**U.S.SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-KSB/A**

**(Amendment No. 1)**

 

| ** ** | **ý** | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d)**                                                                                                                                                                         |
|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |       | **OF THE  SECURITIES AND EXCHANGE ACT OF 1934**                                                                                                                                                                                 |
|       |       |       | **FOR THE  FISCAL YEAR ENDED MAY 31, 2005**                                                                                                                                                                                |
|       |       |       |                                                                                                                                                                                                                            |
| ** ** | **o**      | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF**                                                                                                                                                                   |
|       |       |       | **THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                        |
|       |       |       | **FOR THE  TRANSITION PERIOD FROM                   TO                 ** |

 

**COMMISSION FILE NUMBER: 000-32849**

 

**EXAM USA, INC.**

(Name Of Small Business Issuer In Its Charter)

 
| **Nevada**                                                        | ** ** | **88-0271810**                        |
|-------------------------------------------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of   incorporation or organization) |       | (I.R.S.  Employer Identification No.) |

 

**5912 BolsaAvenue, Suite 108, Huntington Beach, California 92649**

(Address Of Principal Executive Offices)

 

ISSUER’S TELEPHONE NUMBER: **(714)895-7772**

 

SECURITIES REGISTERED UNDER SECTION 12(b) OFTHE EXCHANGE ACT: 

 

| **TITLE OF EACH CLASS** | ** ** | **NAME OF EACH EXCHANGE ON WHICH REGISTERED** |
|-------------------------|------------|-----------------------------------------------|
| N/A                     |       | N/A                                           |

 

SECURITIESREGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:

**COMMON STOCK, PAR VALUE $0.01**

 

Check whether the issuer (1) filed all reports required to be filedby Section 13 or 15(d) of the Exchange Act during the past 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days.                                                                   YES     ý     NO     o

 

Check if there is no disclosure of delinquent filers in response to Item405 of Regulation S-B is not contained in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB.    ý

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

YES     o     NO     ý

 

State issuer’s revenues for its most recent fiscal year: $25,607,148.

 

The aggregate market value of voting and non-voting common stock held bynon-affiliates of the registrant as of September 8,2005:  Common stock, $0.01 par value: $600,044.

 

State the number of shares outstanding of each of the issuer’s classes ofcommon equity, as of the latest practicable date.

 

20,000,148 Shares as of voting common stock as ofSeptember 8, 2005

DOCUMENTS INCORPORATED BY REFERENCE

 

None

 

TransitionalSmall Business Disclosure Format:      YES   o     NO   ý

 

 

----

 

**EXPLANATORY NOTE**

 

This Amendment No. 1 on Form 10-KSB/A amends certain portionsof the Annual Report on Form 10-KSB of Exam USA, Inc. (“Exam”) forthe fiscal year ended May 31, 2005 as filed with the Securities andExchange Commission on September 13, 2005. In response to a comment fromthe Commission’s Division of Corporation Finance, we have amended certainportions of our financial statements as more particularly described in footnote2 under the caption “Restatements” and which are highlighted in thefinancial statements. No other amendments have been made, and this Form 10-KSB/Adoes not reflect events occurring after the filing of the original AnnualReport or modify or update those disclosures affected by subsequent events.

 

----

 

EXAM USA, INC. (FORMERLYOLYMPIC ENTERTAINMENT GROUP, INC.) AND SUBSIDIARIES

 
| **Report of Independent Registered Public Accounting Firm**                                                                    |       |
|--------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                           |       |
| **Consolidated Financial Statements**                                                                                          | ** ** |
|                                                                                                                           |       |
| Consolidated Balance Sheet as of May 31,  2005                                                                            |       |
| Consolidated Statements of Operations and  Comprehensive Loss for each of the two years in the period ended May 31,  2005 |       |
| Consolidated Statements of Shareholders’  Equity for each of the two years in the period ended May 31, 2005          |       |
| Consolidated Statements of Cash Flows for  each of the two years in the period ended May 31, 2005                         |       |
| Notes to Consolidated Financial Statements                                                                                     |       |

 

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

Board of Directors

EXAM USA, Inc. (formerly Olympic Entertainment Group, Inc.)

 

We have audited the accompanying consolidatedbalance sheet of EXAM USA, Inc. (formerly Olympic Entertainment Group, Inc.)and its subsidiaries (the “Company”) as of May 31, 2005, and the relatedconsolidated statements of operations and comprehensive loss, shareholders’equity and cash flows for each of the two years in the period ended May 31,2005. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of EXAM USA, Inc. (formerly Olympic EntertainmentGroup, Inc.) and its subsidiaries as of May 31, 2005, and theconsolidated results of their operations and their cash flows for each of thetwo years in the period ended May 31, 2005, in conformity with accountingprinciples generally accepted in the United States of America.

 

The accompanying consolidated financialstatements have been prepared assuming the Company will continue as a goingconcern. As discussed in Note 2, the Company has a working capital deficiencywhich raises substantial doubt about its ability to continue as a goingconcern. Management’s plans as to theses matters are also described in Note 2.The accompanying consolidated financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

As discussed in Note 1, EXAM USA, Inc.and subsidiaries completed a reverse acquisition with Olympic EntertainmentGroup, Inc., a blank-check company, on June 3, 2004. The financialstatements previously reported by Olympic Entertainment Group, Inc. wereretroactively restated for all periods reported to reflect the historicalfinancial position, results of operations and cash flows of EXAM USA, Inc.and subsidiaries.

 
|   | /s/ McKennon, Wilson & Morgan LLP |   |
|--------|--------------------------------------------|--------|

 

Irvine, California

September 9, 2005

 

F-2

----

 

**EXAM USA, INC.(FORMERLY OLYMPIC ENTERTAINMENT GROUP, INC.) AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEET**

 
| ** **                                                                                                                                                                                                                    | ** ** | **May 31, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **ASSETS (Note 8)**                                                                                                                                                                                                           |       |                  |       |
| Current assets:                                                                                                                                                                                                               |       |                  |       |
| Cash                                                                                                                                                                                                                          |       | $                     | 3,581,034  |   |
| Time  deposits (Note 2)                                                                                                                                                                                                       |       | 2,074,366             |       |
| Restricted time deposits (Note 2)                                                                                                                                                                                             |       | 2,601,586             |       |
| Marketable securities (Note 4)                                                                                                                                                                                                |       | 1,103,239             |       |
| Inventories                                                                                                                                                                                                                   |       | 583,926               |       |
| Deferred  income taxes (Note 11)                                                                                                                                                                                              |       | 103,392               |       |
| Prepaids and  other                                                                                                                                                                                                           |       | 239,337               |       |
| Total  current assets                                                                                                                                                                                                         |       | 10,286,880            |       |
|                                                                                                                                                                                                                          |       |                  |       |
| Property and  equipment, net (Note 6)                                                                                                                                                                                         |       | 29,807,114            |       |
| Deferred  income taxes (Note 11)                                                                                                                                                                                              |       | 997,274               |       |
| Deposits and  other assets (Note  7)                                                                                                                                                                                          |       | 1,742,507             |       |
| Total assets                                                                                                                                                                                                                  |       | $                     | 42,833,775 |   |
|                                                                                                                                                                                                                          |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                 |       |                  |       |
| Current liabilities:                                                                                                                                                                                                          |       |                  |       |
| Accounts  payable                                                                                                                                                                                                             |       | $                     | 3,720,973  |   |
| Accrued  liabilities (Note 7)                                                                                                                                                                                                 |       | 1,951,169             |       |
| Current  portion of long-term debt (Note 8)                                                                                                                                                                                   |       | 9,340,000             |       |
| Current  portion of capital lease obligations (Note 9)                                                                                                                                                                        |       | 1,026,221             |       |
| Total  current liabilities                                                                                                                                                                                                    |       | 16,038,363            |       |
|                                                                                                                                                                                                                          |       |                  |       |
| Long-term debt, net of current portion  (Notes 8 and 13)                                                                                                                                                                      |       | 19,900,278            |       |
| Capital lease obligations, net of current  portion (Note 9)                                                                                                                                                                   |       | 3,509,013             |       |
| Long-term accrued expenses (Note 7)                                                                                                                                                                                           |       | 284,683               |       |
| Asset retirement obligations (Note 6)                                                                                                                                                                                         |       | 706,635               |       |
| Minority interest in related entity (Notes  1 and 2)                                                                                                                                                                          |       | 182,942               |       |
| Total  liabilities                                                                                                                                                                                                            |       | 40,621,914            |       |
|                                                                                                                                                                                                                          |       |                  |       |
| Commitments and contingencies (Note 9)                                                                                                                                                                                        |       | —                |       |
|                                                                                                                                                                                                                          |       |                  |       |
| Shareholders’ Equity (Notes 1 and 2):                                                                                                                                                                                    |       |                  |       |
| Preferred  stock, 5,000,000 shares authorized: Series D convertible preferred  stock, $0.01 par value, liquidation value of $3.00 per share, 98,000 shares  authorized, none issued and outstanding at May 31, 2005 |       | —                |       |
|                                                                                                                                                                                                                          |       |                  |       |
| Series E  convertible preferred stock, $0.01 par value, no liquidation value, 1,800,000  shares authorized, none issued and outstanding at May 31, 2005                                                             |       | —                |       |
| Common  stock, $0.01 par value, 100,000,000 shares authorized, 20,000,148 issued and  outstanding at May 31, 2005 (as restated)                                                                                          |       | 200,001               |       |
| Additional  paid-in capital (as restated)                                                                                                                                                                                     |       | 1,423,693             |       |
| Restricted retained earnings                                                                                                                                                                                                  |       | 41,122                |       |
| Unrestricted  retained earnings                                                                                                                                                                                               |       | 247,196               |       |
| Accumulated  other comprehensive income                                                                                                                                                                                       |       | 299,849               |       |
| Total  shareholders’ equity                                                                                                                                                                                              |       | 2,211,861             |       |
| Total  liabilities and shareholders’ equity                                                                                                                                                                              |       | $                     | 42,833,775 |   |

