KENILWORTH SYSTEMS CORP - Quarter Report: 2004 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

KENILWORTH SYSTEMS CORPORATION

(Exact name of registrant as specified in its charter)

 

New York		84-1641415
(State of incorporation)		(I.R.S. employer identification no.)
185 Willis Avenue, Mineola, New York		11501
(Address of principal executive offices)		(Zip Code)
(516) 741-1352
(Registrant’s telephone number, including area code)

 

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  ý   No  o

 

State the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practical date

 

The number of shares of common stock, $.01 par value of the Registrant outstanding as of May 10, 2004 was 120,107,300

 

 

PART IV – INTRODUCTORY NOTE

 

a)                                      The financials are presented as a Development Stage Corporation.

b)                                     The acquisition cost of Patent No. U.S. 6,575,834 which originally was presented on a Pro-Forma basis, in the amount of $2,500,000, the value the Company placed on the Patent, has been eliminated and is now included in the restated financials on Form 10-Q/A for the quarter period ended March 31, 2003 at the actual costs to file the Patent of $357,100 which include the costs to file the Patent in forty-nine (49) industrialized countries around the world.

 

PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Controls and Procedures
PART II – OTHER INFORMATION
Item 2.	Changes in Securities and Use of Procedures
Item 6.	Exhibits and Reports on Form 8-K

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

To the extent that the information presented in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 discusses financial needs and projections, information or expectations about our proposed products or markets, or otherwise makes statements about future events, such statements are forward-looking.  We are making these forward-looking statements in reliance on the safe harbor provision of the Private Securities Litigation Reform Act of 1995.  Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.  These risks and uncertainties are described, among other places in this Quarterly Report, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the Form 10-K for the fiscal year ended December 31, 2003.

 

In addition, we disclaim any obligations to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report.  When considering such forward-looking statements, you should keep in mind the risks referenced above and the other cautionary statements in this Quarterly Report.

 

PART I – FINANCIAL INFORMATION

 

Item 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003
	Consolidated Statements of Operations for the three (3) months period ended March 31, 2004 and March 31, 2003
	Consolidated Statements of Cash Flows for the three (3) months ended March 31, 2004 and March 31, 2003
	Notes to Consolidated Financial Statements

 

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KENILWORTH SYSTEMS CORPORATION

INDEX TO FORM 10-Q

 

PART I.

FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

KENILWORTH SYSTEMS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31 2004			December 31 2003
		(unaudited)
ASSETS
Cash		$	126,272		$	7,136
Due from Shareholders (subscriptions)		—			50,000
Prepaid Expenses		125,000			187,500
Property, Plant and Equipment, Net		12,302			12,302
CURRENT ASSETS		263,574			$	256,938
Patent, Net		330,848			336,100
TOTAL ASSETS		$	594,422		$	593,038
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Accounts Payable		$	71,675		$	119,097
Payroll Taxes Payable		1,772			13,018
Notes Payable		54,422			142,231
TOTAL LIABILITIES		$	127,869		$	274,346
Common Stock, $.01 par value, authorized 200,000,000 shares; issued and outstanding 104,412,753 in December 31, 2003 and 120,107,300 on March 31, 2004		$	1,201,073		$	1,044,126
Paid in capital		26,080,815			25,723,963
Deficit		(26,815,335		)	(26,449,397		)
TOTAL STOCKHOLDERS’ EQUITY		$	466,553		$	318,692
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	594,422		$	593,038

 

See accompanying notes.

 

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KENILWORTH SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS
OF OPERATION AND DEFICIT

 

		Three-month ended March 31
		2004			2003
		(unaudited)
Revenues:		$	0		$	0
Sales
Costs and Expenses:
Selling, general and administrative expenses		$	365,939		$	553,475
Total Costs and Expenses		$	365,939		$	553,475
Net loss		$	365,939		$	553,475
Net loss		$	365,939		$	553,475
Deficit — Beginning of period		(26,449,396		)	(25,617,229		)
Deficit — End of period		(26,815,335		)	(26,170,704		)
Loss per Share of common stock		$	0.003		$	0.005
Average number of shares outstanding		121,295,121			98,650,945

 

See accompanying notes.

