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

**WASHINGTON, D.C. 20549**

 

**FORM 10-KSB**

 

| **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 THETRANSITION 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                                           |       | (I.R.S.  Employer Identification No.) |
| incorporation  or organization)                                            |       |                                  |
|                                                                       |       |                                  |
| **5912  Bolsa Avenue, Suite 108, Huntington Beach, California 92649** |
| (Address Of Principal  Executive Offices)                                  |
|                                                                       |       |                                  |
| ISSUER’S TELEPHONE NUMBER: **(714) 895-7772**                         |
|                                                                       |       |                                  |
| SECURITIES REGISTERED UNDER  SECTION 12(b) OF THE 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**

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   YES   ý   NO   o

 

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation 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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act)  YES   o   NO   ý

 

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

 

Theaggregate 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

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, 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

 

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**EXAM USA,INC.**

**ANNUALREPORT ON FORM 10-KSB**

**FOR THEFISCAL YEAR ENDED MAY 31, 2005**

 

**TABLE OFCONTENTS**

 
| **PART I**   |                                                                                        |
|-------------------|---------------------------------------------------------------------------------------------|
| Item 1.           | Description of Business                                                                     |   |
| Item 2.           | Description of Property                                                                     |   |
| Item 3.           | Legal Proceedings                                                                           |   |
| Item 4.           | Submission of Matters to a  Vote of Security Holders                                        |   |
|              |                                                                                        |   |
| **PART II**  |                                                                                        |
| Item 5.           | Market for Registrant’s  Common Equity and Related Stockholders’ Matters          |   |
| Item 6.           | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
| Item 7            | Financial Statements                                                                        |   |
| Item 8.           | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosures      |   |
| Item 8A           | Controls and Procedures                                                                     |   |
|              |                                                                                        |   |
| **PART III** |                                                                                        |
|              |                                                                                        |   |
| Item 9.           | Directors and Executive  Officers of the Registrant                                         |   |
| Item 10.          | Executive Compensation                                                                      |   |
| Item 11.          | Security Ownership of  Certain Beneficial Owners and Management                             |   |
| Item 12.          | Certain Relationships and  Related Transactions                                             |   |
| Item 13.          | Exhibits                                                                                    |   |
| Item 14.          | Principal Accountant Fees  and Services                                                     |   |
|              |                                                                                        |   |
|              | Signatures                                                                                  |   |

 

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**PART 1**

 

**Forward Looking Statements**

 

This Annual Report on Form 10-KSB of Exam USA, Inc.(“Exam” or “we”) contains forward-looking statements that are not based onhistorical facts and are based on current expectations that are subject tovarious risks and uncertainties, as well as assumptions that, if they do notmaterialize or prove incorrect, could cause our future results to differmaterially from those expressed or implied in such forward lookingstatements.  All statements other thanhistorical facts are statements that are or could be deemed forward-lookingstatements, including, without limitation any future results of operations,plans or strategies or relating to future economic or industry conditions.Factors that might cause such differences include, but are not limited to,those discussed in the subsection entitled “Risk Factors” under Part I,page 8 or that are otherwise described from time to time in our reports filedwith the Securities and Exchange Commission after this Annual Report.  Exam assumes no obligation to update anyforward looking statements to reflect events that occur or circumstances thatmay arise after the date as of which they are made.

 

# **ITEM 1.DESCRIPTION OF BUSINESS**

#  

##### **TheCompany; Corporate History**

#####  

We were originally incorporated in Nevada on May 21,1987, under the name Olympic Entertainment Group, Inc.  We were formed to finance, produce,co-produce and distribute motion pictures and television shows. We pursuedvarious opportunities through 1993, at which time our management decided tofocus upon the development of a cable television network for the distributionof nonviolent children’s television programming. From 1993 through 1995 we developedthis concept and in 1995, we launched the Children’s Cable Network. Although wehad some early success through 1997, we ceased operating in June 1998.  We were a non-operating company from thattime until June 2004.

 

On June 3, 2004, we entered into a StockExchange Agreement (the “Agreement”) with Exam USA, Inc., a Delawarecorporation (“Exam Delaware”), which provided for a tax-free share exchangeunder Section 368(a)(1)(B) of the Internal Revenue Code. Suchtransaction was accounted for as a reorganization.  Pursuant to the agreement, all of the 10,300shares of outstanding common stock of Exam Delaware were acquired in exchangefor 1,800,000 shares of Olympic Series E Convertible Preferred Stock.  The shares of Series E ConvertiblePreferred Stock were convertible into 18,000,000 shares of our common stock,representing approximately 95% of our outstanding voting power.  Effective August 9, 2003, we changed ourname to Exam USA, Inc.  We have awholly-owned subsidiary, Exam Co. Ltd, a corporation formed and existing underthe laws of Japan.  Our subsidiary is anoperating entity, which presently owns and runs six (6) pachinko.  We also operate two small restaurants one ofwhich includes karaoke entertainment..

 

At various places in this report, we may makereference to “Exam” or the “company” or “us” or “we.”  When we use thoseterms, unless the context otherwise requires, we mean Exam USA, Inc. andits operating subsidiary, Exam Co. Ltd.

 

We are traded on the NASD Over-the-Counter BulletinBoard under the ticker symbol EXMA.

 

We also own a 50% equity interest in Daichi Co.,Ltd., an entity whose sole business is to procure tobacco products for us.  The remaining 50% ownership is held by threeof our shareholders and directors as follows:

 
| Yoneji Hirabayashi     |   | 10% equity  ownership |
|------------------------|--------|-----------------------|
| Shininchi  Hirabayashi |   | 20% equity  ownership |
| Akinori  Hirabayashi   |   | 20% equity  ownership |

 

Our domestic headquarters are located in HuntingtonBeach, California.  Our mailing addressis 5912 Bolsa Avenue, Suite 108, Huntington Beach, California 92649.  Our telephone number is (714) 895-7772.  Our Annual Report on Form 10-KSB,quarterly reports on Form 10-QSB, current reports on Form 8-K, andall amendments to those reports filed with or furnished to the SEC areavailable, free of charge, through our website at www.exam-usa.com as soon asreasonably practicable after such reports are electronically filed with orfurnished to the Securities and Exchange Commission.

 

1

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**Our Pachinko Business**

 

Originallyfounded in 1956 by Mr. Yoneji Hirabayashi as a dining room to which waslater added a hotel, we were first incorporated as Kisorin Inc. in 1969 andrenamed “Exam” in 1999.  We opened ourfirst pachinko store called “Komaki Jambo Kaikan” in 1973.  Pachinko’s popularity has been on the risesince then and we have opened five additional stores to date.  Four stores are located in the Aichiprefecture in Mid-Japan and two stores are located in the Tochigi prefecturejust north of the Greater Kanto Area in Japan. Seeking to expand our business operations, we have also established onekaraoke store.  Our stores arestrategically located in areas that are convenient and accessible to localresidents.  Our stores are known by ourcustomers to be clean, attractive and comfortable.  Our growth has been driven by the successfuladdition of new stores and enhancements to the operational efficiency ofexisting locations.  We are led by aseasoned executive management team with decades of experience and accumulatedindustry knowledge.

 

Unlikesmall stores operated by smaller “mom-and-pop” operators, EXAM’s facilities areupper scale, featuring a selection of the latest pachinko and pachislo machinesat each center

 

**EXAM’s Existing Pachinko Store Statistics**

 
| • | Average gross wagers per sq. m: $3,342             |
|--------|----------------------------------------------------|
| • | Average gross wagers per machine: $77,976          |
| • | Average number of machines per store: 469 machines |
| • | Average annual revenue per machine: $8,831         |
| • | Average age of each store: 14.7 years              |
| • | Average number of employes per store: 33           |

 

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### **TheIndustry**

###  

### **Introductionto Pachinko**

###  

*Pachinko* is believed to have originated in Japan in the 1920s based on avertical pinball-like device called the Corinthian Game that was imported intoJapan from the U.S.  Pachinko is a gamein which players shoot steel metal balls about 3/8” in diameter into a verticalmachine that resembles a Western slot machine. The machine features pins that guide the direction of the balls into oneof several slots in the machine.  Certainslots release more balls while other slots capture the ball.  The machines also have an automatic ballfeeder that allows the player to quickly release balls into the machine.  The player uses a round knob at the bottom ofthe machine, thereby adding an element of skill to the game, to control thespeed and force of the balls as they are released into the machine.  Pachinko machines today also feature digitaldisplays in the background that resemble slot machines.  The digital display is activated when theballs touch certain areas within the machine and allow the player to win extraballs.  Upon completion of play, patronscan exchange balls for prizes, such as cigarettes, candy, and othermerchandise, or a ‘special prize’ which can be exchanged for money.

 

*Pachislo*machines, similar to Western slot machines, are also typically found inpachinko stores.  The key differencebetween a pachislo machine and a Western slot machine is that the playercontrols when each individual reel stops, thereby requiring a certain degree ofskill as well as chance.  Anotherdifference is that pachislo machines do not offer the big “jackpot” payoutspaid by Western slot machines.  Similarto the machine’s low token retention (“hold”) rate, payouts are also keptmodest, to conform to Japan’s strict regulations regarding speculativeentertainment activities.

 

# **TheGaming Experience**

#  

Acustomer entering a modern Japanese electronic gaming store who wishes to playPachinko or Pachislo would either approach a machine and insert cash directlyinto a computer monitored bill reader or purchase a prepaid magnetic card fromone of several vending machines located around the gaming floor which is theninserted into the machine’s reader.  Ineither instance the machine dispenses a specified number of balls into themachine’s loading tray or payout tray at a posted price per ball. The playerthen plays the game and, if successful, collects his or her winnings in plasticbins provided by the store by manually releasing a trap at the base of themachine’s collection tray. When he or she is finished gaming, the customertransfers the filled bins to ball or token counting machines whichautomatically supply the customer with a magnetic or paper receipt for the numberof balls or tokens collected. The customer then presents the receipt at theredemption counter which offers the customer a choice of credit towards retailgoods sold by the store or a ‘special prize’ that can be sold for money at aspecial prize exchange station located within close proximity to the pachinkostore (see “*The Tri-Party Transaction*”below).

 

**Ball/Token Redemption**

 

Theredemption price of balls or tokens is at a lower price per ball/token than thebuy-in price.  On average, the buy-inprice for pachinko balls is 4 yen per ball while the redemption rate rangesfrom 2.75 to 3.75 yen per ball among some of our main competitors.  Our redemption rate is about 3.33 yen perball for our established stores. Our competitors’ rates allow their stores toprofit while giving their players a typical payout ratio of between 120% and130%, which gives the player the feeling that he or she has had a winningsession.  As a result, the store’s netrevenues on total gross wagers are determined by a combination of the *hold percentages* set on the machines andthe ball/token *redemption ratio*.  As in Western style casinos, a “looser”machine (one with a lower hold percentage) will increase the amount of timethat a player will play without losing all of his or her investment, and resultin a lower player velocity for the casino. In order to remain profitable under such a scenario, the store mustmodify its ball/token redemption ratio to offset the low hold percentage on themachines.  Smaller stores typicallyemploy this business model.  In contrast,better established, dominant properties with significant customer traffic offerthe player higher redemption rates on “tighter” machines (higher holdpercentages).  Under this configuration,player velocity is increased as players either lose more quickly or increasetheir level of wagers in order to fill the same amount of playing time.  Adjusting this all-important mix correctly isof critical importance in maximizing profitability and is the hallmark of anexperienced operator.  The advancementsin IT infrastructure for pachinko operations allow pachinko operators tomonitor the profitability of each machine in accurate detail and in real-time.

 

3

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Whileballs and tokens can be redeemed for various prizes such as candy, cigarettes,consumer electronics and certain luxury items, the vast majority of theredemptions are for a ‘special prize’. The concept of the ‘special prize’ has existed for decades in thePachinko business, although in later years it has become significantly morerefined.  Under Japanese law it is notpermissible to exchange pachinko balls or slot machine tokens for currency,gold, or securities.  As a result, theJapanese pachinko industry has established the *tri-partytransaction* system whereby customers can exchange balls/tokens forcertain objects of nominal value which acts as a mode of exchange between thestore, the customer, and a completely unrelated business entity that willaccept the object from the customer in exchange for cash.

 

### **TheTri-Party Transaction**

###  

Thethree parties involved in the tri-party transaction are (i) thecasino/store, (ii) the prize buyer (“Kaitori-Gyosha”), and (iii) theprize wholesaler (“Nonyu-Gyosha”).  Eachof the parties must be completely unrelated to the others, both legally andeconomically, in order to avoid a violation of the law.

 

**Diagram of the Tri-Party Transaction**

 

 

Eachpachinko store maintains an arms-length ad hoc relationship with a prizewholesaler, pursuant to which the prize wholesaler agrees to cause the ‘specialprizes’ to be manufactured and sold to the store and the store agrees topurchase ‘special prizes’ from the prize wholesaler each day in order tomaintain sufficient inventory.  The prizewholesaler and buyer have a similar ad hoc relationship to which the store isnot a party.  The third component of thetri-party transaction is the relationship between the store customer and theprize buyer.  The buyer maintains afreestanding or leased facility nearby the store consisting of a manned window.A customer possessing ‘special prizes’ will exit the store and exchange themfor a like amount of cash at the prize buyer’s window.