 

See accompanying notes to theseconsolidated financial statements

 

F-3

----

 

**EXAMUSA, INC. (FORMERLY OLYMPIC ENTERTAINMENT GROUP, INC.) ANDSUBSIDIARIES**

** **

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**ANDCOMPREHENSIVE LOSS**

 
| ** **                                            | ** ** | **Year Ended  May 31, 2005** | ** ** | **Year Ended  May 31, 2004** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| **REVENUES:**                                         |       |                              |       |                              |       |
| Gaming                                                |       | $                                 | 24,849,430 |                              | $          | 17,419,615 |   |
| Food,  beverage and other                             |       | 757,718                           |       | 443,361                           |       |
| Total  revenues                                       |       | 25,607,148                        |       | 17,862,976                        |       |
|                                                  |       |                              |       |                              |       |
| **COST OF REVENUES:**                                 |       |                              |       |                              |       |
| Salaries and wages                                    |       | 4,051,178                         |       | 2,958,232                         |       |
| Depreciation                                          |       | 7,005,839                         |       | 5,131,945                         |       |
| Facilities and other                                  |       | 6,862,575                         |       | 4,753,921                         |       |
| Impairment  of property and equipment (Note 6)        |       | 4,273,178                         |       | 1,530,156                         |       |
| Total cost of revenues                                |       | 22,192,770                        |       | 14,374,254                        |       |
|                                                  |       |                              |       |                              |       |
| Gross profit                                          |       | 3,414,378                         |       | 3,488,722                         |       |
|                                                  |       |                              |       |                              |       |
| **OPERATING EXPENSES:**                               |       |                              |       |                              |       |
| Marketing  and advertising                            |       | 1,987,605                         |       | 1,036,880                         |       |
| General and  administrative                           |       | 3,352,754                         |       | 2,177,038                         |       |
| Total  operating expenses                             |       | 5,340,359                         |       | 3,213,918                         |       |
|                                                  |       |                              |       |                              |       |
| Operating income (loss)                               |       | (1,925,981                        | )          | 274,804                           |       |
|                                                  |       |                              |       |                              |       |
| **OTHER INCOME (EXPENSE), NET:**                      |       |                              |       |                              |       |
| Interest  income                                      |       | 5,481                             |       | 6,484                             |       |
| Interest  expense                                     |       | (1,031,605                        | )          | (705,815                          | )          |
| Merger fees  (Note 9)                                 |       | (360,000                          | )          | —                            |       |
| Other income                                          |       | 210,107                           |       | 242,932                           |       |
| Gains on  sales of marketable securities              |       | 83,578                            |       | 241,366                           |       |
| Other  expense                                        |       | (55,171                           | )          | (73,151                           | )          |
| Total other  expense, net                             |       | (1,147,610                        | )          | (288,184                          | )          |
|                                                  |       |                              |       |                              |       |
| Loss before provision (benefit) for income  taxes     |       | (3,073,591                        | )          | (13,380                           | )          |
|                                                  |       |                              |       |                              |       |
| Provision (benefit) for income taxes (Note  11)       |       | (312,561                          | )          | 459,662                           |       |
|                                                  |       |                              |       |                              |       |
| **NET LOSS**                                          |       | $                                 | (2,761,030 | )                                 | $          | (473,042 | ) |
|                                                  |       |                              |       |                              |       |
| Change in foreign currency translation                |       | 44,918                            |       | 266,948                           |       |
| Change in unrealized loss on marketable  securities   |       | (4,150                            | )          | (48,041                           | )          |
|                                                  |       |                              |       |                              |       |
| **TOTAL COMPREHENSIVE LOSS**                          |       | $                                 | (2,720,262 | )                                 | $          | (254,135 | ) |
|                                                  |       |                              |       |                              |       |
| Basic and dilutive loss per common share:             |       |                              |       |                              |       |
| Weighted  average number of common shares outstanding |       | 19,695,291                        |       | 18,000,000                        |       |
| Basic and  dilutive net loss per common share         |       | $                                 | (0.14      | )                                 | $          | (0.03 | ) |

 

See accompanying notes to theseconsolidated financial statements

 

F-4

----

 

**EXAMUSA, INC. (FORMERLY OLYMPIC ENTERTAINMENT GROUP, INC.) ANDSUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’EQUITY**

 
| ** **                                                      | ** ** | **Series D Convertible  Preferred Stock** | ** ** | **Series E Convertible Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional Paid-in** | ** ** | **Restricted Retained** | ** ** | **Unrestrited  Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Shareholders’** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|------------------|------------|------------------------|------------|-------------------------|------------|---------------------------|------------|---------------------------------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **Shares**                                     | ** ** | **Amount**                                    | ** ** | **Shares**       | ** ** | **Amount**             | ** ** | **Shares**              | ** ** | **Amount**                | ** ** | **Capital**                           | ** ** | **Earnings**           | ** ** | **Earnings** | ** ** | **Income** | ** ** | **Equity** | ** ** |
| Balances, June 1, 2003                                     |       |                                           |       |                                          |       | 1,800,000        |       | $                      | 180,000    |                    | —     |                      | $          | —                                |       | $                      | —     |   | $ | 41,122 |   | $ | 3,774,718 |   | $ | 40,174 |   | $ | 4,036,014 |   |
| Net loss                                                        |       | —                                         |       | —                                        |       | —           |       | —                 |       | —                  |       | —                    |       | —                                |       | —                 |       | (473,042 | ) | — |   | (473,042 | ) |
| Change in unrealized gain on marketable securities              |       | —                                         |       | —                                        |       | —           |       | —                 |       | —                  |       | —                    |       | —                                |       | —                 |       | — |   | (48,041 | ) | (48,041 | ) |
| Foreign currency translation                                    |       | —                                         |       | —                                        |       | —           |       | —                 |       | —                  |       | —                    |       | —                                |       | —                 |       | — |   | 266,948 |   | 266,948 |   |
| Dividends paid to shareholders                                  |       | —                                         |       | —                                        |       | —           |       | —                 |       | —                  |       | —                    |       | —                                |       | —                 |       | 72,490 |   | — |   | (72,490 | ) |
| Balances, May 31, 2004                                     |       | —                                         |       | —                                        |       | 1,800,000        |       | 180,000                |       | —                  |       | —                    |       | —                                |       | 41,122                 |       | 3,229,186 |   | 259,081 |   | 3,709,389 |   |
|                                                            |       |                                           |       |                                          |       |             |       |                   |       |                    |       |                      |       |                                  |       |                   |       |   |   |   |   |   |   |
| Net loss                                                        |       |                                           |       |                                          |       |             |       |                   |       |                    |       |                      |       |                                  |       |                   |       | (2,761,030 | ) |   |   | (2,761,030 | ) |
| Dividends paid                                                  |       | —                                         |       | —                                        |       | —           |       | —                 |       | —                  |       | —                    |       | —                                |       | —                 |       | (90,959 | ) | — |   | (90,959 | ) |
| Common and D Preferred stock retained by Olympic  shareholders  |       | 40,000                                         |       | 120,000                                       |       | —           |       | —                 |       | 1,000,148               |       | 10,001                    |       | —                                |       | —                 |       | (130,001 | ) |   |   | — |   |
| Capital contribution                                            |       | —                                         |       | —                                        |       | —           |       | —                 |       | —                  |       |                      |       | 10,000                                |       | —                 |       | — |   | — |   | 10,000 |   |
| Value of merger related expenses                                |       | —                                         |       | —                                        |       | —           |       | —                 |       | —                  |       | —                    |       | 360,000                               |       | —                 |       | — |   | — |   | 360,000 |   |
| Fair value of stock transferred from shareholders to  directors |       | —                                         |       | —                                        |       | —           |       | —                 |       | —                  |       | —                    |       | 943,693                               |       | —                 |       | — |   | — |   | 943,693 |   |
| Conversion of D preferred stock                                 |       | (40,000                                        | )          | (120,000                                      | )          | —           |       | —                 |       | 1,000,000               |       | 10,000                    |       | 110,000                               |       | —                 |       | — |   | — |   | — |   |
| Conversion of E preferred stock                                 |       |                                           |       |                                          |       | (1,800,000       | )          | (180,000               | )          | 18,000,000              |       | 180,000                   |       | —                                |       |                   |       |   |   |   |   | — |   |
| Change in unrealized gain on marketable securities              |       | —                                         |       | —                                        |       | —           |       | —                 |       | —                  |       | —                    |       | —                                |       | —                 |       | — |   | (4,150 | ) | (4,150 | ) |
| Foreign currency translation                                    |       | —                                         |       | —                                        |       | —           |       | —                 |       | —                  |       | —                    |       | —                                |       | —                 |       | — |   | 44,918 |   | 44,918 |   |
| Balances, May 31, 2005 (as restated)                       |       | —                                         |       | $                                             | —     |             | —     |                   | $          | —                  |       | 20,000,148                |       | $                                     | 200,001    |                   | $          | 1,423,693 |   | $ | 41,122 |   | $ | 247,196 |   | $ | 299,849 |   | $ | 2,211,861 |   |
|                                                                 |            |                                                |            |                                               |            |                  |            |                        |            |                         |            |                           |            |                                       |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to theseconsolidated financial statements

