**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, 2004**                                                                                                                        |
|       |       |                                                                                                                                                               |
| **o**      | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                            |
|       |       |                                                                                                                                                               |
|       |       | **FOR THE  TRANSITION PERIOD FROM             TO            ** |

 

**COMMISSION FILE NUMBER: 000-32849**

 

**EXAM USA, INC.**

(Name Of Small Business Issuer In Its Charter)

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

 

**5902 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                                           |

 

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:

**COMMON STOCK, PAR VALUE $0.01**

 

Check whether the issuer (1)filed all reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   YES   ý     NO  o

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B isnot contained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB.   o

 

State issuer’s revenues forits most recent fiscal year $ 17,862,976.

 

The aggregate market valueof voting and non-voting common stock held by non-affiliates of the registrantas of September 24, 2004:  Common stock,$0.01 par value:  $3,000,221

 

ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS

 

Check whether the issuer hasfiled all documents and reports required to be filed by Section 12, 13 or 15(d)of the Exchange Act after the distribution of securities under plan confirmedby court.    YES  o    NO  o

 

APPLICABLE ONLY TO CORPORATE REGISTRANTS

 

State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date.

 

2,000,147 Shares as of voting common stock as of September 24, 2004

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None

 

Transitional Small Business Disclosure Format:    YES  o   NO   o

 

 

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**EXAM USA, INC.**

**ANNUAL REPORT ON FORM 10-KSB**

**FOR THE FISCAL YEAR ENDED MAY 31, 2004**

 

**TABLE OF CONTENTS**

 
|           | **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  and Reports on Form 8-K                                                          |   |
| Item  14.      | Principal  Accountant Fees and Services                                                    |   |
|           |                                                                                       |   |
|           | Signatures                                                                                 |   |

 

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**PART 1**

 

**ForwardLooking Statements**

 

This Annual Report on Form10-KSB of Exam USA, Inc. (“Exam” or “we”) contains forward-looking statementsthat are not based on historical facts and are based on current expectationsthat are subject to various risks and uncertainties, as well as assumptionsthat, if they do not materialize or prove incorrect, could cause our futureresults to differ materially from those expressed or implied in such forwardlooking statements.  All statements otherthan historical facts are statements that are or could be deemedforward-looking statements, including, without limitation any future results ofoperations, plans or strategies or relating to future economic or industryconditions. Factors that might cause such differences include, but are notlimited to, those discussed in the subsection entitled “Risk Factors” underPart I, page 8 or that are otherwise described from time to time in our reportsfiled with the Securities and Exchange Commission after this AnnualReport.  Exam assumes no obligation toupdate any forward looking statements to reflect events that occur orcircumstances that may arise after the date as of which they are made.

 

# **ITEM 1****. DESCRIPTION OF BUSINESS**

 

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

 

We were originallyincorporated in Nevada on May 21, 1987, under the name Olympic EntertainmentGroup, Inc.  We were formed to finance,produce, co-produce and distribute motion pictures and television shows andpursued various opportunities through 1993, when our management decided tofocus upon the development of a cable television network for the distributionof children’s nonviolent television programming. From 1993 through 1995 wedeveloped this concept and in 1995, launched the Children’s Cable Network.Although we had some early success through 1997, we ceased operating in June1998.  We were a non-operating companyfrom that time until June 2004.

 

On June 3, 2004, we enteredinto a Stock Exchange Agreement (the “Agreement”) with Exam USA, Inc., aDelaware corporation (“Exam Delaware”), which provided for a tax-free shareexchange under 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 Convertible PreferredStock are convertible into 18,000,000 shares of our common stock, representingapproximately 95% of our outstanding voting power.  Effective August 9, 2003, we changed our nameto Exam USA, Inc.  We have a wholly-ownedsubsidiary, Exam Co. Ltd, a corporation formed and existing under the laws ofJapan.  Our subsidiary is an operatingentity, which presently owns and runs five (5) pachinko stores and one karaokestore.  We also operate two small restaurants.

 

At various places in thisreport, we may make reference to “Exam” or the “company” or “us” or “we.”  When we use those terms, unless the contextotherwise requires, we mean Exam USA, Inc. and its operating subsidiary, ExamCo. Ltd.

 

To our knowledge, Exam isthe only publicly traded company in the United States focused solely on thepachinko industry in Japan

 

We are traded on the NASDOver-the-Counter Bulletin Board under the ticker symbol EXMA.