 

Allreceipts from the store are removed daily from the prepaid card vendingmachines and pachinko/pachislo machines and deposited, either directly on anormal business day or by lock-box if banks are closed, at the store’sbank.  At the opening of each businessday, the store wires from its account to the account of the prize wholesaler,an amount roughly aggregating the value of the ‘special prizes’ that thewholesaler has acquired from the prize buyer representing trade during theprevious day plus a commission.  Thewholesaler uses the proceeds to purchase the ‘special prizes’ from the buyer,also with a commission agreement.  Thusthe special prizes make the triangular, and legally permissible trip from thestore, to the prize buyer, to the wholesaler, who then sells an inventory ofspecial prizes back to the store.

 

Thetri-party transaction is explicitly designed and regulated to be in compliancewith Japan’s *Letter of the Law ConcerningRegulation and Rationalization of Businesses Affecting Public Morals*.  Insofar as the store operator has nocontractual relationship with the prize buyer, and is economically and legallyindifferent to the buyer’s business activities, the store operator iseffectively removed from two of the three prize exchange transactions and thestore

 

4

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operatoris involved only in the purchase of special prize inventory from the prizewholesaler.  Thus, given the form of theprize exchange system and assuming the independence of the three parties, asboth a legal and economic matter, the tri-party transaction has been designedby the industry and the regulators specifically to preclude a violation of thelaw.

 

### **TheJapanese Pachinko Industry**

 

Pachinko,along with public lotteries and horse, motorboat, and cycle racing, is one ofthe key segments of the Japanese gaming industry.  Pachinko and its variants, includingpachislo, account for more than two-thirds of total wager volume in Japan.  Generating an estimated $277 billion in grosswagers per annum and employing over 319,000 employees, the Japanese pachinko industryis larger than even the country’s automobile industry, and is, by far, thelargest service industry sector in Japan. Pachinko is the most popular source of leisure and entertainment,(including dining), in Japan and a regular component of the Japaneselifestyle.  In a country with apopulation of 127 million, an estimated 40 to 50 million Japanese play pachinkowhile an estimated 25 million people play on a regular basis.  While pachinko was traditionally playedprimarily by males of legal gambling age (18 and over), pachinko has grown toappeal to Japanese women as well.  Tocater to the significant number of female players, many stores now featurerefrigerators in which housewives can temporarily place their purchasedgroceries while they play and feature prizes, like brand-name purses, thatappeal to women.

 

Somekey statistics pertaining to the Japanese pachinko industry are listed below:

 

•                                          A total of approximately 6,100 operatorsoperate approximately 16,100 stores housing an estimated 4.9 million pachinkoand pachislo machines.  The industrygenerates annual gross wagers of approximately $277 billion, or an average of$17.2 million per store. (Source: *Tokyo-basedYano Research Institute, Ltd.*)

 

•                                          The industry employs an estimated 319,000people compared to 350,000 employed by the entire U.S. casino industry.  (Source: *Tokyo-basedYano Research Institute, Ltd.*)

 

•                                          Approximately 26% of adults (approximately 25million people) in Japan are regular customers of the Japanese electronicgaming industry. (Source: *The Leisure andDevelopment Center*)

 

•                                          The Japanese pachinko industry representsover one-third of all spending on entertainment making it one of the largest ininternational gaming markets and one of the largest sectors of the Japaneseeconomy.  (Source: *Japanese Ministry of Economy, Trade and Industry*)

 

•                                          Pachinko is enjoyed by a growing number ofwomen, who currently represent over 20% of all players. On average, womenfrequent pachinko stores three times a week and spend 29,000 yen per visit,about 2,000 yen more than men. (Source:  *Tokyo-based Yano Research Institute Ltd.*)

 

5

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Asillustrated in the figure below, the pachinko industry dwarfs other servicesectors within Japan.  Due to the importanceof pachinko to Japan’s economy both as a source of employment for over 319,000people and a significant contributor to the country’s annual tax revenues, thegovernment of Japan has made a conscious effort to establish and enforce lawsto protect consumers, rid criminal elements and raise the public image of thepachinko industry.

 

**Comparative Snapshot of Japan’s Service Industries**

[*Note: Figures in Billion Yen*]

*Source: Ministry of Public Management, HomeAffairs, Posts and Telecommunications (1999 data)*

 

Despiteits relatively lower international profile, compared to the gaming industry inthe United States, the Japanese pachinko industry is comparable in size to theentire U.S. casino industry, whose publicly listed companies alone representwell over $25 billion in public equity value.

 

**Comparison of the Japanese Pachinko and U.S. CasinoIndustries**

 
| **Item**              | ** ** | **Japanese  Pachinko Industry**              | ** ** | **U.S. Casino  Industry** | ** ** |
|-----------------------|------------|----------------------------------------------|------------|---------------------------|------------|
| **Gaming Revenues***  |       | $34.2 Billion                                |       | $28.1 Billion             |       |
| **Number of Players** |       | 40 to 50 million  (25 million regulars) |       | 53 million                |       |
| **Employees**         |       | 319,000                                      |       | 350,000                   |       |

 

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*Wagers less payouts

 

Anothercharacteristic of the Japanese pachinko industry that makes its attractive toboth operators and investors is its relative imperviousness to economictrends.  In fact, pachinko stores haveactually been known to perform better during economic recessions as individualsseek ways to supplement their incomes.

 

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Further****evidence of the magnitude of the Japanesepachinko industry are the leading Japanese pachinko/pachislo machinemanufacturers, including Sankyo Co., Sammy Corporation, Heiwa Corporation,Sigma Gaming, and Konami Co., who have grown to become some of the largestpublicly listed companies in Japan.

 

# **PachinkoOperator Landscape**

#  

TheJapanese pachinko industry is highly fragmented, with an estimated 6,100  operators and 16,100 stores housing anaggregate 4.9 million pachinko and pachislo machines throughout the country.  The largest operator is Dynam Co., Ltd., whichhas approximately 240 stores throughout Japan, with the next largest operatorbeing Maruhan Co., Ltd., which has 165 stores. Smaller stores average 100 to 200 machines while larger stores, such asthose belonging to the Company, have 500 or more machines.  The pachinko industry has been revolutionizedover the last several years with enhancements to pachinko and pachislo machinesand information technology that allow operators to capture comprehensive,real-time data on the performance and usage of each individual machine.  Pachinko machines have largely been convertedto a digital format that features a digital slot machine-like screen in thebackground that enhances the playing experience and winnings potential for thecustomer.  These enhancements to machinesand IT infrastructure have increased the capital expenditures required toestablish and maintain a modern pachinko facility.  As a result, the yet highly fragmentedpachinko industry is experiencing a consolidation trend as smaller stores, wholack the financial resources to make such enhancements, are being put out ofbusiness by larger competitors, such as Exam with greater financial, staff andother necessary resources and operational experience.

 

**Regulatory Matters**

 

Thecriminal law of Japan essentially prohibits gambling organized by privateentities.  However, pachinko isconsidered part of the leisure industry, which is exempt from the prohibitionagainst gambling.  Pachinko is regulatedby the Japanese National Police Agency (“NPA”), through the prefectural policedepartments, which has taken the stance that pachinko is not gambling butsimply a “reasonably speculative form of pastime.”  Pachinko regulations fall under the *Act Regulating Adult Entertainment Business*and the ministerial ordinances and regulations thereunder.  Customers must be at least 18 years ofage.  Pachinko stores are open seven (7) daysa week; however, they are not permitted to operate between the hours of 11 p.m.and 9 a.m.  Also, customers areforbidden from taking pachinko balls from the stores and therefore ‘rent’ theballs with which they play.

 

Mostimportant of the regulations is the law forbidding pachinko stores from givingcash or securities as a prize or repurchasing prizes for cash orsecurities.  In addition, there exist anumber of other regulations such as requirements regarding qualifications toobtain pachinko store operating licenses, machine designs and payout ratios andregulations pertaining to the pachinko store facilities themselves.  Although law in Japan prohibits casinogambling, a statutory system of laws has been established that allows pachinkooperators to provide gaming services to its customers.  (See “*TheTri-party Transaction*” above)

 

Inprevious years, questionable business practices, tax evasion, and crimeassociated with the electronic gaming industry gave the industry a negativepublic image.  However, over the lastfifteen years, the growing magnitude and importance of pachinko to the Japaneseeconomy spurred the government and industry associations to step in toestablish strict regulations, remove criminal elements and improve the publicimage of the pachinko industry.  Theregulation effort has been highly successful and has been of one the principalcatalysts for the growth of large operators in the industry as well as theinvolvement of major companies from such traditional industries as trading,supermarkets and railroads.  In addition,foreign corporations and investors have taken interest in Japanese pachinkooperations due to the profitability and financial stability of theiroperations.  For instance, in 2001, BSGroup, a UK corporation, purchased a stake in leading pachinko operator, TokyoPlaza, who runs about 20 stores in Japan, and established its own pachinkostores in the United Kingdom.  Due to thesuccess of these reform efforts during the last two decades, the Japanesepachinko industry has evolved to become an integral part of the entertainmentsector of the Japanese economy and an important contributor to the Japaneseeconomy.

 

7

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Policeinvolvement is especially important in the tri-party transaction system of theJapanese pachinko industry.  To betterregulate pachinko operators and provide greater protection from criminalinfluences, many police union retirees have been hired to work in the prizebuying and wholesaling operations.  Dueto the importance of regulating this critical aspect of the Japanese electronicgaming industry as well as the significance of the commission income from theseoperations to economic well-being of such police retirees, the NPA issued areport in October 1994 officially endorsing the existing prize exchangemechanism and required that a portion of the proceeds from such systems bededicated to social welfare programs.

 

**Regulatory Bodies Overseeing the Japanese PachinkoIndustry**

 
| **Regulatory  Body**                                                                       | ** **                                                                                                                                                                                                                                                               | **Regulatory Function performed**                                                                                                                                                       |
|--------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                 | ** **                                                                                                                                                                                                                                                               | ** **                                                                                                                                                                              |
| **National Public Safety Commission**(NPSC)** &****Prefectural  Governments**     |                                                                                                                                                                                                                                                                     | Granting licenses and permits required to operate pachinko stores

                                                                                                                |
|                                                                                       | The NPSC regulations contain technical standards for pachinko games.  These standards describe attributes of a pachinko game that are deemed to  stir up the gambling spirit. Thus, they define the outer limits for how  pachinko machines may legally operate.

  |
|                                                                                       | Supervises the National Police Agency (NPA) which implements the  policies set by the NPSC and oversees the prefectural police agencies                                                                                                                                  |
|                                                                                       |                                                                                                                                                                                                                                                                     |                                                                                                                                                                                    |
| **Prefectural Public Safety Commission** (PSC)                                             |                                                                                                                                                                                                                                                                     | Hearing disciplinary actions against licensees and taking action  against the licenses through by revoking the license or suspending the  pachinko license for up to six months

  |
|                                                                                       | Investigating the suitability of applicants for pachinko licenses or  other permits that may be required for a person or business entity to be  associated with the pachinko industry

                                                                             |
|                                                                                       | Local (prefectural) police are included in the PSC and are  responsible for enforcing the laws related to pachinko operations                                                                                                                                            |
|                                                                                       |                                                                                                                                                                                                                                                                     |                                                                                                                                                                                    |
| **Prefectural Police & Metropolitan Police  Department** (MPD)                    |                                                                                                                                                                                                                                                                     | Enforcement of the pachinko operating laws and regulations through  observation and investigation                                                                                       |
| ** **                                                                                 |                                                                                                                                                                                                                                                                     |                                                                                                                                                                                    |
| **NPSC & Security Electronics and  Communications Technology Association**(SECTA) |                                                                                                                                                                                                                                                                     | Examination and approval of electronic gaming devices                                                                                                                                   |
| ** **                                                                                 |                                                                                                                                                                                                                                                                     |                                                                                                                                                                                    |
| **Ministry of Justice**  **Law Department in MPD**                                    |                                                                                                                                                                                                                                                                     | Legal advice and services.                                                                                                                                                              |

 

**Our Employees and Consultants**

 

As of May 31, 2005, wehad 57 full-time employees and 144 part-time employees. Ouremployees are not represented by a collective bargaining organization. Webelieve our relationship with our employees is good.

 

**Risk Factors**

 

***Our industry is subject to intensecompetition from a number of other store operators***

 

There are a total of approximately 16,100 pachinkostores in Japan, which are run by approximately 6,100 operators.  We have several established competitors ineach of our current and target geographic markets.  Some of these competitors have comparable orgreater financial and other resources than we do and, therefore, they may beable better attract customers by updating their stores and pachinko machines,and through increased marketing efforts.

 

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***Changes in the governmentregulations pertaining to the gaming and pachinko industries could adverselyaffect our business***

 

The Japanese pachinko industry is regulated by asystem of laws created and enforced by various national and prefecturalgovernment entities.  Although casinogambling is legally forbidden in Japan, pachinko has been designated as anon-gambling form of adult entertainment. The tri-party exchange system, established as an indirect mechanism forproviding cash prizes without transgressing anti-gambling regulations, ispermitted but highly regulated.  However,changing government regulations regarding the definition of pachinko as a ‘non-gambling’activity and/or restrictions regarding the indirect awarding of cash or similarprizes may have a significant impact on pachinko operators in continuing normalbusiness operations.

 

***We may not be able to obtain the capitalrequired for us to maintain our existing facilities and achieve our expansiongoals.***

 

Our expansion plans to open additional stores willrequire substantial capital commitments and outlays to acquire land rights,construct new buildings, purchase machines and related equipment, hireoperational personnel and procure other resources associated with establishingnew pachinko stores.  We have receivedmost of our financing to date from paid in capital from founders and existingshareholders, bank loans and cash flow from the operation of our existingbusiness.  As we expand, our capitalrequirements will increase.  If for anyreason we are unable to meet ours capital requirements, we will be unable toattain our expansion plans, which could adversely affect or ability to competeand our financial results.

