Annual Report — Small Business — Form 10-KSB Filing Table of Contents
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(State
or other jurisdiction of incorporation or organization)
22-3375134
(I.R.S.
Employer Identification No.)
2 Andrews
Drive, 2nd
Floor,
West
Paterson, New Jersey
(Address
of principal executive offices)
07424-2672
(Zip
Code)
Issuer’s
telephone number: (973)
256-8181
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act: Common
Stock, $.001 par value
(Title
of
class)
_____________________________________
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o
Check
whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and
(2) has been subject to such filing requirements for the past
90 days. Yes x
NO o
Check
if
there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x
Indicate
by a check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act): YES o
NO x
The
issuer’s revenues for its most recent fiscal year (ended September 30,2007) were $500,000.
The
aggregate market value of the voting and non-voting common equity (consisting
of
Common Stock, par value $.001) held by non-affiliates computed using the average
bid and asked price as of January 7, 2008 was approximately
$3,781,550.
The
number of shares of Common Stock, $.001 par value, outstanding as of January7,2008was
12,265,715.
Transitional
Small Business Disclosure Format (check one): YES oNO x
PART
I
Item
1.Description
of Business
The
Company
Interactive
Systems Worldwide Inc. (“ISWI”) has designed, developed and patented an
interactive hardware and proprietary software system (the
“SportXction®
System”)
that enables users to wager at fixed prices during the course of a sporting
event, such as soccer, football, baseball, basketball, golf, tennis, rugby,
cricket and snooker, among many others. The SportXction®
System
accepts bets not only on the outcome of a sporting event, but also on discrete
parts of the event and on specific game situations. These include such wagers
as
will a team make a first down, which player will score next, will a batter
get
on base or will a penalty shot be successful. The SportXction®
System
is unique in that it permits betting continuously while the game is in progress,
or between game events, such as downs, pitches, changes in ball possession
and
similar situations, permitting more frequent placing and cashing of
wagers.
The
SportXction®
System
software monitors and changes the odds on the contestants in a sporting event
to
induce the players to wager such that the betting pool for each betting
proposition is continuously driven toward a financial balance, to within a
pre-set level. In general, a balanced pool is achieved when the money bet on
the
losing outcomes of a betting proposition is sufficient to pay off the winning
outcomes of that proposition plus provide the operator with a commission for
brokering the transactions. The SportXction®
System
maintains a record of all wagers placed by each bettor and keeps an account
for
each bettor, subtracting bet amounts and adding payouts. The
SportXction®
System
has been developed to allow wagers to be placed simultaneously through a variety
of input devices, all interconnected to our central system, such as interactive
television set-top boxes, personal computers communicating via the Internet,
wireless hand-held devices, mobile telephones and standalone kiosks. The Company
has also developed a non-wagering (i.e. competition) version of the
SportXction®
System.
On
July31, 2002, ISWI, through a wholly-owned subsidiary, acquired all of the
outstanding share capital of Global Interactive Gaming Limited (“GIG”) a British
interactive gaming service provider located in London, England, that markets
its
services to interactive television carriers which employ satellite, cable and
terrestrial programming, mobile telephone operators, licensed bookmakers and
casinos. Prior to the acquisition, GIG had been ISWI’s worldwide exclusive
licensee for its technology in all business activities for which the technology
was legally usable other than wagering in Nevada and for securities transactions
and lotteries. GIG has wholly owned subsidiaries, GIG Operations Limited and
Brightform Limited.
The
Company makes available free of charge through our website, www.isw.com,
the
Company’s annual report on Form 10-KSB, quarterly reports on Form 10-QSB,
current reports on Form 8-K, and amendments to these reports, as soon as
practicable after the Company has electronically filed such material with,
or
furnished such material to, the SEC.
As
used
in this Report the term “Company”, unless the context otherwise requires, means
ISWI and its wholly-owned subsidiaries, including GIG.
2
History
ISWI’s
SportXction®
System
was conceived by its founder, Mr. Barry Mindes, who together with Mr. Bernard
Albanese, the Company’s Chairman and Chief Executive Officer, developed a
simulation of the SportXction®
System
for use in determining whether casinos in Nevada had interest in the
SportXction®
System.
Additionally, patent applications covering the SportXction®
System
were prepared and filed with the U.S. Patent and Trademark Office and
corresponding foreign patent applications were also filed. In May 1995, shortly
after the Company was organized and commenced operations, the Company raised
an
initial round of capital privately and during the next year developed and tested
the SportXction®
System.
Thereafter, in mid-1996, the Company sought approval for use of the System
from
the Nevada Gaming Authorities (as hereinafter defined). On December 11,1996, the Company consummated its initial public offering (the “IPO”) pursuant
to which it sold 1,725,000 Units for gross proceeds of $10,350,000. Each Unit
consisted of one share of Common Stock, and one redeemable Warrant
(collectively, the “Redeemable Warrants”) to purchase one share of Common Stock
at an exercise price of $7.20 per share. The Redeemable Warrants expired on
February 25, 2002 without any having been exercised. On May 18, 2007, as a
result of failing to comply with NASDAQ’s shareholders’ equity requirement, the
Company’s Common Stock was de-listed from the NASDAQ Capital Market.
The
Company’s Common Stock is currently quoted on
the
Over-the-Counter Bulletin Board maintained by the NASD
and the
Pink Sheets, an electronic quotation service for securities traded
over-the-counter.
After
completing trials of the SportXction®
System,
it was approved for use in January 1997 by the Nevada Gaming Authorities. The
Company initially used the SportXction®
System
in several individual casinos; subsequently in a group of inter-linked casinos;
and ultimately from remote, non-casino locations, from 1998 until early 2000.
At
that time, the Company concluded that although the SportXction®
System
functioned properly and was well received by players, it was not attracting
a
sufficient number of players in the casino environment or producing sufficient
revenues to warrant the investment required to continue to build the customer
base and operate within the Nevada market.
The
focus
of ISWI then shifted to being a licensor as a result of the signing of License
Agreements (collectively, the “License Agreements”) with GIG in March 2000.
Under the terms of the License Agreements, ISWI granted to GIG exclusive
licenses to market, distribute and use ISWI’s interactive
SportXction®
System
software, technology and patents on the Internet and interactive television,
in
all business activities in which such technology was legally usable, including
for contests and wagering on sporting events world-wide. Excluded from the
licenses were the continued use of the SportXction®
System
in Nevada for wagering, and the application of ISWI’s basic technology and
patents to lotteries and financial transactions (stock, bond, option and
currency trading and the like). The License Agreements provided that ISWI would
be paid the lesser of 25% of the gross profit or 1% of the gross handle, subject
to guaranteed annual minimums during the term of the License Agreements. ISWI’s
efforts between early 2000 and 2002 focused on enhancing the
SportXction®
System
for use by GIG. GIG’s majority stockholders were Prisma iVentures Ltd., a U.K.
company and subsidiary of The Kirch Group, a German media conglomerate, and
MultiSport Games Development, Inc., a Delaware corporation (“MultiSport”). As a
result of Kirch Media’s insolvency filing in Germany in April 2002, an event
unrelated to ISWI, The Kirch Group ceased providing funding for GIG. On July31,2002, ISWI acquired GIG. Since that time, the Company, through GIG, provides
interactive gaming services using the SportXction®
System
to business partners such as licensed bookmakers, mobile telephone companies,
cable and satellite television companies and operators of Internet wagering
sites, in locations where legally permitted. Subsequent to the acquisition,
the
License Agreements were modified and no longer provide an exclusive license
to
GIG or guaranteed annual minimums.
3
Industry
Overview
In
sports
wagering, the gaming establishment, or “house,” generally seeks to maintain a
“balanced book.” A balanced book is achieved when the money bet on the losing
outcomes of a betting proposition is sufficient to pay off the bets on the
winning outcome of that proposition. To accomplish this, the house gives either
a handicap (the point spread or margin by which the favorite must win) or odds
(a greater than equal payout on winning to the underdog or a lesser one to
the
favorite) on the outcome of the event, or a combination of both. The house’s
goal in general is to have the funds paid to the winners equal the amount
received from the losers, less the commissions that the house charges for
brokering the transactions and the use of its facilities.
Sports
bettors want to know the odds or point spread (the “line”) of the wager at the
time the bet is placed. While the odds or point spread might change as the
house
attempts to balance its book, the terms for previously placed bets remain the
same. Thus, bettors who place several bets on the same team or contestant over
a
period of time could have different odds or point spreads on each wager
depending upon when the bet was placed.
The
profits of dedicated sports wagering facilities (“Sports books”) depend upon the
reliability of the odds and its adjustment of the odds when necessary. On
occasion, the house’s initial handicap or odds will not result in a balanced
book because the players do not agree with the house’s assessment of the
expected outcome of the contest or an event that takes place during the contest
for which a betting proposition is being offered. The house will attempt to
attract bets on one potential outcome of the proposition by changing or moving
the line up or down to induce a betting pattern which will lead toward a
balanced book. If this is not possible, the house may only accept bets which
are
matched in payout so that no further imbalance will be created, refuse to accept
wagers on one of the contestants or limit the maximum amount of money that
will
be accepted on a betting line to attempt to avoid the risk of taking an
unacceptable number of bets on one potential outcome of a betting proposition.
When the limit is reached, the line is moved. Currently, sports wagering
establishments do not change odds or handicaps frequently in order to balance
pools. The odds or handicaps are changed usually only after the book gets
substantially out of balance, if at all. Sports books currently are rarely
perfectly balanced. To the extent that the book is not balanced, the sports
book
takes risk on the outcome of the game or event which varies directly with the
level of imbalance. As a result, although the operator can gain extraordinary
profits if the outcome of the proposition favors the side which has too little
payout associated with it, the operator is gambling on a given outcome, instead
of brokering a transaction for a fee.
The
Internet is the largest present venue for sports wagering worldwide as it is
legal in many countries outside of the United States. According to Global
Betting & Gaming Consultants (“GBGC”), a market-research firm, the
global
online sports betting market, including betting exchanges, was estimated to
be
worth approximately $5.6 billion in 2006, having grown at a compound annual
rate
since 2000 of 21%. Excluding the US, which is estimated to be the largest online
sports betting market in the world, GBGC estimates that the size of the online
sports betting market was approximately $2.6 billion in 2006.
4
In
the
United States, gambling over the Internet is illegal both for players and
operators of Internet wagering sites. United States law prohibits players
located in the United States from placing bets on Internet sites that are
operated by legally licensed foreign nationals. As a result of the Unlawful
Internet Gambling Enforcement Act of 2006, credit cards and other payment
providers have stopped accepting charges from residents of the United States.
The agreements between the Company and its partners precludes the partners
from
using the Company’s SportXction®
System
software to accept wagers from the United States and any other location where
it
is illegal to do so. The Company has also implemented controls which prevent
potential users from the United States from being able to use the Company’s
SportXction®
System.
Although
not currently operating in Nevada, ISWI holds a gaming license as an operator
of
an “inter-casino linked system” and is registered with the Nevada Gaming
Commission as a publicly-traded corporation. The Company retains the right
to
re-enter the Nevada sports wagering market at some future date, which it might
do with its SportXction®
System
or a subset thereof.
System
Deployment Status
The
SportXction®
System
is currently operated across several interactive mediums, including the internet
and wireless, touch screen, handheld devices and is capable of operating on
interactive television, mobile phones and standalone kiosks. GIG currently
offers live play-by-play wagering for soccer, cricket (both one day and test
matches), golf, rugby union, tennis, football, basketball, snooker and darts.
The Company also has developed a baseball version of the SportXction®
System
which Hipodromo de Agua Caliente S.A. de C.V. (“Caliente”), GIG’s Latin American
partner, offers.
GIG
offered live play-by-play wagering on approximately 2800 events during the
year
ending September 30, 2007. GIG intends to offer wagering on approximately 3200
events during fiscal year 2008. The SportXction®
System
allows wagering using multiple currencies and provides players with a choice
of
languages. The Company’s current revenue primarily consists of minimum monthly
service charges for furnishing the technology and in some cases operating the
system. In addition, after achieving certain thresholds, the Company may be
entitled to a share of the net wagering revenue generated by its
SportXction®
System.
This component of revenue may be reduced for certain pool imbalance risks that
arise from being a part of the house.
Internet
The
Company has several non-exclusive agreements with bookmakers in the UK and
Gibraltar. Under these agreements, GIG furnishes the technology and operates
the
system, and the partner is responsible for marketing the product, first level
customer support and for processing customer financial transactions.
5
The
Company currently offers a fully integrated product configuration and
operational services package, which is provided to the Company’s wagering
partners. By providing a real-time, interactive data stream, the Company’s
play-by-play betting propositions are placed seamlessly within our business
partners’ betting offerings, maintaining a consistent “look and feel” with the
partner’s other betting offerings. The user can then place wagers from its
existing account in the same manner as all other bets made with that partner.
The betting offerings managed by GIG’s staff, utilizing the SportXction® System,
are indistinguishable from the betting offerings managed by our business
partner’s employees.
On
December 5, 2006, the Company announced that it had launched this integrated
version of its SportXction®
System
with Interactive Sports Limited, a wholly-owned subsidiary of Sportingbet.
On
January 9, 2007, the Company announced that it had launched this integrated
version of its SportXction®
System
with Ladbrokes eGaming Ltd.
As
of
September 1, 2007, the Company had discontinued its stand-alone product
configuration with BetShop Group (Europe) Ltd., Victor Chandler UK Ltd., and
Victor Chandler International. The Company is currently in discussions with
some
of our former stand-alone business partners and with potential new partners
regarding the integrated product.
Hand-held
devices
Under
a
three year agreement entered into in August 2006, GIG provides software and
services that enable Caliente, one of Latin America’s largest gaming companies,
to offer an enhanced play-by-play sports betting service in all of its Race
& Sports Books locations. Caliente owns and/or provides services to 160
betting shops, known as Race & Sports Books, throughout Mexico, Central and
South America and the Caribbean. Since September 2006, the Company’s
SportXction®
System
has been deployed in ten locations using hand held, touch screen devices. The
SportXction®
System
is also expected to be offered on Caliente’s website in 2008.
Caliente
is operating the play-by-play betting service using its own personnel. GIG
has
provided initial set-up support and some software customization and training,
and will provide on-going technical assistance. The agreement specifies monthly
service fees for technical assistance, as well as monthly license fees based
on
the handle derived from the enhanced play-by-play betting service.
Anticipated
deployments
On
September 17, 2007, the Company announced that it had received a purchase order
from the Ontario Lottery and Gaming Corporation ("OLG"), which authorizes the
spending of up to $175,000 for software development and other services. This
software development is required for the modification of the Company's
SportXction®
System
to add certain features, including the offering of parlay wagering, required
by
OLG. OLG is authorized under Canadian and provincial law to operate gaming
and
wagering businesses within the Province of Ontario.
6
The
Company and OLG are currently negotiating a development/licensing agreement,
which would allow OLG to conduct a six-month field trial of the modified
SportXction®
System,
after its completion, for use in up to two casinos. The purchase order allowed
the commencement of software development while the definitive licensing
agreement is being negotiated. Actual delivery of the modified software will
not
occur until after signing the licensing agreement. The Company is optimistic
that this field trial will lead to a broader implementation in multiple casinos
and other on-site gaming venues throughout Ontario, Canada. If successful,
the
system will have applicability in other Canadian provinces, as
well.
On
December 5, 2007, the Company announced that it has signed an Agreement in
Principle with Neptune Race and Sports Book, Inc. ("Neptune"). This non-binding
agreement provides the commercial framework for an anticipated licensing
agreement to be negotiated between the two parties for the use of the Company's
SportXction®
System.
Neptune
currently provides turnkey race and sports wagering systems and services for
use
on cruise ships and in resort casinos. The intention of this agreement is for
Neptune to license the Company's SportXction®
System
in order
to add play-by-play wagering to its existing capabilities for use in its current
and future casino venues. It is anticipated that Neptune's personnel will
operate the SportXction®
System
from its
operations hub located in Nevada. The Company anticipates receiving initial
upfront service fees as well as a share of the revenue.
Non-wagering
product
The
Company has a non-gambling version of its SportXction®
System
which allows users to predict the outcome of events during a sporting event.
This product was successfully introduced in the U.K. during fiscal 2004. Users
earn points for correct predictions, bonuses for strings of successful
predictions and for correct answers to sport’s trivia questions and compete on
the basis of their scores for a variety of prizes. The Company is currently
marketing the contest product to professional leagues, professional teams and
sports rights holders in the United States, the U.K. and Europe.
Racing
product
The
Company also intends to complete development of a fixed-odds / pari-mutuel
hybrid racing product for the U.S. market. The Company has filed a patent
application with the intent of commercializing a product that will combine
the
advantages of fixed-odds wagering while satisfying the current U.S. pari-mutuel
rules and regulations. The Company believes that this offering will provide
an
improved alternative to traditional pari-mutuel wagering in the interstate
horse
racing market.
Marketing
and Sales Strategy
The
Company is in discussions with several companies in the U.K., Europe and
elsewhere in the world for the incorporation of the SportXction®
System
into the offerings of these companies. In this regard, the Company is pursuing
a
“business to business” strategy, partnering with companies who possess an
existing betting customer base. This strategy offers the benefits of potentially
more immediate revenues as well as a lower marketing investment to gain players.