 

We also own a 50% equityinterest in Daichi Co., Ltd., an entity whose sole business is to procuretobacco products for us.  The remaining50% ownership is held by three of our shareholders and directors as follows:

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

 

1

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Ourdomestic headquarters are located in Huntington Beach, California.  Our mailing address is 5902 Bolsa Avenue,Suite 108, Huntington Beach, California 92649. Our telephone number is (714) 895-7772. Copies of materials that we file with the SEC are available at the SEC’sPublic Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.  The telephone number for the Public ReferenceRoom is (900-SEC-0330).  The SECmaintains an Internet site at http://www.sec.gov that contains our reports,proxy and information statements, and certain other information relating toExam.

 

**Our Pachinko Business**

 

Originallyfounded in 1956 by Mr. Yoneji Hirabayashi as a dining room to which was lateradded a hotel, the Company was first incorporated as Kisorin Inc. in 1969 andrenamed “Exam” in 1999.  The companyopened its first pachinko store called “Komaki Jambo Kaikan” in 1973.  Pachinko’s popularity has been on the risesince then and we have opened four additional stores to date.  Four stores are located in the Aichiprefecture in Mid-Japan and one store is located in the Tochigi prefecture justnorth of the Greater Kanto Area in Japan. Seeking to expand our business operations, we have also established onekaraoke store.  Our stores are strategicallylocated in areas that are convenient and accessible to local residents, and ourstores are also known by our customers to be clean, attractive andcomfortable.  Our growth has been drivenby the successful addition of new stores and enhancements to the operationalefficiency of existing locations.  We areled by a seasoned executive management team with decades of experience andaccumulated industry knowledge.

 

Unlike smallstores operated by smaller “mom-and-pop” operators, EXAM’s facilities are upperscale, featuring a selection of the latest pachinko and pachislo machines ateach center.  EXAM’s stores are known byits patrons to be clean, attractive and comfortable, resulting in greatercustomer loyalty and store competitiveness.

 

**EXAM’s Existing Pachinko Store Statistics**

 

•              Averagegross wagers per sq. m: $2,883

•              Averagegross wagers per machine: $86,751

•              Averagenumber of machines per store: 454 machines

•              Averageannual revenue per machine: $ 8,401

•              Averageage of each store: 14.6 years

•              Averagenumber of employes per store: 27

 

2

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### **The Industry**

 

### **Introduction to Pachinko**

 

*Pachinko* is believed to have originated in Japanin the 1920s based on a vertical pinball-like device called the Corinthian Gamethat was imported into Japan from the U.S. Pachinko is a game in which players insert steel metal balls about 3/8”in diameter into a vertical machine that resembles a Western slot machine.  The machine features pins that guide thedirection of the balls into one of several slots in the machine.  Certain slots release more balls while otherslots capture the ball.  The machinesalso have an automatic ball feeder that allows the player to quickly releaseballs into the machine.  The player usinga round knob at the bottom of the machine, thereby adding an element of skillto the game, controls the speed at which the balls are released into themachine.  Pachinko machines today alsofeature digital displays 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.  Balls are traded for prizes, suchas cigarettes, candy, and other merchandise, or a “special prize” which can beexchanged for money.

 

*Pachislo*machines, similar to Western slots, arealso typically found in pachinko stores. The key difference between a pachislo machine and Western slot machinesis that the player, therefore featuring a certain degree of skill as well aschance, stops each reel individually.  Another difference is that pachislo machinesdo not offer the big “jackpot” payouts paid by Western slot machines.  Similar to the machine’s low token retention(“hold”) rate, payouts are also kept modest, to conform to Japan’s strictregulations regarding speculative entertainment activities.

 

# **TheGaming Experience**

 

A customerentering a modern Japanese electronic gaming store who wishes to play Pachinkoor Pachislo would either approach a machine and insert cash directly into acomputer monitored bill reader or purchase a prepaid magnetic card from one ofseveral vending machines located around the gaming floor which is then insertedinto the machine’s reader.  In eitherinstance the machine dispenses a specified number of balls into the machine’sloading tray or payout tray at a posted price per ball. The player then playsthe game and, if successful, collects his or her winnings in plastic binsprovided by the store by manually releasing a trap at the base of the machines collectiontray. When he or she is finished gaming, the customer transfers the filled binsto ball or token counting machines which automatically supply the customer witha magnetic or paper receipt for the number of balls or tokens collected. Thecustomer then presents the receipt at the redemption counter which offers thecustomer a choice of credit towards retail goods sold by the store or a“special prize” that can be sold for money at a special prize exchange stationlocated within close proximity to the pachinko store (see “*The Tri-Party Transaction*” below).