 

***We need to enhance our internalcontrols in order in ensure the accuracy of our financial reporting.***

 

Our auditors have advised us of certain significantinternal control deficiencies that they consider to be, in the aggregate, amaterial weakness, including, inadequate staffing and supervision leading tothe untimely identification and resolution of certain accounting matters;failure to perform timely reviews, substantiation and evaluation of certain generalledger account balances; lack of procedures or expertise needed to prepare allrequired disclosures; and evidence that employees lack the qualifications andtraining to fulfill their assigned functions. Our auditors indicated that they considered these deficiencies to be amaterial weakness as that term is defined under standards established by theAmerican Institute of Certified Public Accountants. We considered these mattersin connection with the year-end closing of accounts and preparation of financialstatements as and for the year ended May 31, 2005 and determined that suchmatters did not materially affect any prior period financial statements.

 

In response to the observations made by our auditorswe will proceed more expeditiously with our existing plan to enhance ourinternal controls and procedures, which we believe addresses each of thematters raised by our auditors.

 

We enhanced our internal control procedures in January 2004by adding a part-time dedicated Chief Accounting Officer (“CAO”) to ourprincipal executive offices in Huntington Beach, California.  We are evaluating the need to supplement ourCAO with additional assistance.  Our CAOis responsible for preparing a disclosure control and reporting package.  We need to establish a written policies andprocedures manual over internal controls of accounting and financialreporting.  We also need to incorporatepreparation of an annual budget and report budget-to-actual analyses on anannual and quarterly basis.

 

9

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***An active trading market may notdevelop for our common stock, which make it difficult for shareholders to selltheir shares of our stock.***

 

Our shares of common stock are publicly quoted onNASD over-the-counter bulletin board system. Securities listed on the OTC bulletin board generally have less tradingvolume and institutional market support and therefore may be susceptible togreater fluctuations in price and have a lower degree of liquidity than shareslisted on a larger exchange, such as the NASDAQ or NYSE.  Ownership of our common stock is highlyconcentrated and the daily trading volume does not yet provide significantliquidity.  Trading may be difficult dueto the limited public float, narrow base of shareholders and the lack of aninstitutional market maker to provide liquidity and pricing support for theCompany’s stock.

 

***Our common stock is subject to pennystock regulation, which may affect its liquidity.***

 

Our common stock is subject to regulations of theSecurities and Exchange Commission (the “Commission”) relating to the marketfor penny stocks. Penny stock, as defined by the Penny Stock Reform Act, is anyequity security not traded on a national securities exchange or quoted on theNASDAQ National or Small Cap Market that has a market price of less than $5.00per share. The penny stock regulations generally require that a disclosure schedule explainingthe penny stock market and the risks associated therewith be delivered topurchasers of penny stocks and impose various sales practice requirements onbroker-dealers who sell penny stocks to persons other than establishedcustomers and accredited investors. The broker-dealer must make a suitabilitydetermination for each purchaser and receive the purchaser’s written agreementprior to the sale. In addition, the broker-dealer must make certain mandateddisclosures, including the actual sale or purchase price and actual bid offerquotations, as well as the compensation to be received by the broker-dealer andcertain associated persons. The regulations applicable to penny stocks mayseverely affect the market liquidity for our common stock and could limit yourability to sell your securities in the secondary market.

 

***Our common stock may experienceextreme price and volume fluctuations***

 

Due to the limited trading volume and public float,the concentration of share ownership, and the lack of market makers in theCompany’s stock, attempts to buy or sell a substantial number of shares couldresult in significant market price fluctuations.

 

***Our management controls asubstantial percentage of our outstanding voting securities.***

 

Our management, together with family members,control approximately 90% of the outstanding voting control of our company.Consequently, it would be almost impossible for a third party to obtain controlof our company, or influence our day-to-day operations.

 

# **ITEM 2.DESCRIPTION OF PROPERTY**

#  

We sublease approximately 500 square feet inHuntington Beach, California, for our domestic executive offices.  The lease requires monthly rental payments of$2,000, and has a term that expires on June 30, 2007. Subject to thesublessor’s ability to keep the underlying lease in effect, we have an optionfor an additional year at a price to be mutually agreed upon.  Our lessor under this lease is a corporationthat is controlled by Mr. Miyano, a director of our company.

 

Our operating subsidiary in Japan leases its headoffice from two individuals under separate leases, one of whom is Mr. YonejiHirabayashi.  The aggregate monthly rentthrough May 31, 2005 for the head office was $16,824, of which $1,402 permonth is paid to Mr. Hirabayashi. The lease with Mr. Hirabayashi has a remaining term through May 31,2005, while the other lease is month to month.

 

10

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With respect to our sixpachinko stores, we own the buildings; and land upon which they are built is acombination of owned and leased. The following is a summary of our pachinkostore locations:

 
| ** **                                      | ** ** | **J’s Club**                                          | ** ** | **Inuyama**                                      | ** ** | **K’s Club**                            | ** ** | **Kaminokawa**                                               | ** ** | **Jimokuji**                                                            | ** ** | **Oyama**                              | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------------------------------|------------|
| **Opening date**                                |       | 1973                                                       |       | 1974                                             |       | 1996                                         |       | 2001                                                         |       | 2003                                                                    |       | 2005                                   |       |
|                                            |       |                                                       |       |                                             |       |                                         |       |                                                         |       |                                                                    |       |                                   |       |
| **Address**                                     |       | 426-1 Jisaimae,  Komakibarashinden  Komaki-shi,  Aichi-Ken |       | 1300-1  Maekawada,  Uenoada, Inuyama,  Aichi-ken |       | 8 Kogita, Oguchi-  cho, Niwa-gun,  Aichi-ken |       | 2542-4 Kitahara,  Kaminokawa-cho,  Kawachi-gun,  Tochigi-ken |       | Aichi-ken36-2  Chanokida Jinmokaza  Jimokujicho Ooaza  Amagun Aichi-ken |       | 297-1 Senoazuka  Oyamashi  Tochigi-Ken |       |
|                                            |       |                                                       |       |                                             |       |                                         |       |                                                         |       |                                                                    |       |                                   |       |
| **Land status**                                 |       | Leased                                                     |       | Leased and owned                                 |       | Leased and owned                             |       | Leased                                                       |       | Leased                                                                  |       | Leased                                 |       |
|                                            |       |                                                       |       |                                             |       |                                         |       |                                                         |       |                                                                    |       |                                   |       |
| **Building status**                             |       | Owned                                                      |       | Owned                                            |       | Owned                                        |       | Owned                                                        |       | Owned                                                                   |       | Owned                                  |       |
|                                            |       |                                                       |       |                                             |       |                                         |       |                                                         |       |                                                                    |       |                                   |       |
| **Parking lot status**                          |       | Leased                                                     |       | Leased                                           |       | Leased                                       |       | Leased                                                       |       | Leased                                                                  |       | Leased                                 |       |
|                                            |       |                                                       |       |                                             |       |                                         |       |                                                         |       |                                                                    |       |                                   |       |
| **Size**** **(sq. m)                       |       | 2,501                                                      |       | 7,700                                            |       | 10,712                                       |       | 18,481                                                       |       | 18,182                                                                  |       | 6,211                                  |       |
|                                            |       |                                                       |       |                                             |       |                                         |       |                                                         |       |                                                                    |       |                                   |       |
| **Parking Spaces**                              |       | 230                                                        |       | 250                                              |       | 400                                          |       | 620                                                          |       | 640                                                                     |       | 430                                    |       |
|                                            |       |                                                       |       |                                             |       |                                         |       |                                                         |       |                                                                    |       |                                   |       |
| **No. Machines******(pachinko /  pachislo) |       | 224/84                                                     |       | 278/100                                          |       | 252/106                                      |       | 336/252                                                      |       | 400/240                                                                 |       | 280/200                                |       |

 

We lease the land and parking lots for each storeidentified above pursuant to numerous leases, most of which are not in writingand do not have a specified term.  Theaggregate of the monthly payments under all leases for each store is asfollows: J’s Club is $16,000; Shop Inuyama is $15,503; K’s Club is $5,139;Kamikawa is $30,317: Jimokuji is $61,782; and Oyama is $21,212.  The leases for Oyama, which commenced in December 2004,are for a period of twenty (20) years.

 

The land that we own, together with all of ourbuildings, serve as collateral for two loans from Gifu Shinyo Kinko Bank andNagoya Bank.  As of May 31, 2005,the outstanding principal balance of each loan was approximately $21,830,000and 3,206,000, respectively.  The loanfrom Gifu Shinyo Kinko is comprised of several advances bearing interest at therate of 2.75% per annum, and with maturity dates from January 29, 2009 to October 31,2015.  The loan from Nagoya Bank iscomprised of several advances all bearing interest at the rate of 2.275% perannum, and with maturity dates ranging from September 15, 2005 to June 30,2009.

 

# **ITEM 3. LEGAL PROCEEDINGS.**

#  

We are not currently a party to any legalproceedings.

 

# **ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

#  

None.

 

11

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**PART II**

 

# **ITEM5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND OTHERSTOCKHOLDER MATTERS.**

#  

# **MarketPrice**

#  

Our common stock is traded on the NASD ElectronicBulletin Board over-the-counter market, and is quoted under the symbolEXMA.  The table below gives the range ofhigh and low bid prices of our common stock for the fiscal years ended May 31,2005 and May 31, 2004 based on information provided by the OTC BulletinBoard. Such over-the-counter market quotations reflect inter-dealer prices,without mark-up, mark-down or commissions and may not necessarily representactual transactions or a liquid trading market. The following prices have beenadjusted to reflect our 15 to 1 reverse stock split which was effective June 11,2004.

 

May 31,2005:

 
| ** **   | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------|------------|----------|------------|---------|------------|
| 1st  Quarter |       | $        | 3.50       |    | $          | 0.07 |   |
| 2nd  Quarter |       | $        | 2.50       |    | $          | 0.51 |   |
| 3rd  Quarter |       | $        | 0.95       |    | $          | 0.25 |   |
| 4th  Quarter |       | $        | 0.39       |    | $          | 0.19 |   |

 

May 31,2004:

 
| ** **   | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------|------------|----------|------------|---------|------------|
| 1st  Quarter |       | $        | 0.45       |    | $          | 0.07 |   |
| 2nd  Quarter |       | $        | 1.20       |    | $          | 0.25 |   |
| 3rd  Quarter |       | $        | 10.65      |    | $          | 0.53 |   |
| 4th  Quarter |       | $        | 7.50       |    | $          | 1.65 |   |

 

When the trading price of our common stock is below$5.00 per share, our common stock is considered to be “penny stocks” that aresubject to rules promulgated by the Securities and Exchange Commission (Rule 15-1through 15g-9) under the Securities Exchange Act of 1934. These rules imposesignificant requirements on brokers under these circumstances, including: (a) deliveringto customers the Commission’s standardized risk disclosure document; (b) providingcustomers with current bid and ask prices; (c) disclosing to customers thebrokers-dealer’s and sales representatives compensation; and (d) providingto customers monthly account statements.

 

The number of shareholders of record of our commonstock as of September 12, 2005 was 144.

 

**Preferred Stock**

 

Our board of directors has the authority, withoutfurther action by the stockholders, to issue up to 5,000,000 shares ofpreferred stock in one or more series and to fix the rights, preferences,privileges and restrictions of these shares of preferred stock without anyfurther vote or action by stockholders. These rights and preferences includedividend rights, conversion rights, voting rights, terms of redemption,liquidation preferences, sinking fund terms and the number of sharesconstituting any series or the designation of the series. The issuance ofpreferred stock could adversely affect the voting power of holders of commonstock and the likelihood that the holders will receive dividend payments andpayments upon liquidation and could have the effect of delaying, deferring orpreventing a change in control.

 

**Common Stock**

 

Our Articles of Incorporation authorize 100,000,000shares of common stock, $0.01 par value per share. As of September 12,2005, we had 20,000,148 shares of common stock issued and outstanding that wereheld by approximately 144 stockholders of record.

 

12

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**Options**

 

We have no outstanding options to purchase shares ofour common stock

 

**Registrar and Transfer Agent**

 

Our registrar and transfer agent is InterwestTransfer Co., Inc., 1981 Murray Road, Suite 100, Halliday, Utah 84117-5148;telephone (801) 272-9294

 

**Dividend Policy**

 

We have not adopted any policy regarding the paymentof dividends on our common stock.  We donot intend to pay any cash dividends on our common stock in the foreseeablefuture. We intend to invest all of our cash resources in developing ourbusiness.

 

**Recent Sales of Unregistered Securities**

 

None.

 

# **ITEM 6.MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

#  

**Overview**

 

Through our subsidiaries, weown and operate six pachinko stores, which is our primary operatingbusiness.  We opened our sixth store in December 2004,which is a medium size store with 480 machines. We operate a total of 2,752 Pachinko and Pachislo machines.  We plan to leverage our expertise andcapitalize on new development opportunities, and we are expanding ouroperations in Japan.  We expect to spendapproximately $12,168,000 to construct and furnish a new store (excluding thecost of the land which we lease), which is expected to open in December 2005.