 

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KENILWORTH SYSTEMS CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Three-month ended March 31
		2004			2003
		(unaudited)
CASH FLOWS USED IN OPERATING ACTIVITIES
Net Loss		$	365,939		$	553,475
Adjustments to reconcile net income to net cash used in operating activities
Changes in Accounts Receivable and Prepaid Expense		112,500
Depreciation					664
Increase (decrease) in due to related party		(87,809		)	(429		)
Increase (Decrease) in accrued liabilities		(58,668		)	201,148
NET CASH USED IN OPERATING ACTIVITIES		(399,916		)	(352,092		)
Cash flows from Investing Activities
Purchase of Equipment		$	0		$	(13,461	)
Amortization of Patent		5,251
CASH FLOWS FROM
Conversion of Promissory Notes		513,800			338,483
FINANCING ACTIVITIES
Increase (decrease) in due to Affiliate		—			20,000
Proceeds from issuance of Convertible Promissory Note		—			35,000
Net cash provided by financing Activities		$	513,800		$	380,022
Net Increase (Decrease) in cash		119,136			(7,930		)
CASH — BEGINNING OF PERIOD		7,136			20,880
CASH — END OF PERIOD		$	126,272		$	12,950

 

See accompanying notes.

 

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KENILWORTH SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - BASIS OF PRESENTATION

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Kenilworth Systems Corporation and subsidiaries (“Kenilworth”) beginning as of January 1, 2004 contain all adjustments (consisting of only normal accruals) necessary to present fairly the consolidated balance sheets as of March 31, 2004 and December 31, 2003 and the related statements of operations and cash flows for the three (3) month periods ended March 31, 2004 and 2003.

 

The results of operations for the three (3) month period ended March 31, 2004 are not necessarily indicative of the results for the entire year.

 

NOTE 2 - THE COMPANY AND NATURE OF BUSINESS

 

Kenilworth Systems Corporation (the “Company”) was incorporated in New York in April 1968 and since emerging from bankruptcy proceedings and now plans to be engaged in the business of developing and manufacturing terminals and design systems that permit individuals from remote locations, to play along with live in progress casino table games via TV (simulcast) satellite and satellite cable broadcast around the world.

 

The Company was in bankruptcy proceedings under Chapter 7 and 11 of the Bankruptcy Code for the period from August 28, 1982 through September 23, 1998. The Company ceased all operations, between February 2, 1991 through September 23, 1998.

 

NOTE 3 - 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 and Kenilworth Systems (UK) Limited. None of these subsidiaries has any assets or liabilities.

 

NOTE 4 - EARNINGS PER SHARE

 

The Company computes and presents earnings (loss) per share in accordance with the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 128 “Earnings Per Share”.

 

Basic loss per share is based on the weighted-average number of shares of common stock outstanding for the period, which were ($0.008), ($0.003), and ($0.005) respectively for the year ended December 31, 2003, and the periods March 31, 2004 and March 31, 2003.

 

Diluted earnings per share have not been presented in the accompanying financial statements because the effect of conversion of convertible promissory notes was anti-dilutive.

 

NOTE 5 - INCOME TAXES

 

The Company uses the liability method to account for income taxes in accordance with requirements of SFAS No. 109.

 

The Company is a “C” Corporation for tax purposes.

 

The Company estimates that it has available approximately ten million dollars ($10,000,000) in net operating loss carry-forwards, which expire at various dates through 2020. Utilization of the NOL carry-

 

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forward may be limited under various sections of the Internal Revenue Code depending on the nature of the Company’s operations.

 

The Company has a deferred tax asset of approximately two million eight hundred thousand dollars ($2,800,000) arising from its net operating loss carry-forwards. The deferred tax asset has been fully reserved due to the uncertainty of future realization.

 

NOTE 6 - USE OF ESTIMATES IN THE FINANCIAL STATEMENTS

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company’s financial statements include cash, receivables and accounts payable. Due to the short-term nature of these instruments, the fair value of these instruments approximates their recorded values.

 

NOTE 8 - PROPERTY AND EQUIPMENT

 

Property and Equipment are stated at cost. For financial reporting purposes, property and equipment are depreciated utilizing the Straight-Line Method over the estimated useful lives of the related assets as follows:

 

 

Property and Equipment consist of the following as of March 31, 2004 and March 31, 2003:

 

		Three-month ended March 31
		2004			2003
Office Equipment		$	3,351		3,939
Vehicles		11,500			13,461
		$	14,851		$	17,400
Less-Accumulated Amortization		2,549			664
Total Property and Equipment, Net		$	12,302		$	16,736

 

Depreciation expense for the quarters ended March 31, 2004 and March 31, 2003 was $2,549 and $664 respectively.