7
The
focus
of the Company’s current marketing efforts is in the U.K. and Europe although
opportunities elsewhere in the world are also being pursued. The Company may
enter other foreign markets acting solely as a licensor of the
SportXction®
System,
similar to its agreement with Caliente in Mexico. The Company may also re-enter
the Nevada market and its Nevada gaming license has been maintained for that
purpose.
Intellectual
Property
The
Company regards the SportXction®
System
as proprietary. The Company has two U.S. patents covering its proprietary
wagering methods and its related computer processing system. Corresponding
applications for each of the two patents have been filed and approved in 17
foreign countries. The Company also has a patent pending to use its technology
in a fixed-odds/pari-mutuel hybrid for use in wagering on horse races.
On
March26, 2007, the Company announced that it had settled all claims pertaining to
the
patent infringement lawsuit filed by ISWI in December 2005 concerning
Progressive Gaming International Corporation's Rapid Bet LiveTM
("RBL")
product. The parties signed a licensing agreement that grants Progressive Gaming
a worldwide, non-exclusive license to practice ISWI's existing patent portfolio
regarding sports wagering. The Company received an initial license payment,
and
may be entitled to an ongoing royalty based on product placement milestones
and
the revenues generated by RBL as well as other related products.
It
is the
Company’s policy that all employees and outside consultants involved in research
or development activities sign proprietary information, non-disclosure and
patent assignment agreements. This may, however, not afford adequate protection
for the Company’s know-how and proprietary products. Other parties may develop
products similar to the SportXction®
System
or otherwise attempt to duplicate the SportXction®
System
in ways which circumvent the Company’s technology and existing or future
patents.
The
Company has not recently received any claim that it is infringing any patents
of
others. However, there can be no assurance that third parties will not assert
infringement claims against the Company, which claims the Company would be
required to defend at considerable expense or enter into arrangements requiring
the Company to pay royalties or other damages, any of which could materially
and
adversely affect the Company’s business.
The
Company applied for Federal trademark registration and for State of Nevada
servicemark registration for the name SportXction®,
both of
which have been issued.
Competition
Sports
wagering both within the United States and in foreign countries competes with
other forms of gambling available to the general public, including, but not
limited to, casino games (such as traditional slot machines, video slot, poker
and blackjack machines, roulette, card games, keno and craps), bingo,
state-sponsored lotteries, on-and-off track betting on horses and dogs, jai
alai, off-shore cruise ships, riverboats, Native American gaming operations
and
wagering via the Internet, iTV and mobile phones.
8
The
Company’s primary competitors include the operators of sports wagering sites on
the Internet. These operators accept traditional pre-game wagers and recently
have expanded the number of wagers being offered during the course of an event
on sporting events. They operate from locations outside of the United States,
as
this type of wagering is illegal in the United States. Well-financed, long
established bookmaking firms with significantly more financial resources than
the Company operate some of these Internet sites. Many of these have
substantially more experience than the Company in the wagering business. While,
to the best of the Company’s knowledge, none of these sites offer products which
are similar to the SportXction®
System
in any significant degree, it cannot be assured that such competition might
not
arise, or that the Company’s patents will provide sufficient protection against
such competition. To the extent that such competition arose, the market for
the
SportXction®
System
might be diluted. In addition, no assurance can be given that other systems
similar to the SportXction®
System
do not exist or are not under development.
Personnel
The
Company currently has two full-time employees in the United States and 5
full-time employees in England. The Company considers its relations with its
employees to be good. The Company also utilizes outside consultants and two
part-time employees (one in the United states and one in England) to perform
the
accounting function and for specific assignments or projects. The Company may
seek to hire additional programmers, technicians and administrative
personnel.
Research
and Development
During
the fiscal years ended September 30, 2007 and 2006, the Company spent
approximately $377,000 and $497,000, respectively, on research and development
activities. These expenses included primarily, programmers’ salaries and
benefits, consultants’ fees, amortization expense associated with capitalized
development costs and the depreciation expense associated with computer
equipment used in the development of the SportXction®
System.
During the fiscal years ended September 30, 2007 and 2006, all of the Company’s
research and development expense reflect costs associated with supporting the
SportXction®
System.
The Company intends to continue to expend significant sums on such
activities.
During
the fiscal years September 30, 2007 and 2006, the Company capitalized $103,000
and $439,000, respectively, of expenses related to enhancements of its
SportXction®
System.
These amounts will be amortized over their estimated useful life (generally
three years) after they were put into commercial use.
The
SportXction®
Sports Wagering System
Overview
of the System
The
SportXction®
sports
wagering System permits continuous fixed price betting during the course of
a
sporting event by continuously attempting to balance the betting pool on each
betting proposition to within a pre-set level. It allows bettors to view a
live
sporting event, wager throughout that event as it progresses and cash winning
bets. The period during which wagers may be placed is thereby extended. The
SportXction®
System
accepts bets on the outcome of the sporting event, on discrete parts of the
event, and on specific game situations, such as will a team get a first down,
which player will score next, or will a player make two foul shots. The
SportXction®
System
can also accept traditional pre-game side and totals wagers as well as some
forms of parlays.
9
The
SportXction®
System
is capable of being used with interactive television, over the Internet, over
a
dedicated private network, or over a wireless network utilizing mobile phones,
PDAs or other hand held devices, as input devices. Furthermore, in addition
to
following the sporting event on television or using a television card or video
streaming technology with a personal computer, a player could follow the game
on
the radio, in a sports bar or betting shop, or even while attending a live
event, with wagers being entered via in-place terminals or from hand held
devices.
Operation
of the System
The
SportXction®
System
operator begins by setting up a number of pools or wagering propositions (for
example, the scorer of the next goal, the winner of a game or the team leading
at the end of a particular period of play, over or under scoring on the game
or
period, and wagers on specific events or games situations). Prior to
commencement of the sporting event, the SportXction®
System
operator sets the odds or handicap (point spread) on certain betting
propositions, with greater odds given to the less capable contestant. These
are
usually based upon statistical data from previous events plus research on the
teams, players, game conditions, injuries, etc. Once the sporting event begins,
the SportXction®
System
sets the initial odds on other betting propositions. The SportXction®
System
changes the odds automatically as bets are made in order to induce a betting
pattern that would lead to a balanced pool. The bettor may therefore make
multiple wagers on the same betting proposition as the odds change. As wagering
continues, one of the potential outcomes of a betting proposition may have
more
money bet on it than expected and thereby become underfunded (that is, the
SportXction®
System
will not have enough money to pay the bettors should this potential outcome
win). If this occurs, and if the underfunded potential outcome of the betting
proposition wins, the house would make less profit than desired, and in some
cases, might even have to pay out more money to the winning bettors than the
house would have received from the bettors on the other potential outcomes
(i.e.
the potential outcomes that are overfunded). Of course, if the potential outcome
that is overfunded wins, the house would win more than expected. To limit the
house’s exposure, the SportXction®
System
is designed to automatically adjust the odds to induce more bettors to wager
on
the potential outcomes of the betting proposition that are overfunded, and
to
discourage bettors to wager on the potential outcomes that are underfunded,
thereby attempting to bring the pool more into balance.
It
is not
necessary that the book be perfectly balanced, but only that the imbalances
be
within a pre-set level, typically less than some percentage of the pool or
dollar amount set by the house. Under these circumstances, the house can
generally ensure that its exposure is no more than a fixed percentage or dollar
amount, which is an acceptable portion of the profit from its commissions.
The
SportXction®
System
is generally able to automatically prevent the house exposure from exceeding
a
specified maximum amount by changing the betting terms in the pool to induce
bettors to wager on the potential outcomes that are overfunded. In extreme
cases, the house or the SportXction®
System
may automatically stop accepting bets on an underfunded potential outcome when
the exposure limit is reached while continuing to accept bets on the other
potential outcomes. Under these circumstances, the pool will presumably tend
to
return to balance after which the house can resume taking bets on the side
of
the proposition for which betting was suspended.
10
The
SportXction®
System
permits, and the sports wagering operator is likely to have, both long- and
short-term propositions on a sporting event. Long-term propositions may be
based
upon the outcome of an entire game or discrete segments of a game. Wagering
continues on the long-term propositions even as game conditions change, causing
the odds on the outcome to change during the course of the event. Examples
of
typical short-term propositions are, in football, will the offensive team make
a
first down on a specific possession; and in basketball, which team will be
the
next to score 10 points. Betting is almost continuous until the specific event
occurs or the specific game situation is completed. Since short-term pools
open
and close rapidly, sometimes in several minutes or less, there are new
propositions constantly available for players during the entire
contest.
The
SportXction®
System
works on a “bet against deposited funds” basis. When a bettor wishes to wager
using the SportXction®
System,
he must establish an account and fund it by depositing a sum of money in the
account. The bettor places wagers using his funds on deposit. The
SportXction®
System
automatically adds the bettor’s payouts and subtracts amounts bet from his
account. When the player wishes to commence play, he signs on to the
SportXction®
System
through an input device which can be an on-line computer terminal, interactive
TV, mobile phone, PDA, or like device (“Player Betting Device”). The screen or
monitor on the Player Betting Device will show the bettor’s available balance,
initially equal to his deposit. As wagers are placed, this balance is reduced
by
the amounts wagered. When the bettor wins, his Player Betting Device shows
that
he has won and his balance is automatically increased by the wager’s
payout.
The
SportXction®
System
produces time-stamped records, providing regulatory authorities as well as
gaming establishments with the ability to audit, analyze and control a
game.
System
Components
The
Company’s proprietary software and state-of-the-art, commonly available
hardware, is configured in an arrangement designed specifically for use with
the
SportXction®
System.
The software permits the operator to make available a wide variety of betting
propositions to players. The SportXction®
System
has been designed to work with a variety of Player Betting Devices (e.g. PC’s
running a browser, television set-top boxes, mobile phones, PDAs, and similar
devices) each of which has different inherent capabilities and limitations,
some
of which are more “intelligent” than others. These Player Betting Devices are
connected to the SportXction®
System
utilizing several types of networks (e.g. Internet, dedicated private network
or
wireless networks). As a result of this flexibility, the SportXction®
System
has a variety of different client interface and interconnection modules that
may
be used as determined by the configuration of a particular instance of the
SportXction®
System.
The Player Betting Device enables bettors to enter bets into the
SportXction®
System.
The System displays the wagers available, the prices, the payoff to be received,
the status of the player’s available balance and open bet amounts. It also
allows for signing on and off, selecting a game, reviewing and sending bets,
reviewing bet history and other information appropriate to interactive
wagering.
11
The
major
back-end server elements of the SportXction®
System
include the Hub Server, which includes the Pool Processor, plus numerous input
and control software modules that run on individual computers connected to
the
Hub Server. These modules include the Game Controller Module, Game Supervisor
Module, Manager Module, Administrative Module and Cashier Module, among others,
all of which are controlled by proprietary software. The SportXction®
System
uses redundant hardware and re-start and recovery software to maximize
SportXction®
System
up-time in the event of component failure.
All
Player Betting Devices are connected to the Hub Server via a client/server
network. The Hub Server Modules are software components on a network of server
computers. The transmission of data between the various elements of the Hub
Server operates in real time utilizing sophisticated mathematical algorithms
for
high speed. As a result, the SportXction®
System
is very scalable and able to handle large numbers of users and wagering
transactions. The Hub Server Modules maintain all pools, calculate odds, open
and close all wagering on all pools, control security for all input devices,
produce all management and regulatory reports and is the repository of all
current and historical data on the wagering system. The proprietary software
contained in the Pool Processor permits continuous, rapid recalculation of
odds,
based upon changing betting patterns and an evaluation of bets that have been
placed and can be augmented with event statistics and statistical modeling,
if
available.
Other
server modules include the following:
The
Game
Controller Module permits the entry of data relating to all substantive events
during the course of a sporting event that affect the betting odds. The
SportXction®
System
sends this information to the Pool Processor to open and close betting
propositions, determine unofficial proposition winners and set opening lines,
among other things.
The
Game
Supervisor Module is used to manually open betting lines, enter data to attempt
to maintain the desired level of house commission as pool balances change,
close
or suspend one or both sides of a betting proposition and declare official
pool
winners.
The
Manager Module is used to monitor the overall SportXction®
System
activity and volume, perform hardware and software system configuration
functions and monitor System alerts.
The
Administrative Module is the main management Module in the
SportXction®
System.
It is used to control security, maintain the schedule of future events and
maintain the SportXction®
System
tables which control the propositions being offered and the business rules
to be
followed by the SportXction®
System.
It is through this module that most reports are accessed.
12
The
Cashier Module can access the status of every player’s account. It is the link
through which funds can be manually entered into and withdrawn from accounts,
adjustments are made, and other manual interactions with player accounts are
accomplished in the casino version of the SportXction®
System.
For on-line implementations, the SportXction®
System’s
design also allows players to transfer funds securely from financial
institutions into and out of their SportXction®
accounts. The SportXction®
System
can also be interfaced to third-party accounting systems, so that money can
be
transferred between the System and the accounts of players who have signed
up
with the Company’s business partners.
Traditional
Pre-Game Wagering
When
the
SportXction®
System
was operational in Nevada, it also accepted traditional pre-game side and totals
wagers as well as some forms of parlays. Pre-game wagers are treated by the
SportXction®
System
in the same way as the play-by-play wagers. Because pre-game wagers arrive
at a
slower pace than play-by-play wagers, less reliance is needed on the automatic
line movement features of the SportXction®
System.
Additional financial analysis programs are available for manual review and
control of the wagering pools.
The
current version of the SportXction®
System
has not been modified to include this traditional pre-game wagering capability.
However, the Company does not consider such a modification to the software,
as
it exists, to be of significant difficulty or scope.
Government
Regulation
United
Kingdom
Prior
to
September 2007, the Company’s indirect, wholly-owned subsidiaries, Brightform
Limited (“Brightform”) and GIG Operations Limited (“GIG Operations”) provided
betting services within the United Kingdom and needed to comply with betting
legislation in the United Kingdom. Betting was regulated in the United Kingdom
under the Betting Gaming and Lotteries Act 1963 (“the Betting Act”), Betting and
Gaming Duties Act 1981 (“the Duties Act”) and associated regulations (all
collectively referred to as the “Acts”).
The
Betting Act regulated on-course (betting taking place at a licensed track)
and
off-course betting (telephone, Internet and other betting not undertaken at
a
licensed track) as well as pool betting in the United Kingdom. The Betting
Act
dealt with, among other things, applications for bookmakers’ permits, the
conduct of bookmakers and the running of licensed betting premises by bookmakers
and/or bookmakers’ agents in the United Kingdom. The Duties Act and associated
regulations primarily dealt with the financial reporting and taxation
responsibilities of those involved in the bookmaking and gaming
industry.
The
Betting Act provided the framework for the control of betting in the United
Kingdom. It is based on the prohibition of betting in streets or public places,
other than on racecourses (on days when racing was taking place), and in
premises operating under a license. It also prohibited any person from acting
as
a bookmaker without a license and restricted pool betting and betting on
tracks.
13
In
order
to obtain a bookmaker’s permit in the United Kingdom an application had to be
made to the Licensing Justices at the applicable Magistrates Court (in England
and Wales) or the Local Authority Licensing Board in Scotland. The essential
tests applied by the licensing justices when considering an application were
whether or not the applicant was a fit and proper person to hold a bookmakers’
permit, whether they were competent to operate a bookmaking business and whether
they had sufficient financial resources to meet the potential liabilities that
may arise. Brightform applied for and acquired a bookmaker’s permit on April 28,2003. This permit was renewed on April 28, 2006 and
was
due to expire on May 31, 2009.
Separately, GIG Operations applied for and acquired a betting agency permit
in
respect of its customer, UKbetting, on January 20, 2003 and in respect of its
customer, Sportingbet, on October 20, 2003. These permits were renewed on April28, 2006 and were due to expire on May 31, 2009.
In
order
to use any premises for betting transactions in circumstances where persons
were
physically present, a bookmaker had also to obtain a betting office license
for
the particular premises. In order to provide fixed odds betting services on
interactive television or over the Internet, a company operating in the United
Kingdom needed only to have a bookmaker’s permit. A betting office license was
not required as it related to specific premises in which customers placed
bets.
Both
bookmakers’ permits and betting office licenses remained valid during the
applicable licensing period (a maximum of three years) and all permits and
licenses expired by elapse of time. Bookmakers and/or bookmakers’ agents had to
make applications for the renewal of their permits and/or betting office
licenses.
In
September 2007, the system for licensing betting activities was replaced by
a
new licensing regime under the Gambling Act 2005 (the “Act”). The Act created a
framework that seeks to modernize the current gaming legislation and importantly
to regulate Internet, interactive television, and other remote forms through
a
new licensing regime. A new body, the Gambling Commission, was created to
regulate the industry. Prior to September 2007, the Company discontinued the
use
of its stand-alone product in the UK. The integrated version of the Company’s
product provides a data stream containing suggested betting propositions,
including pertinent characteristics such as handicaps and betting odds. The
Company’s business partners’ systems receive this data stream and may offer some
or all of the betting opportunities to their customers. The SportXction® System
is configured also to optionally provide risk management recommendations to
its
partners relating to the betting opportunities offered. Wager’s are received,
processed, and tracked by the partner’s systems. Because the Company’s software
is not directly responsible for the processing of wagers, the Company believes
that neither its UK subsidiaries nor its software is required to be licensed
under the Act.