 

**Ball/Token Redemption**

 

The redemptionof balls or tokens is at a lower price per ball/token than the buy-in.  On average, the buy-in for pachinko balls is4 yen per ball while the redemption rate ranges from 2.75 to 3.75 yen per ballamong some of our main competitors.  Ourredemption rate is about 3.33 yen per ball for our established stores. Ourcompetitors’ rate allows their store to profit while giving their players atypical payout ratio of between 120% and 130% thereby giving the player thefeeling that he or she has had a winning session.  As a result, the store’s net revenues ontotal 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 store. 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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While ballsand tokens can be redeemed for various prizes such as candy, cigarettes, consumerelectronics and certain luxury items, the vast majority of the redemptions arefor a “special prize”.  The concept ofthe ‘special prize’ has existed for decades in the Pachinko business, althoughin later years it has become significantly more refined.  Under Japanese law it is not permissible toexchange pachinko balls or slot machine tokens for currency, gold, orsecurities.  As a result, the Japanesepachinko industry has established the *tri-partytransaction* system whereby customers could exchange balls/tokens forcertain objects of nominal value which acted as a mode of exchange between thestore, the customer, and a completely unrelated business entity that wouldaccept the object from the customer in exchange for cash.

 

### **The Tri-Party Transaction**

 

The threeparties involved in the Tri-Party Transaction are (i) the casino/store, (ii)the prize buyer (“Kaitori-Gyosha”), and (iii) the prize wholesaler(“Nonyu-Gyosha”).  Each of the partiesmust be completely unrelated to the others, both legally and economically, inorder to avoid a violation of the law.

 

**Diagram of the Tri-Party Transaction**

 

 

Each pachinkostore maintains an arms-length ad hoc relationship with a prize wholesaler,pursuant to which the prize wholesaler agrees to cause the ‘special prizes’ tobe manufactured and sold to the store and the store agrees to purchase ‘specialprizes’ from the prize wholesaler each day in order to maintain sufficientinventory.  The prize wholesaler andbuyer have a similar ad hoc relationship to which the store is not aparty.  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, having successfullycompleted the gaming experience.

 

All receiptsfrom the store are removed daily from the prepaid card vending machines andpachinko/pachislo machines and deposited, either directly on a normal businessday or by lock-box if banks are closed, at the store’s bank.  At the opening of each business day, the storewires from its account to the account of the prize wholesaler, an amountroughly aggregating the value of the ‘special prizes’ that the wholesaler hasacquired from the prize buyer representing trade during the previous day plus acommission.  The wholesaler uses theproceeds to purchase the special prizes from the buyer, also with a commissionagreement.  Thus the special prizes makethe triangular, and legally permissible trip from the store, to the prizebuyer, to the wholesaler, who then sells an inventory of special prizes back tothe store.

 

4

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 The tri-party transaction is explicitlydesigned and regulated to be in compliance with Japan’s *Letter of the Law Concerning Regulation andRationalization 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 operator is involved only in the purchase of special prize inventory fromthe prize wholesaler.  Thus, given theform of the prize exchange system and assuming the independence of the threeparties, as both a legal and economic matter, the tri-party transaction hasbeen designed by the industry and the regulators specifically to preclude aviolation of the law.

 

### **The Japanese 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 $250 billion in grosswagers per annum and employing over 337,000 employees, the Japanese pachinkoindustry is larger than even the country’s automobile industry, and is, by far,the largest service industry sector in Japan. Pachinko is the most popular source of leisure and entertainment, (includingdining), in Japan and a regular component of the Japanese lifestyle.  In a country with a population of 127million, an estimated 40 to 50 million Japanese play pachinko while anestimated 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.