 

**Results of Operations**

 

**Year Ended May 31, 2005 Compared to Year Ended May 31,2004**

 

***OperatingRevenues and Costs***

 

A summary of the gamingrevenues for the years ended May 31, 2005 and 2004 are as follows:

 
| ** **               | ** ** | **2005**     | ** **  | **2004**       | ** ** |
|--------------------------|------------|--------------|-------------|----------------|------------|
| ** **               | ** ** | **Amount**   | ** **  | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| Patron  wagers (pay-ins) |       | $            | 219,425,163 |           | 100.0      | % | $ | 166,022,684 |   | 100.0 | % |
| Patron  payouts          |       | (194,575,733 | )           | (88.7          | )          | (148,603,069 | ) | (89.5 | ) |
| Gaming revenues          |       | $            | 24,849,430  |           | 11.3       | % | $ | 17,419,615 |   | 10.5 | % |

 

Consistent with the gamingindustry, we report our revenues as the net of wagers less payouts.  Our gaming revenues increased by $7,429,815from 2004 to $24,849,430 in 2005, an increase of 42.7%.  Approximately $802,148 was related to theopening of the new store in December 2004. After excluding such new store effects, our same-store revenues (storesthat have been opened for at least one year) increased by $6,627,667 or 38.1%,which is largely attributable to increases at our store which we opened in December 2003

 

13

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and operates 620 machines.  Other revenues, consisting of food, limitedbeverages and sundry items, increased by $314,357 to $757,718 or 70.9% due tonew contracts and general increase in the number of customers.

 

Our gross wagers increased$53,402,479 or 32.2% from fiscal 2004 to $219,425,163 in fiscal 2005.  Our new store which opened in December 2004contributed to $16,519,740 of such increase in wagers.  Our payouts increased by $45,972,664 or 30.9% from fiscal 2004 to $194,575,733 in fiscal 2005.  Our payouts as a percentage of wagersdecreased from 89.5% to 88.7%.   For thenew store opened in December 2004, we paid out 95.1% of wagers to attractnew customers through May 31, 2005; the other stores had an aggregatepayout rate of 88.2%. We generally increase our payouts for six (6) monthsafter opening a new store, at which time we decrease payouts to customers tonormal rates.

 

***Cost of Revenues***

 

Costs of revenues as apercentage of total revenues for the years ended May 31, 2005 and 2004 areas follows:

 
| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Salaries and  wages                   |       | 15.8     | %          | 16.6     | %          |
| Depreciation                          |       | 27.4     | %          | 28.7     | %          |
| Facilities  and other                 |       | 26.8     | %          | 26.6     | %          |
| Impairment  of property and equipment |       | 16.7     | %          | 8.6      | %          |
| Total cost of revenues                |       | 86.7     | %          | 80.5     | %          |

 

Cost of revenues for 2005increased by $7,818,516 or 54.4% from $14,374,254 to $22,192,770 compared tothe year ended May 31, 2004.   As apercentage of revenues, our costs in 2005 increased to 86.7% from 80.5% in2004.  Overall cost to revenue increaseddue to full year operation of the store that opened in December 2004 andone store subject to impairment.  Thelargest contributor to the increase is impairment expense due to one storewhich operated at a loss and is projected to operate poorly.  Depreciation expense is accelerated in theyear of acquisition for machines acquired. Facility costs include certain start-up costs consisting of supplies,pachinko balls and signage associated with the new store opening in December 2005,which exceeded $360,000.

 

We evaluateour long-term assets to be held and used for impairment when events or changesin economic circumstances indicate the carrying amount of such assets may notbe recoverable.  In 2005 one of ourstores in Aichi operated at a net loss. This net loss was due to a significant decrease in the store’s revenuescaused by the opening of two pachinko stores by competitors during fiscal 2005(one of which has over 1,000 machines). Although management implemented some marketing strategies to increaserevenue, management believes that the future undiscounted net cash flow of therelated assets in this store over the remaining life is not expected togenerate sufficient cash flow to recover the carrying value of suchassets.  We recorded an estimatedimpairment expense for this store in the amount of $2,192,593.

 

The total impairment expenserecorded at the 2005 year-end was approximately $4,273,178.

 

***Marketing andAdvertising Expense***

 

Marketing and advertisingexpenses increased by $950,725 from $1,036,880 in 2004 to $1,987,605 in 2005.The increase is attributable to the new store which opened in December 2004,whereby we spent $442,760 for marketing and advertising expenses and the twolarge stores, whereby they together spent $480,710 more in 2005 than 2004.  As a percentage of revenues, we spent 7.8%and 5.8%, in fiscal 2005 and 2004, respectively.

 

We spent more for advertising on the new store sinceour competitor opened a store next to ours.

 

14

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***General andAdministrative Expenses***

 

General and administrativeexpenses for the year ended May 31, 2005 increased by $1,175,716, or 54.0%from $2,177,038 in 2004 to $3,352,754 in 2005. General and administrativeexpenses for 2005 constituted 13.1% of revenues in comparison to 12.2% for2004. The increase in general and administrative costs can be attributedprimarily to: (1) increase in salary and benefits cost to support anexpanding infrastructure in Japan and to a limited extent, the United States,and (2) increases in professional fees and director fees in connectionwith meeting various reporting requirements as a public company.

 

***Other Income andExpenses***

 

Interest expense increased by $325,790 to $1,031,605in 2005, from $705,815 in 2004, an increase of 46.2%.  This increase is due to borrowings under theCompany’s credit facility and capital lease financing arrangements and anincrease in the interest rates on our borrowings.

 

***Income Taxes***

 

Income taxes expense decreased by $772,223 to$(312,561) for the year ended May 31, 2005, from $459,662 in the prioryear. We have incurred expenses in the United States of America totalingapproximately $602,916 in 2004 and $912,864 in 2005.  We have no income in the United States, thussuch expenses will result in net operating losses to be carried forward, forwhich a valuation allowance is deemed required for the related deferred taxassets.  The federal income tax rate inJapan is 30% and the state and local tax, net of federal benefit, is 10.4%.After considering the impact the decrease in the valuation allowance for netoperating losses, impairment expense and stock-based compensation in the UnitedStates, the effective tax rate is excessively low in 2005.

 

***Net loss***

 

We incurred a net loss for fiscal 2005 of $2,761,030versus net loss of $473,042 in fiscal 2004. This can be attributed to (1) higher payouts, depreciation andstart-up costs of our new store which we opened in December 2004; (2) dispositionof machines at stores in Japan;(3) expenses incurred in the United Stateswhich are apparently not deductible as an expense in Japan and (4) onetime non-cash charge of stock-based compensation in connection with the reversemerger and certain directors, and impairment expenses.  We plan to decrease payouts at our new storewhich opened in December 2004 during fiscal 2006, to reduce ourlosses.  We are evaluating our incometaxes in Japan and United States to reduce our effective income rate. New storeopenings will continue to have a drag on earnings for the foreseeable future.

 

**Liquidity and Sources of Capital**

 

***Cash Flows***

 

During the years ended May 31, 2005 and 2004,we generated $10,378,208 and $5,888,364, respectively, of cash flows fromoperating activities.  Our cash providedby operating activities in fiscal 2005 and 2004, included non-cash depreciationand impairment losses of $11,366,611 and $6,672,132, respectively.  Our increase in cash generated in 2005relates primarily to revenue increases in our two largest stores.

 

During the years ended May 31, 2005 and 2004,we used cash of $14,612,408 and $9,922,046, respectively on investingactivities.  We spent approximately $13,385,503and $9,381,354, respectively, for capital additions (including $1,793,527 and$4,084,666 respectively, for capital leases). The increase in 2005 expendituresincluded approximately $3,809,352 to construct a building, $2,339,474 to supply480 new machines, and $1,776,755 for computer systems and equipment at the newstore which opened in December 2004. We also replaced 2,627 machines in the ordinary course of business in2005, versus 1,758 machines in 2004.

 

15

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During the fiscal year endedMay 31, 2005, we provided cash of $1,828,994 from financingactivities.  During this period, wefinanced a new store and expansion in the amount of $8,178,390 from abank.  In fiscal 2005, we used cash inour financing activities in the amount of $7,427,993.  We repaid notes payable and long-term debt inthe amounts of $4,987,569.

 

***Liquidity***

 

Our working capital deficit as of May 31, 2005was $5,751,483 and our unrestricted cash balance was $3,581,034. During 2006,we expect to spend approximately $12,167,565 on our new store opening in December 2005.  We are financing most of these expenditureswith long-term debt of approximately $4,012,483 and capital leases.

 

During the years ended May 31, 2005 and 2004,we have experienced net losses totaling $2,761,030 and $473,042, respectively,which includes non-cash impairments of store assets of $4,273,178 and$1,530,156, respectively.  As of May 31,2005, the Company has a working capital deficit totaling $5,751,483.  We have one obligation with a bank thatrequires us to reduce principal balance in 2006 by approximately $4.5million.  We plan to renegotiate theprincipal repayments to the extent we are unable to service thesepayments.  We have good relations withour banks in Japan.  We believe Exam willcontinue its growth and generate positive cash flows from operations to fundits daily operations and service its debt obligations.  There are no assurances that we will besuccessful in our plans.  No adjustmentshave been made to the carrying value of assets or liabilities as a result ofthe uncertainty about obtaining cash required to pay obligations as they comedue.  Our independent registered publicaccounting firm has included an explanatory paragraph in their report regardingsubstantial doubt about our ability to continue as a going concern because ofthese matters as required by auditing standards generally accepted in theUnited States of America.

 

Our level of indebtedness presents other risks toinvestors, including the possibility that we may be unable to generate cashsufficient to pay the principal of and interest on our indebtedness when due;and that we may not be able to meet tests and covenants of such debt agreementsand achieve satisfactory resolution of such non-compliance with the lenders. Insuch an event, the holders of our indebtedness may be able to declare allindebtedness owing to them to be due and payable immediately, and proceedagainst any collateral securing such indebtedness. These actions could limitour ability to borrow additional funds and would likely have a material adverseeffect on our business and results of operations.

 

**Critical Accounting Policies**

 

Our significant accountingpolicies are included in Note 2 of the Consolidated Financial Statementsincluded elsewhere in this Report. These policies, along with the underlyingassumptions and judgments made by our management in their application, have asignificant impact on our consolidated financial statements.

 

***Impairment ofLong-Lived Assets and Intangibles***

 

We review the carrying valueof our long-lived assets whenever events or changes in circumstances indicatethat such carrying values may not be recoverable annually. Unforeseen eventsand changes in circumstances and market conditions and material differences inestimates of future cash flows could negatively affect the fair value of ourassets and result in an impairment charge. Fair value is the amount at whichthe asset could be bought or sold in a current transaction between willingparties. Fair value can be estimated utilizing a number of techniques includingquoted market prices, prices for comparable assets, or other valuationprocesses involving estimates of cash flows, multiples of earnings or revenues.

 

***Income Taxes***

 

We account for income taxesin accordance with *Statement of FinancialAccounting Standards No. 109, Accounting for Income Taxes* (SFASNo. 109) which requires that deferred tax assets and liabilities berecognized using enacted tax rates for the effect of temporary differencesbetween the bases used for financial reporting and income tax reporting ofrecorded assets and liabilities. SFAS No. 109 also requires that deferredtax assets be reduced by a valuation allowance if it is more likely than notthat some portion or all of the deferred tax asset will not be realized. Wehave provided a valuation allowance at May 31, 2005 because we feel thatcertain deferred tax assets generated in the United States will not berecovered from future operations.

 

16

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# **ITEM 7.FINANCIAL STATEMENTS.**

#  

The consolidated financial statements of Exam forits fiscal year ended May 31, 2005 are provided with this Form 10-KSBand are incorporated herein by reference.

 

# **ITEM 8.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.**

#  

On September 2, 2004, our Board of Directors ofExam USA, Inc. approved a change in auditors.  The Board of Directorsapproved the dismissal of Malone & Bailey PLLC (“Malone &Bailey”) as our independent registered public accounting firm and the selectionof McKennon, Wilson & Morgan, LLP as their replacement.

 

Malone & Bailey’s report on our financialstatements for the fiscal year ended December 31, 2003 did not contain anyadverse opinion or disclaimer of opinion, nor was it qualified or modified asto audit scope, procedure or accounting.  Our financial statements for thefiscal year ended December 31, 2002, were audited by Scheifley &Associates, P.C., whose report for such fiscal year did not contain any adverseopinion or disclaimer of opinion, nor was it qualified or modified as to auditscope, procedure or accounting.

 

During the two fiscal years ended December 31,2003 and 2002 and the subsequent interim periods through September 2,2004, there were no disagreements between us and either Malone &Bailey (as to the fiscal year ended December 31, 2003 and the subsequentinterim periods through September 2, 2004) or Scheifley &Associates on any matter of accounting principles or practices, financialstatement disclosure, or auditing scope or procedure, which disagreements, ifnot resolved to Malone & Bailey’s or Scheifley’s satisfaction, wouldhave caused either of them to make reference to the subject matter of thedisagreement in connection with their respective reports on our financialstatements for such years; respectively, and there were no reportable events asdescribed in Item 304(a)(1)(v) of Regulation S-K.

 

In addition, during the two fiscal years ended December 31,2003 and 2002 and the subsequent interim periods through September 2,2004, we did not consult with McKennon, Wilson & Morgan, LLP withrespect to the application of accounting principles to a specified transaction,either completed or proposed, or the type of audit opinion that might berendered on our financial statements, or any other matters or reportable eventsas set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.

 

# **ITEM 8A.CONTROLS AND PROCEDURES**

#  

Our principal executive officer and principalfinancial officer have evaluated the effectiveness of the design and operationof our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) as of theend of the period covered by this annual report on Form 10-KSB. Based onthis evaluation, our principal executive officer and principal financialofficer concluded that these disclosure controls and procedures needimprovement to ensure that the information required to be disclosed in ourreports filed or submitted under the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized and reported within the requisitetime periods.

