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UNITED
STATES Washington, D.C. 20549
FORM 10-K
For the transition period from to .
Commission file number 0-08962
KENILWORTH SYSTEMS CORPORATION (Exact name of registrant as specified in its charter)
(516) 741-1352 (Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
(TITLE OF CLASS) Common Stock, par value $.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No o
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller reporting company. See definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ and ‘‘smaller reporting company’’ in Rule 12b-2 of the Exchange Act. (Check one):
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registration based on the closing price as reported on the Pink Sheet Market on March 14, 2008 was $3,000,064.
As of December 31, 2007, 327,741,562 Shares of the Registrant’s Common Stock, $0.01 par value, were outstanding.
Portions of the Registrant’s Proxy Statement for its 2007 Annual Meeting of Stockholders to be filed are incorporated by reference into Part III of this Form 10-K.
At the Annual Meeting of Shareholders held on July 17, 2002 the Shareholders approved the issuance of 20,000,000 Shares of restricted Common Stock to Herbert Lindo, Chairman of the Board of Directors and the President of the Company for having assigned to the Company the Patent that was granted on June 10, 2003. Titled “SYSTEM AND METHOD FOR REMOTE ROULETTE AND OTHER GAME PLAY USING GAME TABLE AT A CASINO”. Upon Mr. Lindo’s request, the Shares were not issued until January 11, 2006, as restricted securities. (See Part III Item 12 Beneficial Ownership (1).)
At the regular meeting of the Board of Directors of the Company held on December 1, 2004 at which all six (6) members of the Board of Directors were present, the Directors (with Herbert Lindo, the Chairman and President abstaining) unanimously voted to issue 25,000,000 shares of restricted Common Stock to Herbert Lindo for having assigned in October 2003 to the Company, the Patent titled “METHOD AND SYSTEM FOR SUPPLYING FUNDS TO A TERMINAL FOR REMOTE WAGERING” (lottery terminals). Upon Mr. Lindo’s request, the shares were not issued until January 11, 2006, as restricted securities (see Part III Item 12 Beneficial Ownership (1)).
On November 27, 2006 Herbert Lindo, the Chairman and Chief Executive Officer exercised a five million (5,000,000) share option for seven hundred fifty thousand dollars ($750,000) at fifteen cents ($0.15) per share pursuant to the Company’s Performance and Equity Plan. The price per share was the price for the Option which would have expired on the following date. Mr. Lindo does not own any other Options pursuant to the Plan. The average market price of the Common Stock for the thirty (30) days prior to November 27, 2006 was high: $0.05, low: $0.03. As provided in the Plan, Herbert Lindo borrowed the seven hundred fifty thousand dollars ($750,000) from the Company and pledged the five million (5,000,000) and other shares he owns totaling fifty million (50,000,000) shares, as collateral for the loan. The five million (5,000,000) shares have been issued and are included as collateral. All of Mr. Lindo’s Kenilworth shares are legended “Restricted Securities”.
2 TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains certain forward-looking statements and Risk Factors. We expressly disclaim any obligations on undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or to reflect any change in events, conditions or circumstances on which any such forward-looking statement is based in whole or in part.
Readers should amongst the other statements contained herein and future filings with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed, carefully review in Item 7 the following: “Cautionary Statements for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995 and Risk Factors”. All of the Risk Factors contained therein should be carefully read.
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INTRODUCTORY NOTE TO PART IV
The Amendment No. 1 on FORM 10-K filed to restate certain amounts which changed as the results of having been ordered by the Securities and Exchange Commission to file the Company’s Financials as a “Development Stage Company” from the period beginning November 24, 1998 to the present at December 31, 2007, the elimination of $4,256,926, which was the amount the Company disbursed on or about September 28, 1998 to exit from Chapter 7 Bankruptcy Proceedings, and certain adjustments to losses sustained for the periods ended December 31, 2002, 2003 and 2004 for having discounted Convertible Promissory Notes from between ten cents ($0.10) per share and twelve cents ($0.12) per share to five cents ($0.05) per share. The Company also added in PART II Item 5 — MARKET PRICES OF THE COMPANY’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS: d) The Company has outstanding 327,741,562 Common Shares. All of the restricted shares may have the restrictions lifted pursuant to new Rule 144 D within six (6) months which will substantially depress the trading price of the Company’s Common Stock.
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ITEM 1 — DESCRIPTION OF BUSINESS
THE COMPANY
Kenilworth Systems Corporation hereinafter referred to as “Kenilworth”, the “Company” or “we”, was incorporated on April 25, 1968 under the laws of the State of New York. Kenilworth has been a publicly traded Company since August 1968 formerly on the National NASDAQ Market, presently on the OTC Pink Sheet Market since emerging from Bankruptcy Proceedings in September 1998. Kenilworth is now being presented as a Development Stage Company.
GENERAL
Since early in the year 2000 we have been solely engaged in developing patents, markets and investigating how best to obtain Governmental approvals, by engaging lobbyists and consultants that would allow television satellite and cable subscribers and other casino gamblers throughout the industrialized world to play and wager along from remote locations with live, in-progress casino table games (Roulette, Craps, Baccarat and more) from strictly regulated casinos located in the United States and other locations around the world.
Employing the latest encrypted satellite, cable and Internet technology and placing television cameras in strategic locations above the casino table games, without disrupting the normal game-monitoring activities, (a separate control room would direct the various camera angles), and transmitting the table games over the digital satellite, digital cable and Internet networks (in countries that permit Internet wagering) to television sets (“TV’s”), which become a platform for playing along with the casino games wherever TV’s are located.
Kenilworth titled the overall project “RoulabetteTM”. There are thirty-eight million (38,000,000) satellite and seventy-three million (73,000,000) cable TV subscribers in the United States and more than five hundred million (500,000,000) subscribers throughout the rest of the industrialized world (“The Market”). On average, households in the U.S. have three (3) TV’s. (It is important since the satellite and cable companies will charge a separate fee for transmitting the table games). Public gathering places can accommodate (be able to network) up to one thousand (1,000) or more TV sets with a single satellite receiving dish, direct cable connections, or streamed via the Internet. With wagering possible in homes, hotel rooms, resort rooms, pubs, restaurants, race tracks and other public gathering places the Company believes it will become a more than $500 billion annual net win Market within five (5) years throughout the industrialized world (by the year ended 2013).
To best market the casino games, the Company is selecting lotteries throughout the world to manage and operate the distribution and cash handling (deposits to play and paying winnings) using the lotteries’ existing databases for the sale of lottery tickets, and paying winnings at regular lottery licensed terminal locations.
All forty-three (43) lotteries in the United States are owned and operated by County and State agencies. Since the beginning of year 2007, Texas, Illinois, Indiana, Maryland, Massachusetts, Michigan, Iowa, New Jersey and California have indicated exploring the privatization of their lotteries. This could greatly enhance our efforts to broadcast the live casino table games to these lottery locations and could result in having Cafés that offer terminals and TV sets to play along. Internet Cafés that offer wagering on various events have been a huge success in the Asian Market. With Internet wagering outlawed in the United States, our patented satellite, one-way broadcasts offer the best possibility to establish satellite Cafés.
Throughout the rest of the world, lotteries are owned by government agencies or non profit charitable agencies that distribute the net earnings to benefit social and charitable programs, or by private entities that pay a percentage of their net win to designated government agencies.
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These foreign lotteries also have the same databases as lotteries in the United States, except most lotteries throughout Europe pool their lotteries between countries, not unlike Mega Millions and PowerBall in the United States, which makes the distribution simpler and very cost effective for both Kenilworth and the lotteries.
There are no technical breakthroughs required. The equipment for the technology is readily available. What is needed is to get through the maze of Local, County, State and Federal regulations in each U.S. State and foreign countries. When the first State in the United States grants the Company permission to transmit the broadcast from one of its casinos to their residents and to States that do not have any casinos, (the entire East coast of the United States), the other forty-three (43) States with lotteries will join expeditiously. The same will occur in foreign countries.
Kenilworth will share the net win revenue with all participating entities that provide RoulabetteTM gaming without costs of any kind. State lotteries or their private operators will receive a minimum of forty percent (40%) of the total net win from their respective jurisdictions.
In States and foreign countries that designate exclusively lottery proceeds to schools and their teachers it is a welcome contribution. It also will help close state budget gaps.
In addition, throughout the United States and most foreign countries there are hundreds of facilities that simulcast live in-progress horse/dog races. At most facilities there are several large TV screens that show the races from the different tracks with general theater-type seating for patrons and at private cubicles with television sets outfitted with touch screens. The cubicles rent for additional fees. After players open an account and select pin numbers, they can watch, in privacy, each race offered on the different tracks on the TV and place wagers on the different races. The players may also watch sporting events, the news, the stock market reports, and in the near future RoulabetteTM, live, in-progress casino table games. The simulcast centers have their own databases to manage the cash deposit and pay winnings on the horse/dog races and will be able to manage the casino games, on the same methods as the lotteries will manage RoulabetteTM. With private TV’s, available in simulcast centers, especially at night, when fewer tracks are operating.
When playing along with live table games from a highly regulated jurisdiction, players will be assured that the game results are exactly what they see; and, playing along with live casino table games such as Roulette, Craps and Baccarat, we believe, will provide interaction, fun and far more excitement than playing virtual games and video lottery terminals. It is the next best thing, we believe, to actually being at the table in the casino.
To conduct actual live test broadcasts Kenilworth believes it will require a minimum of ten million dollars ($10,000,000) and there are no assurances we will ever be able to obtain any of such money. At present, the Company does not have the funds readily available but hopes to obtain same, from investors, as soon as Kenilworth can obtain governmental permission and commence broadcasting from a casino in the United States or other casinos throughout the world.
In prior years, Kenilworth completed a prototype system that allowed casino patrons to play along with live in-progress casino table games only within the confines of a casino, via closed circuit television. Also in 1990, we developed and delivered for the TAB (Totalizator Agency Board) a quasy government agency of the State of Victoria, Australia, a cashless slot machine system. Both systems required debit cards and central mainframe computers to manage the wagers. By making use of the expertise applied in the development of the aforementioned systems we plan to develop a second-generation system that will manage the wagers by the microprocessor installed in TV set-top boxes or an attachment directly connected to the TV set to receive satellite and/or Internet broadcasts. This as planned would allow a player in an interactive manner, at a remote location (outside the casino confines), to experience the actual play and excitement at the casino table game and to make wagers on the various games, without having to be physically present at the casino or casino table. There are no assurances we will be able to successfully develop any system.