 

Some keystatistics pertaining to the Japanese pachinko industry are listed below:

 

•                                          A total of 6,100 operators operate approximately 17,200 stores housing anestimated 4.7 million pachinko and pachislo machines.  The industry generates annual gross wagers ofapproximately $250 billion, or an average of $15.6 million per store. (Source: *Ace Research Institute*, *ibizcube Japan Ltd.*)

 

•                                          The industry employs an estimated 337,000 people compared to 350,000employed by the entire U.S. casino industry. (Source: *Ace Research Institute*)

 

•                                          Approximately 26% of adults (approximately 25 million people) in Japan areregular customers of the Japanese electronic gaming industry. (Source:  *The Leisure and Development Center*)

 

•                                          The Japanese pachinko industry represents over one-third of all spendingon entertainment making it one of the largest in international gaming marketsand one of the largest sectors of the Japanese economy.  (Source: *JapaneseMinistry of Economy, Trade and Industry*)

 

•                                          Pachinko is enjoyed by a growing number of women, who currently representover 20% of all players. On average, women frequent pachinko stores threetimes a week and spend 29,000 yen per visit, about 2,000 yen more than men.  (Source:  *Tokyo-basedYano Research Institute Ltd.*)

 

5

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As illustratedin the figure below, the pachinko industry dwarfs other service sectors withinJapan.  Due to the importance of pachinkoto Japan’s economy both as a source of employment for over 337,000 people and asignificant contributor to the country’s annual tax revenues, the government ofJapan has made a conscious effort to establish and enforce laws to protectconsumers, rid criminal elements and raise the public image of the pachinkoindustry.

 

 

Despite itsrelatively lower international profile, compared to the gaming industry in theUnited 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**          |       | 337,000                                 |       | 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.

 

6

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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., have grown to become some of the largest publiclylisted companies in Japan.

 

# **Pachinko Operator Landscape**

 

The Japanesepachinko industry is highly fragmented, with an estimated 6,100  operators and 17,200 stores housing 3.9million pachinko machines and 767,584 pachislo machines throughout thecountry.  The largest operator is DynamCo., Ltd. which has approximately 200 stores throughout Japan, with the nextlargest operator being Maruhan Co., Ltd which has approximately 120 stores.  Smaller stores average 100 to 200 machineswhile larger stores, such as those belonging to the Company, have 500 or moremachines.  The pachinko industry has beenrevolutionized over the last several years with enhancements to pachinko andpachislo machines and information technology that allows operators to capturecomprehensive, real-time data on the performance and usage of each individualmachine.  Pachinko machines have largelybeen converted to a digital format that features a digital slot machine-likescreen in the background that enhances the playing experience and winningspotential for the customer.  Theseenhancements to machines and IT infrastructure have increased the capitalexpenditures required to establish 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**

 

The criminallaw of Japan essentially prohibits gambling organized by private entities.  However, pachinko is considered part of theleisure industry, which is exempt from the prohibition against gambling.  Pachinko is regulated by the JapaneseNational Police Agency (“NPA”), through the prefectural police departments,which has taken the stance that pachinko is not gambling but simply a“reasonably speculative form of pastime.” Pachinko regulations fall under the *ActRegulating Adult Entertainment Business* and the ministerialordinances and regulations thereunder. Customers must be at least 18 years of age.  Pachinko stores are open seven (7) days aweek; however, are not permitted to operate between the hours of 11 p.m.  to 9 a.m. Also, customers are forbidden from taking pachinko balls from the storesand therefore ‘rent’ the balls with which they play.

 

Most importantof the regulations is the law forbidding pachinko stores from giving cash orsecurities as a prize or repurchasing prizes for cash or securities.  In addition, there exist a number of otherregulations such as requirements regarding qualifications to obtain pachinkostore operating licenses, machine designs and payout ratios and regulationspertaining 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)

 

In previousyears, questionable business practices, tax evasion, and crime associated withthe electronic gaming industry gave the industry a negative public image.  However, over the last fifteen years, thegrowing magnitude and importance of pachinko to the Japanese economy spurredthe government and industry associations to step in to establish strictregulations, remove criminal elements and improve the public image of thepachinko industry.  The regulation efforthas been highly successful and has been of one the principal catalysts for thegrowth of large operators in the industry as well as the involvement of majorcompanies from such traditional industries as trading, supermarkets andrailroads.  In addition, foreign corporationsand investors have taken interest in Japanese pachinko operations due to theprofitability and financial stability of their operations.  For instance, in 2001, BS Group, a UKcorporation, purchased a stake in leading pachinko operator, Tokyo Plaza, whoruns about 20 stores in Japan, and established its own pachinko stores in theUnited Kingdom.  Due to the success ofthese reform efforts during the last two decades, the Japanese pachinkoindustry has evolved to become an integral part of the entertainment sector ofthe Japanese economy and an important contributor to the Japanese economy.