 

F-5

----

 

**EXAM USA, INC.(FORMERLY OLYMPIC ENTERTAINMENT GROUP, INC.)****AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                       | ** ** | **Year Ended  May 31, 2005** | ** ** | **Year Ended  May 31, 2004** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| **Cash  flows from operating activities:**                                       | ** ** | ** **                        | ** ** | ** **                        | ** ** |
| Net loss                                                                         |       | $                                 | (2,761,030 | )                                 | $          | (473,042 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities: | ** ** | ** **                        | ** ** | ** **                        | ** ** |
| Depreciation  and accretion expense                                              |       | 7093,433                          |       | 5,141,976                         |       |
| Impairment  of property and equipment                                            |       | 4,273,178                         |       | 1,530,156                         |       |
| (Gains)  losses on marketable securities                                         |       | (83,578                           | )          | (241,366                          | )          |
| Fair value  of shares issued to directors and placement agent                    |       | 1,303,693                         |       | —                            |       |
| Minority  interest                                                               |       | 12,273                            |       | 26,630                            |       |
| Changes in  operating assets and liabilities:                                    |       |                              |       |                              |       |
| Inventories                                                                      |       | (126,962                          | )          | (232,387                          | )          |
| Deferred  income taxes                                                           |       | (626,297                          | )          | 118,730                           |       |
| Prepaids and  other                                                              |       | 260,249                           |       | (399,181                          | )          |
| Accounts  payable                                                                |       | 1,311,915                         |       | 850,466                           |       |
| Accrued  liabilities                                                             |       | (278,666                          | )          | (433,618                          | )          |
| Net cash  provided by operating activities                                       |       | 10,378,208                        |       | 5,888,364                         |       |
| ** **                                                                       | ** ** | ** **                        | ** ** | ** **                        | ** ** |
| **Cash  flows from investing activities:**                                       | ** ** | ** **                        | ** ** | ** **                        | ** ** |
| Purchases of  property and equipment                                             |       | (13,385,503                       | )          | (9,381,354                        | )          |
| Proceeds  from sales of property and equipment                                   |       | 68,393                            |       | 136,064                           |       |
| Purchases of  marketable securities                                              |       | (1,242,156                        | )          | (2,922,516                        | )          |
| Proceeds  from sales of marketable securities                                    |       | 1,101,955                         |       | 2,546,772                         |       |
| Time  deposits                                                                   |       | (898,797                          | )          | 49,166                            |       |
| Increase in  loan receivable                                                     |       | 373,867                           |       | (206,086                          | )          |
| Other assets                                                                     |       | (630,167                          | )          | (144,092                          | )          |
| Net cash  used in investing activities                                           |       | (14,612,408                       | )          | (9,922,046                        | )          |
| ** **                                                                       | ** ** | ** **                        | ** ** | ** **                        | ** ** |
| **Cash  flows from financing activities:**                                       |       |                              |       |                              |       |
| Payments on  capital lease obligations                                           |       | (1,268,360                        | )          | (1,323,297                        | )          |
| Borrowings  of long-term debt                                                    |       | 8,178,390                         |       | 16,307,645                        |       |
| Payments on  long-term debt                                                      |       | (4,987,569                        | )          | (7,483,865                        | )          |
| Repayments  on notes payable                                                     |       | —                            |       | —                            |       |
| Dividends  paid                                                                  |       | (93,467                           | )          | (72,490                           | )          |
| Net cash provided by financing activities                                        |       | 1,828,994                         |       | 7,427,993                         |       |
|                                                                             |       |                              |       |                              |       |
| Foreign  currency effect on cash                                                 |       | (66,730                           | )          | 249,444                           |       |
|                                                                             |       |                              |       |                              |       |
| **Net  increase (decrease) in cash**                                             |       | (2,471,936                        | )          | 3,643,755                         |       |
| ** **                                                                       | ** ** | ** **                        | ** ** | ** **                        | ** ** |
| Cash,  beginning of year                                                         |       | 6,052,970                         |       | 2,409,215                         |       |
| ** **                                                                       | ** ** | ** **                        | ** ** | ** **                        | ** ** |
| Cash, end of  year                                                               |       | $                                 | 3,581,034  |                              | $          | 6,052,970 |   |
| ** **                                                                       | ** ** | ** **                        | ** ** | ** **                        | ** ** |
| **Supplemental  Disclosure of Cash Flow Information**                            | ** ** | ** **                        | ** ** | ** **                        | ** ** |
| ** **                                                                       | ** ** | ** **                        | ** ** | ** **                        | ** ** |
| **Non-cash  investing and financing transactions:**                              |       |                              |       |                              |       |
| Purchases of  equipment under capital leases                                     |       | $                                 | 1,793,527  |                              | $          | 4,084,666 |   |
| Interest  swap liabilities                                                       |       | 150,024                           |       | —                            |       |
| Increase in  property and equipment from asset retirement obligations            |       | $                                 | 119,100    |                              | $          | 199,048 |   |
|                                                                             |       |                              |       |                              |       |
| **Cash  paid during the year for:**                                              | ** ** | ** **                        | ** ** | ** **                        | ** ** |
| Interest                                                                         |       | $                                 | 1,070,183  |                              | $          | 738,303 |   |
| Income taxes                                                                     |       | $                                 | 380,334    |                              | $          | 641,815 |   |
|                                                                                  |            |                                   |            |                                   |            |  |  |  |

 

F-6

----

 

**EXAM USA, INC.(FORMERLY OLYMPIC ENTERTAINMENT GROUP, INC.)****AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - ORGANIZATION AND BUSINESS**

 

EXAM Co., Ltd, (“EXAM “) previously known as Kisorin Co., Ltd, aJapanese corporation, was incorporated in 1969. On June 10, 2003, EXAMestablished EXAM USA, Inc. (“EXAM USA”), a Delaware corporation, to effecta share-exchange agreement with EXAM, whereby EXAM became a wholly-ownedsubsidiary of EXAM USA (collectively, the “Company”).

 

On June 3, 2004, the Company completed areverse acquisition ofOlympic Entertainment Group, Inc. (“Olympic”), a Nevada Corporation, pursuant to an agreement dated February 9,2004, as amended June 3, 2004. At the time of acquisition, Olympichad no revenues and no significant assets. It was considered a blank-checkcompany prior to the acquisition. In connection with the acquisition, Olympicissued the Company 1,800,000 shares of Olympic Series E preferred stockconvertible into 18,000,000 newly issued, post-split shares of its common stock or 90% of the outstandingcommon stock of Olympic; Olympic shareholders retained 1,000,000 post-split shares of common stock and 40,000 Series Dconvertible preferred, convertible into 1,000,000 shares of common stock.Merger expenses incurred by the Company primarily consisted of $360,000 whichwas a non-cash 1% investment banking fee (Note 9), which was charged to expensein fiscal 2005. Effective August 9,2004, the Company changed its namefrom Olympic Entertainment Group, Inc. to EXAM USA, Inc.