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We also propose for slot machine manufacturers to develop “RoulabetteTM Slot Machines”. The RoulabetteTM Slot will offer the regular slot or video lottery games and by the touch of a button, the live in-progress casino table games. Slot players are offered a change of pace at the cost of a slot handle pull. The games are transmitted to the RoulabetteTM Slot via satellite or the Internet (all broadcasts are encrypted to prevent unauthorized use of the broadcasts).
Where authorized, hotels, resorts, clubs and other public gathering places will be able to offer casino table game action in their establishments without incurring the costs to operate a casino. There are now believed to be more than ten million (10,000,000) slot machines played throughout the world, outside of casino confines.
Project RoulabetteTM is a concept intended to be built and there can be no assurances that it will ever be built. The Patented microprocessors to be installed in the TV set top boxes have not been designed.
SUMMARY:
(1.) Kenilworth continues to fine tune its patented technology dubbed RoulabetteTM. It now plans to “outsource” the manufacturing of all the components instead as formerly manufacture some of the equipment in its 26,000,000 square foot facility then located in Melville, NY. RoulabetteTM would allow casino patrons and other players to play along with live in-progress casino table games such as Roulette, Craps, Baccarat and more via digital satellite, digital cable television or Internet broadcasts (simulcasts) emanating from strictly regulated casinos located in the United States and other locations around the world, to self-sufficient computer terminals dubbed “RoulabetteTM Slots” and digital satellite, cable TV set top boxes or the Internet in countries that permit Internet gaming. The RoulabetteTM terminal is a proposal intended to be built and there can be no assurances that it will ever be built. The microprocessors to be installed in the TV set top boxes have not been designed. We have as at December 31, 2007, no firm agreements, customers, or proposals for any future business and there can be no assurances that we will ever have same. Reference is also made to each of the “Risk Factors” that are set forth in Item 7.
(2.) We believe the thousand virtual casino websites via the Internet obtain sixty percent (60%) of their annual revenue from customers in the U.S. These website have been shut down when President Bush signed the Internet Enforcement Act of 2006.
Simulcast broadcasts of digital satellite and digital cable transmissions around the world must meet, and will be supervised by, the regulations by the gaming authorities of the broadcasting casino and the jurisdiction, which receives the broadcast. We believe the supervision will not be difficult to enforce, because all simulcast wagering is “cash only”, from regulated, supervised betting sites. There are no wire money transfers with banks and no credit or debit cards permitted or used. We believe this fact should ease any opposition from concerned citizens and anti-gambling groups, as regulation and enforcement responsibility will be vested in each individual state (or foreign jurisdiction).
Kenilworth was the first to use color personal computers (PC’s) to replace electromechanical slot machines (1988). We provided the software for the first Tabaret located at the Menzie at the Rialto in Melbourne, Australia, which opened in November 1990. This consisted of cashless, variable denomination and multiple game, virtual PAT’s (“Player Activated Terminals”). Prior thereto Kenilworth sponsored, with the assistance of three (3) Nevada casino operators, legislation to permit cashless wagering in the state of Nevada. The legislation, which is in the form of an amendment to existing casino control statutes, permits the use of account cards (debit cards) and was signed into law by Governor Richard H. Bryan on June 13, 1985.
Kenilworth has been a publicly traded Company since 1968. Prior to commencing its endeavors into its present business in 1988, it also provided security systems to Nuclear Electric Generating Plants in the U.S. and foreign countries, as well as time/attendance systems at a major department store chain.
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THE STATUS WITH PAGCOR
During January 2006, the Company reestablished negotiations with the Philippines Amusement and Gaming Corporation (“PAGCOR”) for permission to broadcast live, in-progress casino table games from their casinos.
PAGCOR is the Republic of the Philippines chartered government gaming monopoly. PAGCOR partially owns and exclusively operates all fourteen (14) Filipino casinos, some of which are located in exclusive resort facilities frequented by Asian patrons (tourists).
In March 2006, Kenilworth conducted a live, in-progress casino table game test to demonstrate the ability to broadcast the table games, for around the world viewing, without disrupting the normal security monitoring and protecting the privacy of players at adjoining table games. The film clip of the test broadcast which was made at a roulette table located in the new Hyatt Hotel and Casino, Manila, is available for viewing on our website www.kenilworthsys.com (see Press Release: Monday, March 6, 2006).
In 2002, the Philippines Government permitted the establishment of two (2) Internet Cafés in the Manila area and allowed the operators, for a fee to PAGCOR, to provide life-like action on virtual baccarat, accept sports bets and video broadcast of actual in-progress cock fights with wagering on the outcome. By year end 2004, the number of Cafés operating in the Manila area increased to sixty (60) Cafés. At the end of 2006 there are now six hundred (600) Cafés in Manila with an additional thirty four hundred (3,400) throughout the country.
Kenilworth never attempted to provide live in-progress real time casino table games to the Cafés since President Gloria Macapagal-Arroyo stated, at all times, that our broadcast should not expand gambling throughout the Philippines. The Cafés now represent a huge profit base for PAGCOR which provides the income from its overall operation entirely for socio-civic endeavors. PAGCOR is the most profitable corporation in the Philippines.
The phenomenal success by the Internet Cafés may not require our broadcasts to improve PAGCOR’s income stream. Kenilworth planned to broadcast to the Pacific Rim countries to maintain the tourist’s trade to the Philippines resorts, all of which have casinos, and now have to compete with Macau. We believe, in the future, PAGCOR will require our broadcasts to maintain their present tourist trade.
MARKETING STRATEGY/SALES PLAN
Our marketing strategy consists of developing the RoulabetteTM Slot terminal and the RoulabetteTM broadcasts. We estimate at this time, that we will need at least approximately ten million dollars ($10,000,000) for promoting the RoulabetteTM concept. We do not have this money nor do we have any agreements or understanding to procure this money. We may never get this money. If we do obtain this money, it may not be sufficient. Further, should such monies be available it may not be available on terms satisfactory to Kenilworth or it may be available on such terms that substantially dilute the interest of existing shareholders. If we obtain this money, we will need substantial additional funds for the proposed marketing plan and there can be no assurances that such funds will ever be available to allow Kenilworth to engage in business on a profitable basis.
At the present time, we do not engage technically oriented employees who will be able to assist in the development of RoulabetteTM (we have available three [3] former technical Kenilworth employees that have indicated to rejoin Kenilworth at the appropriate time). It will be necessary for us to obtain additional personnel qualified and with the expertise to develop RoulabetteTM. We would require additional employees and several more consultants in respective locations and there can be no assurances of our being able to obtain any necessary personnel. There can be no assurances of the availability of any such employees and consultants.
The Company will outsource the development of RoulabetteTM and the microprocessors for the TV set top boxes.
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In the United States, Kenilworth must refrain from using the Worldwide Web (WWW) Internet to manage wagers from individuals outside of the casino confines. It is against the law. In RoulabetteTM, the play-along broadcast emanates from casinos that are regulated by strict and comprehensive rules and state and jurisdiction regulations, enforced by gaming control regulators and everybody plays along with the same live table game. There is a world of difference between playing in a virtual make believe casino compared with an actual casino.
For the reasons stated, Kenilworth will ask state lotteries, Off-Track Betting (OTB) corporations, pari-mutuel race tracks, and other state and federal regulated agencies to manage the wagers from individuals playing along on their PC’s and their television sets using interactive TV set top boxes that convert regular television sets into minicomputers within their state or jurisdiction. There can be no assurances that we will be able to obtain any arrangement with any of these entities or that they would be on suitable terms.
The individuals would have to pre-deposit funds into an account with the wager management company and then place wagers with their credit balance. The wagers and running balances will be transmitted to the RoulabetteTM player’s PC and/or television sets with telephone lines not crossing any state lines, similar in principle to telephone accounts wagering offered by the New York State Off-Track Betting Corporation and the state of Nevada casino sports book and recently with remote purchase of lottery tickets in many states within the United States.
After we obtain permission to play RoulabetteTM, of which there can be no assurances, in a given state and engages a wager management organization in order to promote digital satellite and interactive television to the state’s residents, Kenilworth would install the eighteen (18) inch dish antenna and converter box required to receive digital TV programming and interactive TV at its own cost, if the subscriber opens a RoulabetteTM wagering account for two hundred dollars ($200). In addition, Kenilworth would pay the monthly subscription fees to view all digital TV programming offered and the Internet service provider (ISP) subscription fee if the customer wagers at least one hundred twenty dollars ($120) each month — win, lose, or draw — makes no difference. In the U.S. the contracts would be financed by the satellite carrier such as EchoStar and DirecTV, or cable companies.
In states with approved lottery and/or other gambling legislation, we plan to introduce RoulabetteTM Slot terminals to hotels, clubs (similar to card clubs in California) and resorts, to provide upscale gathering places for tourists and local residents. Charitable organizations that are permitted to conduct “Nevada Nights” and Bingo games may wish to offer RoulabetteTM gaming on a more permanent basis. To receive the broadcast signal, all that would be required is an eighteen (18) inch dish TV antenna and distribution equipment. The RoulabetteTM terminals are intended to be self-sufficient and accept dollar bills (or script, to control the amount an individual is allowed to wager in one day or other time period). We plan to lease all the equipment necessary to participants for a share of the profits.
To gain approval for our RoulabetteTM-style gambling in jurisdictions that have not approved any gambling legislation, Kenilworth proposes to engage lobbyists to introduce, promote, and obtain legislative approval to permit RoulabetteTM-style gambling. Our strategy is to find depressed resort areas and have the resort/hotel operators convince their local politicians of the benefits to their business and the local economies and request them to promote legislative approval, either state-wide or limited to their areas. Riverboat gambling started to rehabilitate decaying waterfronts. RoulabetteTM can do the same in depressed economic areas. No assurances can be given that we can obtain any such approvals.
When the live casino TV broadcasts are beamed for global viewing, Kenilworth will seek out similar organizations, as proposed for the United States and betting shops and slot route operators that can provide the servicing of individual accounts and placement of RoulabetteTM terminals in hotels, clubs, pubs, racetracks, etc. In all instances, we plan to offer only profit sharing arrangements to franchisees, which will require leasing all the equipment necessary to the franchisee, to discourage competition.
In overseas installations, wherever permitted, Kenilworth will make use of the WWW Internet only to manage the wagers, and only in jurisdictions that permit the data collection of the gambler, not for the live broadcast.