 

In connection with its review of the ourconsolidated financial statements for the year ended May 31, 2005,McKennon, Wilson & Morgan LLP, our independent registered publicaccounting firm, advised management of certain significant internal controldeficiencies that they considered to be, in the aggregate, a material weakness,including, inadequate staffing and supervision leading to the untimelyidentification and resolution of certain accounting matters; failure to performtimely reviews, substantiation and evaluation of certain general ledger accountbalances; lack of procedures or expertise needed to prepare all requireddisclosures; and evidence that employees lack the qualifications and trainingto fulfill their assigned functions. McKennon, Wilson & Morgan LLP indicated that they consideredthese deficiencies to be a material weakness as that term is defined under standardsestablished by the American Institute of Certified Public Accountants. Amaterial weakness is a significant deficiency in one or more of the internalcontrol components that alone or in the aggregate precludes our internalcontrol from reducing to an 

 

17

----

 

appropriately low level the risk thatmaterial misstatements in our financial statements will not be prevented ordetected on a timely basis. We considered these matters in connection with theyear-end closing of accounts and preparation of financial statements as and forthe year ended May 31, 2005 and determined that no prior period financialstatements were materially affected by such matters.

 

In response to the observations made by McKennon,Wilson & Morgan LLP, we will proceed more expeditiously with ourexisting plan to enhance our internal controls and procedures, which we believeaddresses each of the matters raised by, McKennon, Wilson & MorganLLP.

 

**Changes in Internal Controls**

 

We enhanced our internalcontrol procedures in January 2004 by adding a part-time dedicated ChiefAccounting Officer (“CAO”) to our principal executive offices in HuntingtonBeach, California.  We are evaluating theneed to supplement our CAO with additional assistance.  Our CAO is responsible for preparing adisclosure control and reporting package. We need to establish a written policies and procedures manual overinternal controls of accounting and financial reporting.   We also need to incorporate preparation ofan annual budget and report budget-to-actual analyses on an annual andquarterly basis.

 

**PART III**

 

# **ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OFTHE EXCHANGE ACT.**

#  

**Executive Officers and Directors**

 

Our executive officers and directors are as follows:

 
| **Name (1)(2)**      | ** ** | **Age** | ** ** | **Position**                         |
|----------------------|------------|---------|------------|--------------------------------------|
| Yoneji Hirabayashi   |       | 74      |       | Chief Financial Officer and Director |
| Shinichi Hirabayashi |       | 44      |       | Chief Executive Officer and Director |
| Akinori Hirabayashi  |       | 42      |       | Chief Operating Officer and Director |
| Haruo Miyano         |       | 63      |       | Secretary and Director               |

 

----

(1)           We presently have no executive committee,nominating committee or audit committee of the Board of Directors.

 

(2)           Our officers and directors hold office untiltheir successors are elected and qualified, or until their death, resignationor removal.

 

Thebackground and principal occupations of each director and officer of Exam areas follows:

 

**Yoneji Hirabayashi.** Mr. Hirabayashi had worked for theMinistry of Agriculture before operating the Accounts Division of the AichiPrefecture Owari Office.  Possessing anentrepreneurial spirit, he opened up a restaurant, followed by a hotel and thena slew of successful Pachinko and Karaoke stores in the mid 1950’s. He foundedKisorin in 1956, and later became its President from 1969 to 1999, which waslater renamed Exam, Inc.  Mr. YonejiHirabayashi is the father of Shinichi Hirabayashi and Akinori Hirabayashi.  Mr. Hirabayashi oversees Exam, Inc.as its Chairman.

 

**Shinichi Hirabayashi.**Mr. Shinichi Hirabayashi is the son of Mr. YonejiHirabayashi.  Mr. ShinichiHirabayashi has been the President of Exam, Inc. since 1999. Following inhis father’s footsteps, Mr. Hirabayashi joined Exam, Inc. in 1983after working for Toyoshima Inc.  He is agraduate of Keio University and he holds a Bachelor of Commerce.

 

**Akinori Hirabayashi.**Mr. Akinori Hirabayashi is the son of Mr. YonejiHirabayashi.  Mr. AkinoriHirabayashi is the Vice President of Exam, Inc.  Mr. Hirabayashi became a Director of oneof Exam, Inc.’s Pachinko stores in 1985. He has served in his current capacity since 1999.  Since then, he has directly overseen fourKaraoke stores, with the most recent one being assigned to him in 2001 (ExamKamikawa Branch).  He graduated fromNagoya University where he majored in Mathematics.

 

18

----

 

**Haruo Miyano.** Mr. Miyano has been the Secretary and a Director of the Companyand its Delaware subsidiary since June 2004 and its’ inception,respectively.  Mr. Miyano has over30 years of experience in trade between the United States and Japan.  Prior to joining the Company and itsaffiliates, Mr. Miyano served as the Vice Chairman of Pulp Mold PackagingGlobal, Inc., a company he founded in April 1998.  He served as PMP’s President from April 1998to August 1999. Prior to PMP, Mr. Miyano worked for Kasumi SportsWorld, Inc. He served as Kasumi’s Vice President of Sales and Marketingand was a Director, and was responsible for handling the sale of sporting goodsto 375 franchises throughout the United States.

 

# **FinancialExpert**

#  

The Company has no audit committee financial expert,as defined under Section 228.401, serving on its audit committee becauseit has no audit committee and is not required to have an audit committeebecause it is not a listed security as defined in Section 240.10A-3.

 

# **Section 16Compliance**

#  

Section 16(a) of the Securities ExchangeAct of 1934, as amended, requires our directors and executiveofficers, and persons who beneficially own more than 10% of a registeredclass of our equity securities, to file reports ofbeneficial ownership and changes in beneficial ownership of our securitieswith the SEC on Forms 3 (Initial Statement of Beneficial Ownership), 4(Statement of Changes of Beneficial Ownership of Securities) and 5 (Annual Statement of Beneficial Ownership of Securities). Directors, executive officers and beneficial owners ofmore than 10% of our Common Stock are required by SEC regulations tofurnish us with copies of all Section 16(a) formsthat they file. Based solely on review of the copies ofsuch forms furnished to us, or written representations that noreports were required, we believe that for the fiscal year ended May 31,2005 beneficial owners complied with Section 16(a) filing requirements.

 

**Code of Business Conduct and Ethics**

 

Our Board of Directors has approved a Code ofBusiness Conduct and Ethics, which applies to all of our employees, directorsand officers, including our principal executive officer, principal financialofficer, principal accounting officer and controller.  The Code ofBusiness Conduct and Ethics addresses such topics as protection and proper useof our assets, compliance with applicable laws and regulations, accuracy andpreservation of records, accounting and financial reporting, conflicts ofinterest and insider trading.  The Code of Business Conduct and Ethics isavailable free of charge to any shareholder who sends a request for a papercopy to Exam USA, Inc., 5912 Bolsa Avenue, Suite 108, HuntingtonBeach, California 92649.

 

19

----

 

# **ITEM 10.EXECUTIVE COMPENSATION**

#  

The following table sets forth the total cashcompensation, paid to or earned during each of our last three fiscal years by (i) ourChief Executive Officer and (ii) our two most highly compensated executiveofficers whose salary and bonus exceeded $100,000 for the fiscal year ended May 31,2005 (collectively referred to herein as the “Named Executive Officers”).

 

SUMMARYCOMPENSATION TABLE

 
| ** **                               | ** ** | ** **       | ** ** | **Annual Compensation** | ** ** | **Long Term Compensation** | ** ** |
|------------------------------------------|------------|------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | ** **       | ** ** | ** **              | ** ** | ** **                 | ** ** | ** ** | ** ** | **Awards** | ** ** | **Payouts** | ** ** |
| **Name &  Principal  Position** | ** ** | **Fiscal  Year** | ** ** | **Salary  ($)(1)**      | ** ** | **Bonus  ($)(1)**          | ** ** | **Other  Annual  Compensation  ($)(2)** | ** ** | **Restricted  Stock  Awards  ($)** | ** ** | **Securities  Underlying  Options  SARS  (#)** | ** ** | **L/TIP  Payouts  ($)** | ** ** | **All  Other  Compensation  ($)(3)** | ** ** |
|                                     |       |             |       |                    |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Shinichi  Hirabayashi                    |       | 5/31/2005        |       | $                       | 336,480    |                       | $          | 18,693 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |
| (President  and CEO)                     |       | 5/31/2004        |       | $                       | 365,592    |                       | $          | 45,491 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |
|                                     |       | 5/31/2003        |       | $                       | 207,555    |                       | $          | 24,907 |   | $ | 81,753 |   | 0 |   | 0 |   | 0 |   | 0 |   |
|                                     |       |             |       |                    |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Yoneji  Hirabayashi                      |       | 5/31/2005        |       | $                       | 409,598    |                       | $          | 37,387 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |
| (CFO)                                    |       | 5/31/2004        |       | $                       | 250,896    |                       | $          | 19,921 |   | $ | 85,197 |   | 0 |   | 0 |   | 0 |   | 0 |   |
|                                     |       | 5/31/2003        |       | $                       | 199,253    |                       | $          | 16,604 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |
|                                     |       |             |       |                    |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Akinori  Hirabayashi                     |       | 5/31/2004        |       | $                       | 355,547    |                       | $          | 37,387 |   | $ | 98,822 |   | 0 |   | 0 |   | 0 |   | 0 |   |
| (COO)                                    |       | 5/31/2004        |       | $                       | 334,767    |                       | $          | 35,842 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |
|                                     |       | 5/31/2003        |       | $                       | 207,555    |                       | $          | 24,907 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |

 

----

(1)           The salary and bonus figures representthe compensation paid to the Named Officers by our wholly-owned operatingsubsidiary, Exam Co. Ltd. in their respective capacities as officers of suchsubsidiary.

(2)           Personal benefits received by ourexecutive officers are valued below the levels, which would otherwise requiredisclosure under the rules of the U.S. Securities and ExchangeCommission.  Amounts shown represent thevalue of automobiles purchased by the company for the Named Officer.

(3)           We do not currently provide anycontingent or deferred forms of compensation arrangements, annuities, pensionor retirement benefits to its directors, officers or employees.

 

**Director Compensation**

 

Pursuant to an agreement we paid our non-employeedirector, Mr. Miyano, annual board fees of $100,000 during fiscal year2005.  Our agreement with Mr. Miyanoprovides for annual board fees of $100,000 for each of the next two fiscalyears.

 

Mr. Miyamoto, whoserves as a member of our Delaware subsidiary, was paid an annual fee of$100,000, in consideration for his board services to such subsidiary duringfiscal year 2005.  Our subsidiariesagreement with Mr. Miyamoto provides for annual board fees of $100,000 foreach of the next two fiscal years. During the years ended May 31, 2005, 2004 and 2003, our operatingcompany in Japan paid $47,501, $48,934, and $46,409, respectively, forconsulting services to SIM International, which is controlled by Mr. Miyamoto.  The services are provided pursuant to anagreement with the Company that is renewable annually upon the consent of bothparties.

 

# **ITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS**

#  

Thefollowing table sets forth certain information known to the Company regardingthe beneficial ownership of the Common Stock, which anticipated to reflectownership immediately following the closing of the Transactions, and subject tothe conclusion of the 10-day period by:

 

•      each person known to beneficially own morethan five percent of the Common Stock;

•      each officer and director of the Company(including proposed directors); and

•      all directors and executive officers as agroup.

 

20

----

 
| **Title of  Class** | ** ** | **Name of Beneficial Owner**                          | ** ** | **Amount and Nature of  Beneficial Owner** | ** ** | **Percent of  Class** | ** ** |
|---------------------|------------|-------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|
| Common Stock        |       | Yoneji Hirabayashi                                    |       | 1,922,330 shares (1)  CFO and Director     |       | 9.6                   | %          |
| Common Stock        |       | Shinichi Hirabayashi                                  |       | 2,097,090 shares  CEO and Director         |       | 10.5                  | %          |
| Common Stock        |       | Akinori Hirabayashi                                   |       | 5,592,230 shares (2)COO and Director       |       | 28.0                  | %          |
| Common Stock        |       | Haruo Miyano                                          |       | 262,137 sharesSecretary and Director       |       | 1.3                   | %          |
| Common Stock        |       | Ai Hirabayashi                                        |       | 1,048,540 shares5% shareholder             |       | 5.2                   | %          |
| Common Stock        |       | Shiho Hirabayashi                                     |       | 1,048,540 shares5% shareholder             |       | 5.2                   | %          |
| Common Stock        |       | Yuka Hirabayashi                                      |       | 1,048,540 shares5% shareholder             |       | 5.2                   | %          |
| Common Stock        |       | Hirotaka Hirabayashi                                  |       | 1,048,540 shares5% shareholder             |       | 5.2                   | %          |
| Common Stock        |       | Misaki Hirabayashi                                    |       | 1,048,540 shares5% shareholder             |       | 5.2                   | %          |
| Common Stock        |       | Arisa Hirabayashi                                     |       | 1,048,540 shares  5% shareholder           |       | 5.2                   | %          |
| Common Stock        |       | Mie Hata                                              |       | 2,796,120 shares (3)5% shareholder         |       | 14.0                  | %          |
| Common Stock        |       | All directors and named executive officers as a group |       | 6,029,127 shares                           |       | 30.3                  | %          |

 

----

(1) Includes873,790 shares of Common Stock owned by Mr. Hirabayashi’s spouse, overwhich Mr. Hirabayashi disclaims beneficial ownership.