 

The Company operated five (5) stores which offer Pachinko(Japanese pinball) gaming entertainment, four (4) stores are located inthe Aichi prefecture and one (1) store is in the Tochigi prefecture justnorth of Greater Kanto Area in Japan as of May 31, 2004. In December 2004,the Company opened a new store in Oyama, and now currently operates six (6) stores.The Company receives income from cigarettes, non-alcoholic beverages and sundryitems, as well as from two small restaurants which are not consideredsignificant. Japanese law regulates Pachinko gaming and the local policeenforce laws. Pachinko gaming is one of the largest business segments in Japan.

 

The Company holds a 50% equity interest in Daichi Co., Ltd., an entitywhich procures tobacco products for EXAM. The remaining 50% ownership is heldby parties affiliated with EXAM. Minority interest income for the years ended May 31,2005 and May 31, 2004, was $12,273 and $9,481, respectively.

 

**NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

*Going Concern Consideration*

 

The Company’s financial statements have been prepared on a goingconcern basis, which contemplates the realization of assets and the settlementof liabilities in the normal course of business. As of May 31, 2005, theCompany has a working capital deficit totaling $5,751,483. Management plans torenegotiate the term of the debt. Management believes the Company will continueits growth and generate positive cash flows from operations to fund its dailyoperations and service its remaining debt obligations. There are no assurancesthat management will be successful in its plans. No adjustments have been made tothe carrying value of assets or liabilities as a result of the uncertainty.

 

*Change in Reporting Entity*

 

As discussed above, the acquisition of Exam by Olympic will beaccounted for as a reverse acquisition, whereby the assets and liabilities ofExam are reported at their historical cost. The assets and liabilities ofOlympic will be recorded at fair value on June 3, 2004, the date of close.No goodwill was recorded in connection with the reverse acquisition. Thereverse acquisition resulted in a change in reporting entity of Olympic foraccounting and reporting purposes. Accordingly, the 

 

F-7

----

 

financial statements reported herein have retroactively restated forall periods presented to report the historical financial position, results ofoperations and cash flows of Exam. Since the shareholders of Exam retained1,800,000 shares of Series E convertible preferred stock in the connectionwith the reverse acquisition, which converted into common stock in fiscal 2005.The shares of Series E preferred stock are reflected in the accompanyingstatements of stockholders’ equity as if these were outstanding untilconverted. The Series D convertible preferred stock and the common stockretained by the Olympic shareholders are reported as of the date of acquisitionon June 3, 2004.

 

*Acquisition of Entity Under Common Control*

 

The acquisition of EXAM by EXAM USA was accounted for at historicalcost because the entities are under common control. The consolidated results ofoperations for the periods reported herein include the historical results ofoperations of EXAM, and includes EXAM USA since incorporation on June 10,2003.

 

*Consolidation of Variable-Interest Entity*

 

Under FASB Interpretation No. 46 “Consolidation of VariableInterest Entities” (FIN 46) and revised FIN 46 (FIN 46R), certain specialpurpose entities are required to be consolidated if it is determined that anenterprise is the primary beneficiary of a subsidiary because it is deemed tohave controlling financial interest in an entity. The Company has determinedthat it has a controlling financial interest in Daichi Co., Ltd. since theCompany is required to absorb any expected losses, will receive the majority ofexpected residual returns and is the primary beneficiary.

 

*Reverse Acquisition*

 

The assets and liabilities of EXAM are reported at their historicalcost. The assets and liabilities of Olympic were recorded at fair value on June 3,2004, the date of close; no goodwill was recorded since there was no priorbusiness. The financial statements reported herein have been retroactivelyrestated for all periods presented to report the historical financial position,results of operations and cash flows of EXAM. Since the shareholders of EXAMretained 1,800,000 shares of Series E convertible preferred stock in theconnection with the reverse acquisition, which are yet to be converted intocommon stock, such shares of Series E preferred stock are reflected in theaccompanying statements of stockholders’ equity as if these were outstandingfor all periods presented. The Series D convertible preferred stock andthe common stock retained by the Olympic shareholders were reported on the dateof acquisition on June 3, 2004.

 

*Principles of Consolidation*

 

The accompanying consolidated financial statements include the accountsof EXAM USA, EXAM, and Daichi Co., Ltd. All significant inter-companytransactions have been eliminated in consolidation.

 

*Interest Rate Swap Agreements*

 

Interestrate swap agreements (see Note 8) are considered ineffective hedges againstchanges in the fair value of the debt due to changes in the benchmark interestrates over their terms because the Company does not maintain a risk policy. Asa result, SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities,” as amended by SFAS No. 149, is applied and the Companyperiodically records to earnings the gain or loss from changes in fair value.The fair value of the swaps is carried as an asset or a liability in theconsolidated balance sheet. The fair values of EXAM’s interest rate swaps arethe amounts it would receive or pay to terminate the agreements as of thereporting dates as quoted by the bank. Interest expense on the debt is adjustedto include net payments made or received under the swap agreements.

 

F-8

----

 

*Use of Estimates*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Actual results could differfrom those estimates. Significant estimates made by management include theevaluation of impairment of property and equipment, as well as the valuationallowance for certain deferred tax assets. Management believes that theestimates are reasonable.

 

*Fair Value of Financial Instruments*

 

Financial instruments consistof cash and cash equivalents, restricted and unrestricted time deposits,marketable securities, receivables, inventories, accounts payable, short-termnotes payable and long-term debt. The fair value of financial instrumentsapproximated their carrying values at May 31, 2005.

 

*Cash Equivalents*

 

The Company considers highly liquid investments with an originalmaturity of 90 days or less from the purchase date to be cash equivalents.During the periods presented, there were no cash equivalents outstanding.

 

The Company maintains deposits in United States, which are federally insured, andJapanese banks, which are notfederally insured, but the payoff of theentire deposits are guaranteed by the Japanese government.

 

*Time Deposits*

 

The Company invests in time deposits with maturities of one to threeyears. Time deposits maturing in excess of one year from the balance sheet dateare classified as long-term time deposits. At May 31, 2005, interest rateson all certificates of deposits were 0.03%, per annum. Time deposits arecarried at cost. Under short-term note agreements with two commercial banks,the Company is required to maintain certain amounts in time deposits asadditional collateral on the notes with banks. These amounts have beenclassified as restricted time deposits and have been classified as a currentasset consistent with the current portion of long-term debt with the banks.

 

*Marketable Securities*

 

Marketablesecurities are accounted for under the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 115, “Accounting for Certain Investmentsin Debt and Equity Securities.”  TheCompany’s long-term investments consisted of marketable debt and equitysecurities, which were classified as “available-for-sale” in accordance withthe provisions of SFAS No. 115. Such investments are presented as non-currentassets since management does not intend to sell the securities within one year,and these are carried at their estimated fair values in the accompanyingconsolidated balance sheet. Fair value was determined based on quoted marketprices. The specific identification method has been used to determine cost foreach security. Unrealized gains and losses are excluded from net income (loss)and reported as a separate component of shareholders’ equity, net of therelated tax effect and as a component of comprehensive income (loss), unlessthe decline is other than temporary (see below).

 

The Company monitors and evaluates the realizable value of itsmarketable securities. When assessing marketable securities forother-than-temporary declines in value, the Company considers such factors as,among other things, how significant the decline in value is as a percentage ofthe original cost, how long the market value of the investment has been lessthan its original cost, the performance of the investee’s stock price inrelation to the stock price of its competitors within the industry and themarket in general, any news that has been released specific to the investee andthe outlook for the overall industry in which the investee operates. If eventsand circumstances indicate 

 

F-9

----

 

that a decline in the value of these assets has occurred and is otherthan temporary, the Company records a charge to other income (expense). SeeNote 4 for discussion of impairments charged to operations.

 

*Inventories*

 

Inventories consist of gaming prizes, food and beverages and are statedat the lower of cost (determined by the first-in, first-out method) or market.

 

*Property and Equipment*

 

Property and equipment is stated at cost, less accumulateddepreciation. Major operational enhancements and betterments are capitalized,while routine repairs and maintenance are charged to expense when incurred.Depreciation, which includes assets under capital leases, is computed using thestraight-line method or declining balance over the following estimated usefullives:

 
| Buildings  and improvements     |   | 10 to 40 years                                      |
|---------------------------------|--------|-----------------------------------------------------|
| Pachinko machines and equipment |   | 2 to 20 years                                       |
| Leasehold improvements          |   | Term of lease or useful life,  whichever is shorter |

 

Pachinko machines generally have a useful life of two (2) to three(3) years; however, technology changes and changes in patron playinghabits may cause pachinko machines to become obsolete. Managementevaluates utilization of machines daily. In the event certain machines becomeunderutilized, management must sell or dispose of the assets.