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In the event a substantial amount is won by a player, Kenilworth will make the payment to the winner, via money wire transfer, to the establishment which managed the wager, within twenty-four (24) hours. Kenilworth will establish a worldwide cage for winning payments; or, a guarantee payment by a well-recognized international bank.
COMPETITION
Many segments of the gaming industry are characterized by intense competition, with a large number of companies offering the same type of wagering products and services. None of these companies, at present, are believed to offer the same or similar equipment or systems as intended by RoulabetteTM. The most likely competition will come from slot machine manufacturers who could relatively quickly adapt slot machines to play along with live casino table games. We believe there are three (3) major slot machine manufacturers in the world, all of which have vastly greater capital resources and substantially more personnel than the Company and may have under development systems that directly compete with RoulabetteTM.
Our present plans are to broadcast the live casino table games from companies that own casinos throughout the industrialized world. Other casino owners may start their own broadcasts and have their own terminals manufactured that compete with Kenilworth after Kenilworth has done all its pioneering for play-along wagering.
PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY
Our most important assets are Patents we have acquired and RoulabetteTM related trademarks and service marks. The Patent granted on June 10, 2003 titled “SYSTEM AND METHOD FOR REMOTE ROULABETTE AND OTHER GAME PLAY USING GAME TABLE AT A CASINO” and Patent Application filed October 15, 2003, entitled “METHOD AND SYSTEM FOR SUPPLYING FUNDS TO A TERMINAL FOR REMOTE WAGERING”, “MULTI-USE GAMING MACHINE” trademarks ROULABETTETM, as in pre-marked cards similar to lottery cards to select number in each game, used with terminals “ROULABETTETM SWIPE CARD” to activate set-top boxes to play RoulabetteTM and “PLAY ALONG WITH ROULABETTETM, LIVE” and MULTI-USE GAMING MACHINE.
GOVERNMENT REGULATIONS
Kenilworth has no licenses from any casino regulating authorities and may not require any casino licenses at the present time and may never become able to obtain any licenses that may be required in the future. Each state has its own regulations, and in states where Kenilworth does business, Kenilworth will have to comply with these regulations and there can be no assurances that it will be able to do so or obtain the necessary license in an applicable jurisdiction. The following discussion is not necessarily complete, or current regarding laws and regulations that may be applicable to us. Any present laws are also subject to future change, amendment or cancellation.
Federal
The Federal Gambling Devices Act of 1962 (the “Federal Act”) makes it unlawful for a person to manufacture, deliver, or receive gaming machines, gaming machine type devices and components thereof across interstate lines unless that person has first registered with the Attorney General of the United States.
In addition, various record keeping and equipment identification requirements are imposed by the Federal Act. Violations of the Federal Act may result in seizure or forfeiture of equipment, as well as other penalties.
Other Regulations
The manufacture, distribution, sale, and use of slot machines are controlled by state and federal law, which may also apply to our RoulabetteTM gaming terminals. Certain foreign countries permit the importation, sale, or operation of slot machines. Where importation is permitted, some countries prohibit or restrict the
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payout feature of the traditional slot machine or limit the operation of slot machines to a controlled number of casinos or casino-like locations. Certain of these jurisdictions also require the licensing of gaming devices. Our RoulabetteTM terminals may be considered similar to slot machines and may have to meet these regulations.
Greenberg Traurig Opinion
August 11, 2005
Kenilworth Systems
Corporation
Re: Legal Issues Relating to Roulabette(TM)
Dear Sir:
We are writing in response to your request for an opinion as to the legal issues relating to the implementation of the Roulabette(TM) concept of Kenilworth Systems Corporation (“KSC”).
Roulabette(TM) is a method and system for placing wagers on live, in-progress casino table games such as roulette, baccarat and dice from locations remote from the actual casino tables at which the games are taking place. The system begins at the casino, where television cameras in strategic locations above the casino table games follow the games being played at the casino tables, and microphones pick up the sounds of the table play. The game play is transmitted via digital satellite and cable transmissions to subscribers who are able to wager by using set top boxes which receive the broadcast of the game and record wagers and results.
LEGAL ANALYSIS
In making use of this opinion, Kenilworth Systems Corporation (“KSC”) should be aware that this is a very complex area of law, involving U.S. federal gambling statutes, the gambling statutes of the fifty states and the District of Columbia, and the gambling statutes of all the countries of the world where you might want to operate a Roulabette(TM) casino or offer Roulabette(TM) wagering. The gambling laws of these jurisdictions vary widely, ranging from the absolute prohibition of Utah, to the street-side betting shops of England, to the wide-open casinos of Las Vegas. Further confusing matters is the fact that there is very little statutory law specifically addressing remote gambling, and the few statutes which do exist relate to Internet gambling, which is not the same as Roulabette(TM). So, for the most part, we will be interpreting the provisions of gambling statutes which were enacted before the digital technology of today existed, and did not contemplate the possibility of playing casino games from remote locations. Similarly, the case law relative to remote gambling is also very sparse and, once again, concerns Internet gambling, which is different from Roulabette(TM). Finally, there are the interpretations of the law relating to remote gambling which have been publicly pronounced by the U.S. Department of Justice (“DOJ”), which in our opinion are clearly erroneous. Consequently, although the opinions expressed below are our best assessment of the situation after years of research and active involvement in numerous cases, they are to a great extent, projections of what we believe the courts would hold if the issues were ever adjudicated. They are not shared by the DOJ, they do not take into account laws which may be enacted in the future as the countries of the world continue to address the issues of remote gambling, and in time they may prove to be incorrect in one respect or another.
In the United States, the prohibition and/or regulation of gambling is a matter of state law. Some states, such as Nevada, permit a wide range of gambling activities throughout the state. Other states, such as Mississippi and New Jersey, permit a wide range of gambling activities, but only at certain geographic locations, such as riverboats and Atlantic City casinos. Finally, other states, in fact most states, permit only very limited gambling activities, such as thoroughbred racing, jai alai, bingo, etc. Superimposed on this tangle of state laws and regulations are the federal statutes, which are designed to assist the states in
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combating illegal gambling operations which cross state and national borders. So, basically, the U.S. legal regime applicable to gambling is two-tiered. The individual states determine the forms of gambling which are legal and illegal, and to what extent they are banned or regulated, and the federal government assists the states in dealing with illegal gambling activities which cross state or national borders.
Given the fact that Roulabette(TM) would be most successful if distributed on a national or international level, the federal issues must be addressed first to determine whether it is legally feasible to distribute the product across state and national borders. If there is no federal prohibition, casino locations must be selected and the state and local laws of the jurisdiction where the casino is located must be analyzed to determine if it is legal and feasible to broadcast from the chosen locations. In view of the fact that casinos can be chosen from anywhere in the world, there is little doubt that locations can be identified from which to originate the broadcasts. It is only a matter of identifying the best casino or casinos from a legal and business perspective. Finally, several U.S. and foreign courts have concluded that remote gambling takes place both where the server is located (or in this case, the casino), and where the player is located. So, once one or more casinos are identified, another analysis will be necessary to determine the markets where it would be legal to offer the games being played. It is not a question of whether there are legal markets for one or more games, but a matter of the number of markets available and the types of games which can be offered in each market.
There are four federal statutes which are most applicable to remote gambling.(1) They are:
This statute prohibits gambling businesses from using interstate or international telephone facilities to transmit gambling-related information, and states:
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Whoever being engaged in the business of betting or wagering knowingly uses a wired communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both.(6)
The Wire Act has been a formidable tool for the DOJ in the prosecution of operators of Internet gaming sites. The DOJ merely has to establish that a bet was transmitted or received over the Internet and it can obtain a conviction, without ever having to address such issues as the actual location of the betting (i.e., where the bettor is or where the bookmaker is), or the fact that the operator was licensed by a sovereign nation to provide gambling services over the Internet.
In the Spring of 1998, when the United States Justice Department proclaimed its opinion that the Wire Act prohibits Internet gambling, U.S. Attorney General Janet Reno announced charges against numerous off-shore Internet gambling operators, stating:
The Internet is not an electronic sanctuary for illegal betting. If a state outlaws soliciting or accepting bets, you can’t evade those requirements by going online. It’s a federal crime to use the Internet to conduct betting operations. And to Internet betting operators everywhere we have a simple message; you can’t hide online and you can’t hide off-shore.
This assertion appears to be correct. “Wire communication facility” is broadly defined as an instrumentality or service “used or useful in the transmission of writings, signs, pictures and sounds of all kinds by aid of wire, cable or other like connection.”(7) The courts have ruled that even with satellite transmissions, there is still a wire connecting the gamblers computer to the Internet.(8) So, even though Roulabette(TM) utilizes satellite transmissions, it is likely that there will be a wire of some sort used for the transmission somewhere along the line, most likely at the casino or at the player’s TV and set-top box. However, regardless of whether a wire was used in the transmissions, the Wire Act still would not apply for two reasons.
First, although the DOJ takes the position that the Wire Act applies to all Internet gambling, sports and non-sports alike, the courts have held otherwise. The DOJ reasons that the word “sports” in the phrase “sports events or contests” modifies only the word “events” thereby leading to a reading that the statute covers betting on sports events and betting on [other] contests. However, the courts and virtually all legal scholars and attorneys experienced in the field are of the opinion that it only applies to sports betting.
The Supreme Court has established the rules of statutory construction, and if the statutory language is clear and unambiguous, then you look no further and follow the language of the statute. The Wire Act makes it a crime to send or receive wagers on sporting events and contests. Sporting events and contests are football, baseball, basketball, hockey, golf, tennis prize fighting or whatever, but not poker, bingo and similar games. Although a card game or a poker tournament, may be a contest, is not as sporting contest.
If there is some doubt as to the meaning of the statute, the courts turn to case law and the legislative intent of Congress. There have been cases addressing the question of whether the Wire Act applies to non-sports gambling and the case law is consistent — it does not. The most recent case dealing with the issue was In re: MasterCard International, a civil RICO case, which hinged on the applicability of the Wire Act to non-
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sports Internet gambling.(9) In deciding the issue, the court stated that the wording of the Act, the case law and the legislative intent all lead to the conclusion that the Wire Act only covers sports gambling. The case was upheld on appeal by the Fifth Circuit Court of Appeals, which stated: “we agree with the district court’s statutory interpretation, its reading of the relevant case law, its summary of the relevant legislative history, and its conclusion.”(10)
It should be noted that although the DOJ loudly proclaims that the Wire Act applies to all Internet gambling, it is apparently concerned that its interpretation may be wrong, and has never attempted to use the statute against non-sports gambling business in the ten years that Internet gaming has existed. In our opinion, the Wire Act does not cover non-sports gambling, such as Roulabette(TM) — that is the law, as enacted by Congress and interpreted by the courts, the desires and opinion of the DOJ notwithstanding.