 

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 exchange mechanismand required that a portion of the proceeds from such systems be dedicated tosocial welfare programs.

 

**Regulatory Bodies Overseeing the Japanese Pachinko Industry**

 
| **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 September 1, 2004, we had 43 full-timeemployees and 116 part-time employees. Our employees are not represented by acollective bargaining organization. We believe our relationship with ouremployees is good.

 

**Risk Factors**

 

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

 

There are atotal of approximately 17,200 pachinko stores in Japan, which are run byapproximately 6,100 operators.  We haveseveral established competitors in each of our current and target geographicmarkets.

 

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Some of thesecompetitors have comparable or greater financial and other resources than we doand, therefore, they may be able better attract customers by updating theirstores and pachinko machines, and through increased marketing efforts.

 

***Changes in the government regulationspertaining to the gaming and pachinko industries could adversely affect ourbusiness***

 

TheJapanese pachinko industry is regulated by a system of laws created andenforced by various national and prefectural government entities.  Although casino gambling is legally forbiddenin Japan, pachinko has been designated as a non-gambling form of adultentertainment.  The tri-party exchangesystem, established as an indirect mechanism for providing cash prizes without transgressinganti-gambling regulations, is permitted but highly regulated.  However, changing government regulationsregarding the definition of pachinko as a ‘non-gambling’ activity and/orrestrictions regarding the indirect awarding of cash or similar prizes may havea significant impact on pachinko operators in continuing normal businessoperations.

 

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

 

Ourexpansion plans to open additional stores will require substantial capitalcommitments and outlays to acquire land rights, construct new buildings,purchase machines and related equipment, hire operational personnel and procureother resources associated with establishing new pachinko stores.  We have received most of our financing todate from paid in capital from founders and existing shareholders, bank loansand cash flow from the operation of our existing business.  As we expand, our capital requirements willincrease.  If for any reason we areunable to meet our capital requirements, we will be unable to attain ourexpansion plans, which could adversely affect or ability to compete and ourfinancial results.

 

***We need to enhance our internal controls inorder in ensure the accuracy of our financial reporting.***

 

Ourauditors have advised us of certain significant internal control deficienciesthat they consider to be, in the aggregate, a material weakness, including,inadequate staffing and supervision leading to the untimely identification andresolution of certain accounting matters; failure to perform timely reviews,substantiation and evaluation of certain general ledger account balances; lackof procedures or expertise needed to prepare all required disclosures; andevidence that employees lack the qualifications and training to fulfill theirassigned functions.  Our auditorsindicated that they considered these deficiencies to be a material weakness asthat term is defined under standards established by the American Institute ofCertified Public Accountants. We considered these matters in connection withthe year-end closing of accounts and preparation of financial statements as andfor the year ended May 31, 2004 and determined that no prior period financialstatements were materially affected by such matters.

 

Inresponse to the observations made by our auditors we will proceed moreexpeditiously with our existing plan to enhance our internal controls andprocedures, which we believe addresses each of the matters raised by ourauditors.

 

Weenhanced our internal control procedures in January 2004 by adding a part-timededicated Chief Accounting Officer (“CAO”) to our principal executive officesin Huntington Beach, California.  We areevaluating the need 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 of anannual budget and report budget-to-actual analyses on an annual and quarterlybasis.

 

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***An active trading market may not developfor our common stock, which make it difficult for shareholders to sell theirshares of our stock.***

 

Ourshares of common stock are publicly quoted on NASD over-the-counter bulletinboard system.  Securities listed on theOTC bulletin board generally have less trading volume and institutional marketsupport and therefore may be susceptible to greater fluctuations in price andhave a lower degree of liquidity than shares listed on a larger exchange, suchas the NASDAQ or NYSE.  Ownership of ourcommon stock is highly concentrated and the daily trading volume does not yetprovide significant liquidity.  Tradingmay be difficult due to the limited public float, narrow base of shareholdersand the lack of an institutional market-maker to provide liquidity and pricingsupport for the Company’s stock.

 

***Our common stock is subject to penny stockregulation, which may affect its liquidity.***

 

Ourcommon stock is subject to regulations of the Securities and ExchangeCommission (the “Commission”) relating to the market for penny stocks. Pennystock, as defined by the Penny Stock Reform Act, is any equity security nottraded on a national securities exchange or quoted on the NASDAQ National orSmall Cap Market that has a market price of less than $5.00 per share. Thepenny 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 experience extremeprice and volume fluctuations***

 

Dueto the limited trading volume and public float, the concentration of shareownership, and the lack of market-makers in the Company’s stock, attempts tobuy or sell a substantial number of shares could result in significant marketprice fluctuations.