 

SFAS No. 143 “Accounting for Asset Retirement Obligations,”requires that a liability for the fair value of an asset retirement obligationbe recognized in the period which it is incurred, with the offsettingassociated asset retirement cost capitalized as part of the carryingamount of the long-lived asset. The Company adopted SFAS No. 143 effectiveMay 31, 2001, the effects of which are disclosed in Note 6.

 

SFAS No. 144, “Accounting for Impairment or Disposal of Long-LivedAssets,” requires that long-lived assets, such as property and equipment andpurchased intangibles subject to amortization, be reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable, or at least annually. Recoverabilityof the asset is measured by comparison of its carrying amount to undiscountedfuture net cash flows the asset is expected to generate. Specifically,management projects undiscounted cash flows expected over the period to bebenefited. If such assets are considered to be impaired, the impairment to berecognized is measured as the amount by which the carrying amount of the assetexceeds its fair market value. Estimates of expected future cash flowsrepresent management’s best estimate based on currently available informationand reasonable and supportable assumptions. Any impairment recognized inaccordance with SFAS No. 144 is permanent and may not be restored.See Note 6 for discussion of impairments of property and equipment.

 

*Revenue Recognition*

 

*Revenues from pachinko and pachislot gamesrepresent the gross pay-ins, less payouts to customers. Revenues are recordedwhen cash is received for game balls or game tokens are rented to the patrons.Payouts are recorded when the token prizes are purchased back from theexchangers. Other revenues for beverage are recognized at the time of sale.Deferred revenues consist of payments received by the Company related to theexclusive rights for beverage and food vending machines to third-party vendors,and unredeemed prizes as well as, unused prepaid cards. The revenues of theexclusive rights are recognized either over the term of the contract or basedupon an agreed upon percentage of disbursements from the vending machines.*

 

F-10

----

 

*Advertising*

 

Advertising costs are expensed as incurred. Advertising expenses forthe years ended May 31, 2005 and 2004 were $1,909,137 and $959,726, respectively.

 

*Accounting for Stock-Based Compensation*

 

The Company has notadopted a fair value-based method of accounting for stock-based compensationplans for employees and non-employee directors. The Company will use theintrinsic value-based approach, and supplement disclosure of the pro formaimpact on operations and per share information using the fair value-basedapproach as required by SFAS No. 148 “Accounting for Stock-BasedCompensation – Transition and Disclosure”. Stock-based compensation issued tonon-employees and consultants are measured at fair value in accordance withSFAS No. 123. Common stock purchase options and warrants issued tonon-employees and consultants will be measured at fair value using theBlack-Scholes valuation model. As of May 31, 2005, there were no optionsor warrants outstanding.

 

*Per Share Information*

 

The Company presents basic earnings per share (“EPS”) and diluted EPSon the face of all statements of operations. Basic EPS is computed as netincome (loss) divided by the weighted average number of common sharesoutstanding for the period, plus the Series E preferred shares which wereretained by the shareholders of EXAM, which are automatically convertible into18,000,000 shares of common stock during the periods presented. Diluted EPSreflects the potential dilution that could occur from common shares issuablethrough stock options, warrants, and other convertible securities.

 

*RecentAccounting Pronouncements*

 

InDecember 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,”which revises SFAS No. 123. SFAS No. 123(R) is effective for annualperiods that begin after June 15, 2005 and requires companies to expensethe fair value of employee stock options and other forms of stock-basedcompensation. This expense will be recognized over the period during which anemployee is required to provide services in exchange for the award. Currently,the Company does not have any outstanding stock options, and as such theCompany does not expect the guidance under SFAS No. 123(R) to have amaterial impact on the consolidated financial statements.

 

In December 2004, the FASB issued SFAS No. 153, **“Exchange of Non-monetaryAssets, an amendment of APB Opinion No 29,****Accounting forNon-monetary Transactions.”****SFAS No. 153** eliminates the exception fornon-monetary exchanges of similar productive assets, which were previouslyrequired to be recorded on a carryover basis rather than a fair value basis.Instead, this statement provides that exchanges of non-monetary assets that donot have commercial substance be reported at carryover basis rather than a fairvalue basis. A non-monetary exchange is considered to have commercial substanceif the future cash flows of the entity are expected to change significantly asa result of the exchange. The provisions of this statement are effective fornon-monetary asset exchanges occurring in fiscal periods beginning after June 15,2005. The Company expects to adopt the standard during the fiscal year 2005.The Company is evaluating the requirements of SFAS No. 153 and has notdetermined the impact on its financial condition or results of operations.

 

*ForeignCurrency*

 

The functional currency of EXAM and DaichiCo., Ltd. is the Japanese Yen. The financial statements of EXAM and Daichi Co.,Ltd. are translated into United States Dollars at year-end exchange rates forassets and liabilities, and weighted-average exchange rate for revenues andexpenses. The resulting translation adjustments are recorded as a component ofother comprehensive income reflected on the consolidated statements of incomeand comprehensive income

 

F-11

----

 

(loss) and the consolidated statements ofshareholders’ equity. Transaction gains and losses, if any, in foreigncurrencies are reflected in operations. During the years ended May 31,2005 and 2004, no foreign currency transaction gains or losses wereexperienced.

 

*Income Taxes*

 

The Company accounts for its income taxes in accordance with SFAS No. 109,“Accounting for Income Taxes”.Under SFAS No. 109, deferred tax assets and liabilities are determinedbased on temporary differences between bases used for financial reporting andincome tax reporting purposes. Income taxes are provided based on the enactedtax rates in effect at the time such temporary differences are expected toreverse. A valuation allowance is provided for certain deferred tax assets ifit is more likely than not that the Company will not realize tax assets throughfuture operations. The Company and its subsidiaries file separate national andlocal income tax returns in Japan and the United States of America.

 

*Comprehensive Income (Loss)*

 

Comprehensive income (loss) is defined as the change in equity of abusiness enterprise during a period from transactions and other events andcircumstances from non-owner sources, including foreign currency translationadjustments and unrealized gains and losses on marketable securities.

 

Accumulated other comprehensive income at May 31,2005, consisted of foreign currency translation gain $331,344 and unrealizedlosses on marketable securities of $31,495 net of tax.

 

*Reclassification*

 

Management reclassified officer salaries infiscal 2004 from cost of sales to general and administrative expenses in theamount of $993,206, which management believes is the more proper presentationto conform with 2005 classification.

 

*Restatement*

 

The Company made a clerical error in thepresentation of common stock at par value upon the conversion of E Preferred.The Company reclassified $168,200 from additional paid-in capital to commonstock. This adjustment had no impact on the Company’s financial position,results of operations or cash flows.

 

**NOTE 3 - RISKS AND UNCERTAINTIES**

 

*Innovations in Technologies*

 

The Company’s gaming machines are subject tonew innovations and changes in entertainment experiences. Pachinko machinesvary widely in price and expected life. Rapid changes in demand will render amachine under-producing and potentially obsolete.

 

*Cyclical Nature of Business*

 

The Company’s primary business involves gaming entertainment. Duringperiods of recession or economic downturn, patrons may reduce or eliminatespending on gaming entertainment activities. In the event that any of theCompany’s demographic markets suffer adverse economic conditions, the Company’srevenues may be materially adversely affected. In addition, the operationsof some pachinko stores are typically seasonal in nature. The sales during theholiday seasons are usually higher than the regular months. The biggest holidayseason in Japan lies in the end of December through the beginning ofJanuary. Additionally, revenues can fluctuate when a new type of pachinkomachine is introduced at the stores.

 

*Japanese Gaming Regulation*

 

The Company’s business is regulated. The Entertainment EstablishmentControl Law (EECL) governs a variety of entertainment establishments, includingpachinko and pachislot stores. The National Public Safety Commission (NPSC)sets out the general standard of the pachinko stores within the scope of EECL.The ability of the Company to remain in business and to operate profitablydepends upon the Company’s ability to satisfy all applicable NPSC gaming lawsand regulations governed by EECL

 

F-12

----

* *

*Political Climate*

 

The Company’s ability to remain in the gaming business depends on thecontinued political acceptability of pachinko gaming activities to both thepublic and governmental officials. In addition, the gaming laws regulate payoutrates which, if altered, may diminish the Company’s profitability.Management is aware of nothing to indicate that NPSC officials will change itspolicies toward gaming activities in general; however, there are no assurancesthat such policies will not be changed. Any substantial, unfavorable change inthe enabling laws or tax rates on gaming revenues could make the Company’sbusiness substantially more onerous, less profitable or illegal, which wouldhave a material adverse effect on the Company’s business.