Second, there is an exemption to the Act, which provides that it is not illegal to transmit “information assisting in the placing of bets or wagers on a sporting event or contest from a place where such betting is legal to another place where such betting is legal.”(11) The Roulabette(TM) broadcast would constitute “information assisting in the placing of bets or wagers” within the meaning of the statute, and it would be broadcast from a casino in a jurisdiction where such gaming activity is legal to a jurisdiction where the actual wagering activities would take place and where such wagering would be legal. Consequently, even if one accepts, or accedes to, the expansive view of the U.S. Department of Justice, with which most people do not agree, that the Wire Act is not limited to sports betting but extends to other forms of wagering activities, Roulabette(TM) would be exempted from the statute.
2. The Illegal Gambling Businesses Statute(12)
This statute prohibits persons from operating an illegal gambling business, and states:
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The statute applies to all forms of gambling, sports and non-sports alike, and makes it a federal offense to conduct, finance, manage, supervise, direct or own all or part of an “illegal gambling business.” An illegal gambling business is defined as a gambling business, which “is a violation of the law of a State or political subdivision in which it is conducted.” The application of this statute to Roulabette(TM) is obvious, because it applies to sports and non-sports gambling alike, and Roulabette(TM) would be operated, managed, financed or owned by at least five people. Despite the language appearing to limit the statute to persons who conduct, finance, manage, etc., numerous cases have recognized that the statute proscribes any degree of participation in an illegal gambling business except participation as a bettor.(14) As one court recently put it, “conducts extends to those on lower echelons, but with a function at their level necessary to the illegal gambling operation.”(15)
However, unlike the Wire Act, under this statute, the location of the actual activity is of critical significance, because it must be a violation of the law of the state or political subdivision in which it is conducted. This should not be an issue for Roulabette(TM), because it intends to broadcast from a casino in a jurisdiction where it would be legal. If it was not legal under the laws of the jurisdiction where the casino is located, and the casino is in the United States, then there would be a violation not only of state law, but of this federal statute as well.
The statute could also apply if the player is located in a state where the gambling would be in violation of state law. I think there is little question that offering services to players in a particular state would constitute doing business in that state. So, it will be essential that the service not be offered to players located in states where such gambling would be illegal. Otherwise there would be a violation of this federal statute, as well as the laws of the player’s state.
3. The Travel Act
This statute prohibits the use of interstate or foreign travel, and the use of the mail or any facility in interstate or foreign commerce, to distribute the proceeds of illegal gambling, or otherwise promote, manage or facilitate any illegal activity, including gambling, in violation of federal or state law.(16)
Once again, the statute will not present a problem so long as Roulabette(TM) is legal in the state where the casino is located and the states where any U.S. players are located.
4. The Transportation of Wagering Paraphernalia Statute.
This statute prohibits persons from carrying or sending gambling paraphernalia in interstate or foreign commerce, and states:
Whoever ... knowingly carries or sends in interstate or foreign commerce any record, paraphernalia, ticket, certificate, bills, slip, token, paper, writing, or other device used, or to be used, or adapted, devised, or designed for use in (a) bookmaking; or (b) wagering pools with respect to a sporting event; or (c) in a numbers, policy, bolita, or similar game shall be fined under this title or imprisoned for not more than 5 years or both.(17)
A New York state court declared that an Internet gambling web site located in Antigua violated the law by sending records of gambling activity into the State of New York.(18) Moreover, the court also held that the
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defendant Internet gambling operator further violated the statute by sending computers to Antigua, which computers would ultimately be used for conducting gambling business between the United States and Antigua.(19) More on point, a California court has held that a computer disk containing a program for recording and analyzing bets on sporting events is gambling paraphernalia.(20) So, it is quite possible that the Roulabette(TM) data could be deemed to be paraphernalia. However, this statute should not apply because the data is not “used, or to be used, or adapted, devised, or designed for use in (a) bookmaking; or (b) wagering pools with respect to a sporting event; or (c) in a numbers, policy, bolita, or similar game.” It is to be used in casino games, which are not covered by the statute.
OPINION AND SUMMARY
Based on the analysis above, in our opinion Roulabette(TM) would be entirely legal under U.S. federal law, so long as: (1) it is legal under the laws of the state where the casino is located if the casino is in fact located in the United States, and (2) the service is not offered to any player in the United States in violation of the laws of the state where the player is located.
If KSC will select one or more casinos from which it intends to broadcast the games, we will research the jurisdiction where each such casino is located to determine if there are any legal impediments to Roulabette(TM). I would suggest selecting a Native American casino operated by a tribe which is receptive to the Roulabette(TM) concept, and located in a state which would be amenable to amending its compact with the tribe if research indicates that an amendment is necessary. I would also suggest selecting a casino in a foreign jurisdiction, which might be receptive to the Roulabette(TM) concept. A casino in a smaller country, perhaps in the Caribbean would probably be a good selection.
I hope this analysis is useful to KSC. If you have any questions or wish to discuss the issues further, please do not hesitate to contact me on my direct line at (954)768-8221.
Sincerely yours,
By: Patrick T. O’Brien
FABRICATION/ASSEMBLY OPERATION
When we start to market the Roulabette™ Wagering System, of which there can be no assurances, we plan to engage sub-contractors to assemble/manufacture the terminals from standard or specially manufactured (to our specifications) electronic, TV, and other components purchased from vendors or manufactured by subcontractors.
EMPLOYEES
Kenilworth, at present, has three (3) full time employees to perform administrative work and research related to casino wagering and marketing around the world, in addition to the officers that manage the affairs of the Company. The Company has engaged consultants to assist us in the United States, Europe and Asian markets and that may manage the proposed satellite transmission programs, and others that may assist in the marketing of Roulabette™ broadcasts throughout the industrialized world.
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Kenilworth maintains medical insurance for its employees, who do not contribute to the costs of the Plan.
BACKLOG
We do not have any backlog.
Kenilworth leases two thousand three hundred (2,300) square feet in an office building paying two thousand eight hundred dollars ($2,800) per month rent, fuel and electric cost adjustments from the date of the lease, renewed for a three (3) year term to end in June 2009.
Since exiting from Chapter 7 Bankruptcy Proceedings on September 23, 1998, Kenilworth has not been involved in any significant legal proceedings.
ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions held by each of Kenilworth’s directors and executive officers are as follows:
All of the above Executive Officers and Directors have been elected to serve until the next Annual Meeting of Shareholders or until their respective successors are elected and qualified. The Board presently anticipates that the next Shareholders Meeting will be held during the third quarter period of 2008.
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ITEM 5 — MARKET PRICES OF THE COMPANY’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) Kenilworth exited from Bankruptcy Proceedings in September of 1998, its Common Stock which had been trading on the NASDAQ National Market, is now trading on the OTC Pink Sheets under the old trading symbol “KENS”. The following table sets forth high and low closing sales prices for our Common Stock, as reported on the OTC Pink Sheets.
(b) Holders. There were approximately seven thousand (7,000) holders of record of Common Stock of Kenilworth as of June 30, 2007.
(c) Dividends. Kenilworth has not paid any dividends on its Common Stock. We plan to apply any earnings it achieves to expansion of the business and does not expect to pay any dividends in the foreseeable future.
(d) No underwriters were involved in the sale of the unregistered Convertible Promissory Notes. Exemption from registration is claimed under Section 4(2) of the SEC Act of 1933 as amended. The proceeds from the sale of all unregistered securities have all been used for working capital.
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The Company has outstanding 327,741,562 Common Shares. All of the restricted shares may have the restriction lifted pursuant to new SEC Rule 144 D within six (6) months which may substantially depress the trading price of the Company’s stock.
(e) Equity Compensation Plan Information
The following table summarizes the equity compensation plans under which Kenilworth Systems Corporation common stock may be issued as of December 31, 2005.
ITEM 6 — SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data and is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements and related Notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein.
Selected Financial Data for the five (5) years ended December 31, 2007, are as Follows:
SUMMARY OF OPERATIONS
19 ITEM 7 — MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion following should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.
(A) RESULTS OF OPERATIONS
Since we exited from bankruptcy proceedings on September 28, 1998, we have had no revenues from operations, and therefore sustained losses from general administration expenses amounting to $1,093,538 in 2007, $850,079 in 2006 and $3,815,302 in 2005. Kenilworth has had no revenues from operations since exiting from Bankruptcy Proceedings in September 1998.
(B) LIQUIDITY AND CAPITAL RESOURCES
Kenilworth has not conducted any new business operations since 1991. At December 31, 2007, 2006 and 2005 we had a deficiency in working capital of $301,957, $436,910 and $239,745 respectively. In Kenilworth’s present state of operation to continue a viable business plan, Kenilworth requires little funding. We have been dependant upon the resources of its Chairman and Chief Executive Officer, who receives no compensation, and funds received from private investors, totaling $832,500 in 2007, $765,400 in 2006 and $776,250 in 2005. In addition the Company issued restricted Common Stock for services totaling $306,400 for 10,240,000 shares in 2007, $1,829,000 for 58,116,044 shares in 2006 and $1,723,000 for 15,885,000 shares in 2005.
Our present plans are to continue to develop a wagering system titled “Roulabette™” that would allow patrons all over the industrialized world to view and wager on live casino table games on terminals placed in hotels, resorts, bars and other public gathering places and in homes and offices on personal computers (PC’s) or television sets connected to set top boxes for Interactive TV via digital satellite and digital cable broadcasts emanating from strictly regulated casinos. At present we do not have sufficient liquidity and capital resources to develop our business or to remain in business and we may never have such resources.
CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND RISK FACTORS
The information contained in this Form 10-K and Kenilworth’s other filings with the Securities Exchange Commission contain “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, and is subject to the safe harbors created thereby. Such information involves important risks and uncertainties.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information included in this Annual Report on this Form 10-Kcontains statements that are forward-looking, including, but not limited to, statements relating to our business strategy and development activities as well as other capital spending, financing sources, the effects of regulation (including gaming and tax regulations), expectations concerning future operations, margins, profitability and competition. Any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, in some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “would,” “could,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “continue” or the negative of these terms or other comparable terminology. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by us. These risks and uncertainties include, but are not limited to, our lack of recent operating history, our dependence on Herbert Lindo, our Chairman and Chief Executive Officer who is eighty-two (82) years old and existing management, general domestic or international economic conditions, pending or future legal
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proceedings, changes in federal or state tax laws or the administration of such laws, changes in gaming laws or regulations (including the legalization of gaming in certain jurisdictions), applications for licenses and approvals under applicable jurisdictional laws and regulations (including gaming laws and regulations). You should not place undue reliance on any forward-looking statements, which are based only on information currently available to us. We undertake no obligation to publicly release any revisions to such forward-looking statements to reflect events or circumstances after the date of this 10-K report for the year ended December 31, 2007.
