
on April 20, 2006).
10.23 Amendment to 2004 Global Share Option Plan of Zone 4 Play,
Inc. (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 10, 2006).
10.24 2004 Global Share Option Plan of Zone 4 Play, Inc.
(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 30, 2004).
10.25 Option Agreement between Zone 4 Play, Inc. and Citron
Investments Ltd. dated April 3, 2006 (incorporated by
reference to Exhibit 10.1. to the Company's Quarterly Report
on Form 10-QSB filed with the Securities and Exchange
Commission on August 15, 2006).
10.26 Share Subscription and Option Agreement dated September 14,
2006, by and among, RNG Gaming Ltd., Golden Palace Ltd.,and
Gaming Ventures plc. (incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on September 14,
2006).
10.27 Software License Agreement dated October 31, 2006, by and
among, RNG Gaming Ltd. and Golden Palace Ltd. (incorporated
by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K filed with the Securities and Exchange
Commission on November 6, 2006).
10.28 Agreement dated April 30, 2007 between Zone 4 Play, Inc. and
Two Way Limited. (incorporated by reference to Exhibit 10.1.
to the Company's Quarterly Report on Form 10-QSB filed with
the Securities and Exchange Commission on May 21, 2007).
16.1 Letter from Kost Forer Gabbay & Kasierer, a member of Ernst
& Young Global to the Securities and Exchange Commission
dated July 10, 2006 (incorporated by reference to Exhibit
16.1 to the Company's Current Report on Form 8-K/A filed
with the Securities and Exchange Commission on July 10,
2006).
21.1 List of Subsidiaries (incorporated by reference to Exhibit
21.1 to the Company's Annual Report on Form 10K-SB filed
with the Securities and Exchange Commission on March 30,
2007).
23.1 Consent of Z.A.G./S&W LLP (see Exhibit 5.1).
23.2 Consent of Kost Forer Gabbay & Kasierer, a member of Ernst &
Young Global. *
23.3 Consent of Ziv Haft, a member of the BDO network.*
24.1 Power of Attorney (incorporated by reference to Exhibit 24.1
to the Company's registration statement number 333-133820 on
Form SB-2 filed with the Securities and Exchange Commission
on May 4, 2006).
99.1 Letter from the Company to Mr. Ori Sasson and Mr. Jonathan
Medved dated March 24, 2006 (incorporated by reference to
Exhibit 99.1 to the Company's registration statement number
333-133820 on Form SB-2 filed with the Securities and
Exchange Commission on May 4, 2006).
* 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;
II - 6
(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.
(7) That, for the purpose of determining liability under the Securities Act
to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated of
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
II - 7
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Tel-Aviv, Israel on July 18, 2007.
ZONE 4 PLAY, INC.
By: /s/ Uri Levy
----------------
Uri Levy,
Acting Chief Executive Officer
And Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Shimon Citron and Uri Levy and each of
them, his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to (i) act on, sign and file with the Securities and
Exchange Commission any and all amendments (including post-effective amendments)
to this registration statement together with all schedules and exhibits thereto
and any subsequent registration statement filed pursuant to Rule 462(b) under
the Securities Act of 1933, as amended, together with all schedules and exhibits
thereto, (ii) act on, sign and file such certificates, instruments, agreements
and other documents as may be necessary or appropriate in connection therewith,
(iii) act on and file any supplement to any prospectus included in this
registration statement or any such amendment or any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and (iv) take any and all actions which may be necessary or appropriate
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming that all said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Uri Levy Acting Chief Executive Officer and Chief July 18, 2007
------------ Financial Officer (Principal Executive,
Uri Levy Financial and Accounting Officer)
* Director July 18, 2007
--------------
Shlomo Rothman
* Director July 18, 2007
--------------
Oded Zucker
* Director July 18, 2007
--------------
Shimon Citron
* Director July 18, 2007
--------------
Adiv Baruch
* The undersigned by signing his name hereto, does sign and execute this
registration statement pursuant to the powers of attorney executed by the
above-named directors of the registrant. Which have been filed with the
Securities and Exchange Commission on behalf of such directors.
By: /s/ Uri Levy
----------------
Uri Levy
Attorney-in-Fact
II - 8