 

*Competition*

 

The Company faces substantial competition in each of the markets inwhich its gaming facilities are located. Some of the competitors havesignificantly greater name recognition and financial and marketing resourcesthan the Company. Such competition results, in part, from the geographicconcentration of competitors. All of the Company’s gaming operations primarilycompete with other gaming operations in their geographic areas. New expansionand development activity is occurring in each of the relevant markets, which may beexpected to intensify competitive pressures.

 

*Foreign Currency*

 

Since the local currency is the Japanese Yen, the Company may experiencesignificant fluctuations in the value of reported assets and liabilities inUnited States Dollars.

 

**NOTE 4 – MARKETABLE SECURITIES**

 

Cost,as adjusted for impairments, and fair market values of marketable securities,accounted for as available-for-sale securities, at May 31, 2005, are asfollows:

 
| **Securities available for sale**  | ** ** | **Adjusted  Cost Basis** | ** ** | **Unrealized   Gain** | ** ** | **Unrealized   Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------------------|------------|----------------|------------|
| Equity Mutual Fund – Japan    |       | $                        | 19,723     |                  | $          | 3,966                   |       | $              | —     |   | $ | 23,689 |   |
| Common stocks – Japan         |       | 1,137,462                |       |                  |       | (58,275                 | )          | 1,079,187      |       |
| Government securities – Japan |       | 363                      |       | —                |       | —                  |       | 363            |       |
| Total                              |       | $                        | 1,157,548  |                  | $          | 3,966                   |       | $              | (58,275    | ) | $ | 1,103,239 |   |

 

###### **No unrealized losses were chargedto operations in 2004. During the year ended May 31, 2005, managementrecorded a temporary decline in the value of the marketable securities in theamount of 12,785.**

###### ** **

###### **NOTE 5 – RELATED PARTYTRANSACTIONS**

###### ** **

*LoansReceivable from Related Parties*

 

OnMarch 10, 1998, Exam loaned $135,919 to Next Creation Co., Ltd., a relatedparty through common relationship, to finance its operations. In December 2003and January 2004, the Company loaned aggregate amounts of $117,796 to NextCreation Co., Ltd. The total loaned to Next Creation Co., Ltd was $253,715 at May 31,2004. The loan accrued interest at 3.65% from 1998 until February 28, 2002and at 1.83% thereafter. The loan was due and fully satisfied on August 31,2004.

 

OnDecember 17, 2003, Daichi Co., Ltd. loaned $108,735 to Next Creation Co.,Ltd. to finance its operations. The interest rate was 1.825%, due and payablemonthly. The Company’s demand loan was satisfied on August 31, 2004.

 

F-13

----

 

*LandPurchase*

 

OnFebruary 21, 2005, the Company purchased land previously rented from ashareholder for $620,804. Management believes the transfer price wasrepresentative of fair value at the date of transfer.

 

*Consulting agreement*

 

The Company uses a consulting firm, which is controlled by a director,for the purpose of designing and establish systems at its stores. In connectiontherewith, the Company paid approximately $3,900 (¥420,000) per month duringthe years ended May 31, 2005 and May 31, 2004.

 

**NOTE 6 - PROPERTY AND EQUIPMENT**

 

 At May 31,2005, property and equipment consisted of the following:

 
| Land                                     |   | $           | 3,376,589  |   |
|------------------------------------------|--------|-------------|------------|--------|
| Buildings and improvements               |   | 26,186,346  |       |
| Pachinko machines and computer equipment |   | 17,444,639  |       |
| Construction in progress                 |   | 238,615     |       |
|                                     |   | 47,246,189  |       |
| Less accumulated depreciation            |   | (17,439,075 | )          |
|                                     |   | $           | 29,807,114 |   |

 

*Land Impairment*

 

Management reduced the carrying value real property (land) during theyear ended May 31, 2004 by $93,819, based on the local tax authority’sassessed value which management believes approximates fair value.

 

*Store impairment*

 

One of the Company’s stores suffered losses in 2005 because ofincreased competition, and a deteriorating facility which in need ofimprovements. The store was profitable in 2004. The store is on leased land,and the building and improvements have little residual value, if any.Management has evaluated the future cash flows of this store and determinedthat an impairment loss is required under SFAS No. 144. Accordingly,management recorded a charge to operations, which is included in cost ofrevenues in the amount of $2,213,312 in fiscal 2005.

 

*Impairments of Idle Machines*

 

During the year ended May 31, 2005 and 2004, the Company retiredpachinko and pachislot machines, as well as certain computer equipment prior tothe end of their useful life resulting in losses in the amount of $2,059,866and $1,436,337 respectively.

 

*Asset Retirement Obligations*

 

The Company adopted SFAS No. 143, “Accounting for Asset RetirementObligations,” during fiscal year 2003 and applied this change retroactively toall previous years effected. The statement requires that a liability for thefair value of an asset retirement obligation be recognized in the period whichit is incurred with the offset associated asset retirement cost capitalized as part ofthe carrying amount of the long -lived asset. The asset retirement cost issubsequently allocated to expense using a systematic and rational method overthe useful life of the related asset. Changes in the asset retirementobligation resulting from the passage of time are recognized as an increase inthe carrying amount of the liability and as an accretion expense. Under certainlease agreements in which the Company leases land, while owning the buildingand/or parking lot located on that land, the Company is required to return theland to its original condition at the end of the land lease term. The lessorhas the option to require the Company to return the land to its originalcondition. It has been determined that in all cases the lessors will requirethe Company to restore the land. 

 

F-14

----

 

At May 31, 2005, the Company increased their obligated long-livedassets under property and equipment by $133,874 due to the future estimatedcosts related to the new store. The Company used an average risk free rate of 2% to discount the estimated obligationsand a 40-year useful life for their retired assets in computing the netretirement obligations as of May 31, 2005. Accretion expense for the yearsended May 31, 2005 and May 31, 2004, was $ 16,029 and $10,031,respectively.

 

The reconciliation of the asset retirement obligation is asfollows:  

 
| Balance, June 1, 2004 – foreign currency rate effective |   | $       | 556,732 |   |
|-------------------------------------------------------------------|--------|---------|---------|--------|
| Liabilities incurred                                              |   | 133,874 |    |
| Accretion expense                                                 |   | 16,029  |    |
|                                                              |   |    |    |
| Balance, May 31,2005                                         |   | $       | 706,635 |   |
|                                                                   |        |         |         |        |  |

 

*Capitalized Interest*

 

The Company capitalized the cost of constructing the new stores.Capitalized interest for the years ended May 31, 2005 and May 31,2004, was $20,860 and $23,429, respectively.

 

*Depreciation*

 

Depreciation expense charged to operations related to property andequipment during the years ended May 31, 2005 and 2004 was $7,005,839 and$5,131,945, respectively. See Note 9 for equipment under capital leases.

 

**NOTE 7 – DEPOSITS AND OTHER ASSETS, ANDACCRUED LIABILITIES**

 

At May 31,2005, deposits and other assets consisted of the following:

 
| Deposits                   |   | $       | 1,156,781 | ** ** |
|----------------------------|--------|---------|-----------|------------|
| Long-term prepaid expenses |   | 261,867 |      |
| Prepaid insurance          |   | 130,875 |      |
| Long-term time deposits    |   | 113,889 |      |
| Other                      |   | 79,095  |      |
|                       |   |    |      |
|                       |   | $       | 1,742,507 |       |

 

At May 31,2005, accrued liabilities consisted of the following:

 
| Accrued  liabilities-Current:         |   |     |      |
|---------------------------------------|--------|----------|-----------|
| Deferred revenue                      |   | $        | 829,195   |   |
| Less: non-current deferred revenue    |   | (136,062 | )         |
| Deferred revenue-Current              |   | 693,133  |      |
| Salaries and related benefits         |   | 504,841  |      |
| Professional fees                     |   | 214,005  |      |
| Taxes payable                         |   | 324,604  |      |
| Other                                 |   | 214,586  |      |
|                                  |   |     |      |
| Total accrued liabilities - current   |   | $        | 1,951,169 |   |
|                                  |   |     |      |
| Accrued liabilities-Non-current:      |   |     |      |
| Non-current deferred revenue          |   | 136,062  |      |
| Swap contract obligations             |   | 148,621  |      |
|                                  |   |     |      |
| Total accrued liabilities non-current |   | $        | 284,683   |   |

 

F-15

----

 

**NOTE 8 – LONG-TERM DEBT**

 