RISK FACTORS
NO OPERATING HISTORY
We have had no new revenues from operations since 1991. We exited from bankruptcy proceedings in 1998 without assets and liabilities. We have had no revenues from operations since then and we may never have any revenues from operations in the future, which may result in the termination of our business.
WE HAVE NO WORKING CAPITAL
As of December 31, 2007 the working capital deficiency of Kenilworth was $301,957. This will not enable Kenilworth to achieve any of its planned operations. There can be no assurances that Kenilworth will again have sufficient working capital to engage in its planned operations. Although we have been able to obtain working capital from investors that purchase Convertible Promissory Notes and by issuing restricted Common Shares for services rendered.
OUR BUSINESS IS ONLY IN THE PLANNING STAGE
Kenilworth’s business except for the completion of the $9,000,000 contract with the Totalizator Agency Board of Victoria, Australia, and the revenue from providing encoded access cards to United States and foreign Nuclear Electric Generating Plants, remains in the planning stage. We plan to engage in the development, manufacturing by subcontractors, and marketing of an operation entitled Roulabette™. Roulabette™ would allow casino patrons and other players to play along from remote locations with live in-progress casino table games such as Roulette, Craps, Baccarat and more via digital satellite and digital cable television broadcasts (simulcasts) emanating from strictly regulated casinos located in the United States or via the Internet in other locations around the world, to self-sufficient computer terminals dubbed “Roulabette™” and digital satellite and cable TV set top boxes. The Roulabette™ terminal is a proposal intended to be built and there can be no assurances that it will ever be built. The microprocessors to be installed in the TV set top boxes or attached to TVs have not been designed. We have, as at December 31, 2007, no specific agreements, customers or proposals for any future business and there can be no assurances that we will ever have same.
WE NEED AT LEAST TEN MILLION DOLLARS ($10,000,000)
In order to commence to develop the Roulabette™ terminal and the Roulabette™ broadcasts, we estimate at this time, that we will need at least approximately ten million dollars ($10,000,000). We do not have this money nor do we have any agreements or understanding to procure this money. We may never get this money. If we do obtain this money, it may not be sufficient. Further, should such monies be available it may not be available on terms satisfactory to Kenilworth or it may be available on such terms that substantially dilute the interest of existing shareholders. If we obtain this money, we will need substantial additional funds for the proposed marketing plan and there can be no assurances that such funds will ever be available to allow Kenilworth to engage in business on a profitable basis.
OUR BUSINESS IS SUBJECT TO OUR ABILITY TO OBTAIN AND RETAIN KEY PERSONNEL
At the present time, we do not have any employees who will be able to develop Roulabette™. It will be necessary for us to obtain personnel qualified and with the expertise to develop Roulabette™. We believe at this time we would require additional employees and several more consultants. There can be no assurances of the availability of any such employees and consultants. The Company expects to outsource
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the development of Roulabette™ and the microprocessors for the TVs or set top boxes. No assurances can be given that the Company will be able to do this successfully.
WE ARE DEPENDANT UPON HERBERT LINDO
Kenilworth has been dependant upon the services of its Chairman and Chief Executive Officer Herbert Lindo who is eighty-two (82) years old. Herbert Lindo has performed his services during the past seventeen (17) years without compensation. Should Kenilworth procure working capital, there can be no assurances that he will continue to work without receiving compensation. There also can be no assurances of Herbert Lindo’s continued availability. We believe without assurances that present management is capable to continue our present plans in the event that Herbert Lindo is not available.
RAPID CHANGES IN TECHNOLOGY
The technology and Roulabette™ in general is subject to rapid change. Kenilworth will need to maintain an ongoing research and development effort of which there can be no assurances of success or availability of funds. Additionally, there can be no assurances that the development of technologies and products by competitors will not render the Kenilworth’s products or technologies non-competitive or obsolete.
WE ARE ENGAGED IN A HIGHLY COMPETITIVE INDUSTRY
Our business is subject to significant competition. Competition exists from larger companies that possess substantially greater technical, financial, sales and marketing resources that Kenilworth presently possesses. Such competition is expected to increase. Such increased competition may have a material adverse effect on Kenilworth’s ability to successfully market its products.
WE WERE GRANTED A PATENT FOR THE VARIOUS ASPECTS OF SIMULCAST WAGERING
On June 10, 2003, the U.S. Patent for the various aspects of wagering on live in-progress casino table games was granted by the U.S. Patent Office to Herbert Lindo, the Inventor and which Patent was assigned by Herbert Lindo to the Company in August 2000. We filed the Patent for approval in forty-nine (49) countries in the industrialized world including Russia and China. There can be no assurances that foreign patents will be issued and the challenges will not be instituted against the validity or enforceability of our patent. Herbert Lindo also filed two (2) Patents in the U.S. Patent Offices in September and October 2004 which Patents have been published to use lottery terminals to accept deposits for wagers placed with the TV set top boxes and the use of Play Cards similar to lottery tickets, which have also been assigned to the Company by Herbert Lindo. A Patent Application for Multi-Use Gaming Machines invented by Herbert Lindo and Gordon Coplein, Esq. was published on February 1, 2007 and assigned, by the inventors, to Kenilworth.
OUR ROULABETTE™ TERMINALS ARE SUBJECT TO VARIOUS FEDERAL, STATE, LOCAL AND FOREIGN JURISDICTION LAWS AND REGULATIONS
The use of Roulabette™ may be subject to various federal, state and local laws and regulations both in the United States and foreign countries. There can be no assurances that we will ever be able to obtain licenses or permits necessary to conduct our business or that we will be able to comply with these applicable laws and regulations.
The Roulabette™ system is planned to allow casino patrons and other players to play along with live, in-progress casino table games such as Roulette, Craps, Baccarat and more via digital satellite television and digital cable programming emanating from regulated casinos.
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OUR OFFICERS AND DIRECTORS WILL HAVE SIGNIFICANT CONTROL OVER US AND MAY APPROVE OR REJECT MATTERS CONTRARY TO A VOTE OF OUR SHAREHOLDERS
Our executive officers and directors together with their affiliates beneficially own a significant percentage of our outstanding common stock. These stockholders, if acting together, will be able to significantly influence all matters requiring approval by our stockholders including the election of directors and the approval of mergers or similar transactions even if the stockholders disagree.
SHARES ELIGIBLE FOR FUTURE SALE COULD CAUSE OUR STOCK PRICE TO FALL
If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could fall. As of December 31, 2007 we added 49,733,259 restricted shares of Common Stock outstanding, which are eligible for sale by our Shareholders under new SEC Rule 144 D of the Securities Act of 1933 as amended which reduces the holding period to six (6) months or are otherwise registered for sale.
WE DO NOT INTEND TO PAY DIVIDENDS
We are not able to pay any dividends because we have no funds available to do so. Even if we had funds available, we do not intend or declare to pay any dividends on our common stock in the near future.
The financial statements, the accompanying notes are filed as part of this Report annexed at the end of this report. See ITEM 15.
ITEM 9 — CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On October 2, 2006, Demetrius & Company, L.L.C. (“Demetrius”) resigned as independent registered public accountants of Kenilworth Systems Corporation (the “Company”). The Company’s Board of Directors accepted the resignation of Demetrius.
The report of Demetrius on the Company’s financial statements as of December 31, 2004 and for the year then ended neither contains an adverse opinion or a disclaimer of opinion nor is modified as to uncertainty, audit scope or accounting principles, except that the opinion includes an explanatory paragraph that the Company has incurred operating losses since its inception as a development stage company for the period beginning September 24, 1998, which raises substantial doubt about the Company’s ability to continue as a going concern. Demetrius did not issue a report on the Company’s financial statements as of December 31, 2005 or for the years then ended.
During the fiscal years ended December 31, 2004 and 2005 and the period from January 1, 2006 to October 2, 2006, there were no disagreements with Demetrius on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Demetrius, would have caused it to make reference to the subject matter of the disagreement in connection with its report.
Effective February 5, 2007, the Company engaged KGS, LLP as its independent certified public accountants with respect to the fiscal years ended December 31, 2005, 2006 and 2007. The Company’s Board of Directors approved the engagement of KGS, LLP. KGS, LLP. has not yet audited any of the Company’s financials from the time Demetrius ended their audit engagement. The delay was not caused by KGS, LLP.
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ITEM 9A — CONTROLS AND PROCEDURES
a.) Disclosure Controls and Procedures
The Company has evaluated, under the supervision and with the participation of the Company’s management including the Company’s Chairman, Chief Executive Officer who is also its Financial Officer. The effectiveness of the Company’s disclosure controls and procedures (as 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. Because of the inherent limitations in all control systems evaluation of controls can provide only reasonable assurance that all control issues and instances of fraud, if any, within the Company have been detected. However, based on that evaluation, the Company’s Chairman and Chief Executive Officer who is also the Company’s Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Report at a reasonable assurance level.
b.) Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the annual period ending December 31, 2007, that has materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting.
ITEM 10 — DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Herbert Lindo has been President, Treasurer and Chief Financial Officer of Kenilworth since 1972. Since Kenilworth’s emergence from bankruptcy, he has also served as Chief Executive Officer until July 17, 2002 when Gino Scotto was elected to that office. When Mr. Scotto resigned in November 2005, Mr. Lindo resumed the position of Chief Executive Officer. Mr. Lindo devotes his full time to the business of Kenilworth.
Kit Y. Wong has served as a Director of Kenilworth since 1999, since December 2005 he also serves as Secretary of the Company. He is part owner and operator of several Chinese restaurants in the New York metropolitan area. Mr. Wong devotes only a portion of his time to the business of Kenilworth.
Patrick J. Mc Devitt has been a licensed representative for Securities firms for the past eight (8) years. He retired in 2003 from the Securities business and joined his wife in the CPA business. Mr. Mc Devitt devotes only a portion of his time to the business of Kenilworth.