 

NOTE 9 - CONVERTIBLE PROMISSORY NOTES

 

During the year 2003, the Company sold one (1) year Convertible Promissory Notes totaling four hundred and six thousand ($406,000).  At the option of the Note Holders, the Notes were convertible into Common Stock of the Company at the rate of between one (1) share for each $0.07 and $0.10 of face value of the indebtedness represented by the Notes together with accrued interest at the annual rate of two percent (2%) above the prime rate quoted by Citibank of N.A. Management believed it was unable to repay the Notes when they become due, in order to induce the Note Holders to convert the Notes by year end 2003 when the quoted price per Common Share, as traded on the Pink Sheet Market was between $0.035 and $0.06 per share, the Company offered to convert the Notes at the rate of one (1) share for each $0.05 of indebtedness

 

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represented by each Note, together with accrued interest.  As the result of the Company’s offer, all Note Holders converted their Notes into 7,712,606 restricted shares of authorized but unissued Common Stock, including accrued interest, at an average price of $0.05 per share.

 

During the first quarter period ended March 31, 2004, the Company sold one (1) year Convertible Promissory Notes totaling $422,000.  At the option of the Note Holders, the Notes were convertible into Common Stock of the Company at the rate of $0.10 per share.  At the request of the Company all Note Holders converted their Notes by January 31, 2004 at the rate of one (1) share for each $0.05 per share of the principal amount of the Notes without any accrued interest.  The Company’s Common Stock was trading on the Pink Sheets at that time between $0.06 and $0.075 per share.  As the result of the Company’s offer all Note Holders converted their Notes into 9,114,699 restricted shares for the $422,000 face amount of Notes, thus avoiding to carry the Notes on the Company’s balance sheet as indebtedness which could have made the Company insolvent with the cost of traveling to the Asian markets by members of the Company and the costs associated engaging consultants in the various Asian jurisdictions.

 

NOTE 10 - GOING CONCERN UNCERTAINTY

 

As indicated in Note 2, the Company emerged from Chapter 7 in September 1998 and has not yet commenced operations. These factors create uncertainty as to the Company’s ability to operate as a going-concern and continue in business. Management plans to develop a wagering system that allows casino patrons and individuals outside the casino to play along with live in-progress casino table games. Among the first steps 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 plans to obtain the necessary funding by offering its Common Stock, Senior Cumulative Convertible Preferred Shares and/or continue to sell Convertible Promissory Notes in private placements, or selling limited joint venture participations in future “play along with casino game” franchises. There can be no assurances the Company can be successful in obtaining such financing.

 

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 11 – NON CASH TRANSACTIONS

 

During the year ended December 31, 2003 the Company issued 7,395,558 shares of restricted Common Stock in payment for services rendered in the amount of $596,440 an average price of $0.08 per share.  The amount did not include 2,500,000 shares for the services rendered by the Directors of the Company (See Note 13).

 

During the First Quarter period ended March 31, 2004 the Company issued 6,580,000 shares of restricted Common Stock in payments for services rendered in the amount of $296,800, an average price of $0.05 per share.  The amount includes $250,000 for services rendered by Directors of the Company.

 

In connection with the emergence from bankruptcy in September 1998 the trustee distributed four million three hundred thousand four hundred and three dollars ($4,300,403) to pay one hundred percent (100%) of all approved claims.

 

NOTE 12 - COMMITMENTS AND CONTINGENCIES

 

OUTSTANDING PAYROLL TAXES

 

During the year 2000, the Internal Revenue Service contended that the Company owes payroll taxes including interest and penalties totaling almost $400,000 for various periods from 1985-1991. The Company commenced negotiations with the IRS to resolve these issues. In management’s opinion, no accruals are necessary since it believes that these assessments are incorrect and were discharged in its bankruptcy proceedings.  As the result of the Internal Revenue Service claim, similar claims were made by

 

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the New York State Income Tax Authorities which claims were negotiated and have been officially cancelled by the New York State Taxing Authorities on July 1, 2002.