In June, November, December 2004,the Company entered into three additional long-term debt agreements withcommercial banks totaling approximately $8,796,296. The loans were for theconstruction of the new store. The loans bear interest rates ranging from 1.58%to 2.75% per annum. These loans are secured by substantially all of the Company’s assets including therestricted time deposits. Long-term debt at May 31, 2005, consistedof the following:

 
| Loans payable to commercial bank, payable monthly in principal and  interest installments ranging from $3,796 to $370,370, interest between 2.6%-2.75%  per annum, due 2005 through 2014, secured by substantially all of the Company’s  assets including the restricted cash and restricted time deposits. |   | $          | 21,829,630 |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|--------|
| Loans payable to commercial bank, payable monthly in principal and  interest installments ranging from $12,686 to $25,372, interest at 2.275% per  annum, due 2005 through 2009, secured by substantially all of the Company’s  assets.                                                                     |   | 3,205,556  |       |
| Loan payable to commercial bank, payable monthly in principal and  interest installments at $38,580 to $50,463, interest between approximately  1.58% to 2.03% per annum, due 2005 through 2009, unsecured.                                                                                                      |   | 4,205,092  |       |
| Total long-term debt                                                                                                                                                                                                                                                                                             |   | 29,240,278 |       |
|                                                                                                                                                                                                                                                                                                             |   |       |       |
| Less current portion of long-term debt                                                                                                                                                                                                                                                                           |   | (9,340,000 | )          |
|                                                                                                                                                                                                                                                                                                             |   |       |       |
| Long-term debt, net of current portion                                                                                                                                                                                                                                                                           |   | $          | 19,900,278 |   |

 

The Company’s obligations are collateralized by substantially all ofthe Company’s assets. As a common practice in Japan, the Company’s collateralis not allocated to each commercial bank loan. Rather the commercial banks holdan interest in substantially all of the Company’s assets together, there are nofirst or second positions. Upon default of the loans, the Company’s assetswould be liquidated and the proceeds from the liquidation would be distributedto the commercial banks based on liquidation preference. Interest expenserelated to long-term debt amounted to $751,739 and $452,171, during the yearsended May 31, 2005 and 2004, respectively. Future annual minimum principalpayments under long-term debt contracts as of May 31, 2005 are as follows:

 
| **Years ending May 31,** | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------|------------|
| 2006                          |       | $          | 9,340,000  |   |
| 2007                          |       | 5,277,963  |       |
| 2008                          |       | 3,660,833  |       |
| 2009                          |       | 3,371,019  |       |
| 20010                         |       | 2,312,685  |       |
| Thereafter                    |       | 5,277,778  |       |
|                          |       |       |       |
| Total long-term debt          |       | $          | 29,240,278 |   |

 

*Interest Swap Agreements*

 

EXAMentered into two interest rate swap agreements on November 28, 2003 and March 24,2004 with Mitsui Sumitomo Bank. First, EXAM entered into an agreement wherebythey obtained financing in the amount of ¥300,000,000 (approximately $2,900,000),which expires on November 28, 2008. In connection therewith, EXAM agreedto a contract to pay interest at 1.67%, per annum on ¥300,000,000, offset bythe receipt of interest at the three-month TIBOR (“Tokyo Interbank Offered Rate”).Interest payments start on February 29, 2004 and are payable at the end ofevery three months thereafter until expiration. The effect of the arrangementwas to increase interest expense by approximately $40,000during the year ended May, 31, 2005. In addition, EXAM was required to enterinto an agreement for a ¥100,000,000 (approximately 

 

F-16

----

 

$900,000)interest swap contract, which expires on March 24, 2009. In connectiontherewith, EXAM agreed to pay interest at 1.89%, per annum on the face amountof the contract, offset by the receipt of interest at 3-month TIBOR. Interestpayments commenced on June 24, 2004 and are payable at the end of everythree months thereafter until expiration. The effect of the arrangement was toincrease interest expense by approximately $17,000during the year ended May, 31, 2005, and a lesser amount in 2004.

 

 In addition, on December 27, 2004, theCompany entered into an agreement whereby they obtained financing in the amountof ¥250,000,000(approximately $2,400,000), which expires on November 30,2009. In connection therewith, theCompany agreed to a contract to pay interest at 1.11%, per annum on the faceamount of the contract, offset by the receipt of interest at three-month TIBOR.Interest paymentscommenced starting in February, 2005 and are payable at the end of every threemonths thereafter until expiration. Theeffect of the arrangement was to increase interest expense by approximately $11,000during the yearended May 31, 2005.

 

TheCompany was induced to enter into the interest swap contracts to obtainfinancing. On the date the contracts were executed, the fair value of thecontract liabilities aggregated approximately $160,000 (thereforea cost of the borrowings), and accordingly, such amountswere reported as an asset, and accreted to interest expense using the effectiveinterest method. The fair values of EXAM’s interest rate swaps are theestimated amounts it would receive or pay to terminate the agreements as of thereporting dates as determined by the bank. As of May 31, 2005, the fairvalue of the outstanding swaps was $148,621.The change in fair value of the swap obligations are recorded in operations.

 

**NOTE 9 - COMMITMENTS AND CONTINGENCIES**

 

*Investment Banking Agreement*

 

On September 2, 2003, management enteredinto an agreement for services related to seek a reverse merger partner, astrategic partner or strategic alliances, and, on a best efforts basis, raiseadditional equity capital. The Company paid $2,500 per month for seven (7) months,at which date the agreement was cancelled and the monthly fee ceased. Inaddition, the Company was required to pay a cash fee of 3.5% for equityfinancing, and issue common stock equal to 1.0% to 1.5% of the outstandingpost-merger shares, upon the close of a transaction. On June 3, 2004, thetransaction was closed with Olympic. The investment banker earned a fee of 1%of the post merger, post-reverse-stock-split common stock outstanding ofOlympic, in accordance with the contract. The estimated fair value of $360,000was determined using the average closing stock price of Olympic near thetransaction, and charged to operations in fiscal 2005.

 

*Director Agreements*

 

On June 17, 2003, the Company’s retained two (2) outsidedirectors. The agreements provide for annual payments of $150,000, plusreimbursement of reasonable expenses. The agreements expired on June 16,2004. In June, 2004,new agreements are provided for annual payments of $100,000, plus reimbursementof reasonable expenses. Each director was paid $100,000 for the year ending May 31,2005.

 

*Consulting Agreement*

 

 On August 1,2004, the Company entered an agreement with a consulting firm. The agreement isfor consulting services of company’s management and personal system. The agreementexpires on July 31, 2007. The monthly consulting fee is approximately$26,000, plus reimbursement of reasonable expenses. In addition, the Companypaid some additional fees for training sessions. The consulting firm was paidapproximately $380,000 for the year ended May, 31, 2005.

 

F-17

----

 

*Capital Leases*

 

The Company leases pachinko machines and computer equipments underleases that qualify as capital leases. The pachinko machine leases were for twoyears and expired on December 24, 2005. The computer equipments lease arefor a term of six years through eight years and expire on November 22, 2012.

 

In connection with the opening of a newstore, the Company entered into an agreement to lease computer equipment attotal cost of $610,185. The lease is for a period of 60 months and requiresmonthly lease payment of $11,861. Additionally, the Company entered into anagreement to lease equipment for $1,166,569. The lease is for 96 months andrequires a monthly lease payment of $16,026. These leases are accounted for asa capital leases. Future annual minimum lease payments forequipment accounted for as capital leases as of May 31, 2005 are asfollows:

 

 
| **Years ending May 31,**                      | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|------------|------------|
| 2006                                               |       | $          | 1,202,950  |   |
| 2007                                               |       | 1,202,950  |       |
| 2008                                               |       | 868,364    |       |
| 2009                                               |       | 837,947    |       |
| 2010                                               |       | 515,130    |       |
| Thereafter                                         |       | 480,785    |       |
| Total minimum lease payments                       |       | 5,108,126  |       |
| Less amounts representing interest                 |       | (572,892   | )          |
|                                               |       |       |       |
| Present value of future minimum lease  payments    |       | 4,535,234  |       |
| Less current portion of capital lease  obligations |       | (1,026,221 | )          |
|                                               |       |       |       |
| Capital lease obligations, net of current  portion |       | $          | 3,509,013  |   |

 

Interest expense related to capital lease obligations amounted to$230,396 and $131,111 during the years ended May 31, 2005 and 2004, respectively.

 

Property and equipment at May 31, 2005, include the following amounts forcapitalized leases:

 
| Equipment  under capital leases      |   | $          | 7,516,318 |   |
|--------------------------------------|--------|------------|-----------|--------|
| Less accumulated depreciation        |   | (2,856,660 | )         |
|                                 |   |       |      |
| Equipment  under capital leases, net |   | $          | 4,659,657 |   |

 

*Operating Leases*

 

The Company leases land for certain of its gaming locations. Minimummonthly rental payments under these leases range from $5,139 to $61,782,aggregating total payments of $130,610 per month. Under Japanese custom, thereare occasionally no written agreements for the land leases, and all terms areagreed upon orally. The Company has entered into written agreements for leaseswhich last twenty (20) years.Additionally, under Japanese custom, if significant improvements are made tothe leased land, the land leases are required to be extended by the lessor foras long as the Company is in operation. In December, 2004, the Company hasentered into written agreements for new leases which last twenty (20) years.The leases are for new store, and it will start in December, 2005. See Note 13for additional information regarding to new store.