Joyce D. Clark has served as a Director of Kenilworth since 1998. Since 1991 she has served as controller of Long Island Wholesalers Inc., a wholesale door manufacturer and recently started her own tax filing
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entity. She is also the sister of Betty S. Svandrlik, the former Corporate Secretary, who is engaged in business as a medical transcriber. Joyce D. Clark is the ex-wife of Herbert Lindo, they divorced in 1980. Mrs. Clark devotes only a portion of her time to the business of Kenilworth.
Edward Vietmeier is a professional golfer and participates in major golf tournaments throughout the United States. He is also the operator of a public golf course in Pennsylvania. The immediate members of his family are shareholders of our Company’s stock. Mr. Vietmeier devotes only a portion of his time to the business of Kenilworth.
DIRECTORS IN OTHER PUBLIC COMPANIES
Kit Wong, a Director of the Company, serves as a Director of a private plastic extrusion company.
CRIMINAL/BANKRUPTCY/SEC VIOLATIONS WITHIN THE LAST FIVE (5) YEARS
NONE
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Kenilworth’s Executive Officers and Directors, and persons who beneficially own more than ten percent (10%) of our Common Stock, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. Executive Officers, Directors and greater than ten percent (10%) beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Through December 31, 2007 only Herbert Lindo, Chairman and Chief Executive Officer owns beneficially more than ten percent (10%) of our Common Stock. The Company is presently reviewing the compliance for the foregoing.
AUDIT COMMITTEE AND CHARTER
The following Charter has been adopted with respect to an Audit Committee. We have not, however, at this time appointed an Audit Committee.
The Audit Committee of the Board of Directors (the “Audit Committee”) shall have the responsibility to assist the Board of Directors in fulfilling its fiduciary and other obligations with respect to accounting and financial matters. Specifically, and without limiting the generality of the foregoing, the Audit Committee shall:
The Audit Committee will be comprised of at least three (3) Independent Directors.
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Code of Ethics
The Registrant has not yet adopted a written formal Code of Ethics. However, the Registrant’s Officers intend to comply with all honest and ethical requirements including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; full, fair, accurate, timely and understandable disclosure in reports and documents that the Registrant files with or submits to the Securities and Exchange Commission and in other public communications made by the Registrant; compliance with applicable governmental laws, rules and regulations; prompt internal reporting of any violations of the foregoing to an appropriate person and accountability for adherence of the foregoing. A formal Code of Ethics is expected to be adopted shortly and will be filed with the Securities and Exchange Commission.
ITEM 11 — EXECUTIVE COMPENSATION
a.) The following table sets forth the exercise of options and SARs during the fiscal year ended December 31, 2007.
Aggregated
Option/SAR Exercises in Last Fiscal Year
No options or SARs were granted during the year ended December 31, 2007. Herbert Lindo exercised his five million (5,000,000) share Option on November 27, 2006.
b.) The Registrant has no employment agreements with any of its Executive Officers or Directors.
c.) The Registrant has no compensation committee at this time.
d.) Stock Performance Graph is not applicable.
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TOTAL
RETURN TO SHAREHOLDER’S
Kenilworth has not declared a dividend since its inception in 1968.
e.) The following table sets forth the total compensation of the President and each Executive Officer of Kenilworth whose total salary and bonus exceeds $100,000.
SUMMARY COMPENSATION TABLE
Herbert Lindo received no compensation during the past four (4) years and no Executive Officer received any compensation in excess of $100,000 during the past three (3) fiscal years.
ITEM 12 — SECURITY OWNERSHIP OF CETAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth as of March 14, 2007 the ownership with respect to each Executive Officer and Director and each person known to own beneficially more than five percent (5%) of the Company’s Common Stock.
The information provided in the table is based on Kenilworth’s records, information filed with the Securities and Exchange Commission and information provided to Kenilworth, except where otherwise noted.
The number of shares beneficially owned by each person, Director or Executive Officer is determined under rules of the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has the right to acquire as of May 31, 2006 through the exercise of any stock option or other right. Unless otherwise indicated, each person has sole voting and investment power (or shares such powers with his spouse) with respect to the shares set forth in the following table:
BENEFICIAL OWNERSHIP TABLE
The percent of class has been determined with 327,741,465 shares issued and outstanding on December 31, 2007.
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ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE
ITEM 14 — PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Company has appointed KGS, LLP. as Independent Auditor’s for the fiscal year ending December 31, 2005, 2006 and 2007 and to restate the Company’s financials as A Development Stage Company as directed by the SEC. Representatives of KGS, LLP. are expected to be present at the annual meeting and will have the opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions. KGS, LLP. has not commenced the audit for the respective years. The Company’s back office accountants, which were not timely compensated during some of their work, halted the financial preparation for the audit. The Company believes that after recent payments, the accounting will resume and finish 2005, 2006 and 2007.
Fees Incurred by Kenilworth
Fees for professional services provided by the Company’s Independent Auditor KGS, LLP. are estimated:
Audit fees are for professional services rendered in connection with the audit of the Company’s annual financial statements, the review of its quarterly financial statements and the restatements of the years 2003 and 2004 as A Development Stage Company. No other services were provided by Demetrius & Company, LLC. and KGS, LLP.
The Company has no Audit Committee.
ITEM 15—EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Consolidated balance sheets as of December 31, 2007 and 2006
Consolidated statement of operations and deficit for the periods ended December 31, 2007, 2006 and 2005
Consolidated statement of cash flows for the periods ended December 31, 2007, 2006 and 2005
Consolidated statement of changes in stockholders equity the years ended December 31, 2007, 2006
and 2005
Notes to consolidated financial statements
(b) On July 12, 2002 Kenilworth filed an 8-K in which the Company reported the following event:
Herbert Lindo, Chairman and Chief Executive Officer of Kenilworth Systems Corporation (“Kenilworth”) since 1972, advised the Company’s Board of Directors that on June 26, 2002 the Sheriff of Nassau County (the “Sheriff”) sold at a purported Public Auction Sale (the “Sale”) 10,333,450 restricted common shares of Kenilworth Systems Corporation (the “Shares”) that he had owned and which represented control (14% of the outstanding shares) of Kenilworth, for one thousand dollars ($1,000) or $0.000095 per share. The Shares were sold to Tappan Zee Capital Corp. (“Tappan Zee”). On the date of
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the Sale the Shares had a market value of nine hundred thirty thousand ten dollars and fifty cents ($930,010.50). The Sheriff seized and sold the Shares on behalf of Tappan Zee, as a result of a claim by Tappan Zee in a disputed civil suit brought in the New York Supreme Court for $128,062. Tappan Zee was both the foreclosing party and the purchaser. Herbert Lindo owned real estate at the time valued in excess of $128,062 which the Sheriff could have seized instead of the Kenilworth Shares.
Kenilworth claims that the Sheriff’s Auction Sale was conducted in a fraudulent manner by (1) failing to comply with the rules and regulations set forth under the Securities and Exchange Commission Act of 1933 and 1934, as amended (The “Acts”) the New York State Securities Laws, and (2) by failing to properly advertise the Sale, failing to notify any or all Kenilworth shareholder’s (numbering approximately 5,500), and (3) failing to register the Restricted Shares with the Securities and Exchange Commission before conducting the Sale or in the absence of registering the Shares, obtain a No-Action letter from the Commission permitting the Public Sale, and (4) by making an immediate distribution of the Restricted Shares, and (5) by concluding the auction sale despite only one (1) bidder that appeared and bid only one thousand dollars ($1,000) for all the shares when the market value of the 10,333,450 shares was nine hundred thirty thousand ten dollars and fifty cents ($930,010.50). He should have adjourned the auction and then advertise the auction sale in appropriate newspapers that quoted Kenilworth Systems Corporation shares which has traded since 1968 under the trading symbol “KENS” on organized exchanges NASDAQ and OTC, and (6) by failing to file required notices of 13 D-G as provided under the Acts. Tappan Zee and its Counsel and the Sheriff’s department were advised in court documents and correspondence that their acts violated Federal and State Securities Laws and of the existence of the Real Property, prior to the Sale.
By the attorneys for Tappan Zee’s failure to seize the Real Property owned by Herbert Lindo raises the question of complicity to take control of Kenilworth instead of satisfying a disputed claim for $128,062.
Kenilworth or Herbert Lindo, as an individual will seek in Federal or State Courts to cancel the 10,333,450 shares, which were subject of the Sheriff Auctions Sale, and seek triple damages under RICO on behalf of the shareholders of Kenilworth, the damaged parties. Herbert Lindo and Kenilworth have not commenced any proceedings against the Sheriff’s Office of Nassau County and Tappan Zee and the attorney’s representations Tappan Zee since we believe that the Statue for Security Fraud does not expire until June 26, 2009.
At the this time, the Company does not wish to spend the substantial funds required to commence the action nor does Mr. Lindo have the time, at present, to assist in any law suit Kenilworth may institute on behalf of its Shareholders.
Kenilworth will distribute the proceeds, if any, from any settlement or court award to the Shareholders that owned Kenilworth Common Stock on or before June 26, 2002.
In June 2003, the Madison Bank of Blue Bell, Pennsylvania returned two million (2,000,000) of the wrong fully distributed shares by Tappan Zee for cancellation to American Stock Transfer and Trust Company, Kenilworth’s Stock Transfer Agents. Since the Madison Bank was complacent with Tappan Zee in the fraudulent seizure and auction of the shares, neither Herbert Lindo nor Kenilworth issued general releases to the Madison Bank, although the subsequent Madison Bank and Kenilworth Agreement provided for the releases. The Company was desirous of having the two million (2,000,000) shares returned, reducing the claim against the Nassau County Sheriff’s Department and for future free distribution to Kenilworth’s shareholders on record on June 26, 2002 which were not made aware by the Sheriff of the Auction Sale.
ITEM 15—EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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REPORT ON FORM 8-K
None
ITEM 8.01 OTHER EVENTS
None
On September 13, 2005 the Company reported on FORM 8-K:
ITEM 5.02 (d) DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF PRINCIPAL OFFICERS.
At the Annual Meeting of shareholders of Kenilworth Systems Corporation held on September 13, 2005 and the submission to shareholders of a proxy statement filed, Herbert Lindo, Gino Scotto, Maureen Plovnick, Patrick Mc Devitt, Joyce Clark, Kit Wong and Paul Nusbaum were elected directors of the company. Thereafter, the Board of Directors, as authorized by Article 2, Section 2 of the Company’s By-Laws, approved an increase in the Board of Directors from seven (7) to nine (9) directors. Pursuant then to
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Article 2, Section 6 of the Company’s By-Laws, the Board of Directors then elected Alfred J. Luciani and David Satterfield to fill the two (2) new seats.