Nevada
Prior
to
April 2000, ISWI conducted business in the State of Nevada as the operator
of a
sports wagering system. As such, it was required to obtain a gaming license
as
an operator of an “inter-casino linked system” (“OILS License”) and to register
with the Nevada Gaming Commission as a publicly traded corporation (a
“Registered Corporation”). ISWI is not currently operating in Nevada, although
it continues to hold its OILS License and is still a Registered Corporation.
ISWI is currently marketing its current System to software providers and casinos
in Nevada. These marketing efforts are aimed at licensing the Company’s
SportXction®
System
to software providers and casinos in order for them to operate a system
utilizing the Company’s SportXction®
System
software. The Company has no current plans to re-enter the business of operating
a sports wagering system in Nevada. Nevertheless, in order to maintain its
OILS
License, the Company must continue to comply with Nevada gaming law. If the
Company decided that it is not likely that it will operate a sports wagering
system in Nevada, it may decide to withdraw its license.
14
The
ownership and operation of casino gaming facilities in Nevada, including sports
pools, the operation of an inter-casino linked system, the manufacture, sale
and
distribution of gaming devices for use or play in Nevada or for distribution
outside of Nevada, and the manufacture, sale and distribution of associated
equipment for use or play in Nevada is subject to The Nevada Gaming Control
Act
and the regulations promulgated there under (collectively, the “Nevada Act”) and
various local ordinances and regulations. Such activities are subject to the
licensing and regulatory control of the Nevada Gaming Commission (“Nevada
Commission”), the Nevada State Gaming Control Board (“Nevada Board”), and
various local, city and county regulatory agencies. (The Nevada Commission
and
Nevada Board are collectively referred to herein as the “Nevada Gaming
Authorities.”)
The
laws,
regulations and supervisory procedures of the Nevada Gaming Authorities are
based upon declarations of public policy which are concerned with, among other
things: (i) the prevention of unsavory or unsuitable persons from having a
direct or indirect involvement with gaming, or manufacturing or distribution
of
gaming devices at any time or in any capacity; (ii) the strict regulation
of all persons, locations, practices, associations and activities related to
the
operation of licensed gaming establishments and the manufacture or distribution
of gaming devices and equipment; (iii) the establishment and maintenance of
responsible accounting practices and procedures; (iv) the maintenance of
effective controls over the financial practices of licensees, including the
establishment of minimum procedures for internal fiscal affairs and the
safeguarding of assets and revenues, providing reliable record keeping and
requiring the filing of periodic reports with the Nevada Gaming Authorities;
(v) the prevention of cheating and fraudulent practices; and
(vi) providing a source of state and local revenues through taxation and
licensing fees.
Within
the United States, sports wagering is currently legal only in Nevada. Pursuant
to the Professional and Amateur Sports Protection Act, 28 U.S.C. Section 3701,
et. seq. (hereinafter referred to as the “Sports Act”), which became effective
January 1, 1993, the proliferation of legalized sports books was
significantly curtailed. Although the Sports Act generally prohibits sports
wagering in every jurisdiction in the United States, including those
jurisdictions subject to the Indian Gaming Regulatory Act (25 U.S.C. Section
2701 et. seq.), the Sports Act currently permits such wagering in those
jurisdictions that authorized sports wagering prior to the effective date of
the
Act. 28 U.S.C. Section 3704. Thus, sports books and wagering are permitted
to
continue to operate in Nevada. Moreover, the Interstate Wire Act, 18 U.S.C.
Section 1084, also prohibits those in the business of betting and wagering
from
utilizing a wire communication facility for the transmission in interstate
or
foreign commerce of any bets, wagers or information assisting in the placing
of
such bets and wagers on any sporting event or contest unless such betting or
wagering activity is specifically authorized in each jurisdiction
involved.
15
On
April 23, 1998, the Nevada Commission granted ISWI an OILS License and
registered it as a Registered Corporation. The Nevada Commission further granted
an exemption from the requirements of its Regulation 16.100(1), which would
have
otherwise prohibited ISWI, as a Registered Corporation, from holding a Nevada
OILS License. ISWI’s OILS License has a number of conditions, all of which were
agreed to by the Company, relating to the Company’s operations and to the
SportXction®
System’s
method of operation and accounting. As a Registered Corporation and a gaming
licensee (“Gaming Licensee”) the following regulatory requirements apply to the
Company:
·
The
Company is required to maintain a regulatory compliance committee
and
periodically to submit detailed financial and operating reports to
the
Nevada Commission and to furnish any other information which the
Nevada
Commission may require.
·
The
Nevada Gaming Authorities may investigate any individual who has
a
material relationship to, or material involvement with, the Company
in
order to determine whether such individual is suitable or should
be
licensed as a business associate. Changes in licensed positions must
be
reported to the Nevada Gaming Authorities and, in addition to their
authority to deny an application for a finding of suitability of
licensure, the Nevada Gaming Authorities have jurisdiction to disapprove
a
change in corporate position or sever a relationship with such person.
Bernard Albanese (Chairman of the Board and Chief Executive Officer)
has
been approved for licensure.
·
If
it were determined that the Nevada Act was violated by the Company,
the
registration and OILS Licenses it holds could be limited, conditioned,
suspended or revoked, subject to compliance with certain statutory
and
regulatory procedures.
·
Any
beneficial holder of the Company’s voting securities, regardless of the
number or shares owned, may be required to file an application, be
investigated, and have his suitability determined as a beneficial
holder
of the Company’s voting securities if the Nevada Commission has reason to
believe that such ownership would otherwise be inconsistent with
the
declared policies of the State of Nevada. The applicant must pay
all costs
of investigation incurred by the Nevada Gaming Authorities in conducting
any such investigation.
·
The
Nevada Act requires any person who acquires beneficial ownership
of more
than 5% of a Registered Corporation’s voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that
beneficial owners of more than 10% of a Registered Corporation’s voting
securities apply to the Nevada Commission for a finding of suitability
within thirty days after the Nevada Board Chairman mails the written
notice requiring such filing. Under certain circumstances, an
“institutional investor,” as defined in the Nevada Act, which acquires
more than 10%, but not more than 15%, of the Registered Corporation’s
voting securities may apply to the Nevada Commission for a waiver
of such
finding of suitability if such institutional investor holds the voting
securities for investment purposes only. In certain circumstances,
an
institutional investor may hold up to 19% of a Registered Corporation’s
voting securities for a limited period of time and maintain such
a waiver.
The applicant is required to pay all costs of
investigation.
16
·
Any
person who fails or refuses to apply for a finding of suitability
or a
license within thirty days after being ordered to do so by the Nevada
Commission or the Nevada Board Chairman, may be found unsuitable.
The same
restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner. Any stockholder found unsuitable
and who holds, directly or indirectly, any beneficial ownership of
the
common stock beyond such period of time as may be prescribed by the
Nevada
Commission may be guilty of a criminal offense.
·
The
Nevada Commission may, in its discretion, require the holder of any
debt
security of a Registered Corporation to file applications, be investigated
and be found suitable to own the debt security of a Registered Corporation
if the Nevada Commission has reason to believe that its acquisition
of
such debt security would otherwise be inconsistent with the declared
policy of the State of Nevada. If the Nevada Commission determines
that a
person is unsuitable to own such security, then pursuant to the Nevada
Act, the Registered Corporation can be
sanctioned.
·
The
Company is required to maintain a current stock ledger in Nevada
which may
be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record
holder may be required to disclose the identity of the beneficial
owner to
the Nevada Gaming Authorities. A failure to make such disclosure
may be
grounds for finding the record holder unsuitable. To date, the Commission
has not required the Company to disclose its’ beneficial
owners.
·
A
Registered Corporation may not make a public offering of its securities
without the prior approval of the Nevada Commission if the securities
or
proceeds there from are intended to be used to construct, acquire
or
finance gaming facilities or operations in Nevada, or to retire or
extend
obligations incurred for such purposes.
·
Changes
in control of a Registered Corporation through merger, consolidation,
stock or asset acquisitions, management or consulting agreements,
or any
act or conduct by a person whereby he obtains control, may not occur
without the prior approval of the Nevada Commission. Entities seeking
to
acquire control of a Registered Corporation must satisfy the Nevada
Board
and the Nevada Commission in a variety of stringent standards prior
to
assuming control of such Registered Corporation. The Nevada Commission
may
also require controlling stockholders, officers, directors and other
persons having a material relationship or involvement with the entity
proposing to acquire control, to be investigated and licensed as
part of
the approval process relating to the
transaction.
·
The
Nevada legislature has declared that some corporate acquisitions
opposed
by management, repurchases of voting securities and corporate defense
tactics affecting Nevada corporate gaming licensees, and Registered
Corporations that are affiliated with those operations, may be injurious
to stable and productive corporate gaming. Approvals are, in certain
circumstances, required from the Nevada Commission before the Registered
Corporation can make exceptional repurchases of voting securities
above
the current market price thereof and before a corporate acquisition
opposed by management can be consummated. The Nevada Act also requires
prior approval of a plan or recapitalization proposed by the Registered
Corporation’s board of directors in response to a tender offer made
directly to the Registered Corporation’s stockholders for the purposes of
acquiring control of the Registered
Corporation.
17
·
License
fees and taxes, computed in various ways depending on the type of
gaming
or activity involved, are payable to the State of Nevada and to the
counties and cities in which gaming operations are to be conducted.
Depending upon the particular fee or tax involved, these fees and
taxes
are payable either monthly, quarterly or annually and are based upon
either (i) a percentage of the gross revenues received; or
(ii) the number of gaming devices operated. Under 1999 Nevada
legislation, operators of inter-casino linked systems are required
to
share a proportionate percentage of such taxes. Annual fees are also
payable to the State of Nevada for renewal of licenses as a manufacturer
and distributor.
·
Any
person who is licensed, required to be licensed, registered, required
to
be registered, or is under common control with such persons (collectively,
“Licensees”), and who proposes to become involved in a gaming venture
outside of Nevada, is required to deposit with the Nevada Board,
and
thereafter maintain, a revolving fund in the amount of $10,000 to
pay the
expenses of investigation by the Nevada Board of their participation
in
such foreign gaming. The revolving fund is subject to increase or
decrease
in the discretion of the Nevada Commission. Thereafter, Licensees
are
required to comply with certain reporting requirements imposed by
the
Nevada Act. A Licensee is also subject to disciplinary action by
the
Nevada Commission if it knowingly violates any laws of the foreign
jurisdiction pertaining to the foreign gaming operation, fails to
conduct
the foreign gaming operation in accordance with the standards of
honesty
and integrity required of Nevada gaming operations, engages in activities
or enters into associations that are harmful to the State of Nevada
or its
ability to collect gaming taxes and fees, or employs, contracts with,
or
associates with a person in the foreign operation who has been denied
a
license or finding of suitability in Nevada on the ground of
unsuitability. As a result of the acquisition of GIG, the Company
filed a
Foreign Gaming Notification Statement and established a revolving
investigation fund of $10,000 in October 2002. The Company continues
to
comply with ongoing foreign gaming reporting requirements regarding
GIG.
The
Company may also be required to make annual filings with the Attorney General
of
the United States in connection with the operation of the
SportXction®
System.
It
is
possible that the Company may be regulated or required to be licensed in various
foreign countries, including the United Kingdom, or that the Company’s
SportXction®
System
software may be required to be approved for use in such foreign countries prior
to its use or operation by the Company. Although the Company is not currently
aware of any such requirements, the Company has only done a limited inquiry
with
respect thereto. If the Company is required to be licensed or its
SportXction®
System
software is required to be approved in any foreign countries, there is no
assurance that such licensing or approval could be obtained, although the
Company is not aware of any reason why it could not be so licensed or its
SportXction®
System
software would not be approved.
18
SAFE
HARBOR STATEMENT
Important
Factors Regarding Forward Looking Statements and Other
Risks
This
Report on Form 10-KSB (“Report”), except for the historical information
contained herein, contains “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward looking statements
include, without limitation, statements regarding the length of time that the
Company will incur losses and negative cash flow, the length of time the
Company’s cash resources will last and its ability to meet its cash
requirements, the ability of the Company to raise additional funds or execute
a
strategic transaction and if it does raise additional funds, the terms and
conditions thereof and the dilutive impact to existing stockholders, the
ultimate dilutionary effect that the preferred stock, warrants and options
will
have on existing stockholders, whether the Company will offer wagering on 3200
events during fiscal year 2008, whether there is a significant potential market
for the Company’s horseracing product under development, whether the Company
will be able to enter into additional agreements for the fully integrated system
implementation, whether the Company will enter into definitive agreements with
the Ontario Lottery Board or the Neptune Race and Sports Book, Inc., the
likelihood that the Company will receive and maintain any needed gaming licenses
or other approvals for use of its products, the ability of the Company to
attract adequate numbers of players to the SportXction®
System
for sports wagering and sports contests, whether legal or regulatory
requirements will inhibit marketing of the products as intended by the Company,
whether the Company will enter into agreements with others for use of the
SportXction®
System,
whether the Company will extend or renew its employment agreement with its
Chief
Executive Officer, and whether the Company will complete product extensions
to
the SportXction®
System.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or industry results, to be materially different
from any future results, performance, or achievements, expressed or implied,
by
such forward-looking statements. Such risks and factors include, among others,
those listed below. When used in this Report, statements that are not statements
of current or historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words “anticipates,”“plans,”“intends,”“expects,”“believes” and similar expressions are intended to identify such
forward-looking statements. Readers are cautioned that these forward-looking
statements are inherently uncertain and are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result
of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence
of
unanticipated events.
19
RISK
FACTORS
We
will need to raise additional capital or execute a strategic transaction for
us
to continue our operations.
The
Company must raise additional capital to fund its future operations or consider
other strategic alternatives, including a possible merger, sale of assets or
other business combination or restructuring transactions. There can be no
assurance that additional financing or strategic alternatives will be available
on terms acceptable to the Company, or at all. If additional funds are raised
by
issuing equity securities, dilution to existing stockholders will result and
future investors may be granted rights superior to those of existing
stockholders. The Series C Preferred Stock contain certain negative covenants
including limitations with respect to borrowings. Moreover, raising additional
funds in the future are likely to trigger the anti-dilution provisions in our
Series C Preferred Stock and in the Company’s outstanding warrants, resulting in
further significant dilution to existing stockholders and certain other rights
to holders of the Series C Preferred Stock.
As
of
September 30, 2007, the Company had liquid resources totaling $284,000
consisting of cash and cash equivalents. Management believes that these
resources, without any significant increase in revenues, will only be sufficient
to fund operations through January 2008. Accordingly, the Company must raise
additional capital or pursue strategic alternatives immediately. If the Company
cannot raise additional capital immediately, its liquidity, financial condition
and business prospects will be materially and adversely affected and it may
have
to cease operations.
There
is substantial doubt about our ability to continue as a going concern due to
our
cash requirements, which means that we may not be able to continue operations
unless we obtain additional funding or execute a strategic
transaction.
Our
independent registered public accounting firm’s report on our financial
statements for the fiscal year ended September 30, 2007 includes an explanatory
paragraph regarding our ability to continue as a going concern. Note 2 to
the financial statements states that our ability to continue operations, meet
our operational goals and pursue our long-term strategy is dependent upon our
raising additional capital, which raises substantial doubt about our ability
to
continue as a going concern. Further, the registered public accounting firm’s
report states that the financial statements do not include any adjustments
that
might result from the outcome of this uncertainty.
The
public market for our stock is limited, and stockholders may not be able to
resell their shares at or above the purchase price paid by such stockholder,
or
at all.
On
May18, 2007, our shares were delisted from the NASDAQ Capital Market. The
Company’s Common Stock is currently quoted on
the
Over-the-Counter Bulletin Board maintained by the NASD
and on
the Pink Sheets, an electronic quotation service for securities traded
over-the-counter.
As a result, there is currently only a limited public market for our common
stock. We cannot assure you that an active public market for our Common Stock
will develop or be sustained in the future. The effects of delisting include
the
limited publication of the market prices of the Company’s securities and limited
news coverage of the Company. Delisting may reduce investors’ interest in the
Company’s securities and materially adversely affect the trading market and
prices for such securities and the Company’s ability to issue additional
securities or to secure additional financing.
20
Low
price
stocks like ours are at risk for volatile price changes and are subject to
the
additional risks of federal and state regulatory requirements and the potential
loss of effective trading markets. In particular, since our Common Stock has
been delisted from trading on NASDAQ and because the trading price of the Common
Stock is less than $5.00 per share, the Common Stock is subject to Rule 15g-9
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
which, among other things, requires that broker/dealers satisfy special sales
practice requirements, including making individualized written suitability
determinations and receive purchasers’ written consent, prior to any
transaction. The Company’s Common Stock is also deemed a penny stock under the
Securities Enforcement and Penny Stock Reform Act of 1990, which requires
additional disclosures in connection with trades in the Company’s Common Stock,
including the delivery of a disclosure schedule explaining the nature and risks
of the penny stock market. The SEC’s regulations define a “penny stock” to be
any non-NASDAQ equity security that has a market price (as therein defined)
of
less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions. These requirements limit the liquidity
of
the Company’s securities.