 

NOTE 13 – PREPAID ITEMS

 

At the Board of Directors Meeting held in September 2003 the Board approved the issuance of two million five hundred thousand (2,500,000) shares of authorized but unissued Common Stock of the Corporation to the Directors in lieu of Director’s Compensation and Director’s Liability insurance for the ensuing year: Gino Scotto, Kit Wong, Patrick J. McDevitt, Joyce Clark and Maureen Plovnick each were issued five hundred thousand (500,000) shares of restricted Common Stock of the Company at a price of ten cents ($0.10) per share, the equivalent of fifty thousand dollars ($50,000) for each Director, a total of $250,000.  The $250,000 is recorded for shares issued as paid in capital in the first quarter period in 2004.  In the last quarter of 2003 and the first quarter of 2004, the Company expensed $62,500 as administrative expenses.

 

ITEM 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS

 

Since we emerged from bankruptcy proceedings on September 23, 1998 we have had no revenues from operations. We sustained substantial losses from general administrative expenses amounting of $832,168 and $660,289 in year 2003 and 2002 and for the three-months ended March 31, 2004 we sustained losses from general administrative expenses amounting to $365,939 compared to a loss of $553,475 for the quarter ending March 31, 2003. Kenilworth has had no revenues from operations during the past twelve (12) years and there can be no assurances that it will ever have revenues from present planned operations.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our present plans are to develop a wagering system dubbed “Roulabette™” that would allow patrons in the industrialized world to play and wager on live in-progress simulcast 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.

 

A first step will be to conduct a one (1) month test of the system at a casino site to prove the viability of broadcasting live in-progress table games around the world.

 

To conduct the tests Kenilworth believes it will require initially five million dollars ($5,000,000) to (a) purchase computers, digital television broadcast equipment and table games; and, (b) defray the cost of the facility and pay the salaries of six (6) employees who are specialists in software design, TV broadcasts, and mechanical design, for a period of eighteen (18) months, and from time to time, consultants who will assist the design team. In order to market Project Roulabette™ while the development of the terminals proceeds we will require an additional five million dollars ($5,000,000) to hire management and marketing people to secure future orders for the system.

 

Unless we are able to obtain these funds, of which there are no assurances, none of the tests and initial development work can begin; and we will not be able to commence our planned business.

 

Kenilworth plans to obtain the necessary funding by offering in Private Placements, Common Shares, Convertible Promissory Notes, and Cumulative Convertible Preferred Shares and/or by the sale of limited joint venture participations in future Roulabette™ franchises. There can be no assurances that the Company will be able to secure any of these funds.

 

When the tests are completed and we have obtained all required licenses from the gaming control regulators and state legislatures or foreign jurisdictions to broadcast the live in-progress casino table games and has contracts with franchisees to place terminals around the world and franchise television

 

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broadcasters, we expect to commence normal business. Kenilworth will also seek to obtain production financing from regular banking sources to finance the manufacturing of the Roulabette™ terminals. There can be no assurances that any such financing and approvals will be available to us.

 

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-Q and Kenilworth’s other filings with the Securities Exchange Commission may 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 that could significantly affect results in the future and, accordingly, such results may differ from those expressed in any forward looking statements herein. Future operating results may be adversely affected as a result of a number of factors.

 

You should not rely on forward-looking statements in this Form 10-Q. This Form 10-Q contains forward-looking statements that involved risks and uncertainties. We use words such as “anticipates”, “believes”, “plans”, “expects”, “future”, “intends” and similar expressions to identify such forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by Kenilworth as described below and elsewhere in this Form 10-Q.

 

RISKS

 

Specific reference is made to each of the risks described in Item 7 of the Form 10-K for December 31, 2003 under the discussion “Cautionary Statement For Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 and Risk Factors”. Reference is also made to future filings under Forms 10-Q and Forms 10-K and filings under the Securities Exchange Act of 1934 as amended and as may be applicable under the Securities Act of 1933 as amended.

 

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PART II.

OTHER INFORMATION

 

Item 1.		LEGAL PROCEEDINGS:
		None
Item 2.		CHANGE IN SECURITIES:
		None
Item 3.		DEFAULT UPON SENIOR SECURITIES:
		None
Item 4.		SUBMISSION OF A MATTER TO A VOTE OF SECURITIES HOLDERS:
		None
Item 5.		OTHER INFORMATION:

 

The Company plans to hold its Annual Meeting of Shareholders on July 21, 2004 or any adjournment thereof with proxy materials mailed to shareholders of record on June 28, 2004 prior to the proposed meeting dates.

 

Item 6.		EXHIBITS AND REPORTS ON FORM 8-K:
		Ex 31.1 Certification of Chief Financial Officer of the Company Required by Rule 13a-14(a) or Rule 15d-14(c) of the Exchange Act

 

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