 

***Our management controls a substantialpercentage of our outstanding voting securities.***

 

Ourmanagement, together with family members, control approximately 90% of theoutstanding voting control of our company. Consequently, it would be almostimpossible for a third party to obtain control of our company, or influence ourday-to-day operations.

 

# **ITEM 2****. DESCRIPTION OFPROPERTY**

 

Wesublease approximately 500 square feet in Huntington Beach, California, for ourdomestic executive offices.  The leaserequires monthly rental payments of $1,000, and has a term that expires on June30, 2005. Subject to the sublessor’s ability to keep the underlying lease in effect,we have an option for an additional year at a price to be mutually agreedupon.  Our lessor under this lease is acorporation that is controlled by Mr. Miyano, a director of our company.

 

Ouroperating subsidiary in Japan leases its head office from two individuals underseparate leases, one of whom is Mr. Yoneji Hirabayashi.  The aggregate monthly rent through May 31,2004 for the head office was $3,919, of which $3,584 per month was paid to Mr.Hirabayashi.  The lease with Mr.Hirabayashi has a remaining term through May 31, 2005, at a new monthly rentalof $1,792 while the other lease is month to month.

 

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With respect to our five pachinkostores, 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**                          | ** ** | **Kamikawa**                                             | ** ** | **Jimokuji**                                                       | ** ** |
|----------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Opening date**                       |       | 1973                                                     |       | 1974                                          |       | 1996                                       |       | 2001                                                     |       | 2003                                                               |       |
| ** **                             |       |                                                     |       |                                          |       |                                       |       |                                                     |       |                                                               |       |
| **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, Kamikawa-cho, Kawachi-gun,  Tochigi-ken |       | Aichi-ken36-2 ChanokidaJinmokaza  JimokujichoOoaza AmagunAichi-ken |       |
| ** **                             |       |                                                     |       |                                          |       |                                       |       |                                                     |       |                                                               |       |
| **Land status**                        |       | Leased                                                   |       | Leased and  owned                             |       | Leased and  owned                          |       | Leased                                                   |       | Leased                                                             |       |
| **Building  status**                   |       | Owned                                                    |       | Owned                                         |       | Owned                                      |       | Owned                                                    |       | Owned                                                              |       |
| **Parking lot  status**                |       | Leased                                                   |       | Leased                                        |       | Leased                                     |       | Leased                                                   |       | Leased                                                             |       |
| **Size (sq. m)**                       |       | 2,501                                                    |       | 7,700                                         |       | 10,712                                     |       | 18,481                                                   |       | 18,182                                                             |       |
| **Parking  Spaces**                    |       | 230                                                      |       | 250                                           |       | 400                                        |       | 620                                                      |       | 640                                                                |       |
| **No. Machines**(pachinko  / pachislo) |       | 224/84                                                   |       | 278/100                                       |       | 252/106                                    |       | 336/252                                                  |       | 400/240                                                            |       |

 

Welease the land and parking lots for each store identified above pursuant tonumerous leases, most of which are not in writing and do not have a specifiedterm.  The aggregate of the monthlypayments under all leases for each store is as follows: J’s Club is $21,723;Shop Inuyama is $16,716; K’s Club is $4,927; Kaminokawa is $29,063 and Jimokujiis $60,756.  In addition to the abovestores, we also have several leases for our planned new store Oyama withaggregate monthly payments of $19,961. The leases for Oyama are for a period of twenty (20) years and willcommence in December of 2004.

 

Theland that we own, together with all of our buildings, serve as collateral fortwo loans from Gifu Shinyo Kinko Bank and Nagoya Bank.  As of May 31, 2004, the outstanding principalbalance of each loan was approximately $20,894,000 and 1,857,000,respectively.  The loan from Gifu ShinyoKinko is comprised of several advances bearing interest at rates between 2.5%and 2.75% per annum, and with maturity dates from November 30, 2004 to November30, 2013.  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 24, 2004 to December 29,2006.

 

# **ITEM 3****. LEGAL PROCEEDINGS.**

 

We are notcurrently a party to any legal proceedings.