The
delisting of our shares from the Nasdaq Capital Market has triggered certain
provisions of the Company’s Series C Preferred Stock.
As
a
result of the delisting from NASDAQ, each holder of the Series C Preferred
Stock
has the right (which has not yet been exercised) to require the Company to
redeem the Series C Preferred Stock (generally at 120% of the stated value
thereof) for the Company’s Common Stock (at approximately 90% of the market
value of the Common Stock) subject to an ownership limitation or to increase
the
dividend on the Series C Preferred Stock to 12% per annum. In addition, the
Company is unable to satisfy the quarterly dividend payments on the Series
C in
shares of Common Stock without the consent of the holders of the Series C.
The
Company failed to make the mandatory quarterly dividend payments on its Series
C
Preferred Stock in the amount of $56,000 (calculated at the rate of 6% per
annum), which were due on July 2 and October 1, 2007. The unpaid dividends
are
subject to a late fee (which must be paid in cash) at the rate of 12% per annum.
The payment of dividends and late fees in cash will reduce the amount of cash
available to fund operations.
If
we violate certain provisions of the Company’s Series C Preferred Stock and are
forced to redeem the Preferred Stock for cash, we may not have enough cash
to
fund our operations and may not be able to obtain additional financing.
Anti-dilution provisions of the Series C Preferred Stock may limit our ability
to obtain necessary new financing.
The
Company’s Series C Preferred Stock issued in August 2005 contain certain
provisions and restrictions under the Company’s control, which if violated,
could give the holders of the Series C Preferred Stock the right to require
the
Company to redeem their shares of Series C Preferred Stock for cash. If such
an
event occurred and a holder of the Series C Preferred Stock exercised its right
to require the Company to redeem its shares, the Company would not have the
cash
resources to redeem such shares. The Series C Preferred Stock also contains
anti-dilution provisions that may limit the Company’s ability to obtain
additional financing on favorable terms, or at all, notwithstanding that the
Company now needs new equity financing in order to continue operations beyond
January 2008. New investors would likely expect to purchase any privately placed
securities at some discount to current market price. The “full ratchet” dilution
protection contained in the Series C Preferred Stock and certain of the
outstanding warrants would result in the conversion price of the Series C
Preferred Stock being substantially reduced from the current $3.75, and the
warrant exercise price being reduced from their current price, and as a
consequence, many more shares would become issuable upon conversion (or
exercise), and could potentially be sold into the market. This market “overhang”
may deter potential new investors.
21
If
the holders of our outstanding Series C Preferred Stock, options and warrants
convert or exercise those securities, or if we obtain the consent of the holders
of the Series C Preferred Stock to pay dividends on the Series C Preferred
Stock
with shares of our Common Stock, our existing stockholders will be significantly
diluted. In addition, sales of substantial amounts of our Common Stock could
cause the market price to go down.
To
the
extent that the shares of Series C Preferred Stock are converted or redeemed
for
common stock and/or the options or warrants are exercised, a significantly
greater number of shares of our Common Stock will be outstanding and the
interests of our existing stockholders will be substantially diluted (even
more
if the conversion occurs after a downward adjustment to the Series C Preferred
Stock conversion price). If these additional shares are sold into the market,
it
could decrease the market price of our Common Stock and encourage short sales.
Short sales and other hedging transactions could place further downward pressure
on the price of our Common Stock. We cannot predict whether or how many
additional shares of our Common Stock will become issuable as a result of these
provisions. Additionally, although because of the delisting from NASDAQ, we
are
currently unable to pay dividends on the Series C Preferred Stock in shares
of
our Common Stock, we may seek the consent of the holders of the Series C
Preferred Stock to pay dividends on the Series C Preferred Stock in shares
of
our Common Stock which could result in increased downward pressure on our stock
price and further dilution to our existing stockholders.
Our
success is dependant on our ability to market, and the market’s acceptance of, a
single product.
The
Company’s success will depend primarily on the success of a single product, the
SportXction®
System,
and the ability of the Company and its business partners and customers to market
the SportXction®
System
and develop a significant number of players with interest in wagering or playing
contests utilizing the SportXction®
System.
Previously, the Company pursued an aggressive marketing and advertising campaign
to introduce the SportXction®
System
to the gaming public in Nevada. Nonetheless, the total number of players who
used the SportXction®
System
in Nevada was limited, and the total amount wagered through the
SportXction®
System
in Nevada was modest, as a result of which the Company ceased its Nevada
operations. To achieve commercial success, the SportXction®
System,
must be accepted by a significant number of gaming patrons. There can be no
assurance that the SportXction®
System
will be accepted by its intended market. If the SportXction®
System
does not achieve sufficient market acceptance, the Company’s business, financial
condition and results of operations would be materially and adversely
affected.
22
We
have a history of losses and the likelihood of our success depends on many
factors, including some that are out of our control.
Until
entering into the License Agreements with GIG in 2000, the Company was in the
development stage and generated limited revenues from the
SportXction®
System.
As of September 30, 2007 and September 30, 2006, the Company had cumulative
net losses since inception of approximately $27.9 million and $25.6 million,
respectively. The Company incurred a net loss applicable to common shareholders
of $2.2 million during the year ended September 30, 2007. The likelihood
of the Company’s success must be considered in light of the problems, delays,
expenses and difficulties encountered by an enterprise in the Company’s stage of
development, some of which may be beyond the Company’s control. These include,
but are not limited to, the ability of the Company to operate its anticipated
business; delays in commencement of operation of the SportXction®
System
by the Company’s business partners; the ability of the Company and its business
partners to attract a sufficient number of players desirous of utilizing the
SportXction®
System;
unanticipated problems relating to further software enhancement and development;
acceptance of the SportXction®
System
by the wagering public; gaming regulations and gaming taxes (including those
in
the United States, United Kingdom and other foreign countries); the competitive
and regulatory environment in which the Company operates; marketing problems;
and additional costs and expenses that may exceed current
estimates.
We
do not intend to pay cash dividends on our Common Stock for the foreseeable
future.
The
Company has not paid any dividends on its Common Stock since its inception
and
does not intend to pay any dividends on our Common Stock in the foreseeable
future. The Company currently intends to reinvest earnings, if any, in the
development and expansion of its business.
We
anticipate continued losses and negative cash flow, and we can not predict
whether or when we will again become profitable.
The
Company expects to incur losses and negative cash flow at least for the fiscal
year ending September 30, 2008. The Company expects revenue to increase as
a
result of its existing agreements as well as anticipated new licensees but
can
give no assurance that will occur or if it does when or whether we will again
achieve profitability.
We
rely on a limited number of partners for our revenues.
Revenues
from three customers (Interactive Sports Limited, Ladbrokes and Caliente)
represented over 90% of the Company’s revenues in the year ended September 30,2007. The Company expects a significant portion of its future revenues to
continue to be generated by a limited number of bookmakers. The loss of any
of
these bookmakers or any substantial reduction in betting activity by any of
their customers could materially and adversely affect the Company’s operating
results.
23
A
significant amount of our revenue is derived from monthly
minimums.
In
May
2007, the Company restructured its agreements on a temporary basis with two
of
its largest customers (Interactive Sports Limited and Ladbrokes) to provide
the
Company with either fixed or minimum monthly fees, rather than a share of the
revenue. Although the Company is still being paid on the basis of monthly
minimum fees, there is no assurance that it will continue to be so paid. If
the
Company’s agreements were to revert back to a revenue share basis, the Company’s
revenue would become more variable on a monthly basis, and may decrease overall
depending on the number of customers using the system, the amount wagered and
the performance of the system with regard to the amount held.
Our
sales and integration cycles with potential business partners are long and
unpredictable, and may encounter unanticipated problems.
The
sales
and integration cycles with potential business partners for the Company’s
SportXction®
System
are long and unpredictable. Potential business partners typically undertake
a
lengthy evaluation process. As a result, the Company may not recognize revenue
from sales efforts for an extended period of time, if at all. Assuming an
agreement is reached, the SportXction®
System
must then be integrated with the business partner’s technical environment. The
length of time to complete the integration process may be adversely impacted
by
a number of factors, including the business partner’s system infrastructure, its
strategic priorities and technical resources. Unanticipated problems during
the
integration process could result in extensive delays in launching the
SportXction®
System
or termination of an agreement, which could materially and adversely affect
the
Company’s business, financial condition and results of operations.
Our
international operations subject us to currency exchange risks.
A
significant portion of the Company’s operations and its sales are in the United
Kingdom and denominated in British Pounds. As a result, the Company’s operating
results may be adversely affected by changes in exchange rates. Given the
volatility of currency exchange rates, the Company cannot predict the effect
of
exchange rate fluctuations on the Company’s future operating
results.
Our
business is reliant on obtaining and retaining certain gaming licenses.
Sports
wagering and wagering over the Internet is highly regulated throughout the
world. The inability of the Company to obtain and/or retain any gaming licenses
or other approvals that may be required could have a material adverse impact
on
the Company (see “Government Regulation”).
24
We
face substantial competition in the gaming industry and may not be able keep
up
with future technological changes.
The
Company’s SportXction®
System
and the business operated by the Company competes with other forms of gambling,
including, but not limited to, sports wagering as currently conducted
world-wide, casino games (such as traditional slot machines, video slot, poker
and blackjack machines, roulette, card games, keno and craps), bingo,
government-sponsored lotteries, on-and off- track betting on horses and dogs,
jai alai, offshore cruise ships, riverboats, illegal wagering of all types
and
Native American gaming operations. The gaming industry is also subject to
shifting consumer preferences and perceptions. A shift in consumer acceptance
or
interest in gaming could adversely affect the Company. There can be no assurance
that future technological advances will not result in improved products or
services that could adversely affect the Company’s business or that the Company
will be able to develop and introduce competitive uses for its products and
to
bring such uses to market in a timely manner.
Our
success depends significantly upon our ability to protect our intellectual
property and to avoid infringing the intellectual property of third parties,
which could result in costly and time-consuming litigation.
The
Company regards the SportXction®
System
and related technology as proprietary and relies primarily on a combination
of
patent, trademark, copyright and trade secret laws and employee and third-party
non-disclosure agreements to protect its proprietary rights. The Company has
two
United States patents for its proprietary wagering methods and its related
computer processing system. Corresponding patents have been granted in 16
foreign countries for one or both of these patents. The Company is also required
to pay yearly taxes in each jurisdiction for each patent to maintain its status.
The Company also has a patent pending to use its technology in a
fixed-odds/pari-mutuel hybrid for horse race wagering. No assurance can be
given
that any of the Company’s pending domestic or foreign patent applications will
issue as patents, that the Company will have the funds available to maintain
all
of the issued patents, that any issued patents will provide the Company with
significant competitive advantages, or that challenges will not be instituted
against the validity or enforceability of any patent owned by the Company or,
if
instituted, that such challenges will not be successful. Defense of intellectual
property rights can be difficult and costly, in particular in certain foreign
countries, and there can be no assurance that the Company will be able
effectively to protect our technology from misappropriation by competitors.
Additionally, third party infringement claims may result in the Company being
required to enter into royalty arrangements or pay damages, any of which could
materially and adversely affect the Company’s business, financial condition and
results of operations.
As
the
number of software products in the industry increases and the functionality
of
these products further overlap, software developers and publishers may
increasingly become subject to infringement claims. There can be no assurance
that the Company will not face such claims, with or without merit, in the
future. Any such claims or litigation could be costly and could result in a
diversion of management’s attention, which could have a material adverse effect
on the Company’s business, financial condition and results of operations. Any
settlement of such claims or adverse determinations in such litigation could
also have a material adverse effect on the Company’s business, financial
condition and results of operations.
25
Our
success depends on our ability to attract and retain key personnel.
The
Company is dependent upon the continued efforts and abilities of its executive
officer and other key personnel. The Company has entered into an employment
agreement with its Chairman and Chief Executive Officer that expires June
30,2008. No assurance can be given that this agreement will be extended or
renewed by the Company and if not extended or renewed, whether an individual
with similar background and experience could be hired to replace him. The
Company does not maintain and does not intend to obtain key person life
insurance on the life of its executive officer. The Company’s operations will
also depend to a great extent on the Company’s ability to attract new key
personnel and retain existing key personnel in the future. Competition is
intense for highly skilled employees and there can be no assurance that the
Company will be successful in attracting and retaining such personnel, or that
it can avoid increased costs in order to do so. The Company’s failure to attract
additional qualified employees or to retain the services of key personnel could
have a material adverse effect on the Company’s business, financial condition
and results of operations.
The
Company’s retired founder, Barry Mindes, may have the ability to exercise
effective control of our Company as he and his affiliates own and control a
significant percentage of our outstanding Common Stock.
As
of
December 21, 2007, Barry Mindes and Mindes Family Limited Partnership, of which
an entity controlled by Mr. Mindes is general partner, together
beneficially own approximately 25% of the outstanding shares of Common Stock.
As
a result of such ownership, such stockholders may have the ability to control
the election of the directors of the Company and the outcome of issues submitted
to a vote of the stockholders of the Company.
The
market price of our Common Stock may be highly volatile.
The
market price of securities of many emerging and high technology companies has
been highly volatile, experiencing wide fluctuations not necessarily related
to
the operating performance of such companies. Factors such as the Company’s
operating results and announcements by the Company or its competitors concerning
technological innovations, new products or systems may have a significant impact
on the market price of the Company’s securities.
Certain
provisions of our Certificate of Incorporation and Delaware law may have the
effect of discouraging, delaying or preventing a change of control that our
stockholders may consider favorable.
The
Company’s Certificate of Incorporation authorizes the issuance of 2,000,000
shares of preferred stock (of which 60,000 shares have been designated as Series
A Preferred Stock, 3,000 shares have been designated as Series B Preferred
Stock
and 4,000 shares have been designated as Series C Preferred Stock) with such
designations, rights and preferences as may be determined from time to time
by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without obtaining stockholder approval, to issue such preferred stock with
dividend, liquidation, conversion, voting or other rights that could adversely
affect the voting power or other rights of the holders of the Common Stock.
In
the event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change
in
the control of the Company. Certain provisions of Delaware law may also
discourage third party attempts to acquire control of the Company.
26
Item
2.
Description of Property
The
Company currently leases approximately 2,500 square feet of space in West
Paterson, New Jersey under a lease which expires on June 30, 2009. Lease
payments for this facility, at which all development and administrative
functions in the United States are currently conducted, during the fiscal year
ended September 30, 2007, were approximately $37,500. For the fiscal year
ending September 30, 2008, lease payments for this facility are expected to
be approximately $37,500.
The
Company currently licenses for use approximately 900 square feet of office
space, in London, England under a use license, which expires in March 2008.
Lease payments for this facility, at which all operations and administrative
functions in England are currently conducted, during the year ended
September 30, 2007, were approximately $175,388. For the fiscal year ending
September 30, 2008, lease payments for this facility are expected to be
approximately $246,112.
Item
3.
Legal Proceedings
See
“Business - Intellectual Property”.
Item
4. Submission of Matters to a Vote of Security Holders
The
2007
Annual Meeting of Stockholders was held on September 17, 2007. The following
matters were voted upon at the meeting and received the number of votes
indicated:
To
elect
a board of three directors to serve until the next Annual Meeting of
Stockholders and until their respective successors are elected and
qualified.
For
Withheld
Bernard
Albanese
8,125,097
502,063
Bruce
Feldman
8,130,405
496,755
Philip
Rule
8,130,405
496,755
To
approve an amendment to the Certificate of Incorporation of the Company to
increase the number of authorized shares of Common Stock by 60,000,000 shares,
from 20,000,000 to 80,000,000.
For:
8,083,229
Against:
543,930
Abstain:
0
Broker
non-votes:
0
To
ratify
the selection of Eisner LLP as the Company’s independent registered public
accounting firm for the fiscal year ending September 30, 2007.
For:
8,544,340
Against:
66,735
Abstain:
16,085
27
PART
II
Item
5. Market for Common Equity, Related Shareholder Matters and Small Business
Issuer Purchases of Equity Securities
Market
Information
The
following table sets forth, for the periods indicated and as reported by NASDAQ
or the OTC Bulletin Board, the high and low sales prices for shares of the
Company’s Common Stock until May 18, 2007 and the high and low bid prices for
the periods thereafter. The bid quotations reflect inter-dealer prices without
retail mark-up or commission and may not represent actual transactions. On
May18, 2007, as a result of failing to comply with NASDAQ’s shareholders’ equity
requirement, the Company’s Common Stock was de-listed from the NASDAQ Capital
Market. The
Company’s Common Stock is currently quoted on
the
Over-the-Counter Bulletin Board maintained by the NASD
and on
the Pink Sheets, an electronic quotation service for securities traded
over-the-counter:
The
high
and low bid prices on January 07, 2008 were $0.40 and $0.34, respectively.