(2) Includesa total of 2,970,870 shares of Common Stock owned by Mr. Hirabayashi’sspouse and minor children, over which Mr. Hirabayashi disclaims beneficialownership.

(3) Includes1,747,580 shares owned by Mr. Hata’s minor children, over which Mr. Hatadisclaims beneficial ownership.

 

# **ITEM 12.CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS**

#  

Forthe past several years Mr. Yoneji Hirabayashi leased a parcel of land tothe Company in Japan. The lease was scheduled to expire on May 31, 2005;however, on February 21, 2005, we purchased the land from Mr. Hirabayashifor $620,804.  Management believes thatthe purchase price was representative of the land’s fair market value at thetime of the sale. Lease payments paid to Mr. Hirabayashi for each of thefiscal years ended May 31, 2005, 2004, and 2003 with respect to such leasewere $16,824, $43,011, and $39,920, respectively.  In addition, he received compensation fromDaichi Co., Ltd. in the amount of $50,939, $26,883, and $24,950, for the fiscalyears ended May 31, 2005, 2004, and 2003, respectively.

 

# **ITEM 13. EXHIBITS.**

#  

31.1                           Certification of Chief Executive Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                           Certification of Chief Financial Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32                                    Certification of Chief Executive Officer andChief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

21

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# **ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES**

#  

Thefollowing summarizes aggregate fees for professional audit services rendered byMcKennon, Wilson & Morgan LLP during fiscal years ended May 31,2005 and 2004:

 
| ** **      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Audit Fees      |       | $        | 188,000    |     | $          | 198,000 |   |
| Audit  Related  |       | —   |       | —   |       |
| Tax Fees        |       | —   |       | —   |       |
| All Other  Fees |       | —   |       | —   |       |
| Total Fees      |       | $        | 188,000    |     | $          | 198,000 |   |

 

Audit Fees pertain to the audit of our annualconsolidated financial statements for fiscal year 2005 and 2004 and, commencingin fiscal year 2005, reviews of our quarterly consolidated financialstatements.

 

22

----

 

EXAM USA, INC. (FORMERLY OLYMPIC ENTERTAINMENT GROUP, INC.) ANDSUBSIDIARIES

 
| **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                                                                               |   |

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Board of Directors

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

 

We have audited theaccompanying consolidated balance sheet of EXAM USA, Inc. (formerlyOlympic Entertainment Group, Inc.) and its subsidiaries (the “Company”) asof May 31, 2005, and the related consolidated statements of operations andcomprehensive loss, shareholders’ equity and cash flows for each of the twoyears 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 inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of EXAM USA, Inc.(formerly Olympic Entertainment Group, Inc.) and its subsidiaries as ofMay 31, 2005, and the consolidated results of their operations and theircash flows for each of the two years in the period ended May 31, 2005, inconformity with accounting principles generally accepted in the United Statesof America.  

 

The accompanyingconsolidated financial statements have been prepared assuming the Company willcontinue as a going concern.  Asdiscussed in Note 2, the Company has a working capital deficiency which raisessubstantial doubt about its ability to continue as a going concern.  Management’s plans as to theses matters arealso described in Note 2.  Theaccompanying consolidated financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

 

As discussed in Note 1, EXAMUSA, Inc. and subsidiaries completed a reverse acquisition with OlympicEntertainment Group, Inc., a blank-check company, on June 3,2004.  The financial statements previouslyreported by Olympic Entertainment Group, Inc. were retroactively restatedfor all periods reported to reflect the historical financial position, resultsof 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 (Note 8)                                                                                                                                                          |       | 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 |       | —                |       |
|                                                                                                                                                                                                     |       |                  |       |
| Series E convertible  preferred stock, $0.01 par value, no liquidation value, 1,800,000 shares  authorized, none issued and outstanding                                                             |       | —                |       |
| Common stock, $0.01 par  value, 100,000,000 shares authorized, 20,000,148 shares issued and  outstanding                                                                                                 |       | 31,801                |       |
| Additional paid-in capital                                                                                                                                                                               |       | 1,591,893             |       |
| 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 tothese consolidated financial statements

 

F-3

----

 

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

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**AND COMPREHENSIVE 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 tothese consolidated financial statements

 

F-4

----

 

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

 

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

 
| ** **                                                     | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **     | ** ** | ** **        | ** ** | ** **             | ** ** | ** **   | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|----------------|------------|-------------------|------------|------------------------|------------|--------------|------------|-----------------|------------|------------|------------|
| ** **                                                     | ** ** | **Series D Convertible** | ** ** | **Series E Convertible** | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | **Restricted** | ** ** | **Unrestricted**  | ** ** | **Other**              | ** ** | ** **   | ** ** |
| ** **                                                     | ** ** | **Preferred Stock**           | ** ** | **Preferred Stock**           | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | **Retained**   | ** ** | **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     |       | 1,800          |       | 178,200           |       |                   |       |         |       |            |       | —     |       |
| Change in unrealized gain on marketable securities             |       | —                        |       | —                        |       | —           |       | —      |       | —         |       | —         |       | —            |       | —                 |       | —       |       | (4,150          | )          | (4,150     | )          |
| Foreign currency translation                                   |       | —                        |       | —                        |       | —           |       | —      |       | —         |       | —         |       | —            |       | —                 |       | —       |       | 44,918          |       | 44,918     |       |
| Balances, May 31, 2005 (unaudited)                             |       | —                        |       | $                             | —     |             |       |        | $          |           |       | 20,000,148     |       | $                 | 31,801     |                   | $          | 1,591,893    |       | $               | 41,122     |       | $          | 247,196 |   | $ | 299,849 |   | $ | 2,211,861 |   |
|                                                                |            |                               |            |                               |            |                  |            |             |            |                |            |                |            |                   |            |                        |            |              |            |                 |            |            |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes tothese consolidated financial statements

 

F-5

----

 

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

 

**CONSOLIDATED STATEMENTS 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                                              |       | 7,093,433                         |       | 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, net                                                               |       | (1,013,761                        | )          | 49,166                            |       |
| Proceeds (repayments) of  loan receivable                                        |       | 373,867                           |       | (206,086                          | )          |
| Deposits and other assets                                                        |       | (515,203                          | )          | (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, a Japanese corporation, was incorporatedin 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, theCompany completed a reverse acquisition of Olympic EntertainmentGroup, Inc. (“Olympic”), a Nevada Corporation, pursuant to an agreementdated February 9, 2004, as amended June 3, 2004.  At the time of acquisition, Olympic had norevenues and no significant assets.  Itwas considered a blank-check company 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 stockor 90% of the outstanding common stock of Olympic; Olympic shareholdersretained 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 Companyprimarily consisted of $360,000 which was a non-cash 1% investment banking fee(Note 9), which was charged to expense in fiscal 2005.  Effective August 9, 2004, the Companychanged its name from Olympic Entertainment Group, Inc. to EXAMUSA, Inc.

 

The Company operated five(5) stores which offer Pachinko (Japanese pinball) gaming entertainment,four (4) stores are located in the Aichi prefecture and one (1) storeis in the Tochigi prefecture just north of Greater Kanto Area in Japan as ofMay 31, 2004.  InDecember 2004, the Company opened a new store in Oyama, and now currentlyoperates six (6) stores.  TheCompany receives income from cigarettes, non-alcoholic beverages and sundryitems, as well as from two small restaurants which are not consideredsignificant.  Japanese law regulatesPachinko gaming and the local police enforce laws.  Pachinko gaming is one of the largestbusiness segments in Japan.

 

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

 

**NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*GoingConcern Considerations*

 

The Company’s financialstatements have been prepared on a going concern basis, which contemplates therealization of assets and the settlement of liabilities in the normal course ofbusiness.  As of May 31, 2005, theCompany has a working capital deficit totaling $5,751,483.  Management plans to renegotiate the term ofthe debt.  Management believes theCompany will continue its growth and generate positive cash flows fromoperations to fund its daily operations and service its remaining debtobligations.  There are no assurancesthat management will be successful in its plans.  No adjustments have been made to the carryingvalue of assets or liabilities as a result of the uncertainty.

 

*Change inReporting Entity*

 

As discussed above, theacquisition of Exam by Olympic will be accounted for as a reverse acquisition,whereby the assets and liabilities of Exam are reported at their historicalcost.  The assets and liabilities ofOlympic will be recorded at fair value on June 3, 2004, the date ofclose.  No goodwill was recorded inconnection with the reverse acquisition. The reverse acquisition resulted in a change in reporting entity ofOlympic for accounting and reporting purposes. Accordingly, the

 

F-7

----

 

financial statementsreported herein have retroactively restated for all periods presented to reportthe historical financial position, results of operations and cash flows ofExam. Since the shareholders of Exam retained 1,800,000 shares of Series Econvertible preferred stock in the connection with the reverse acquisition, whichconverted into common stock in fiscal 2005. The shares of Series Epreferred stock are reflected in the accompanying statements of stockholders’equity as if these were outstanding until converted.  The Series D convertible preferred stockand the common stock retained by the Olympic shareholders are reported as ofthe date of acquisition on June 3, 2004.

 

*Acquisitionof Entity Under Common Control*

* *

The acquisition of EXAM byEXAM USA was accounted for at historical cost because the entities are undercommon control. The consolidated results of operations for the periods reportedherein include the historical results of operations of EXAM, and includes EXAMUSA since incorporation on June 10, 2003.

 

*Consolidationof Variable-Interest Entity*

 

Under FASB InterpretationNo. 46 “Consolidation of Variable Interest Entities” (FIN 46) and revisedFIN 46 (FIN 46R), certain special purpose entities are required to beconsolidated if it is determined that an enterprise is the primary beneficiaryof a subsidiary because it is deemed to have controlling financial interest inan entity. The Company has determined that it has a controlling financialinterest in Daichi Co., Ltd. since the Company is required to absorb anyexpected losses, will receive the majority of expected residual returns and isthe primary beneficiary. 

 

*ReverseAcquisition*

 

The assets and liabilitiesof EXAM are reported at their historical cost. The assets and liabilities of Olympic were recorded at fair value onJune 3, 2004, the date of close; no goodwill was recorded since there wasno prior business.  The financialstatements reported herein have been retroactively restated for all periodspresented to report the historical financial position, results of operationsand cash flows of EXAM. Since the shareholders of EXAM retained 1,800,000shares of Series E convertible preferred stock in the connection with thereverse acquisition, which are yet to be converted into common stock, suchshares of Series E preferred stock are reflected in the accompanying statementsof stockholders’ equity as if these were outstanding for all periodspresented.  The Series D convertiblepreferred stock and the common stock retained by the Olympic shareholders werereported on the date of acquisition on June 3, 2004.

* *

*Principlesof Consolidation*

 

The accompanyingconsolidated financial statements include the accounts of EXAM USA, EXAM, andDaichi Co., Ltd.  All significantinter-company transactions have been eliminated in consolidation.

 

*InterestRate Swap Agreements*

 

Interest rate swapagreements (see Note 8) are considered ineffective hedges against changes inthe fair value of the debt due to changes in the benchmark interest rates overtheir terms because the Company does not maintain a risk policy.  As a result, SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities,” as amended by SFASNo. 149, is applied and the Company periodically records to earnings thegain or loss from changes in fair value. The fair value of the swaps is carriedas an asset or a liability in the consolidated balance sheet. The fair valuesof EXAM’s interest rate swaps are the amounts it would receive or pay toterminate the agreements as of the reporting dates as quoted by the bank.  Interest expense on the debt is adjusted to includenet payments made or received under the swap agreements. 

 

F-8

----

 

*Use ofEstimates*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes. Actual results could differ from those estimates. Significant estimatesmade by management include the evaluation of impairment of property andequipment, as well as the valuation allowance for certain deferred taxassets.   Management believes that theestimates are reasonable.

* *

*Fair Valueof Financial Instruments*

 

Financial instrumentsconsist of cash and cash equivalents, restricted and unrestricted timedeposits, marketable securities, receivables, inventories, accounts payable,short-term notes payable and long-term debt.** The fair value of financialinstruments approximated their carrying values at May 31, 2005.

 

*CashEquivalents*

 

The Company considers highlyliquid investments with an original maturity of 90 days or less from thepurchase date to be cash equivalents. During the periods presented, there were no cash equivalentsoutstanding.

 

The Company maintainsdeposits in United States, which are federally insured, and Japanese banks,which are not federally insured, but the payoff of the entire deposits areguaranteed by the Japanese government.

 

*TimeDeposits*

 

The Company invests in timedeposits with maturities of one to three years. Time deposits maturing inexcess of one year from the balance sheet date are classified as long-term timedeposits.  At May 31, 2005, interestrates on all certificates of deposits were 0.03%, per annum. Time deposits arecarried at cost.  Under short-term noteagreements with two commercial banks, the Company is required to maintaincertain amounts in time deposits as additional collateral on the notes withbanks. These amounts have been classified as restricted time deposits and havebeen classified as a current asset consistent with the current portion oflong-term debt with the banks.

* *

*MarketableSecurities*

 

Marketable securities areaccounted for under the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 115, “Accounting for Certain Investments in Debtand Equity Securities.”  The Company’slong-term investments consisted of marketable debt and equity securities, whichwere classified as “available-for-sale” in accordance with the provisions of SFASNo. 115.  Such investments arepresented as non-current assets since management does not intend to sell thesecurities within one year, and these are carried at their estimated fairvalues in the accompanying consolidated balance sheet.  Fair value was determined based on quotedmarket prices.  The specificidentification method has been used to determine cost for each security.  Unrealized gains and losses are excluded fromnet income (loss) and reported as a separate component of shareholders’ equity,net of the related tax effect and as a component of comprehensive income(loss), unless the decline is other than temporary (see below).