 

# **ITEM 4****. SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS.**

 

Bywritten consent dated as of July 6, 2004, a majority of our shareholdersapproved an amendment to our Articles of Incorporation to change our name toExam USA, Inc. and to increase the number of shares our authorized common stockto 100,000,000 shares.  In addition, theshareholders approved an amendment to Section 2.01 of our Bylaws in order toclarify the procedure for changing the number of members on our Board ofDirector.  In connection with the writtenconsent, we filed an Information Statement of Schedule 14c that was mailed toour shareholders commencing on July 19, 2004.

 

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In accordance with applicable federalsecurities laws, the items approved by our shareholders by written consent wereeffective on August 9, 2004.

 

Otherthan the foregoing, there were no other matters submitted to a vote of oursecurity holders during the fiscal year ended May 31, 2004.

 

**PART II**

 

# **ITEM 5****. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY ANDOTHER STOCKHOLDER MATTERS.**

 

# **MarketPrice**

 

Ourcommon stock is traded on the NASD Electronic Bulletin Board over-the-countermarket, and is quoted under the symbol EXMA. The table below gives the range of high and low bid prices of our commonstock for the fiscal years ended May 31, 2004 and May 31, 2003 based oninformation provided by the OTC Bulletin Board. Such over-the-counter marketquotations reflect inter-dealer prices, without mark-up, mark-down orcommissions and may not necessarily represent actual transactions or a liquidtrading market. The following prices have been adjusted to reflect our 15 to 1reverse stock split which was effective June 11, 2004.

 
| ** **    | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------|------------|----------|------------|---------|------------|
| May 31, 2004: |       |     |       |    |       |
| 1st Quarter   |       | $        | 0.45       |    | $          | 0.07 |   |
| 2nd Quarter   |       | $        | 1.20       |    | $          | 0.25 |   |
| 3rd Quarter   |       | $        | 10.65      |    | $          | 0.53 |   |
| 4th Quarter   |       | $        | 7.50       |    | $          | 1.65 |   |
|          |       |     |       |    |       |
| May 31, 2003: |       |     |       |    |       |
| 1st Quarter   |       | $        | 0.45       |    | $          | 0.15 |   |
| 2nd Quarter   |       | $        | 1.20       |    | $          | 0.15 |   |
| 3rd Quarter   |       | $        | 0.38       |    | $          | 0.07 |   |
| 4th Quarter   |       | $        | 0.22       |    | $          | 0.07 |   |

 

Whenthe trading price of our common stock is below $5.00 per share, our commonstock is considered to be “penny stocks” that are subject to rules promulgatedby the Securities and Exchange Commission (Rule 15-1 through 15g-9) under theSecurities Exchange Act of 1934. These rules impose significant requirements onbrokers under these circumstances, including: (a) delivering to customers theCommission’s standardized risk disclosure document; (b) providing customerswith current bid and ask prices; (c) disclosing to customers thebrokers-dealer’s and sales representatives compensation; and (d) providing tocustomers monthly account statements.

 

Thenumber of shareholders of record of our common stock as of September 17, 2004was 137.

 

**Preferred Stock**

 

Ourboard of directors has the authority, without further action by thestockholders, to issue up to 5,000,000 shares of preferred stock in one or moreseries and to fix the rights, preferences, privileges and restrictions of theseshares of preferred stock without any further vote or action by stockholders.These rights and preferences include dividend rights, conversion rights, votingrights, terms of redemption, liquidation preferences, sinking fund terms andthe number of shares constituting any series or the designation of the series.The issuance of preferred stock could adversely affect the voting power ofholders

 

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of common stock and the likelihood that theholders will receive dividend payments and payments upon liquidation and couldhave the effect of delaying, deferring or preventing a change in control.

 

Asof October 6, 2004, we had outstanding 1,800,000 shares of Series E ConvertiblePreferred Stock that were originally issued in connection with our acquisitionof Exam USA, Inc., a Delaware corporation. Each outstanding share of Series E Preferred Stock is convertible into10 shares of our common stock, and is entitled to 10 votes on matters submittedto our shareholders for approval or consent. The shares of Series E Convertible Preferred Stock may be converted intoCommon Stock at any time at the option of the holders thereof.

 

**Common Stock**

 

OurArticles of Incorporation authorize 100,000,000 shares of common stock, $0.01par value per share. As of September 17, 2004, we had 2,000,147 shares ofcommon stock issued and outstanding that were held by approximately 137stockholders of record.