In addition thereto, each of the two (2) new directors will be issued one million (1,000,000) shares of the Company’s unregistered (restricted) stock. Alfred J. Luciani, an attorney, entered into a Consulting Agreement with Kenilworth on July 1, 2005 pursuant to which he is to be compensated at the rate of $5,000 per month, with an additional $5,000 per month accrued and issued one million (1,000,000) shares of the Company’s unregistered (restricted) stock every six (6) months.
On November 22, 2005 the Company reported on FORM 8-K:
At the Company’s Annual Shareholder’s Meeting held on September 13, 2005, the Shareholders ratified the issuance of 25,000,000 shares of the Company’s Common Stock to Herbert Lindo, the Inventor of two (2) additional patents assigned to Kenilworth.
On December 9, 2005 the Company reported on FORM 8-K:
On December 27, 2005 the Company reported on FORM 8-K:
On December 21, 2005, the Company, via Certified Mail — Return Receipt Requested, responded to Mr. Luciani’s email by accepting his resignation and advising Mr. Luciani, in a Letter Agreement, which based on the reason for his resignation, the Company must terminate his consideration payable for his consulting services, proportionately, as at December 19, 2005.
On December 27, 2005, the Company received the Company’s Letter Agreement in which Mr. Luciani agreed to terminate his consulting services with the Company.
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Mr. Edward Vietmeier, a professional golfer who owns 1,583,097 Common Shares of Kenilworth, has agreed to replace Mr. Luciani on the Board of Directors. At the scheduled Board Meeting held on January 10, 2006, a majority of the Board Members present elected Mr. Vietmeier to serve on the Board of Directors until the next Board of Directors elections.
The By-Laws of Kenilworth, a New York Corporation, requires a minimum of three (3) and a maximum of fifteen (15) Directors. With the election of Mr. Vietmeier, the Company has seven (7) Directors. Mr. Vietmeier was elected pursuant to the Company’s By-Laws which empowers the Board of Directors to elect new members to the Board until the next shareholder’s meeting.
On September 20, 2006 the Company reported on FORM 8-K:
On November 27, 2006 the Company reported on FORM 8-K:
Herbert Lindo, Chairman and Chief Executive Officer today exercised his Incentive Stock Options granted on November 27, 2001 and acquired five million (5,000,000) shares at the exercise price of $0.15 per share.
Mr. Lindo borrowed the $750,000 to exercise the Options from the Company, as provided in the Plan and pledged the five million (5,000,000) shares and forty-five million (45,000,000) other Kenilworth shares he owns as collateral for the loan.
Mr. Lindo has performed his services during the past seventeen (17) years without compensation and with the acquisition of the five million (5,000,000) shares, he now owns fifty million (50,000,000) shares of the Company’s Common Stock, par value one cent ($0.01) per share, which represents fifteen and two-tenths of one percent (15.2%) of the presently 327,741,465 shares issued and outstanding as at December 31, 2007. Mr. Lindo is believed to be the largest individual shareholder of Kenilworth stock.
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To the Board of Directors
of
Effective February 5, 2007 the Company engaged KGS, LLP. as its independent Certified Public Accountants to Audit the Company’s financials for the years ended December 31, 2005, 2006 and 2007.
The Company has completed the financials but the Audit is not, as yet, completed. After filing an automatic extension on March 27, 2007, we feel obligated to our shareholders to file the 2005, 2006 and 2007 Financials absent of the Auditor’s Opinion.
When the Audit is completed, which we expect to be within ninety (90) days, the Company will file a FORM 10K/A, explicitly pointing out any significant changes in our unaudited financials, if any, for ease of review.
Respectfully submitted,
The Independent Auditor’s Report will appear on this page when the Company will file the Amended FORM 10-K/A.
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KENILWORTH
SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
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KENILWORTH
SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
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KENILWORTH
SYSTEMS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
36
KENILWORTH
SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS
The accompanying notes are an integral part of these consolidated financial statements.
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KENILWORTH
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — THE COMPANY AND NATURE OF BUSINESS
Kenilworth Systems Corporation (the “Company”) was incorporated in New York in April 1968 and completed an S-1 Registration in August 1968. The Company is currently engaged in the development and eventual by outsourcing the manufacture the terminals that will permit individuals to play along with live in-progress casino table games at locations inside and outside the casino confines (remote locations). Games will be available via TV simulcast of digital satellite and digital cable broadcasts to individuals at homes, offices and public gathering places and wherever television sets are located around the world. The Company’s business remains in continuous development stage although it completed a nine million dollar ($9,000,000) contract with the Totalizator Agency Board (“TAB”), a state government agency of Victoria, Australia, while being in voluntary bankruptcy reorganization under Chapter 11, of the United States Bankruptcy Code. Successful execution of its business plan is dependent up such factors as: the ability to raise substantial capital and assemble a skilled and experienced management team, obtaining regulatory approval from gaming authorities and other governmental bodies, customer acceptance of a new experience in casino gaming, and technological feasibility.
These challenges create uncertainty as to the Company’s ability to operate as a going concern and could result in the termination of its business. Management continues to develop a wagering system that allows casino patrons and individuals inside and outside the casino to play and wager along with live casino table games. The first step in the plan is to conduct testing. Unless the Company is able to obtain sufficient funds, none of the tests and initial development work can commence. The Company will attempt to obtain the necessary funding by offering its Common Stock or Preferred Stock to private investors.
If initial testing is successful, the second step is to obtain, if required, the appropriate licenses from gaming control regulators in the various venues the Company intends to offer its system. Upon successful testing, the Company intends to seek financing from banking sources for the manufacture of a microprocessor that will be installed in digital set top boxes, digital cable boxes, or as attachments to TVs when necessary. These appliances will then be able to convert an ordinary television set into a computer terminal using the TV set as the monitor for remote casino game play and wagering. This technology is protected by the Company’s recently issued patents (see Note 6).
The accompanying financial statements have been prepared assuming the Company is a going concern and do not reflect adjustments, if any that would be necessary if the Company were not a going concern.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of Kenilworth Systems Corporation and its wholly owned subsidiaries: Video Wagering Systems Corporation, Roulabette™ Nevada Corporation, Kenilworth Systems Nevada Corporation, Kenilworth U.K. Ltd., Kenilworth Satellite Broadcasting Corporation and Satellite Gaming Consultants, Inc., both Delaware Corporations. None of the subsidiaries has any significant assets or liabilities except Satellite Gaming Consultants which acts primarily as depository and disburses payments of expenses payable by Kenilworth.
Use of estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenue and expenses. Actual results could vary from the estimates that were used.
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KENILWORTH
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
Cash and cash equivalents
The Company considers all highly liquid debt instruments with an original maturity of three months or less when purchased to be cash equivalents. There were cash equivalents at December 31, 2007 and 2006.
Property and equipment
Property and equipment are stated at cost. Equipment is depreciated over the estimated useful lives of the respective assets, ranging from five to seven (5-7) years. Leasehold improvements are amortized over the shorter of either the asset’s useful life or the related lease term. Depreciation is computed on the straight-line method for financial reporting purposes.
Impairment of long-lived Assets
The Company regularly reviews long-lived assets for indicators of impairment. Management’s judgments regarding the existence of impairment indicators are based on performance. Future events could cause management to conclude that impairment indicators exist and that the value of long-lived assets is impaired. When events or circumstances indicate that the carrying amount of an asset may not be recoverable, the fair value of the asset is compared to its carrying value. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its estimated fair value.
Advertising costs
Advertising costs are expensed as incurred. There were no advertising costs for any period presented.
Income taxes
Income taxes are accounted for under the asset and liability method specified by SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled.
Fair value of financial instruments
Financial instruments reported in the balance sheet consist of accounts payable and loans payable, the carrying value of which approximated fair value at December 31, 2007 and 2006. The fair value of the financial instruments disclosed are not necessarily representative of the amount that could be realized or settled nor does the fair value amount consider the tax consequences of realization or settlement.
Stock-based compensation
The Company has adopted SFAS No. 123 “Accounting for Stock Based Compensation” which requires it to recognize stock awards granted to employees and non-employees as compensation expense based on the fair market value of the stock award or fair market value of the goods or services received, whichever is more reliably measurable.
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KENILWORTH
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
Loss per share
Basic loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding, plus the weighted average number of net shares that would be issued upon the exercise or conversion of dilutive securities, such as stock options and warrants, and convertible debt. There were no dilutive securities outstanding as of December 31, 2007, 2006 and 2005. Accordingly, diluted loss per share for 2007, 2006 and 2005 is the same as basic loss per share.
New Authoritative Accounting Pronouncements
The Company does not anticipate the adoption of recently issued accounting pronouncements will have a significant impact on its results of operations, financial position or cash flows.
NOTE 3 — BANKRUPTCY PROCEEDINGS
Throughout the 1980’s the Company experienced working capital shortages that resulted in the Company filing a voluntary petition for reorganization under Chapter 11 of the United States bankruptcy Code. From August 28, 1982 to June 7, 1985 the Company operated during reorganization proceedings. On June 7, 1985, a United States Bankruptcy Judge confirmed the Company’s Plan of Reorganization. On April 27, 1988, the Bankruptcy Court entered a final decree in the case. On October 27, 1988, the case was re-opened on grounds the Debtor failed to consummate its plan of reorganization and on February 25, 1991 the case was converted to a case under Chapter 7 of the Bankruptcy Code. By order of the Court dated June 19, 1991 the Chapter 7 was reconverted to a case under Chapter 11 of the Bankruptcy Code. A second plan of reorganization was approved and a second order of confirmation was entered in connection with the Chapter 11 case on October 2, 1991. However, the Debtor was unable to consummate its second plan of reorganization, and by order dated November 25, 1991, the case was reconverted to a case under Chapter 7 of the Bankruptcy Code.
From February 1991 through September 1998, the Company was inactive. In September 1998 a United States Bankruptcy Judge in the Eastern District of New York approved the Final Report and Accounts submitted by the Chapter 7 Trustee of the Estate of Kenilworth and after obtaining approval from the U.S. Trustee, Kenilworth made a one hundred percent (100%) cash distribution to the creditors and paid in full all administrative fees and expenses. The Company exited from Bankruptcy on September 28 1998 with no assets and no liabilities. For the period September 29, 1998 through November 23, 1998 the Company was in the process of monitoring the payments by check to the creditors. No other activity occurred during that period. Effective, November 24, 1998, the Company commenced its present plans.