 

The Company has made significant modifications to the land throughconstruction of buildings and parking lots. Thus, the terms of the land leasesin most cases are infinite. The Company leased land from one of its officers.The monthly lease fee from the officer is $1,869, and the contract was 

 

F-18

----

 

terminated in February, 2005. For the years ended May 31, 2005 and2004, total rental expense under all land leases was approximately $1,725,126and $1,219,420, respectively.

 

Future annual minimum payments under non-cancelable operating leases asof May 31, 2005, are as follows:

 
| **Years ending May 31,**              | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2006                                       |       | $          | 1,654,671  |   |
| 2007                                       |       | 1,766,343  |       |
| 2008                                       |       | 1,760,144  |       |
| 2009                                       |       | 1,753,767  |       |
| 2010                                       |       | 1,710,791  |       |
| Thereafter                                 |       | 22,908,429 |       |
| Total future annual minimum lease payments |       | $          | 31,554,145 |   |

 

**NOTE 10 - SHAREHOLDERS’ EQUITY**

 

*Preferred Stock*

 

There are 5,000,000 shares of preferred stockauthorized to be issued.

 

In connection with the reverse acquisition of Olympic, Examshareholders received 1,800,000 shares of Series E convertible preferredstock. Each share was convertible into ten (10) shares of common stock ora total of 18,000,000 shares and converted on May 31, 2005. The 40,000shares of Series D convertible preferred stock issued in connection withthe reverse acquisition was convertible into 25 shares of common stock or anaggregate of 1,000,000 shares and converted in fiscal 2005.

 

*Stock Spilt*

 

Olympic authorized a one for fifteen (1 for 15) reverse split on the Company’s common stock thereby resulting in 1,000,000 shares issued and outstanding upon the date of the reverse acquisition on June 3, 2004.

 

*Restricted Retained Earnings*

 

As required under Japanese laws, the Company must accumulate 10% ofdividends paid until restricted retained earnings amounts to 25% of commonstock. As of May 31, 2005, the Company was in satisfaction of thisrequirement.

 

*Dividends*

 

Prior to becoming a public company, the Company paid dividends of$90,959 for the year ended May 31, 2005, and $72,490 for the year ended May 31,2004.

 

*Stock-based compensation*

 

Theshareholders of EXAM contributed 26,100 shares, each, of Series EConvertible Preferred stock to two (2) directors for services rendered inconnection with going public in the United States on June 3, 2004 and forservices to be rendered in fiscal 2005. The shares vest 25% on June 3,2004, and 25% quarterly thereafter. The shares were converted into an aggregateof 522,000 shares of common stock. EXAM will recorded a non-cash charge of$943,693 as compensation expense in fiscal 2005, based on the average closingask prices 15 days prior to, and after, the acquisition of $2.00 per share,less a 10% discount for restricted stock or $1.80 per share.

 

F-19

----

 

**NOTE 11 - INCOME TAXES**

 

The following summarizes the provision (benefit) for income taxes forthe years ended May 31, 2005 and 2004:

 
| ** **                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Current -                            |       |     |       |     |       |
| Foreign                              |       | $        | 375,128    |     | $          | 373,502 |   |
| Deferred -                           |       |     |       |     |       |
| Foreign                              |       | (687,689 | )          | 86,160   |       |
|                                 |       |     |       |     |       |
| Provision (benefit) for income taxes |       | $        | (312,561   | )        | $          | 459,662 |   |

 

Income taxes in the United States of America were not material. A reconciliationof the expected statutory national income tax provision to the provision(benefit) for income taxes for the years ended May 31, 2005 and 2004 is asfollows:

 
| ** **                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Provision for income taxes, at Japan  national rate |       | (30.0    | )%         | (30.0    | )%         |
| Increase in income taxes resulting from:            |       |     |       |     |       |
| Local income  taxes, net of national benefit        |       | (10.4    | )%         | (10.4    | )%         |
| Meals                                               |       | 1.9      | %          | 453.1    | %          |
| Penalties                                           |       | —   |       | 365.4    | %          |
| Other                                               |       | —   |       | 308.2    | %          |
| Increase in valuation allowance                     |       | 28.3     | %          | 2,349.0  | %          |
|                                                |       |     |       |     |       |
| Provision (benefit) for income taxes                |       | (10.2    | )%         | 3,435.3  | %          |

 

At May 31, 2005, significant components of the Company’s netdeferred taxes are as follows:

 

 
| ** **                                            | ** ** | **2005**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|
| Deferred tax assets (liability)                       |       |       |       |
| Current assets:                                       |       |       |       |
| Accrued  liabilities                                  |       | $          | 21,667     |   |
| Unrealized  losses on marketable securities           |       | 81,724     |       |
| Less -  Valuation allowance                           |       | —     |       |
| Total  current deferred tax assets                    |       | 103,391    |       |
| Noncurrent assets:                                    |       |       |       |
| Impairment  charges                                   |       | 1,145,642  |       |
| Net  operating loss carryforward – United States |       | 1,351,425  |       |
| Other                                                 |       | 215,799    |       |
| Depreciation                                          |       | 19,738     |       |
| Less –  Valuation allowance                      |       | (1,735,328 | )          |
|                                                  |       | 997,276    |       |
| Total  deferred tax assets                            |       | $          | 1,100,667  |   |

 

Management increased its valuation allowance by $883,009 and $314,299during the years ended May 31, 2005 and 2004, respectively, for certainexpenses paid in the United States that will not be deductible in Japan. At thepresent time, management cannot determine if there will be income in the UnitedStates to offset such expenses, which will be carried forward as net operatinglosses. The net operating losses expire in twenty years for United Statesfederal tax purposes and five years for the State of California tax purposesbeginning from fiscal 2004.

 

F-20

----

 

**NOTE 12 - GAMING OPERATIONS**

 

The Company derives revenue from the operation of pachinko andpachislot games. The Company is subject to annual licensing requirementsestablished by the Prefectural Public Safety Commission. The Company must renewthis license yearly to operate. The Company pays sales taxes of 4% of netrevenues.

 

A summary of gross wagers, less winning patron payouts, for the yearsended May 31, 2005 and 2004, are as follows:

 
| ** **                     | ** ** | **2005**     | ** **  | **2004**     | ** ** |
|--------------------------------|------------|--------------|-------------|--------------|------------|
| Total gross pay-ins            |       | $            | 219,425,163 |         | $          | 166,022,684 |   |
| Less - winning patron pay outs |       | (194,575,733 | )           | (148,603,069 | )          |
|                           |       |         |        |         |       |
| Gaming Revenues                |       | $            | 24,849,430  |         | $          | 17,419,615 |   |
|                                |            |              |             |              |            |  |  |  |  |

 

**NOTE 13 – SUBSEQUENT EVENT**

 

*New Store Opening*

 

In December 2005, the Company plans to open a new store inOkazaki, Aichi, Japan. The Company entered into lease agreements for a portionof the land and parking lots. These leases will start in December, 2005, andthe total monthly leases are $30,115. The deposits of the lease agreements were$189,854 and paid for the year ended May 31, 2005.

 

F-21

----

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

 
|                                | EXAM USA, INC. |
|-------------------------------------|---------------------|
|                                |                |   |
|                                |                |   |
| Date:  March 3, 2006 | By:                 | /s/  Shinichi  Hirabayashi |
|                                |                | **Shinichi Hirabayashi** **Chief Executive Officer** **(Principal Executive Officer)** |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and intheir capacities and on the dates indicated.

 

 
| **Signature**                        | ** ** | **Capacity**                         | ** ** | **Date**           |
|--------------------------------------|------------|--------------------------------------|------------|--------------------|
|                                 |       |                                 |       |               |
|                                 |       |                                 |       |               |
| /s/  Shinichi  Hirabayashi |       | Chief Executive Officer and Director |       | March 3, 2006 |
| **Shinichi  Hirabayashi**            |       |                                 |       |               |
| ** **                           | ** ** |                                 |       |               |
| ** **                           | ** ** |                                 |       |               |
| /s/  Yoneji  Hirabayashi   |       | Chief Financial and  Principal       |       | March 3, 2006 |
| **Yoneji  Hirabayashi**              |       | Accounting Officer and  Director     |       |               |
| ** **                           | ** ** |                                 |       |               |
| ** **                           | ** ** |                                 |       |               |
| /s/  Akinori  Hirabayashi  |       | Director                             |       | March 3, 2006 |
| **Akinori  Hirabayashi**             |       |                                 |       |               |

 

----