 

The Company monitors andevaluates the realizable value of its marketable securities. When assessingmarketable securities for other-than-temporary declines in value, the Companyconsiders such factors as, among other things, how significant the decline invalue is as a percentage of the original cost, how long the market value of theinvestment has been less than its original cost, the performance of theinvestee’s stock price in relation to the stock price of its competitors withinthe industry and the market in general, any news that has been releasedspecific to the investee and the outlook for the overall industry in which theinvestee operates.  If events andcircumstances indicate that a decline in the value of these assets has occurredand is other than temporary, the Company records a charge to other income(expense).  See Note 4 for discussion ofimpairments charged to operations.

 

F-9

----

 

*Inventories*

 

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

 

*Propertyand Equipment*

 

Property and equipment isstated at cost, less accumulated depreciation. Major operational enhancements and betterments are capitalized, whileroutine repairs and maintenance are charged to expense when incurred.  Depreciation, which includes assets undercapital leases, is computed using the straight-line method or declining balanceover the following estimated useful lives:

 
| 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 generallyhave a useful life of two (2) to three (3) years; however, technologychanges and changes in patron playing habits may cause pachinko machines tobecome obsolete.  Management evaluatesutilization of machines daily.  In theevent certain machines become underutilized, management must sell or dispose ofthe assets.

 

SFAS No. 143 “Accountingfor Asset Retirement Obligations,” requires that a liability for the fair valueof an asset retirement obligation be recognized in the period which it isincurred, with the offsetting associated asset retirement cost capitalized aspart of the carrying amount of the long-lived asset.  The Company adopted SFAS No. 143effective May 31, 2001, the effects of which are disclosed in Note 6.

 

SFAS No. 144, “Accountingfor Impairment or Disposal of Long-Lived Assets,” requires that long-livedassets, such as property and equipment and purchased intangibles subject toamortization, be reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable, or at least annually. Recoverability of the asset is measured by comparison of its carryingamount to undiscounted future net cash flows the asset is expected togenerate.  Specifically, managementprojects undiscounted cash flows expected over the period to be benefited.  If such assets are considered to be impaired,the impairment to be recognized is measured as the amount by which the carryingamount of the asset exceeds 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 in accordance with SFAS No. 144 ispermanent and may not be restored.  SeeNote 6 for discussion of impairments of property and equipment.

* *

*RevenueRecognition*

 

Revenues from pachinko andpachislot games represent the gross pay-ins, less payouts to customers.  Revenues are recorded when cash is receivedfor game balls or game tokens are rented to the patrons. Payouts are recordedwhen the token prizes are purchased back from the exchangers.  Other revenues for beverage are recognized atthe time of sale.  Deferred revenuesconsist of payments received by the Company related to the exclusive rights forbeverage and food vending machines to third-party vendors, and unredeemedprizes as well as, unused prepaid cards. The revenues of the exclusive rightsare recognized either over the term of the contract or based upon an agreedupon percentage of disbursements from the vending machines.

 

F-10

----

 

*Advertising*

 

Advertising costs areexpensed as incurred.  Advertisingexpenses for the years ended May 31, 2005 and 2004 were $1,909,137 and$959,726, respectively.

 

*Accountingfor Stock-Based Compensation*

 

The Company has not adopteda fair value-based method of accounting for stock-based compensation plans foremployees and non-employee directors. The Company will use the intrinsic value-based approach, and supplementdisclosure of the pro forma impact on operations and per share informationusing the fair value-based approach as required by SFAS No. 148 “Accountingfor Stock-Based Compensation – Transition and Disclosure”.  Stock-based compensation issued tonon-employees and consultants will be measured at fair value in accordance withSFAS No. 123.  Common stock purchaseoptions and warrants issued to non-employees and consultants will be measuredat fair value using the Black-Scholes valuation model.  As of May 31, 2005, there were nooptions or warrants outstanding.

 

*Per ShareInformation*

 

The Company presents basicearnings per share (“EPS”) and diluted EPS on the face of all statements ofoperations. Basic EPS is computed as net income (loss) divided by the weightedaverage number of common shares outstanding for the period, plus theSeries E preferred shares which were retained by the shareholders of EXAM,which are automatically convertible into 18,000,000 shares of common stockduring the periods presented. Diluted EPS reflects the potential dilution thatcould occur from common shares issuable through stock options, warrants, andother convertible securities. 

* *

*ForeignCurrency*

 

The functional currency ofEXAM and Daichi Co., Ltd. is the Japanese Yen. The financial statements of EXAM and Daichi Co., Ltd. are translatedinto United States Dollars at year-end exchange rates for assets and liabilities,and weighted-average exchange rate for revenues and expenses.  The resulting translation adjustments arerecorded as a component of other comprehensive income reflected on theconsolidated statements of income and comprehensive income

 

F-11

----

 

(loss) and the consolidatedstatements of shareholders’ equity. Transaction gains and losses, if any, in foreign currencies arereflected in operations. During the years ended May 31, 2005 and 2004, noforeign currency transaction gains or losses were experienced.

* *

*IncomeTaxes*

 

The Company accounts for itsincome taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”.  Under SFAS No. 109, deferred tax assetsand liabilities are determined based on temporary differences between basesused for financial reporting and income tax reporting purposes. Income taxesare provided based on the enacted tax rates in effect at the time suchtemporary differences are expected to reverse. A valuation allowance is provided for certain deferred tax assets if itis more likely than not that the Company will not realize tax assets throughfuture operations.  The Company and itssubsidiaries file separate national and local income tax returns in Japan andthe United States of America.

 

*ComprehensiveIncome (Loss)*

 

Comprehensive income (loss)is defined as the change in equity of a business enterprise during a periodfrom transactions and other events and circumstances from non-owner sources,including foreign currency translation adjustments and unrealized gains andlosses on marketable securities.

 

Accumulated othercomprehensive income at May 31, 2005, consisted of foreign currencytranslation gains of $331,344 and unrealized losses on marketable securities of$31,495 net of tax.

 

*Reclassification*

 

Management reclassifiedofficer salaries in fiscal 2004 from cost of sales to general andadministrative expenses in the amount of $993,206, which management believes isthe more proper presentation to conform with 2005 classification.

 

*RecentAccounting Pronouncements*

 

In December 2004, theFASB issued SFAS No. 123(R), “Share-Based Payment,” which revises SFASNo. 123. SFAS No. 123(R) is effective for annual periods that beginafter December 15, 2005 and requires companies to expense the fair valueof employee stock options and other forms of stock-based compensation. Thisexpense will be recognized over the period during which an employee is requiredto provide services in exchange for the award. Currently, the Company does not have any outstanding stock options, andas such the Company does not expect the guidance under SFAS No. 123(R) tohave a material impact on the consolidated financial statements.

 

In December 2004, theFASB issued SFAS No. 153, “Exchange of Non-monetary Assets, an amendmentof APB Opinion No 29,**Accountingfor Non-monetary Transactions.”**SFASNo. 153 eliminates the exception for non-monetary exchanges of similarproductive assets, which were previously required to be recorded on a carryoverbasis rather than a fair value basis. Instead, this statement provides thatexchanges of non-monetary assets that do not have commercial substance bereported at carryover basis rather than a fair value basis. A non-monetaryexchange is considered to have commercial substance if the future cash flows ofthe entity are expected to change significantly as a result of the exchange.The provisions of this statement are effective for non-monetary asset exchangesoccurring in fiscal periods beginning after June 15, 2005. The Companyexpects to adopt the standard during the fiscal year 2005. The Company isevaluating the requirements of SFAS No. 153 and has not determined theimpact on its financial condition or results of operations.

 

**NOTE 3 -RISKS AND UNCERTAINTIES**

 

*Innovationsin Technologies*

 

The Company’s gamingmachines are subject to new innovations and changes in entertainmentexperiences.  Pachinko machines varywidely in price and expected life.  Rapidchanges in demand will render a machine under-producing and potentiallyobsolete. 

* *

*CyclicalNature of Business*

 

The Company’s primarybusiness involves gaming entertainment. During periods of recession or economicdownturn, patrons may reduce or eliminate spending on gaming entertainmentactivities. In the event that any of the Company’s demographic markets sufferadverse economic conditions, the Company’s revenues may be materially adverselyaffected. In addition, the operations of some pachinko stores are typicallyseasonal in nature. The sales during the holiday seasons are usually higherthan the regular months. The biggest holiday season in Japan is from the end ofDecember through the beginning of January. Additionally, revenues can fluctuate when a new type of pachinko machineis introduced at the stores.

* *

*JapaneseGaming Regulation*

 

The Company’s business isregulated.  The EntertainmentEstablishment Control Law (“EECL”) governs a variety of entertainmentestablishments, including pachinko and pachislot stores. The National PublicSafety Commission sets out the general standard of the pachinko stores withinthe scope of EECL. The ability of the Company to remain in business and tooperate profitably depends upon the Company’s ability to satisfy all applicableNPSC gaming laws and regulations governed by EECL.

 

F-12

----

 

*PoliticalClimate*

 

The Company’s ability toremain in the gaming business depends on the continued political acceptabilityof pachinko gaming activities to both the public and governmental officials. Inaddition, the gaming laws regulate payout rates which, if altered, may diminishthe Company’s profitability. Management is aware of nothing to indicate thatNPSC officials will change its policies toward gaming activities in general;however, there are no assurances that such policies will not be changed. Anysubstantial, unfavorable change in the enabling laws or tax rates on gamingrevenues could make the Company’s business substantially more onerous, lessprofitable or illegal, which would have a material adverse effect on theCompany’s business.

* *

*Competition*

 

The Company facessubstantial competition in each of the markets in which its gaming facilitiesare located. Some of the competitors have significantly greater namerecognition and financial and marketing resources than the Company. Such competitionresults, in part, from the geographic concentration of competitors. All of theCompany’s gaming operations primarily compete with other gaming operations intheir geographic areas. New expansion and development activity is occurring ineach of the relevant markets, which may be expected to intensify competitivepressures. 

 

*ForeignCurrency*

 

Since the local currency isthe Japanese Yen, the Company may experience significant fluctuations in thevalue of reported assets and liabilities in United States Dollars.  

 

**NOTE 4 –MARKETABLE SECURITIES**

 

Cost, as adjusted forimpairments, and fair market values of marketable securities, accounted for asavailable-for-sale securities, at May 31, 2005, are as follows:

 
| **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 werecharged to operations in 2004.  Duringthe year ended May 31, 2005, management recorded a temporary decline inthe value of the marketable securities in the amount of $12,785.

 

**NOTE 5 – RELATEDPARTY TRANSACTIONS**

 

*LoansReceivable from Related Parties*

 

On March 10, 1998, Examloaned $135,919 to Next Creation Co., Ltd., a related party through commonrelationship, to finance its operations.  In December 2003 and January 2004, the Company loanedaggregate amounts of $117,796 to Next Creation Co., Ltd.   The total loaned to Next Creation Co., Ltdwas $253,715 at May 31, 2004. The loan accrued interest at 3.65% from 1998until February 28, 2002 and at 1.83% thereafter. The loan was due and fullysatisfied on August 31, 2004. 

 

On December 17, 2003,Daichi Co., Ltd. loaned $108,735 to Next Creation Co., Ltd. to finance itsoperations. The interest rate was 1.825%, due and payable monthly.  The Company’s demand loan was satisfied onAugust 31, 2004.

 

F-13

----

 

*LandPurchase*

 

On February 21, 2005,the Company purchased land previously rented from a shareholder for$620,804.  Management believes thetransfer price was representative of fair value at the date of transfer.

 

*Consultingagreement*

 

The Company uses aconsulting firm, which is controlled by a director, for the purpose ofdesigning and establishing computer systems at its stores.  In connection therewith, the Company paidapproximately $3,900 (¥420,000) per month during the 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 |   |

* *

*LandImpairment*

 

Management reduced thecarrying value real property (land) during the year ended May 31, 2004 by$93,819, based on the local tax authority’s assessed value which managementbelieves approximates fair value.  

 

*Storeimpairment*

 

One of the Company’s storessuffered losses in 2005 because of increased competition, and a deterioratingfacility which is in need of improvements. The store was profitable in 2004. The store is on leased land, and the building and improvements havelittle residual value, if any. Management has evaluated the future cash flows of this store anddetermined that an impairment loss is required under SFAS No. 144.  Accordingly, management recorded a charge tooperations, which is included in cost of revenues in the amount of $2,213,312in fiscal 2005.

 

*Impairmentsof Idle Machines*

 

During the year endedMay 31, 2005 and 2004, the Company retired pachinko and pachislotmachines, as well as certain computer equipment prior to the end of theiruseful life resulting in losses in the amount of $2,059,866 and $1,436,337respectively.

 

*AssetRetirement Obligations*

 

The Company adopted SFASNo. 143, “Accounting for Asset Retirement Obligations,” during fiscal year2003 and applied this change retroactively to all previous years effected.  The statement requires that a liability forthe fair value of an asset retirement obligation be recognized in the periodwhich it is incurred with the offset associated asset retirement costcapitalized as part of the carrying amount of the long -lived asset.  The asset retirement cost is subsequentlyallocated to expense using a systematic and rational method over the usefullife of the related asset.  Changes inthe asset retirement obligation resulting from the passage of time arerecognized as an increase in the carrying amount of the liability and as anaccretion expense. Under certain lease agreements in which the Company leasesland, while owning the building and/or parking lot located on that land, theCompany is required to return the land to its original condition at the end ofthe land lease term.  The lessor has theoption to require the Company to return the land to its originalcondition.  It has been determined thatin all cases the lessors will require the Company to restore the land.  