NOTE 4 — PREPAID EXPENSES
Prepaid expenses consist of the unamortized value of stock issued to directors for the twelve-month service period ending September 30, 2008. The balance will be amortized on a straight-line basis over the remaining term.
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KENILWORTH
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
NOTE 5 — PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
NOTE 6 — PATENT
The Company owns a patent and has pending, three (3) additional patents for technology that will enable it to provide real-time transmission of roulette and other game play from live tables at a casino facility. Prior to December 31, 2006, the costs incurred in connection with the submission and approval of the patent applications has been capitalized. A U.S. patent was awarded in June 2003. The Company previously amortized patent costs. On December 31, 2006, the Company elected to write-off all patent costs to meet generally accepted accounting principles (GAAP). The $81,604 of accrued costs was charged against capital.
NOTE 7 — ACCOUNTS PAYABLE AND ACCRUED EXPENSES
NOTE 8 — LOANS PAYABLE
2006:
During the year, the Company borrowed from two (2) shareholders, $30,000 and $16,000 with annual interest payments of eight percent (8%) and twelve percent (12%), respectively. The $30,000 loans were reduced on January 16, 2007 to $17,745, including interest, and the $16,000 loan the Company repaid together with accrued interest to November 9, 2007.
NOTE 9 — CONVERTIBLE PROMISSORY NOTES
During 2007, 2006 and 2005, respectively, the Company sold to various private investors $832,500, $765,400, $776,250 principal amount of Convertible Promissory Notes bearing interest at rates ranging from 4.00% to 10.00% per annum. The Notes had a one (1) year term and were immediately convertible at the option of the note holder into shares of restricted common stock based on conversion prices ranging from $0.025 and $0.05 per share. All Notes issued in 2007, 2006 and 2005 were converted into a total of 49,733,259, 20,356,000 and 15,525,000 common shares, respectively. The issuance of the Notes gave rise to a beneficial conversion feature (BCF) in the amount of: none in 2006, $368,640 in 2005 and $188,191 in
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2004, reflecting the benefit of conversion prices that were below the market price of the Company’s common stock. The BCF was charged in full to operations on the respective issuance dates of the Notes with an offsetting credit to additional paid-in capital. The Company accounts for BCF under the recognition and measurement principles of Emerging Issues Task Force (EITF) 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios to Certain Convertible Instruments” and EITF-00-27, “Application of EITF Issue 98-5.
NOTE 10 — INCOME TAXES
The provision for income taxes consists of the following:
The Company did not have any revenue from operations since exiting Bankruptcy Proceedings in September 1998.
The effective income tax rate differed from the U. S. federal statutory rate as follows:
The difference between the U. S. federal tax rate and the Company’s effective tax rate in 2007, 2006 and 2005 is due primarily to changes in the valuation allowance related to the net deferred tax asset, offset by certain nondeductible expenses.
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The major sources of temporary differences and their deferred tax effect are as follows:
Deferred tax assets:
The benefits of net operating losses will not be recognized until management determines that realization is more likely than not to occur. Accordingly, management has established a valuation allowance to offset the tax benefits of net operating losses for all periods presented. At December 31, 2007, the Company had net operating loss carry-forwards of approximately $33,838,435, expiring through 2024. Utilization of NOL carry-forwards may be limited under various sections of the Internal Revenue Code depending on the nature of the Company’s operations.
NOTE 11 — COMMITMENT
Operating lease
The Company rents approximately 2,300 square feet of office space in Mineola, NY under a lease expiring in May 2009. Annual rent is approximately $35,000, payable monthly. The lease also requires the Company to pay its share of increases in real estate taxes, operating costs and repairs over the base year amounts. Following is a schedule of minimum lease payments required under the lease.
Rent expense for the years ended December 31, 2007, 2006 and 2005 was $35,000, $33,000 and $31,000, respectively.
NOTE 12 — RELATED PARTY TRANSACTIONS
On November 27, 2006 Herbert Lindo, the Chairman and Chief Executive Officer exercised a five million (5,000,000) share option for seven hundred fifty thousand dollars ($750,000) at fifteen cents ($0.15) per share pursuant to the Company’s Performance and Equity Plan. The price per share was the price for the Option which would have expired on the following date. The average market price of the Common Stock for the thirty (30) days prior to November 27, 2006 was high: $0.05, low: $0.03.
NOTE 13 — STOCKHOLDERS’ DEFICIT
Authorized shares
The Company is authorized to issue up to 500,000,000 shares of Common Stock and up to 2,000,000 shares of Preferred Stock. Both classes have a par value of $.01 per share. The rights and preferences of the preferred shares will be designated by the Board of Directors.
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Sales of unregistered common stock
In fiscal 2007, the Company raised $832,500 from the sale of 49,733,259 shares of common stock to a group of private investors at an average price of $0.017 per share.
Loan receivable
At December 31, 2007, shareholders owed $4,000 and $1,500, respectively, on balances due for the purchase of common stock and loans and a consultant owes $14,300 on a Promissory Note guaranteed by Herbert Lindo, the Chairman and Chief Executive of the Company.
Common shares issued for services
2007: The Company issued 10,240,000 restricted shares to investors and for services rendered with a stated value of $307,200.
2006: The Company issued approximately 58,116,044 restricted shares to investors and for services rendered for $1,829,000.
Conversion of Notes and related transactions
During 2007, 2006 and 2005, the Company issued 49,733,259, 17,646,000 and 1,172,001 shares, respectively, upon conversion of the Notes.
Equity plan
In December 2000, the Company adopted and in August 2001, stockholders approved the Performance and Equity Incentive Plan (the Plan). The Board of Directors has reserved up to 10,000,000 shares of common stock for issuance under the plan as incentive stock options (ISOs), nonqualified stock options (NQSOs), restricted stock grants, and stock appreciation rights. The terms and conditions of each grant are determined by a committee composed of two or more non-employee directors. Grants to non-employee directors are subject to approval of the entire board. All employees, directors and non-employee consultants are eligible to receive grants under the Plan. ISOs may not be granted to any owner of 10% or more of the combined voting power of the Company, unless the exercise price is at least 110% of the fair market value of the common stock on the grant date and the option term does not exceed five years.
In August 2001, administrators of the Plan granted 5,000,000 NQSOs to Herbert Lindo, the Company’s Chairman and Chief Executive Officer, and 500,000 NQSOs to Maureen Plovnick, an employee. The options have a five-year term, an exercise price of $.15 per share and immediate vesting. There have been no other Plan transactions since these grants. Mr. Lindo exercised his 5,000,000 share option on November 27, 2006. A remaining option for 500,000 shares expired. No new options have been granted.
NOTE 14 — RESTATEMENT
There were certain transactions that were entered into in fiscal years 2001 through 2004 that were accounted for improperly. The transactions involved the beneficial conversion features accompanying the issuance of the convertible notes, as well as additional shares issued in connection with the convertible notes as discounts and inducements to convert.
In addition, there were a number of transactions involving the day to day operations of the Company that were accounted for improperly. These included the recognition of deferred and accrued expenses, the recording of loans to and from the Company and the recording of the patent related costs and other capitalized expenses.
The cumulative impact of these restatements increases the deficit accumulated during the development stage by $55,308, and increases the total stockholders’ deficit by $719,471.
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The following table summarizes the annual consolidated statements of operations and balance sheet data for the periods indicated, giving effect to the restatement described above:
NOTE 15 — SUBSEQUENT EVENTS
The Company, through March 14, 2008 has issued 12,967,334 shares for conversion of Notes and issuance of services rendered.
The Company, through March 14, 2007 has issued 66,652,983 Restricted Shares for conversion of Notes and issuance of services rendered. The total includes the issuance of 5,000,000 shares to Herbert Lindo, the Chairman and Chief Executive Officer, in connection with exercising his stock option on November 27, 2006.
The Company through June 30, 2005 has issued 73,182,000 Restricted Shares for the conversion of Notes and issuance of shares for services rendered. The total includes the issuance of 45,000,000 shares owed to Herbert Lindo, the Chairman and Chief Executive Officer.
On February 14, 2007, the Company issued 2,500,000 shares to a consultant for services rendered through the year from February 14, 2006 to February 14, 2007.
In October 2006, the Company entered into two (2) consulting agreements for a two (2) year term as compensation, the consultants each received 2,000,000 shares of restricted common stock upon signing.
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In April 2005, the Company entered into a consulting agreement for a one-year term. As compensation, the consultants received 2,000,000 shares of restricted common stock upon signing.
In June 2005, the Company agreed to issue 770,588 shares of restricted common stock in settlement of an employment contract dispute. The shares were valued by management at approximately $38,500. The liability was accrued in 2004. On March 14, 2008 the Company settled the dispute in Federal Court by issuing the 770,588 shares, absent of any restrictions.
PRIOR CONVICTION OF HERBERT LINDO
Herbert Lindo, the Chairman and CEO of Kenilworth, was convicted in 1993 on three (3) counts of having permitted three (3) banks located in the Upper Peninsula of Michigan to sell unregistered, legended, restricted Kenilworth shares pursuant to SEC Rule 144 prior to the bank having the then required two (2) year holding period. The sales took place in 1987 and 1988. Mr. Lindo was found not guilty of conspiring to sell unregistered securities which was not met, pursuant to SEC Rule 144. The Securities and Exchange Commission did not enter into the case. The indictments were brought by the U.S. Attorney of the Western District of Michigan. Mr. Lindo was sentenced to one thousand (1,000) hours of community service, fifteen (15) months house arrest, and fined six hundred thousand dollars ($600,000).
In 1992, the holding period for exemption pursuant to Rule 144 was reduced to one (1) year. The changed Rule did not apply to the 1987-88 sales. No one lost any money and Kenilworth had received fair value for the pledged securities. The government never charged Mr. Lindo with fraud. Mr. Lindo claimed he had no knowledge of the sales by the banks.
Because of this conviction, Herbert Lindo is likely not to be found suitable by any Casino Control Commission or other regulatory body to hold licenses. When the time to apply for licensing Roulabette™ arrives, Mr. Lindo will resign totally from Kenilworth and place his Kenilworth shares into a voting trust. Until that time, Herbert Lindo believes that he is best suited to manage the post bankruptcy reorganization and to transform Kenilworth into a viable business.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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Forward Looking Statement Contact: Kenilworth Systems Corp. (516) 741-1352, Roulabette@aol.com. ^Back to top |
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©Copyright 2004 Kenilworth Systems Corporation