Current
Holders of Common Stock
Based
upon information supplied to the Company by its transfer agent, there were
approximately 50 stockholders of record of the Common Stock on December 14,2007. The Company believes there are in approximately 1,600 beneficial owners
of
its Common Stock whose shares are held in “Street Name.”
Dividends
The
Company has never paid cash dividends with respect to its Series A Preferred
Stock, Series B Preferred Stock or its Common Stock. In January 2005, the
Company declared a cash dividend with respect to its Series C Preferred Stock
of
$24,000. Although holders of our Series C Preferred Stock are entitled to
receive dividends, we have elected to pay such dividends in shares of our Common
Stock. As a result of the delisting from the NASDAQ Capital Market, the Company
is not permitted to pay the dividends on the Series C Preferred Stock in shares
of Common Stock, and is required to pay them in cash. The Company did not pay
the dividends due to the holders of the Series C Preferred Stock on July 1,2007
or October 1, 2007. The Company intends to retain future earnings, if any,
which
may be generated from the Company’s operations to help finance the operations
and expansion of the Company and accordingly does not plan, for the foreseeable
future, to pay cash dividends to holders of Common Stock. Any decision as to
the
future payment of dividends on preferred stock or Common Stock (other than
that
required in respect of the Series C Preferred Stock) will depend on the results
of operations and financial position of the Company and such other factors
as
the Company’s Board of Directors, in its discretion, deems
relevant.
Issuances
of Common Stock
We
made
no sales of unregistered securities during the quarter ended September 30,2007.
28
Item
6.
Management’s Discussion and Analysis
or Plan of Operation
The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Form 10-KSB.
Overview
Interactive
Systems Worldwide Inc. (“ISWI”) has designed, developed and patented an
interactive hardware and proprietary software system (the
“SportXction®
System”)
that enables users to wager at fixed prices during the course of a sporting
event, such as soccer, football, baseball, basketball, golf, tennis, rugby,
cricket and snooker, among many others. The SportXction®
System
accepts bets not only on the outcome of a sporting event, but also on discrete
parts of the event and on specific game situations. These include such wagers
as
will a team make a first down, which player will score next, will a batter
get
on base or will a penalty shot be successful. The SportXction®
System
is unique in that it permits betting continuously while the game is in progress,
or between game events, such as downs, pitches, changes in ball possession
and
similar situations, permitting more frequent placing and cashing of
wagers.
On
July31, 2002, ISWI, through a wholly-owned subsidiary, acquired all of the
outstanding share capital of Global Interactive Gaming Limited (“GIG”), a
British interactive gaming service provider which was previously ISWI’s
exclusive licensee. GIG markets its services to licensed bookmakers, casinos
and
other gambling operators and is located in London, England.
Since
the
acquisition, which transformed ISWI from a licensor to an operator of the
SportXction®
System,
the Company has formed strategic partnerships primarily with bookmakers in
the
U.K and Gibraltar. A factor which will be critical to our success will be the
ability of the Company and its business partners to market the
SportXction®
System.
To achieve commercial success, the SportXction®
System
must be accepted by a significant number of users.
During
the years ended September 30, 2007 (“Fiscal 2007”) and 2006 (“Fiscal 2006”), the
Company’s revenue primarily consisted of license fees and service charges from
providing interactive gaming services using the SportXction®
System
to business partners such as licensed bookmakers and others located in the
United Kingdom, Gibraltar and Mexico.
Going
Concern Considerations
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As shown in the accompanying financial
statements, the Company has incurred recurring losses from operations and has
not generated positive net cash flows from operations. There can be no assurance
that the Company will generate sufficient cash flows to meet its cash flow
and
working capital needs. The Company requires additional financing or the
execution a strategic transaction to continue operations, meet its operational
goals and to pursue its long term strategy. Management has developed and is
attempting to implement a plan to address these issues and allow the Company
to
continue as a going concern through at least the fiscal year ending September30, 2008. The plan includes (i) securing
minimum monthly cash receipts from existing customers and new
licensees,
(ii) a
program to reduce costs, (iii) seeking equity or debt financing and (iv)
considering
other strategic alternatives, including a possible merger, sale of assets or
other business combination or restructuring transactions.
29
There
is
no assurance, however, that the Company will be able to raise additional
financing or execute a strategic transaction on commercially reasonable terms,
if at all, or that the Company will be able to meet its future contractual
obligations. The failure to raise financing or execute a strategic transaction
will negatively impact the Company and its growth plans and its financial
condition and results of operations, and could force the Company to cease
operations. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
On
May18, 2007, as a result of failing to comply with NASDAQ’s shareholders’ equity
requirement, the Company’s Common Stock was de-listed from the NASDAQ Capital
Market. The
Company’s Common Stock is currently quoted on
the
Over-the-Counter Bulletin Board maintained by the NASD
and the
Pink Sheets, an electronic quotation service for securities traded
over-the-counter.
Critical
Accounting Policies and Estimates
The
Company prepares its financial statements in conformity with accounting
principles generally accepted in the United States of America. Certain of the
Company’s accounting policies, including accounting for software development
costs; depreciation and amortization of long-lived assets, including intangible
assets and deferred income taxes require that the Company apply significant
judgment in defining the appropriate assumptions for calculating financial
estimates. These estimates and judgments are subject to an inherent degree
of
uncertainty and are evaluated by the Company on an ongoing basis. The Company
bases its estimates and judgments on its historical experience and other
relevant factors, the results of which form the basis in making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources.
The
Company accounts for software development costs in accordance with Statement
of
Financial Accounting Standards ("SFAS") No. 86 “Computer Software To Be
Sold, Leased, or Otherwise Marketed”. Such costs are expensed prior to a product
or product enhancement’s achievement of technological feasibility and thereafter
are capitalized. The Company defines a product enhancement as an improvement
to
an existing product that is intended to extend the life or improve significantly
the marketability of the original product. In order to meet the requirements
for
capitalization, a product enhancement should involve considerable development
resources, requires a product design and may require a redesign of all or part
of the existing product. The Company stops capitalizing software costs relating
to a particular enhancement when the enhanced product is available for general
release to its customers. Amortization expense, which has been computed on
a
straight-line basis and an estimated economic life of three years, amounted
to
$155,000 and $165,000 for the years ended September 30, 2007 and 2006,
respectively.
30
At
each
balance sheet date, the Company compares unamortized capitalized software costs
to net realizable value on a project-by-project basis and writes off any excess
of the unamortized cost over the net realizable value. The net realizable value
is the estimated future gross revenues for that product or product enhancement
reduced by the estimated future costs of completing and disposing of that
product or product enhancement, including the costs of performing maintenance
and support.
See
Note
3 to the Company’s Financial Statements for a full discussion of the Company’s
critical accounting policies and estimates.
Results
of Operations
Revenues
for Fiscal 2007 were $500,000, as compared to $111,000 during Fiscal 2006.
The
increase was primarily due to the launching of the Company’s new integrated
version of its SportXction® System in combination with Company’s agreements with
Sportingbet, Ladbrokes and Caliente which provide certain minimum
payments.
Cost
of
revenues for Fiscal 2007 were $531,000, as compared to $542,000 during Fiscal
2006. The decrease in Fiscal 2007 was primarily due to lower amortization
expenses associated with capitalized product enhancements that had become fully
amortized.
Research
and development expense for Fiscal 2007 was $377,000, as compared to $497,000
during Fiscal 2006. The decrease in Fiscal 2007 was primarily due to lower
payroll costs partially offset by a reduction in the amount of software
development costs which met the criteria for capitalization.
General
and administrative expenses during Fiscal 2007 were $2,289,000, as compared
to
$3,526,000 during Fiscal 2006. The decrease was primarily due to lower payroll
costs, lower professional fees, lower compensation costs and a reduction in
marketing costs.
Interest
income during Fiscal 2007 was $55,000, as compared to interest expense of $2,000
during Fiscal 2006. In Fiscal 2006, the Company incurred interest expense in
relation to its outstanding Debentures, which have been satisfied primarily
through the issuance of shares of Common Stock. The Debentures were fully repaid
in May 2006.
Other
income for the Fiscal 2007 was $460,000, as compared to $3,000 during Fiscal
2006. In Fiscal 2007, other income represents settlement of a dispute with
a
vendor as well as settlements from the Company’s patent infringement litigation.
In Fiscal 2006, other income represents the change in value of the Company’s
liability associated with the registration rights agreements associated with
its
private placements.
Net
loss
and net loss per share applicable to common stock (basic and diluted) for Fiscal
2007 were $2,421,000 and $0.20, respectively, as compared to $4,721,000 and
$0.40, respectively, during Fiscal 2006. The
decrease was primarily due to lower expenses and increased revenue and other
income (as described above).
31
Financial
Condition; Liquidity
and Capital Resources
As
of
September 30, 2007, the Company had liquid resources totaling $284,000
which consisted of cash and cash equivalents.
The
Company’s operations currently do not generate positive cash flow. The Company
anticipates that, based on its current level of cash receipts and disbursements,
its existing resources will be adequate to fund its capital and operating
requirements through January 2008.
The
Company is currently in discussions with several additional gambling companies
to provide services. There is no assurance however, that the
SportXction®
System
will be launched as planned with additional business partners or accepted by
potential users. In addition, there is no assurance that any additional
agreements will be signed.
We
cannot
assure you that we will be able to successfully implement our plans to raise
additional capital or execute a strategic transaction. We may not be able to
obtain the required additional capital or execute a strategic transaction,
on
favorable terms, or at all. If we cannot successfully implement our plans,
our
liquidity, financial condition and business prospects will be materially and
adversely affected and we may have to cease operations.
Capital
expenditures which primarily consist of additional computer equipment are not
expected to be significant and are expected to be funded from existing
resources. The Company’s capital requirements may vary materially from those now
planned due to a number of factors, including the rate at which the Company
can
introduce its system, the market acceptance and competitive position of the
System and the response of competitors to the System.
Off-Balance
Sheet Arrangements
None
Item
7.
Financial Statements
See
Page
F-1
Item
8.Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
None
Item
8A. Controls and Procedures
(a)
Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and acting Chief
Financial Officer, has evaluated the effectiveness of the Company's disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this report. Based on such
evaluation, the Company's Chief Executive Officer and acting Chief Financial
Officer has concluded that, as of the end of such period, the Company's
disclosure controls and procedures are effective to ensure that information
relating to the Company (including its consolidated subsidiaries) required
to be
disclosed in the Company's periodic SEC filings is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms
of the SEC.
(b)
Internal Control Over Financial Reporting. There have not been any changes
in
the Company's internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal
quarter ended September 30, 2007 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Item
8B. Other Information
None
32
Part
III
Item
9. Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange
Act
Set
forth
below is certain information, as of January 7, 2008, regarding the directors,
executive officers and key personnel of the Company.
Chairman
of the Board, Chief Executive Officer, President, Director and Acting
Principal Financial Officer
Bruce
Feldman
59
Director
Philip
Rule
71
Director
Bernard
Albanese has served as Chairman of the Board of the Company since March 2006,
as
Chief Executive Officer of the Company since January 2006, as Acting Principal
Financial Officer since June 2007, as President of the Company since September
1996, as Treasurer between July 1995 and March 2002, as Vice President-Systems
from July 1995 until August 1996, and as a director since October 1996. From
1993 to 1995, Mr. Albanese was Vice President—Operations of Advanced Data
Systems Inc., a provider of medical-related computer systems, in which position
he was responsible for all installation, training and telephone support for
an
installed base of over 1,000 customers. Mr. Albanese was a co-founder of Script
Systems Inc. and was its Executive Vice President until 1993. From 1980 to
1986,
Mr. Albanese served as Vice President of Information Industries, Inc., in which
position he was responsible for, among other things, software development for
the Midwest Stock Exchange and other large projects.
Bruce
Feldman has served as a director of the Company since March 2004. Mr. Feldman
is
a senior partner of Feldman Sablosky Massoni & Co., a public accounting firm
where he has served since 1989. Mr. Feldman has extensive experience assisting
companies with their S.E.C. filings, has worked with several companies in their
initial public offerings and has over thirty years experience in the practice
of
public accounting. Mr. Feldman is a member of the American Institute of
Certified Public Accountants and the New Jersey Society of Public
Accountants.
Philip
Rule has served as a director of the Company since March 2006. Mr. Rule is
a
technology and software executive with over 35 years experience. Mr. Rule is
currently the Non-executive Chairman of Safe Computing Ltd., a software firm
in
England as well as the Non-executive Chairman of Rule Financial Ltd, an
information technology consulting firm in London. In the early 1970s, Mr. Rule
founded Safe Computing Ltd. in partnership with the Chubb Group. Over the next
several decades, he developed Safe Computing into a leading supplier in its
market sectors. Mr. Rule has been a non-executive director of Kode International
plc, an electronics group, and United Computing and Technology Holdings Plc,
a
venture capital company, as well as a number of private companies providing
computer services. Mr. Rule has written numerous articles and has lectured
extensively in the UK and Europe.
33
Audit
Committee Financial Expert
The
Board
of Directors has determined that Bruce Feldman, a member of the Board’s Audit
Committee, is an audit committee financial expert. Mr. Feldman is “independent”
as independence for audit committee members is defined in NASDAQ
standards.
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
directors, executive officers and persons who own beneficially more than 10%
of
the Company’s Common Stock, to file reports of ownership and changes in
ownership of such stock with the SEC. Directors, executive officers and greater
than 10% stockholders are required by SEC regulations to furnish the Company
with copies of all such reports they file. To the Company’s knowledge, based
solely on a review of the copies of such reports furnished to the Company or
filed with the SEC and written representations that no other reports were
required, its directors, executive officers and greater than 10% stockholders
complied with these requirements during the fiscal year ended September 30,2007.
Code
of Ethics
The
Company has adopted a code of ethics and business conduct that applies to its
principal executive officer, principal financial and accounting officer and
other employees. The Code of Ethics and Business Conduct is available on the
Company’s website at www.isw.com. The Company intends to satisfy the disclosure
requirements under Item 5.05 of Form 8-K regarding any amendment or waiver
of
the code with respect to its principal executive officer or principal financial
or accounting officer by posting such information on the Company’s
website.
34
Item
10. Executive Compensation
Summary
Compensation Table
The
following summary compensation table sets forth the aggregate compensation
for
the fiscal year ended September 30, 2007 earned by or paid to our principal
executive officer and other executive officers and key personnel (the “Named
Executive Officers”) whose total compensation exceeded $100,000 for that fiscal
year.
Summary
Compensation Table
Name
and Principal Positions
Years
Salary
Bonus
Options
Awards (1)
All
Other Compen-sation (2)
Total
($)
($)
($)
($)
($)
Bernard
Albanese
Chief
Executive Officer, Chairman of the Board and Acting Principal Financial
Officer
2007
200,769
-0-
36,000
(3
)
-0-
236,769
Andrew
Harbison (4)
Vice
President-Software Development
2007
100,559
-0-
2,800
(4
)
-0-
103,359
______________
(1)
The
aggregate grant date fair value of these options, computed in accordance
with FAS 123R and recognized for financial statement purposes, is
reflected in the table. See “Accounting for Stock Based Compensation” in
Note 3 to the Consolidated Financial
Statements.
(2)
Excludes
prerequisites and other personal benefits which did not exceed in
the
aggregate $10,000. No person listed in the Table received prerequisites
and other personal benefits during the year shown that exceeded $10,000.
(See “Employment Agreement” for a description of the employment agreement
between the Company and Mr. Albanese, including the benefits payable
thereunder.)
(3)
On
June 7, 2007, Mr. Albanese was granted options to purchase 100,000
shares
of the Company’s Common Stock at an exercise price of $0.45 per share. The
options become exercisable as to 50,000 shares on September 5, 2007,
as to
25,000 shares on December 7, 2007 and as to 25,000 shares on June7, 2008
and expire on June 7, 2017.
(4)
On
April 19, 2007, Mr. Harbison was granted options to purchase 28,000
shares
of the Company’s Common Stock at an exercise price of $0.72 per share. The
options were immediately exercisable and were to have expired on
April 19,2017. Mr. Harbison’s employment with the Company terminated on April 20,2007 and these options have
terminated.
Employment
Agreement and Termination of Employment Benefits
On
August10, 2007, the Company entered into an amended and restated one year employment
agreement (the "Agreement") with Bernard Albanese, its Chairman of the Board,
Chief Executive Officer and President, and acting Principal Financial Officer,
for the period from July 1, 2007 through June 30, 2008 (the "Term"), amending
and restating the terms of Mr. Albanese's employment agreement dated as of
June19, 2007 (the "Prior Agreement"). The primary purpose of the amended terms
is to
reduce the salary obligations of the Company in the event of early termination
(i.e. prior to the completion of the Term) of Mr. Albanese's employment. In
the
Prior Agreement, if the Company terminated Mr. Albanese's employment, other
than
for cause, the Company would have still been obligated to pay Mr. Albanese
$300,000 in salary, less the salary and Bonus (as defined below) he had already
been paid during the Term. This salary obligation has been replaced with a
60-day notification period.
35
The
Agreement provides that Mr. Albanese is to receive a base salary of not less
than $240,000 per annum plus an incentive compensation bonus of $30,000 for
each
$1 million of revenue realized by the Company and its subsidiaries on a
consolidated basis during the Term, up to a maximum bonus of $120,000 if
revenues of $4 million are realized during the Term (the "Bonus").