 

F-14

----

 

At May 31, 2005, theCompany increased their obligated long-lived assets under property andequipment by $133,874 due to the future estimated costs related to the newstore. The Company used an average risk free rate of 2% to discount theestimated obligations and a 40-year useful life for their retired assets incomputing the net retirement obligations as of May 31, 2005.  Accretion expense for the years endedMay 31, 2005 and May 31, 2004, was $ 16,029 and $10,031,respectively.  

 

The reconciliation of theasset retirement obligation is as follows:

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

* *

*CapitalizedInterest*

* *

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

 

*Depreciation*

 

Depreciation expense chargedto operations related to property and equipment during the years endedMay 31, 2005 and 2004 was $7,005,839 and $5,131,945, respectively.  See Note 9 for equipment under capitalleases. 

 

**NOTE 7 –DEPOSITS AND OTHER ASSETS, AND ACCRUED 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 debtagreements with commercial banks totaling approximately $8,796,296. The loanswere for the construction of a new store. The loans bear interest rates ranging from 1.58% to 2.75% perannum.  These loans are secured bysubstantially all of the Company’s assets including the restricted timedeposits. Long-term debt at May 31, 2005, consisted of 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 obligationsare collateralized by substantially all of the Company’s assets.  As a common practice in Japan, the Company’scollateral is not allocated to each commercial bank loan.  Rather the commercial banks hold an interestin substantially all of the Company’s assets together; there are no first orsecond positions.  Upon default of theloans, the Company’s assets would be liquidated and the proceeds from theliquidation would be distributed to the commercial banks based on liquidationpreference.  Interest expense related tolong-term debt amounted to $751,739 and $452,171, during the years endedMay 31, 2005 and 2004, respectively. Future annual minimum principal payments under long-term debt contracts asof 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 |       |
| 2010                          |   |   |   |   |   | 2,312,685 |       |
| Thereafter                    |   |   |   |   |   | 5,277,778 |       |
|                          |   |   |   |   |   |      |       |
| Total long-term debt          |   |   |   |   |   | $         | 29,240,278 |   |

 

*InterestSwap Agreements*

 

EXAM entered into twointerest rate swap agreements on November 28, 2003 and March 24, 2004with Mitsui Sumitomo Bank. First, EXAM entered into an agreement whereby theyobtained financing in the amount of ¥300,000,000 (approximately $2,900,000),which expires on November 28, 2008.  In connection therewith, EXAMagreed to a contract to pay interest at 1.67%, per annum on ¥300,000,000,offset by the receipt of interest at the three-month TIBOR (“Tokyo InterbankOffered Rate”).  Interest payments start on February 29, 2004 and arepayable at the end of every three months thereafter until expiration. Theeffect of the arrangement was to increase interest expense by

 

F-16

----

 

approximately $40,000 duringthe year ended May 31, 2005.  Inaddition, EXAM was required to enter into an agreement for a ¥100,000,000(approximately $900,000) interest swap contract, which expires onMarch 24, 2009.  In connection therewith, EXAM agreed to pay interestat 1.89%, per annum on the face amount of the contract, offset by the receiptof interest at 3-month TIBOR.  Interest payments commenced onJune 24, 2004 and are payable at the end of every three months thereafteruntil expiration. The effect of the arrangement was to increase interest expenseby approximately $17,000 during the year ended May, 31, 2005, and a lesseramount in 2004.

 

In addition, onDecember 27, 2004, the Company entered into an agreement whereby theyobtained financing in the amount of ¥250,000,000 (approximately $2,400,000),which expires on November 30, 2009. In connection therewith, the Companyagreed to a contract to pay interest at 1.11%, per annum on the face amount ofthe contract, offset by the receipt of interest at three-month TIBOR. Interestpayments commenced starting in February, 2005 and are payable at the end ofevery three months thereafter until expiration. The effect of the arrangementwas to increase interest expense by approximately $11,000 during the year endedMay 31, 2005. 

 

The Company was induced to enterinto the interest swap contracts to obtain financing. On the date the contractswere executed, the fair value of the contract liabilities aggregatedapproximately $160,000 (therefore a cost of the borrowings), and accordingly,such amounts were reported as an asset, and accreted to interest expense usingthe effective interest method.  The fairvalues of EXAM’s interest rate swaps are the estimated amounts it would receiveor pay to terminate the agreements as of the reporting dates as determined bythe bank.  As of May 31, 2005, the fair value of the outstandingswaps was $148,621.  The change in fairvalue of the swap obligations are recorded in operations.  

 

**NOTE 9 -COMMITMENTS AND CONTINGENCIES**

* *

*InvestmentBanking Agreement*

 

On September 2, 2003, managemententered into an agreement for services related to seeking a reverse mergerpartner, a strategic partner or strategic alliances, and, on a best effortsbasis, raise additional equity capital. The Company paid $2,500 per month for seven (7) months, at whichdate the agreement was cancelled and the monthly fee ceased.  In addition, the Company was required to paya cash fee of 3.5% for equity financing, and issue common stock equal to 1.0%to 1.5% of the outstanding post-merger shares, upon the close of atransaction.  On June 3, 2004, thetransaction was closed with Olympic.  Theinvestment banker earned a fee of 1% of the post merger,post-reverse-stock-split common stock outstanding of Olympic, in accordancewith the contract.  The estimated fairvalue of $360,000 was determined using the average closing stock price ofOlympic near the transaction, and charged to operations in fiscal 2005.

* *

*DirectorAgreements*

 

On June 17, 2003, theCompany retained two (2) outside directors. The agreements providedfor annual payments of $150,000, plus reimbursement of reasonable expenses. The agreements expired on June 16, 2004 and were expensed in fiscal2004.  In June, 2004, new agreements areprovided for annual payments of $100,000, plus reimbursement of reasonableexpenses.  Each director was paid$100,000 for the year ending May 31, 2005.

 

*ConsultingAgreement*

 

On August 1, 2004, theCompany entered an agreement with a consulting firm. The agreement is forconsulting services to the company’s management and personnel.  The agreement expires on July 31,2007.  The monthly consulting fee isapproximately $26,000, plus reimbursement of reasonable expenses.  In addition, the Company paid some additionalfees for training sessions.   Theconsulting firm was paid approximately $380,000 for the year ended May, 31,2005. 

 

F-17

----

 

*CapitalLeases*

 

The Company leases pachinkomachines and computer equipment under leases that qualify as capitalleases.  The pachinko machine leases werefor two years and expire on December 24, 2005.  The computer equipment leases are for a termof six to eight years and expire on November 22, 2012.

 

In connection with theopening of a new store, the Company entered into an agreement to lease computerequipment at total cost of $610,185.  Thelease is for a period of 60 months and requires monthly lease payment of$11,861.  Additionally, the Companyentered into an agreement to lease equipment for $1,166,569. The lease is for96 months and requires a monthly lease payment of $16,026.  These leases are accounted for as a capitalleases. Future annual minimum lease payments for equipment accounted for ascapital leases as of May 31, 2005 are as follows:

 
| **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 tocapital lease obligations amounted to $230,396 and $131,111 during the yearsended May 31, 2005 and 2004, respectively.

 

Property and equipment atMay 31, 2005, include the following amounts for capitalized leases:

 
| Equipment under capital  leases      |   |   |   |   |   | $          | 7,516,318 |   |
|--------------------------------------|--------|--------|--------|--------|--------|------------|-----------|--------|
| Less accumulated depreciation        |   |   |   |   |   | (2,856,660 | )         |
|                                 |   |   |   |   |   |       |      |
| Equipment under capital  leases, net |   |   |   |   |   | $          | 4,659,658 |   |

* *

*OperatingLeases*

 

The Company leases land forcertain of its gaming locations.  Minimummonthly rental payments under these leases range from $5,139 to $61,782, aggregatingtotal payments of $130,610 per month. Under Japanese custom, there are occasionally no written agreements forthe land leases, and all terms are agreed upon orally.  The Company has entered into writtenagreements for leases which last twenty (20) years.  Additionally, under Japanese custom, ifsignificant improvements are made to the leased land, the land leases arerequired to be extended by the lessor for as long as the Company is inoperation.  In December, 2004, theCompany has entered into written agreements for new leases which last twenty(20) years.  The leases are for newstore, and it will start in December, 2005. See Note 13 for additional information regarding a new store.

 

The Company has madesignificant modifications to the land through construction of buildings andparking lots.  The Company leased landfrom one of its officers.  The monthlylease fee from the officer is $1,869, and the contract was terminated inFebruary, 2005.  For the years endedMay 31, 2005 and 2004, total rental expense under all land leases wasapproximately $1,725,126 and $1,219,420, respectively.

 

F-18

----

 

Future annual minimumpayments under non-cancelable operating leases as of May 31, 2005, are asfollows:

 
| **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**

 

*PreferredStock*

 

There are 5,000,000 sharesof preferred stock authorized to be issued.

 

In connection with thereverse acquisition of Olympic, Exam shareholders received 1,800,000 shares ofSeries E convertible preferred stock. 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 40,000 shares of Series D convertiblepreferred stock issued in connection with the reverse acquisition wasconvertible into 25 shares of common stock or an aggregate of 1,000,000 sharesand converted in fiscal 2005. 

* *

*StockSpilt*

 

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

* *

*RestrictedRetained Earnings*

 

As required under Japaneselaws, the Company must accumulate 10% of dividends paid until restrictedretained earnings amounts to 25% of common stock.  As of May 31, 2005, the Company was insatisfaction of this requirement.

 

*Dividends*

 

Prior to becoming a publiccompany, 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-basedCompensation*

 

The shareholders of EXAMcontributed 26,100 shares, each, of Series E Convertible Preferred stockto two (2) directors for services rendered in connection with going publicin the United States on June 3, 2004 and for services to be rendered infiscal 2005.  The shares vest 25% on June 3, 2004, and 25% quarterlythereafter.  The shares were converted into an aggregate of 522,000 sharesof common stock.  EXAM will recorded a non-cash charge of $943,693 ascompensation expense in fiscal 2005, based on the average closing ask prices 15days 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 theprovision (benefit) for income taxes for the years ended May 31, 2005 and2004:

 
| ** **                           | ** ** | ** ** | ** ** | **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 UnitedStates of America were not material.  Areconciliation of the expected statutory national income tax provision to theprovision (benefit) for income taxes for the years ended May 31, 2005 and2004 is as follows:

 
| ** **                                         | ** ** | ** ** | ** ** | **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 net deferred taxes are as follows:

 
| ** **                                            | ** ** | ** ** | ** ** | **2005**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax assets (liability)                       |       |       |       |       |       |
|  Current assets:                                 |       |       |       |       |       |
| Accrued liabilities                                   |       |       |       | $          | 21,668     |   |
| Unrealized losses on  marketable securities           |       |       |       | 81,724     |       |
| Less - Valuation allowance                            |       |       |       | —     |       |
| Total current deferred tax  assets                    |       |       |       | 103,392    |       |
|  Noncurrent assets:                              |       |       |       |       |       |
| Impairment charges                                    |       |       |       | 1,145,642  |       |
| Net operating loss  carryforward – United States |       |       |       | 1,351,424  |       |
| Other                                                 |       |       |       | 215,798    |       |
| Depreciation                                          |       |       |       | 19,738     |       |
| Less – Valuation allowance                       |       |       |       | (1,735,328 | )          |
|                                                  |       |       |       | 997,274    |       |
| Total deferred tax assets                             |       |       |       | $          | 1,100,666  |   |

 

Management increased itsvaluation allowance by $883,009 and $314,299 during the years endedMay 31, 2005 and 2004, respectively, for certain expenses paid in theUnited States that will not be deductible in Japan.  At the present time, management cannotdetermine if there will be income in the United States to offset such expenses,which will be carried forward as net operating losses.  The net operating losses expire in twentyyears for United States federal tax purposes and five years for the State ofCalifornia tax purposes beginning from fiscal 2004.

 

F-20

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**NOTE 12 -GAMING OPERATIONS**

 

The Company derives revenuefrom the operation of pachinko and pachislot games.  The Company is subject to annual licensingrequirements established by the Prefectural Public Safety Commission.  The Company must renew this license yearly tooperate.  The Company pays sales taxes of4% of net revenues.

 

A summary of gross wagers,less winning patron payouts, for the years ended 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 StoreOpening*

 

In December 2005, theCompany plans to open a new store in Okazaki, Aichi, Japan.  The Company entered into lease agreements fora portion of the land and parking lots. These leases will start in December, 2005, and the total monthly leasesare $30,115.  The deposits of the leaseagreements were $189,854 and paid for the year ended May 31, 2005.  The Company also entered into two additionallong-term debt arrangements with two commercial banks totaling approximately$4,012,483.  The loans are for theconstruction and facilities of a new store. The loans bear interest at rates ranging from 2.50% to 2.75% per annumand are due in seven to ten years.

 

F-21

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**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: September 13,  2005 | 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 |       | September 13, 2005 |
| **Shinichi Hirabayashi** |       |       |                                  |       |                    |
| ** **               |       |       |                                  |       |                    |
| /s/ Yoneji Hirabayashi   |       |       | Chief Financial and Principal         |       | September 13, 2005 |
| **Yoneji Hirabayashi**   |       |       | Accounting Officer and Director       |       |                    |
|                     |       |       |                                  |       |                    |
| /s/ Akinori Hirabayashi  |       |       | Director                              |       | September 13, 2005 |
| **Akinori Hirabayashi**  |       |       |                                  |       |                    |

 

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