The
compensation described above is unchanged from the Prior Agreement and from
Mr.
Albanese's employment agreement in effect during the period from July 1, 2006
through June 30, 2007. Since January 2007, Mr. Albanese has voluntarily reduced
his base compensation from an annual rate of $240,000 to $180,000, a 25%
reduction. It is Mr. Albanese's current intention to continue this voluntary
reduction for the foreseeable future until such time as the Company can resolve
its cash resources issues. The Prior Agreement included certain benefits for
Mr.
Albanese upon termination following a "change of control" which are not included
in the Agreement.
The
Agreement provides that Mr. Albanese will be entitled to: (i) such salary
increases, bonuses or other incentive compensation as may be approved by the
Board of Directors; (ii) health and life insurance and other fringe benefits
substantially similar to those provided in the past and not less than those
provided by the Company to its other executive employees; (iii) four weeks
of
vacation each year; and (iv) severance in the amount of $300,000 and
continuation of fringe benefits for one year, in the event (a) the Company
terminates his employment other than for "cause" (as defined in the Agreement),
or he resigns or if his employment terminates as a result of his death or
disability during the Term, or (b) of expiration of the Term without a new
employment agreement being entered into which is at least as beneficial to
Mr.
Albanese as the Prior Agreement. If during the Term the Company terminates
Mr.
Albanese's employment other than for cause or he resigns or his employment
terminates as a result of death or disability, the Bonus to which he is entitled
shall be determined after annualizing the revenue realized by the Company from
July 1, 2007 through the last day of the calendar month in which the termination
occurred. Under the Prior Agreement revenues would not have been annualized
for
determining the Bonus. Mr. Albanese is also entitled, at the Company's expense,
to the use of a leased automobile, including all operating, maintenance and
insurance expenses. The Agreement also provides that if his employment
terminates for any reason whatsoever, including his death or disability, other
than by the Company for cause, all stock options theretofore granted to him
which have not become exercisable shall vest and become exercisable and remain
exercisable in accordance with the Company's 1995, 1996 and 2006 Stock Option
Plans and related stock option agreements, as applicable. The Agreement also
provides that Mr. Albanese has the right, in his discretion, to voluntarily
retire from the Company and upon such retirement he is entitled to receive
$300,000 and continuation of his benefits for a period of one year.
36
Mr.
Albanese has entered into an agreement restricting competitive activities for
12
months following termination of his employment and prohibiting disclosure of
confidential information of the Company.
Outstanding
Equity Awards at Fiscal Year-End
The
following table set forth certain information with respect to the number of
unexercised outstanding equity awards held by each Named Executive Officer
on
September 30, 2007.
Outstanding
Equity Awards at Fiscal Year-End
Name
Number
of Securities Underlying Unexercised Options (#)
Exercisable
Number
of Securities Underlying Unexercised Options (#)
Unexercisable
The
Company pays each outside director $12,000 per year, payable quarterly. During
the Fiscal Year ending September 30, 2007, each of the outside directors has
voluntarily given up one quarterly payment of $3,000. The Company also
periodically grants to outside directors options to purchase Common Stock.
Each
of the outside directors have been granted options in prior fiscal years, all
of
which have been described in proxy statements previously furnished to the
Company’s stockholders (see “Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters”).
The
following table set forth certain information with respect to the compensation
of directors (other than Named Executive Officers) for our last completed fiscal
year and (in the footnotes to the table) the aggregate number of option awards
outstanding to each such director at fiscal year end.
Director
Compensation
Name
Fees
Earned or Paid
in
Cash ($)
Option
Awards ($)
All
Other
Compensation
($)
Total
($)
Bruce
Feldman
$
9,000
$
7,200
(2)(3
)
$
16,200
Philip
Rule
$
9,000
$
7,200
(2)(4
)
$
16,200
Vincent
Caldwell (1)
$
3,000
-
0 - (5
)
$
22,500
(6
)
$
25,500
___________________________
(1)
Mr.
Caldwell resigned as a director, effective March 30,2007.
(2)
Consists
of options to purchase 20,000 shares at an exercise price of $0.45
granted
on June 7, 2007. The options become exercisable as to 10,000 shares
on
September 3, 2007, as to 5,000 shares on December 7, 2007 and as
to 5,000
shares on June 7, 2008, and expire on June 7, 2017. The aggregate
grant
date fair value of these options, computed in accordance with FAS
123R and
recognized for financial statement purposes, is reflected in the
table.
See “Accounting for Stock Based Compensation” in Note 3 to the
Consolidated Financial Statements.
(3)
At
September 30, 2007 Mr. Feldman held in the aggregate outstanding
options
having ten year terms to purchase 60,000
shares.
(4)
At
September 30, 2007 Mr. Rule held in the aggregate outstanding options
having ten year terms to purchase 60,000
shares.
(5)
Mr.
Caldwell was not granted any options during the fiscal year ended
September 30, 2007, and at September 30, 2007 the options previously
granted to Mr. Feldman had
terminated.
(6)
Mr.
Caldwell served as a consultant. See Item 12 - “Certain Relationships and
Related Transactions.”
37
Item
11. Security Ownership and Certain Beneficial Owners and Management and Related
Stockholder Matters
The
following table sets forth, as of January 7, 2008, certain information regarding
the beneficial ownership of the Company’s outstanding Common Stock by (i) each
person known by the Company to beneficially own more than five percent of the
outstanding Common Stock, (ii) each current director and executive officer
of
the Company, (iii) all directors and executive officers as a group. As of
January 7, 2008, there were outstanding 12,265,715 shares of the Company’s
Common Stock, 60,000 shares of the Company’s Series A Preferred Stock and 3,742
shares of the Company’s Series C Preferred Stock. The Series C Preferred Stock
are non-voting securities but are convertible into Common Stock. No current
director, executive officer, or person known by the Company to beneficially
own
more than five percent of the outstanding Common Stock owns any shares of Series
A Preferred Stock. All shares of Series A Preferred Stock that are outstanding
as of January 7, 2008 are owned by MultiSport Games Development Inc., a Delaware
corporation.
Name
and Address of Beneficial Owner (1)
Amount
and Nature of Beneficial Ownership (2)
Percent
of Class (3)
Barry
Mindes (4)
3,023,952
24.7
Mindes
Family Limited Partnership (5)
1,511,523
12.3
Midsummer
Investment, Ltd. (6)
613,158
4.9
Bernard
Albanese (7) (8)
501,728
4.0
The
Marie Albanese Trust, Marie Albanese and Christine Albanese, trustees
(8)
302,304
2.5
Bruce
Feldman (9)
75,000
*
Philip
Rule (10)
98,300
*
Andrew
Harbison (11)
75,521
*
All
directors and executive officers as a group (3 persons)
(12)
675,028
5.4
___________________________
*Less
than 1% of the Common Stock outstanding.
38
(1)
The
address of each beneficial owner identified is c/o Interactive Systems
Worldwide Inc., 2 Andrews Drive, West Paterson, NJ07424, except
as
indicated in Notes 5 and 6.
(2)
Unless
otherwise indicated, the Company believes that all persons named
in the
table have sole voting and investment power with respect to all shares
of
Common Stock beneficially owned by them. A person is deemed to be
the
beneficial owner of Common Stock that can be acquired by such person
within 60 days of the date hereof upon the exercise of options or
warrants
or conversion of convertible
securities.
(3)
Each
beneficial owner’s percentage ownership is determined by assuming that (i)
options, warrants or convertible securities that are held by such
person
(but not those held by any other person) and which are exercisable
or
convertible within 60 days of the date hereof, have been exercised
or
converted and are outstanding and (ii) 12,265,715 shares of Common
Stock
are outstanding, before any consideration is given to options, warrants
or
convertible securities.
(4)
Includes
1,511,523 shares held by Mindes Family Limited Partnership, the general
partner of which is an entity wholly-owned by Mr. Mindes. Mr. Mindes
disclaims beneficial ownership of the shares owned by Mindes Family
Limited Partnership to the extent such shares of Common Stock exceed
his
proportionate interest therein.
(5)
The
address for Mindes Family Limited Partnership is 100 Old Palisade
Rd.,
Unit PL5, Fort Lee, NJ07024.
(6)
Includes
shares issuable upon conversion of Series C Preferred Stock and exercise
of warrants. Pursuant to the terms of the Series C Preferred Stock
and
warrants, Midsummer Investment, Ltd. (“Midsummer”) may not convert its
Series C Preferred Stock or exercise its warrants to the extent that
such
conversion or exercise would result in it and its affiliates beneficially
owning more that 4.99% of the outstanding shares of Common Stock.
Without
such limitations, Midsummer would beneficially own 1,005,327 shares,
or
7.6% of the outstanding shares of Common Stock. Midsummer Capital,
LLC is
the investment manager to Midsummer. By virtue of such relationship,
Midsummer Capital, LLC may be deemed to have dispositive power over
the
shares owned by Midsummer. Midsummer Capital, LLC disclaims beneficial
ownership of such shares. Mr. Michel Amsalem and Mr. Scott Kaufman
have
delegated authority from the members of Midsummer Capital, LLC with
respect to the shares of Common Stock owned by Midsummer. Messrs.
Amsalem
and Kaufman may be deemed to share dispositive power over the shares
of
Common Stock owned by Midsummer. Messrs. Amsalem and Kaufman disclaim
beneficial ownership of such shares of Common Stock and neither person
has
any legal right to maintain such delegated authority. The address
for
Midsummer is 295 Madison Avenue, New York, NY10017.
(7)
Includes
275,000 shares underlying options held by Mr. Albanese which are
exercisable within 60 days of the date
hereof.
(8)
Marie
Albanese and Christine Albanese are the wife and daughter, respectively,
of Mr. Albanese. Mr. Albanese disclaims beneficial interest in the
shares
of Common Stock held in such Trust.
(9)
Includes
35,000 shares underlying options held by Mr. Feldman which are exercisable
within 60 days of the date hereof.
(10)
Includes
20,000 shares underlying options held by Mr. Rule which are exercisable
within 60 days of the date hereof.
(11)
Information
regarding Mr. Harbison, whose employment terminated on April 20,2007, is
given to the Company’s knowledge.
(12)
Includes
(i) an aggregate of 330,000 shares underlying options held by all
directors and executive officers as a group which are exercisable
within
60 days of the date hereof. Does not include 302,304 shares held
by The
Marie Albanese Trust (see Note 8
above).
39
Equity
Compensation Plan Information
The
following table sets forth certain information as of September 30, 2007
regarding the Company’s equity compensation plans:
Plan
Category
Number
of Securities to be Issued upon Exercise of Outstanding Options,
Warrants
and Rights
(a)
Weighted-average
Exercise Price of Outstanding Options, Warrants and
Rights
(b)
Number
of Securities Remaining Available for Future Issuance under Equity
Compensation Plans (excluding securities reflected in column
(a))
(c)
(1)
Equity
compensation plans approved by security holders
638,000
$
1.22
621,034
Equity
compensation plans not approved by security holders
-0-
N/A
N/A
___________________________
(1)
In
January 2006, the Board of Directors adopted, and in March 2006 the
stockholders approved, the 2006 Stock Option Plan (the “2006 Plan”). There
are 500,000 shares of Common Stock authorized and available for issuance
pursuant to options that may be granted thereunder, plus any shares
subject to the 1,172,669 options under the 1995 Plan and 1996 Plan
which
were outstanding at March 30, 2006 that expire or terminate. Through
September 30, 2007, options to purchase 505,034 shares which were
outstanding at March 30, 2006 under the 1995 Plan and 1996 Plans
expired.
Item
12. Certain Relationships and Related Transactions, and Director
Independence
During
the year ended September 30, 2007, the Company paid $22,500 in consulting fees
to Vincent Caldwell, a former director of the Company, under an agreement which
the Company paid $7,500 per month between September and December 2006. The
agreement was terminated in December 2006.
The
Board
of Directors has determined, after review of all relevant transactions or
relationships between each director, or any of his family members, and the
Company, its senior management and independent registered public accounting
firm, that Bruce Feldman and Philip Rule, constituting a majority of the board
of directors, are “independent” directors under the “independent director”
definition and standards of NASDAQ; and that Vincent Caldwell, who resigned
as a
director of the Company effective March 30, 2007, was also an “independent
director” under NASDAQ standards, the Board having considered the
above-mentioned consulting agreement in this regard. Messrs. Feldman and Rule
are the only members of the Board’s Audit Committee, Nominating Committee and
Stock Option Committee. Mr. Albanese, the Company’s other director, is not
independent.
Stock
Purchase Agreement, dated as of July 3, 2002, between Prisma iVentures
Ltd. and ISW Acquisition Co., LLC. (1)
2.2
Stock
Purchase Agreement, dated as of July 30, 2002, between Global Interactive
Gaming Ltd., MultiSport Games Development Inc., Peter G. Sprogis,
ISW
Acquisition Co., LLC and Interactive Systems Worldwide Inc. (with
respect
only to certain Sections). (1)
Certificate
of Designation relating to the Series A Preferred Stock dated July31,2002. (1)
4.2
Warrant
to Purchase 150,000 Shares of Common Stock, par value $.001 per share,
of
Interactive Systems Worldwide Inc., dated as of May 15, 2006 issued
to
Faraway Partners LLC. (13)
4.3
Form
of 7.5% Convertible Debenture due April 1, 2006 (6)
4.4
Form
of Common Stock Purchase Warrant issued to certain investors dated
November 24, 2003. (7)
4.5
Form
of Common Stock Purchase Warrant issued to Brandon Ross dated November24,2003. (8)
4.6
Form
of Certificate of Designation relating to the Series B Convertible
Preferred Stock dated November 12, 2004. (9)
4.7
Form
of Common Stock Purchase Warrant issued to certain investors dated
November 12, 2004. (10)
4.8
Form
of Common Stock Purchase Warrant issued to Maxim Group LLC dated
November12, 2004. (11)
4.9
Certificate
of Designation relating to the Series C Preferred Stock dated August3,2005. (29)
4.10
Amendment
No. 1 to the Certificate of Designation relating to the Series C
Preferred
Stock dated September 7, 2005. (30)
4.11
Form
of Common Stock Purchase Warrant issued to certain investors dated
August3, 2005. (31)
41
4.12
Amendment
to Common Stock Purchase Warrant issued to certain investors dated
September 5, 2005. (32)
4.13
Form
of Common Stock Purchase Warrant issued to Finder dated August 3,2005.
(33)
4.14
Amendment
to Common Stock Purchase Warrant issued to Finder dated September5, 2005.
(34)
10.1
Employment
Agreement between the Company and Bernard Albanese, dated as of June19,2007. (42) (a)
10.1(a)
Amended
and Restated Employment Agreement between the Company and Bernard
Albanese
dated as of August 10, 2007 (12)(a)
10.2
Form
of Proprietary Information, Inventions and Non-Solicitation Agreement.
(17) (a)
10.3
Form
of Indemnification Agreement entered into between the Company and
its
directors and executive officers. (18) (a)
10.4
1995
Stock Option Plan, as amended January 7, 1999. (19)
(a)
10.5
1996
Stock Option Plan, as amended January 2, 2003. (14)
(a)
10.6
2006
Stock Option Plan. (15) (a)
10.7
Form
of Incentive Stock Option Agreement under 1995 and 1996 Stock Option
Plans. (20) (a)
10.8
Form
of Non-Qualified Stock Option Agreement under 1995 and 1996 Stock
Option
Plans. (21) (a)
10.9
Form
of Incentive Stock Option Agreement under 2006 Stock Option Plan.
(16)
(a)
10.10
Form
of Non-Qualified Stock Option Agreement (U.S.) under 2006 Stock Option
Plan. (38) (a)
10.11
Form
of Non-Qualified Stock Option Agreement (U.K.) under 2006 Stock Option
Plan. (39) (a)
10.12(a)
License
Agreement dated as of March 17, 2000 by and among the Company and
Global Interactive Gaming Limited (formerly Global Interactive Gaming
AG).
(22)
10.12(b)
First
Amendment to the License Agreement, dated as of July 1, 2003, by
and among
the Company and Global Interactive Gaming Limited (formerly known
as
Global Interactive Gaming AG). (5)
Consulting
Agreement, dated as of August 2, 2006, between the Company and Techmatics,
a Corporation whose Chairman is Barry Mindes. (13)
23.1
Consent
of Eisner LLP.*
24.1
Power
of Attorney (Included on signature page hereto).
31.01
Certification
of Bernard Albanese, Chairman of the Board and Chief Executive Officer
and
acting Chief Financial Officer of Interactive Systems Worldwide Inc.,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
32.01
Certification
of Bernard Albanese, Chairman of the Board and Chief Executive Officer
and
acting Chief Financial Officer of Interactive Systems Worldwide Inc.,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections
(a)
and (b) of Section 1350, Chapter 63 of Title 18, United States
Code).*
____
(a)
Management
contract or compensatory plan or arrangement.
1.
Incorporated
by reference to the Exhibit with the corresponding number contained
in the
Company’s Current Report on Form 8-K dated August 15,2002.
2.
Incorporated
by reference to the Exhibit with the corresponding number contained
in the
Company’s Registration Statement on Form SB-2 (Reg. No. 333-15005) which
was declared effective by the Securities and Exchange Commission
on
December 11, 1996.
3.
Incorporated
by reference to the Exhibit with the corresponding number contained
in the
Company’s Current Report on Form 8-K dated February 28,2001.
4.
Incorporated
by reference to the Exhibit with the corresponding number contained
in the
Company’s Report on Form 10-KSB dated and filed December 29,2005.
5.
Incorporated
by reference to Exhibit 10.11(b) contained in the Company’s Annual Report
on Form 10-KSB dated December 24,2003.
43
6.
Incorporated
by reference to Exhibit 4.1 contained in the Company’s Current Report on
Form 8-K dated November 24, 2003.
7.
Incorporated
by reference to Exhibit 4.2 contained in the Company’s Current Report on
Form 8-K dated November 24, 2003.
8.
Incorporated
by reference to Exhibit 4.3 contained in the Company’s Current Report on
Form 8-K dated November 24, 2003.
9.
Incorporated
by reference to Exhibit 4.1 contained in the Company’s Current Report on
Form 8-K dated November 18, 2004.
10.
Incorporated
by reference to Exhibit 4.2 contained in the Company’s Current Report on
Form 8-K dated November 18, 2004.
11.
Incorporated
by reference to Exhibit 4.3 contained in the Company’s Current Report on
Form 8-K dated November 18, 2004.
12.
Incorporated
by reference to Exhibit 10.1 contained in the Company’s Current Report on
Form 8-K dated August 10, 2007.
13.
Incorporated
by reference to the Exhibit with the corresponding number contained
in the
Company’s Annual Report on Form 10-KSB for the fiscal year ended September30, 2006, filed on January 16, 2007.
14.
Incorporated
by reference to Exhibit 10.8 contained in the Company’s Annual Report on
Form 10-KSB dated December 24, 2003.
15.
Incorporated
by reference to Exhibit 10.1 contained in the Company’s Current Report on
Form 8-K dated April 4, 2006.
16.
Incorporated
by reference to Exhibit 10.2 contained in the Company’s Current Report on
Form 8-K dated April 4, 2006.
17.
Incorporated
by reference to Exhibit 10.3 contained in the Company’s Registration
Statement on Form SB-2 (Reg. No. 333-15005) which was declared effective
by the Securities and Exchange Commission on December 11,1996.
18.
Incorporated
by reference to Exhibit 10.10 contained in the Company’s Registration
Statement on Form SB-2 (Reg. No. 333-15005) which was declared effective
by the Securities and Exchange Commission on December 11,1996.
19.
Incorporated
by reference to Exhibit 10.11 contained in the Company’s Annual Report on
Form 10-KSB dated December 22,2000.
44
20.
Incorporated
by reference to Exhibit 4.3 contained in the Company’s Registration
Statement on Form S-8 (Reg. No. 333-41847) which was declared effective
by
the Securities and Exchange Commission on December 10,1997.
21.
Incorporated
by reference to Exhibit 4.4 contained in the Company’s Registration
Statement on Form S-8 (Reg. No. 333-41847) which was declared effective
by
the Securities and Exchange Commission on December 10,1997.
22.
Incorporated
by reference to Exhibit 10.15 contained in the Company’s Current Report on
Form 8-K dated March 23, 2000.
23.
Incorporated
by reference to Exhibit 10.1 contained in the Company’s Current Report on
Form 8-K dated November 24, 2003.
24.
Incorporated
by reference to Exhibit 10.2 contained in the Company’s Current Report on
Form 8-K dated November 24, 2003.
25.
Incorporated
by reference to Exhibit 10.1 contained in the Company’s Current Report on
Form 8-K dated November 18, 2004.
26.
Incorporated
by reference to Exhibit 10.2 contained in the Company’s Current Report on
Form 8-K dated November 18, 2004.
27.
Incorporated
by reference to Exhibit 10.3 contained in the Company’s Current Report on
Form 8-K dated November 18, 2004.
28.
Incorporated
by reference to Exhibit 10.1 contained in the Company’s Quarterly Report
on Form 10-QSB for the quarter ended March 31, 2004 dated May 17,2004.
29.
Incorporated
by reference to Exhibit 4.1 contained in the Company’s Current Report on
Form 8-K dated August 5, 2005.
30.
Incorporated
by reference to Exhibit 4.1 contained in the Company’s Current Report on
Form 8-K dated September 12, 2005.
31.
Incorporated
by reference to Exhibit 4.2 contained in the Company’s Current Report on
Form 8-K dated August 5, 2005.
32.
Incorporated
by reference to Exhibit 4.2 contained in the Company’s Current Report on
Form 8-K dated September 12, 2005.
33.
Incorporated
by reference to Exhibit 4.3 contained in the Company’s Current Report on
Form 8-K dated August 5, 2005.
45
34.
Incorporated
by reference to Exhibit 4.3 contained in the Company’s Current Report on
Form 8-K dated September 12, 2005.
35.
Incorporated
by reference to Exhibit 10.1 contained in the Company’s Current Report on
Form 8-K dated August 5, 2005.
36.
Incorporated
by reference to Exhibit 10.2 contained in the Company’s Current Report on
Form 8-K dated August 5, 2005.
37.
Incorporated
by reference to Exhibit 10.3 contained in the Company’s Current Report on
Form 8-K dated August 5, 2005.
38.
Incorporated
by reference to Exhibit 10.3 contained in the Company’s Current Report on
Form 8-K dated April 4, 2006.
39.
Incorporated
by reference to Exhibit 10.4 contained in the Company’s Current Report on
Form 8-K dated April 4, 2006.
40.
Incorporated
by reference to Exhibit 10.1 contained in the Company’s Current Report on
Form 8-K dated September 8, 2006.
41.
Incorporated
by reference to Exhibit 3.1 contained in the Company’s Current Report on
Form 8-K dated and filed on September 18, 2007.
42.
Incorporated
by reference to Exhibit 10.1 contained in the Company’s Current Report on
Form 8-K dated and filed June 22,2007
* Filed
herewith
Item
14. Principal Accountants Fees and Services
Audit
Fees:
Fees
billed to the Company by Eisner LLP for the Company’s fiscal years ended
September 30, 2007 and 2006 for the audit of the Company’s annual financial
statements and the review of the financial statements included in the Company’s
quarterly reports on Form 10-QSB for the periods ended December 31, March 31,
and June 30, totaled $110,000 and $112,000, respectively.
Audit-Related
Fees:
No
fees
were billed to the Company by Eisner LLP for audit-related services during
the
fiscal years ended September 30, 2007 and 2006.
46
Tax
Fees
The
Company engaged Eisner LLP to provide professional services for tax compliance,
tax advice and tax planning during the fiscal year ended September 30, 2007.
Fees billed for these services totaled $8,899. No fees for such services were
billed to the Company by Eisner LLP for the fiscal year ended September 30,2006.
All
Other Fees:
The
Company engaged Eisner LLP to provide professional services relating to the
review of a registration statement and related matters during the year ending
September 30, 2007. Fees billed for these services totaled $5,000. No fees
for
such services were billed to the Company by Eisner LLP for the fiscal year
ended
September 30, 2006.
The
Audit
Committee’s policy is to pre-approve all services (audit and non-audit) to be
provided to the Company by the independent auditor. All services (audit and
non-audit) provided to the Company during fiscal years ended September 30,2007
and 2006 were pre-approved. The Audit Committee believes that any non-audit
services provided by Eisner to the Company did not impair the auditor’s
independence.
47
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERACTIVE
SYSTEMS WORLDWIDE INC.
By:/s/
Bernard
Albanese
Bernard
Albanese, Chairman of the Board and
Chief Executive Officer
(Principal
Executive Officer and
Principal Financial Officer)
January
14,
2008
POWER
OF ATTORNEY
KNOW
ALL
MEN BY THESE PRESENTS, that each person whose signature appears below hereby
severally constitutes and appoints Bernard Albanese, 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 sign
any
and all amendments to this Report and all documents relating thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each
and
every act and thing necessary or advisable to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute, may lawfully do or cause to be done by virtue hereof.
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
Signature
Title
Date
/s/
Bernard Albanese
Chairman
of the Board and Chief Executive Officer and Director
(Principal
Executive Officer and Principal Financial Officer)
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Stockholders
Interactive
Systems Worldwide Inc.
We
have
audited the accompanying consolidated balance sheets of Interactive Systems
Worldwide Inc. and subsidiaries as of September 30, 2007 and 2006, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Interactive Systems
Worldwide Inc. and subsidiaries as of September 30, 2007 and 2006, and the
consolidated results of their operations and their cash flows for the years
then
ended in conformity with accounting principles generally accepted in the
United
States of America.
The
accompanying financial statements have been prepared assuming the Company
will
continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has incurred net losses and used cash in its operating
activities in fiscal 2007 and 2006. Further, the Company had a working capital
deficiency at September 30, 2007 and will require additional financing to
meet
its forecasted cash requirements during fiscal 2008. These events and conditions
raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans regarding those matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Interactive
Systems Worldwide Inc. (“ISWI”) developed an interactive, client/server based
computer system for purposes of wagering on sporting events. On July 31,2002, ISWI acquired all of the outstanding share capital of Global Interactive
Gaming Limited (“GIG”), a United Kingdom company, which had been the Company’s
exclusive licensee and was a development stage company. This acquisition
transformed ISWI from a licensor to an operator of the computer system.
Subsequent thereto, ISWI's activities through GIG consist of generating revenue
by providing interactive gaming services using the SportXction®
System
to business partners such as licensed bookmakers and others located in the
United Kingdom, Gibraltar and Mexico.
The
consolidated financial statements include the accounts of Interactive Systems
Worldwide Inc., its wholly owned subsidiaries, ISW Acquisition Co., LLC, and
Global Interactive Gaming Limited and its subsidiaries (collectively the
“Company”). All significant intercompany balances and transactions have been
eliminated.
(2) Basis
of
Preparation
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As shown in the accompanying financial
statements, the Company has incurred net losses and used cash in its operating
activities during the years ended September 30, 2007 and 2006. In addition,
the
Company had a working capital deficiency at September 30, 2007 and requires
additional financing to meet its forecasted cash requirements and continue
operations during fiscal 2008. These events and conditions raise substantial
doubt about the Company’s ability to continue as a going concern. Management has
developed and is attempting to implement a plan to address these issues and
allow the Company to continue as a going concern through at least the fiscal
year ending September 30, 2008. The plan includes (i) securing
minimum monthly cash receipts from existing customers and new
licensees,
(ii) a
program to reduce costs, (iii) seeking debt and/or equity financing and (iv)
pursuing other strategic transactions. There is no assurance, however, that
the
Company will be able to raise equity financing or execute a strategic
transaction on commercially reasonable terms, if at all, or that the Company
will be able to meet its future contractual obligations.
The
Company’s ability to continue as a going concern is contingent upon obtaining
adequate financing to meet its funding requirements and ultimately generating
sufficient revenue and achieving profitability. The financial statements do
not
include any adjustments that might result from the outcome of this uncertainty.
F-8
Interactive
Systems Worldwide Inc. and Subsidiaries
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications:
Certain
amounts have been reclassified in the 2006 Statement of Operations to conform
to
the current year presentation.
Cash
and
Cash Equivalents:
Cash
equivalents consist of funds held on deposit with banking institutions with
original maturities of less than 90 days.
Property
and Equipment:
Property
and equipment are stated at cost, net of accumulated depreciation and
amortization. Depreciation and amortization are provided over the estimated
useful lives of the respective assets, generally three to ten years, using
the
straight-line method. Expenditures for repairs and maintenance are charged
to
expense as incurred.
Investments:
Investments
at September 30, 2006 consist of Auction Rate Securities issued by
corporate entities. These securities are debt securities classified as trading
securities in accordance with Statement of Financial Accounting Standard 115,
“Accounting for Investments in Debt and Equity Securities.” Trading securities
are recorded at fair value with changes in fair value recorded in earnings.
At
September 30, 2006, the remaining auction days for these securities were between
4 - 25 days.
Software
Development Costs:
The
Company accounts for software development costs in accordance with Statement
of
Financial Accounting Standards ("SFAS") No. 86 “Computer Software To Be
Sold, Leased, or Otherwise Marketed”. Such costs are expensed prior to
achievement of technological feasibility and thereafter are capitalized. The
Company defines a product enhancement as an improvement to an existing product
that is intended to extend the life or improve significantly the marketability
of the original product. In order to meet the requirements for capitalization,
a
product enhancement should involve considerable development resources, requires
a product design and may require a redesign of all or part of the existing
product. Capitalized costs relate to product enhancements to the
SportXction®
product
which had achieved technological feasibility. The Company stops capitalizing
software costs relating to a particular enhancement when the enhanced product
is
available for general release to its customers. Amortization of capitalized
amounts, which begins with the enhanced product’s availability for general
release to a customer, has been computed on a straight-
F-9
Interactive
Systems Worldwide Inc. and Subsidiaries
(3) Summary
of Significant Accounting Policies (continued)
line
basis and an estimated economic life of 3 years and amounted to $155,000 and
$165,000 for the years ended September 30, 2007 and 2006, respectively.
At
each
balance sheet date, the Company compares unamortized capitalized software costs
to net realizable value on a project-by-project basis and writes off any excess
of the unamortized cost over the net realizable value.
Revenue
Recognition:
The
Company's revenue during the years ended September 30, 2007 and 2006 primarily
consisted of license fees and service charges for the use of the
SportXction®
product
from service agreements with bookmakers located in the United Kingdom, Gibraltar
and Mexico. In Fiscal 2006, revenue consisted primarily of service charges
calculated based on a percentage share of net wagering revenue after payment
of
winnings and taxes. In Fiscal 2007, the Company’s revenue primarily consists of
minimum monthly service charges for furnishing the technology and in some cases
operating the system. In addition, after achieving certain thresholds, the
Company may be entitled to a share of the net wagering revenue generated by
its
SportXction®
System.
This component of revenue may be reduced for certain pool imbalance risks that
arise from being a part of the house. The Company recognizes revenue as it
is
earned according to the terms of the related agreement.
Fair
Value of Financial Instruments:
SFAS
No.107, "Disclosures About Fair Value of Financial Instruments," defines the
fair value of a financial instrument as the amount at which the instrument
could
be exchanged in a current transaction between willing parties and requires
disclosure of the fair value of certain financial instruments. Investments
are
carried at fair value or at amounts which approximate fair value. The Company
believes that there is no material difference between the fair value and the
reported amounts of other financial instruments in the balance sheets due to
the
short term maturity of these instruments.
Income
Taxes:
Deferred
income taxes reflect the net tax effects of net operating loss carryforwards
and
temporary differences between the carrying amounts of assets and liabilities
for
financial reporting purposes and the amounts used for income tax purposes.
Deferred income taxes are measured using the enacted tax rates and laws that
are
anticipated to be in effect when the differences are expected to reverse. A
valuation allowance is established if it is more likely than not that a portion
of the deferred tax asset will not be realized.
F-10
Interactive
Systems Worldwide Inc. and Subsidiaries
(3) Summary
of Significant Accounting Policies (continued)
Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of:
Long-lived
assets and identifiable intangibles subject to amortization are reviewed for
impairment 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 future undiscounted cash flows expected to be generated by the asset. If
such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of
the carrying amount or fair value less costs to sell.
Accounting
for Stock Based Compensation:
Effective
October 1, 2005, the Company adopted the fair value recognition provisions
of
SFAS No. 123(R), “Share-Based Payment”, using the
modified-prospective-transition method. Under that transition method,
compensation cost recognized after the effective date includes: (a) compensation
cost for all share-based payments granted prior to, but not yet vested as of
October 1, 2005, based on the grant date fair value estimated in accordance
with
original provisions of Statement 123, and (b) compensation cost for all
share-based payments granted subsequent to October 1, 2005, based on the grant
date fair value estimated in accordance with the provisions of Statement 123(R)
and (c) compensation costs for share-based awards modified, repurchased or
cancelled after such date.
Stock-based
employee and director compensation costs charged to general and administrative
expense during the years ended September 30, 2007 and 2006 amounted to $60,000
and $175,000, respectively.
F-11
Interactive
Systems Worldwide Inc. and Subsidiaries
(3) Summary
of Significant Accounting Policies (continued)
Accounting
for Stock Based Compensation:
The
fair
value of the stock options granted is estimated at grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions for Fiscal 2007 and 2006, respectively: expected dividend yield
0.0%
(in both periods), risk free interest rate of 4.94% and 4.43%, expected
volatility of 71% and 68% and an expected life of 5 years. The weighted average
fair value of options granted in 2007 and 2006 was $0.24 and $1.72,
respectively. Expected volatilities are based on historical volatility of the
Company’s stock price. The Company uses historical data to estimate option
exercise and employee termination within the valuation model. The risk-free
rate
for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.
The
Company accounts for equity awards issued as compensation to non-employees
at
fair value as measured on the date that performance is complete. During the
years ended September 30, 2007 and 2006, the Company recognized compensation
expense of $81,000 and $84,000, respectively, which was charged to general
and
administrative expense in relation to options, warrants and common stock which
were granted to consultants.
Basic
and
Diluted Net Loss per Common Share:
Basic
and
diluted net loss per common share is computed by dividing net loss as increased
by cumulative preferred stock dividends by the weighted average number of common
shares outstanding during the period. In computing diluted net loss per share
for Fiscal 2007 and 2006, no adjustment has been made to the weighted average
outstanding common shares as the assumed exercise of outstanding options and
warrants and the assumed conversion of preferred stock and Debentures is
anti-dilutive.
Potential
common shares not included in calculating diluted net loss per share are as
follows:
2007
2006
Stock
options
638,000
1,064,191
Stock
warrants
1,765,825
1,765,825
Convertible
Preferred Stock (a) (b)
997,867
1,066,667
Total
3,401,692
3,896,683
(a)
Excludes
Series A Preferred Stock convertible on a cashless basis as number
of
common shares obtainable upon conversion is based upon market price
of
common stock and no shares are obtainable until the common stock
exceeds
$15.00 per share (see Note 6).
(b)
Does
not include the potential common shares issuable on redemption
of the
Series C Convertible Preferred Stock (see Note
4).
F-12
Interactive
Systems Worldwide Inc. and Subsidiaries
(3) Summary
of Significant Accounting Policies (continued)
Comprehensive
Loss:
Comprehensive
loss consists of net loss adjusted for the results of certain stockholders'
equity changes not reflected in net loss such as the gain or loss on foreign
currency translation.
Foreign
Currency Translation:
The
functional currency of GIG, ISWI's United Kingdom subsidiary, is the pound
sterling. GIG's assets and liabilities are translated at the exchange rate
at
the balance sheet date and its revenue and expenses are translated at the
weighted average rate for the period. Gains or losses from translation
adjustments are recorded in the accumulated other comprehensive loss section
of
stockholders’ equity.
(4) Series
C
Convertible Preferred Stock
On
August3, 2005, the Company entered into a financing agreement relating to a $4.0
million private placement with institutional investors consisting of
4,000 shares of the Company’s newly issued Series C Convertible Preferred Stock
(“Series C”). Series C has a stated value of $1,000 per share, is non-voting and
is initially convertible into the Company’s Common Stock at $3.75 per share,
subject to adjustment, including full ratchet antidilution protection in the
event of the issuance of additional shares of Common Stock at a price below
the
conversion price. The investors also received warrants that expire in August
2010 to purchase 557,103 shares of Common Stock at $3.95 per share, subject
to
adjustment which were valued at $929,000 using the Black-Scholes option pricing
model. Net proceeds from the financing after costs and expenses were
approximately $3.7 million.
The
Series C is initially convertible into an aggregate of 1,066,667 shares of
Common Stock. Holders of Series C are entitled to receive a cumulative 6% annual
dividend, payable quarterly in cash or, subject to certain conditions (which
the
Company no longer satisfies because its Common Stock is no longer listed on
NASDAQ), shares of Common Stock at the Company’s option. During the three months
ended December 31, 2006, a holder of the Series C converted 258 shares of Series
C into 68,800 shares of Common Stock and there are currently 3,742 remaining
Series C outstanding. During the years ended September 30, 2007 and 2006,
respectively, the Company declared dividends of $202,000 and $240,000 on the
Series C which were satisfied by the issuance of 131,746 and 112, 537 shares
of
common stock. As of September 30, 2007, unpaid cumulative dividends on the
Series C amounted to $112,000. These dividends are subject to a late fee at
the
rate of 12% per annum (which must be paid in cash). A placement agent in this
transaction received a cash fee of $120,000 and warrants to purchase 65,753
shares of the Company’s Common Stock expiring in August 2010, which are
exercisable at $4.38 per share. The warrants were valued at $132,000 using
the
Black-Scholes option pricing model.
F-13
Interactive
Systems Worldwide Inc. and Subsidiaries
(4) Series
C
Convertible Preferred Stock (continued)
Under
the
terms of the private placement, and subject to certain conditions, the Company
has the right to force conversion of all or a portion of the Series C into
Common Stock. The Series C also provides that if certain events (all of which
are within the control of the Company) occur such holder would have the right
to
require the Company to redeem the Series C for cash. Upon the occurrence of
certain other events (including, without limitation, failure to be listed on
the
NASDAQ Capital Market for more than 10 consecutive trading days), each holder
of
Series C would have the right to require the Company to redeem the Series C
(generally at 120% of the stated value thereof) for the Company’s Common Stock
(at approximately 90% of the market value thereof), subject to an ownership
limitation, or increase the dividend on the Series C to 12% per annum. On May18, 2007, as a result of failing to comply with NASDAQ’s shareholders’ equity
requirement, the Company’s Common Stock was de-listed from the NASDAQ Capital
Market. As of January 10, 2008, the Company has not been notified of any
election having been made by the Series C holders as to the exercise of either
of their rights. If the Series C holders elected to require the Company to
redeem their shares, absent the holders’ limitations, the Company would be
required to issue approximately 14,675,000 common shares based on the
quoted market price for its common stock on September 30, 2007.
As
a
result of the de-listing from NASDAQ, the holders of Series C currently have
the
right to require that, commencing with the July 2007 dividend payment, dividend
payments be made in cash. The unpaid quarterly dividends (which accrued for
the
quarter ended June 30, 2007 and September 30, 2007), amounting to $112,000,
has
been accrued as a liability in the accompanying balance sheet at September30,2007. The unpaid quarterly dividend has been accrued at 6% (rather than 12%)
per
annum because the holders of the Series C have not exercised either of their
rights resulting from the NASDAQ de-listing. As of January 10, 2008, the Company
has not made the mandatory dividend payments, which were due on July 2, 2007
and
October 1, 2007. Such dividend is subject to a 12% late fee to be paid in cash
accruing from such payment date. A late fee for the dividend due on July 2,2007, amounting to $2,000, has been accrued as a liability in the accompanying
balance sheet at September 30, 2007.
The
Series C investor warrants and placement agent warrants are subject to certain
anti-dilution protection similar to that applicable to the Series C. The Series
C contains certain negative covenants including limitations with respect to
borrowings and prohibition on payment by the Company of dividends and
distributions on Common Stock.
Registration
rights agreements were entered into in connection with private placements which
required the Company to file registration statements for the resale of the
common shares issuable upon conversion of debentures and Series B Preferred
Stock (all of which have been converted or repaid) and Series C Preferred Stock
and upon the exercise of warrants issued in connection with the private
placements and to use commercially reasonable efforts to have the registration
statements declared effective by the end of a specified grace period. In
addition, the Company is required to use commercially reasonable efforts to
maintain the effectiveness of the registration statements until all such common
shares have been sold or may be sold without volume restrictions pursuant to
Rule 144(k) of the Securities Act. If the Company fails to have the registration
statement declared effective within the grace period or if effectiveness is
not
maintained, the agreements require cash payments of liquidated damages
F-14
Interactive
Systems Worldwide Inc. and Subsidiaries
(4) Series
C
Convertible Preferred Stock (continued)
by
the
Company to the investors of 2.0% per month or 1.5% per month of the amounts
invested by the investors until the failure is cured with no limitation on
the
maximum liquidated damages.
Registration
statements were filed and declared effective within the specified periods with
respect to the three private placements. See Note 5 - Accounting Change
regarding a change in accounting principle associated with the liquidated
damages provisions of these registration rights agreements.
(5) Accounting
Change
As
described in Note 4, registration rights agreements were entered into in
connection with three of the Company’s private placements. Prior to October 1,2006, the Company accounted for the registration rights agreements as a separate
free-standing instrument and accounted for the liquidated damages provision
as a
derivative liability subject to SFAS 133, “Accounting for Derivative Instruments
and Hedging Activities.” Accordingly, the liability was recorded at estimated
fair value based on an estimate of the probability and costs of cash penalties
being incurred and is revalued at each balance sheet date with changes in value
recorded in other income. As of September 30, 2006, the liability amounted
to
$27,000 and was included in accrued expenses.
In
December 2006, FASB Staff Position EITF 00-19-2 was issued which specified
that
the contingent obligation to make future payments under a registration payment
arrangement should be separately recognized and measured in accordance with
SFAS
5, “Accounting for Contingencies” which states that a liability is recorded if
the obligation is probable and can be reasonably estimated. In addition, SFAS
133 was amended to exclude registration payment arrangements from its scope.
As
of September 30, 2007, as the obligation was not considered probable, the
Company has recorded no liability associated with these arrangements. Effective
October 1, 2006, the Company adopted EITF 00-19-2 and reported a change in
accounting principle through a reversal of the liability and as a decrease
to
the opening balance of accumulated deficit.
(6) Stockholders’
Equity
On
September 17, 2007, the Company’s stockholders approved an amendment to the
Company's Certificate
of Incorporation to increase the number of authorized shares of common stock
to
80 million shares.
The
designations, rights, and preferences of the Company's Preferred Stock are
to be
determined by the Board of Directors at the time of issuance. In connection
with
the acquisition of GIG, the Company issued 60,000 shares of a new class of
Series A Preferred Stock ("Series A"). Each share of Series A has
one vote, is convertible through July 31, 2009 into 10 shares of the
Company’s Common Stock at $15 per common share on a cashless basis and is
redeemable by the Company on such date for nominal consideration if not
previously converted into Common Stock. The holder of Series A is entitled
to a non-cumulative dividend of 6% per annum if and when declared by the Board
of Directors. Series A has no liquidation preference. See Note (4)
regarding the Company’s Series C Preferred Stock.
F-15
Interactive
Systems Worldwide Inc. and Subsidiaries
In
May
1995, the Board of Directors adopted and the stockholders approved the 1995
Stock Option Plan (the “1995 Plan”). The 1995 Plan provides for the grant of
incentive stock options (“ISOs”) and nonqualified stock options (“NQSOs”). On
May 24, 2005, the term of the 1995 Plan expired and thus, no additional options
may be granted under this plan. In October 1996, the Board of Directors adopted
and the stockholders approved the 1996 Stock Option Plan (the “1996 Plan”). The
1996 Plan, as amended, is substantially similar to the 1995 Plan, except that
there are 1,500,000 shares of Common Stock authorized and available for issuance
pursuant to options that may be granted thereunder. The 1996 Plan is
administered by the Stock Option Committee. On October 24, 2006, the term of
the
1996 Plan expired; thus no additional options may be granted under this plan.
In
January 2006, the Board of Directors adopted and in March 2006 the stockholders
approved the 2006 Stock Option Plan (the “2006 Plan”). The 2006 Plan is
substantially similar to the 1995 and 1996 Plans, except that there are 500,000
shares of Common Stock authorized and available for issuance pursuant to options
that may be granted thereunder, plus any shares subject to the 1,172,669 options
under the 1995 Plan and 1996 Plan which were outstanding at March 30, 2006
that
expire or terminate. Through September 30, 2007, 505,034 shares which were
subject to options which were outstanding at March 30, 2006 under the 1995
Plan
and 1996 Plans expired.
ISOs
may
be granted to individuals, who, at the time of grant, are employees of the
Company. NQSOs may be granted to officers, directors, agents, employees and
consultants of the Company, whether or not the individual is an employee of
the
Company. The Plans provide that the exercise price for ISOs shall be no less
than the fair market value per share of the Common Stock at the date of grant.
The exercise price of NQSOs shall be determined by the Board of Directors.
Options granted under the Plans may not be exercisable for terms in excess
of
ten years from the date of grant, with vesting periods varying for option
grants.
Activity
related to the 1995, 1996 and 2006 Plans for the year ended September 30, 2007 is
as
follows:
The
total
intrinsic value of options exercised during the years ended September 30, 2007
and 2006 was $9,000 and $201,000, respectively. As of September 30, 2007, there
was $83,000 of total unrecognized compensation cost related to nonvested options
granted under the Plans. That cost is expected to be recognized over a
weighted-average period of 1 year. During the quarter ended December 31, 2005,
the Company effectively extended the contractual life of 90,692 fully vested
share options held by an officer by canceling existing options and replacing
them with new options at the same exercise price. As a result of that
modification, the Company recognized additional compensation expense of $6,000
for the year ended September 30, 2006, measured as the excess of fair market
value of the new options over the fair market value of the cancelled options
as
of the cancellation date.
(8) Warrants
At
September 30, 2007, outstanding warrants to acquire shares of the Company’s
Common Stock consist of the following:
During
the year ended September 30, 2007, the Company wrote-off $214,000 of fully
depreciated property and equipment which was no longer in use, realized proceeds
from disposal of property and equipment of $2,000 and recorded a loss on
disposal of property and equipment of $12,000.
The
income tax benefit for the years ended September 30, 2007 and 2006 differed
from the amounts computed by applying the federal income tax rate of 34% to
pre-tax loss as a result of the following:
2007
2006
Computed
benefit at 34%
$
(742,000
)
$
(1,514,000
)
State
tax benefit net of federal effect
(28,000
)
(267,000
)
Potential
benefits from net operating loss carryforward
in United States and United
Kingdom
which are not being recognized
770,000
1,815,000
Other
--
(34,000
)
Income
tax benefit
$
--
$
--
The
tax
effects of temporary differences and loss carryforwards that give rise to
deferred tax assets and deferred tax liabilities at September 30, 2007 and
2006 are presented below:
2007
2006
Deferred
tax assets:
Federal
and state net operating loss carryforward
$
6,135,000
$
5,867,000
United
Kingdom net operating loss carryforward
11,699,000
8,119,000
Tax
basis for capitalized license fees paid to
The
Company by GIG prior to acquisition
--
4,107,000
Property
and equipment
341,000
328,000
Employee
compensation and benefits
208,000
179,000
Total
gross deferred tax assets
18,383,000
18,600,000
Deferred
tax liabilities:
Capitalized
software
(150,000
)
(171,000
)
Net
deferred tax asset
18,233,000
18,429,000
Less
valuation allowance
(a
)
18,233,000
18,429,000
Net
deferred tax asset
$
0
$
0
(a)
Includes
$11,912,000 and $12,420,000 in 2007 and 2006, respectively, applicable
to
subsidiary in United Kingdom.
F-19
Interactive
Systems Worldwide Inc. and Subsidiaries
As
of
September 30, 2007, the Company had a net operating loss carryforward of
approximately $15,338,000 for Federal and state income tax reporting purposes
available to offset future Federal taxable income through the year 2027 and
future state taxable income through the year 2014, which may be subject to
an
annual limitation on its utilization under Section 382 of the Internal Revenue
Code. In addition, GIG had a net operating loss carryforward of approximately
$41,783,000, which is available to offset future taxable income in the United
Kingdom. As the Company is unable to conclude that it is more likely than not
that the benefits of the carryforwards and deductible temporary differences
will
be realized it has provided a valuation allowance to offset the related deferred
tax asset.
(12) Commitments,
Contingencies and Other
(a) The
Company leases office facilities in the U.S. under an operating lease which
has
a monthly payment of $3,125 and expires in June 2009. The Company has the right
to terminate the lease at any time by providing four months written
notice.
Rent
expense under operating leases during 2007 and 2006 was $222,000 and $300,000,
respectively. On December 4, 2006, the Company exercised the break clause within
its lease to vacate its offices in London, England on February 4, 2007 at no
cost.
(b)
The
Company entered into an employment agreement with one of its employees. The
agreement, which expires in June 2008, provides for minimum compensation and
certain benefits. Compensation expense recognized under this agreement during
the years ended September 30, 2007 and 2006 was $201,000 and $285,000,
respectively. The agreement also provides for severance payments upon certain
events, as defined.
(c) Other
income for the years ended September 30, consists of the following:
2007
2006
Settlement
dispute with a vendor
$
370,000
--
Settlement
of patent infringement litigation
90,000
--
Miscellaneous
--
$
3,000
$
460,000
$
3,000
F-20
Interactive
Systems Worldwide Inc. and Subsidiaries
Revenues
from Sportingbet (32%), Ladbrokes (24%) and Caliente (41%), represented over
90%
of revenues in the year ended September 30, 2007. Revenues from Sportingbet
(60%) and Caliente (23%) represented over 80% of revenues for the year ended
September 30, 2006. The Company expects a significant portion of its future
revenues to continue to be generated by a limited number of bookmakers. The
loss
of any of these bookmakers or any substantial reduction in betting activity
by
any of their customers could materially and adversely affect the Company’s
operating results.
(14) Related
Party Transactions
During
the year ended September 30, 2006, the Company paid $29,000 in consulting fees
to Barry Mindes, the founder and former Chairman of the Board and Chief
Executive Officer of the Company. In addition, the Company entered into a
consulting agreement in September 2006 with Vincent Caldwell, a former director
of the Company, under which the Company paid Mr. Caldwell $22,500 and $7,500
in
consulting fees in the years ended September 30, 2007 and 2006,
respectively.
(15)
Fourth
Quarter Adjustment (Unaudited)
The
Company recorded an adjustment in the fourth quarter of fiscal 2006 to
capitalize software development costs amounting to $342,000 ($0.03 per share)
which had previously been incorrectly charged to research and development
expense during the previous interim quarters of 2006. The effect on the previous
quarters was not material in any individual quarter.
F-21
Dates Referenced Herein and Documents Incorporated by Reference