 

**Options**

 

Wehave no outstanding options to purchase shares of our common stock

 

**Registrar and Transfer Agent**

 

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

 

**Dividend Policy**

 

Wehave not adopted any policy regarding the payment of dividends on our commonstock.  We do not intend to pay any cashdividends on our common stock in the foreseeable future. We intend to investall of our cash resources in developing our business.

 

**Recent Sales of Unregistered Securities**

 

OnJune 3, 2004, we issued to the stockholders of Exam Delaware 1,800,000 sharesof Series E Convertible Preferred Stock with a par value of $0.01 per share inconnection with the Share Exchange Agreement. The shares of Series E Convertible Preferred Stock were issued in aprivate transaction exempt from the registration requirements pursuant toSection 4(2) of the Securities Act of 1933, as amended.

 

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

 

**Overview**

 

EXAMUSA, Inc. and subsidiary completed a reverse acquisition with OlympicEntertainment Group, Inc., a blank-check company, on June 3, 2004.  The financial statements previously reportedby Olympic Entertainment Group, Inc. were retroactively restated for allperiods reported to reflect the historical financial position, results ofoperations and cash flows of EXAM USA, Inc. and subsidiaries.

 

Throughour subsidiaries, we own and operate five pachinko stores, which is our primaryoperating business.  We opened our fifthstore in December 2003, which is our largest store with 640 machines.  We operate a total of 2,272 Pachinko andPachislo machines.  We plan to leverageour expertise and capitalize on new development opportunities, and we areexpanding our operations in Japan.  We expectto spend approximately $9.0 million to construct and furnish a new store(excluding the cost of the land which we will lease), which is expected to openin December 2004.

 

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**Results of Operations**

 

**Year Ended May 31, 2004 Compared to Year Ended May 31, 2003**

 

***OperatingRevenues and Costs***

 

A summary of the gaming revenues for theyears ended May 31, 2004 and 2003 are as follows:

 
| ** **              | ** ** | **2004**     | ** **  | **2003**       | ** ** |
|-------------------------|------------|--------------|-------------|----------------|------------|
| ** **              | ** ** | **Amount**   | ** **  | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
|                    |       |         |        |           |       |   |   |   |   |
| Patron wagers (pay-ins) |       | $            | 166,022,684 |           | 100.0      | % | $ | 130,084,727 |   | 100.0 | % |
|                    |       |         |        |           |       |   |   |   |   |
| Patron payouts          |       | (148,603,069 | )           | (89.5          | )          | (115,344,986 | ) | (88.8 | ) |
|                    |       |         |        |           |       |   |   |   |   |
| Gaming revenues         |       | $            | 17,419,615  |           | 10.5       | % | $ | 14,739,741 |   | 11.2 | % |

 

Consistent with the gaming industry, wereport our revenues as the net of wagers less payouts.  Our gaming revenues increased by $2,679,874from 2003 to $17,419,615 in 2004, an increase of 18.2 %.  Approximately $1,670,000 was related to theopening of the new store in December 2003. After excluding such new store effects, our same-store revenues (storesthat have been opened for at lease one year) increased 6.9%, which is largelyattributable to increases at our store which we opened in July 2001 andoperates 588 machines, our second largest store.  Other revenues, consisting of food, limitedbeverages and sundry items, decreased by $246,451 to $443,361 or 35.7% becauseof reduced emphasis of such revenues.

 

Our gross wagers increased $35,937,957or 27.6% from fiscal 2003 to $166,022,684 in fiscal 2004.  Our new store which opened in December 2003contributed to $31,073,793 of such increase in wagers.  Our payouts increased by $33,258,083 or 28.8%from fiscal 2003 to $148,603,069 in fiscal 2004.  Our payouts as a percentage of wagersincreased from 88.8% to 89.5%.  Thisincrease in payouts is largely due to the new store opening in December 2003,for which we paid out 94.6% of wagers to attract new customers through May 31,2004.  We generally increase our payoutsupon opening a new store, then steadily decrease payouts over the next six (6)months after opening.  After excludingsuch new store effects, our same-store payouts decreased from 88.8% in 2003 to88.3% in 2004, which is largely attributable to reasons described in thepreceding paragraph**.**

 

***Costof Revenues***

 

Costs of revenues as a percentage oftotal revenues for the years ended May 31, 2004 and 2003 are as follows:

 
| ** **                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Salaries and wages                    |       | 22.1     | %          | 21.4     | %          |
| Depreciation                          |       | 28.7     | %          | 21.6     | %          |
| Facilities and other                  |       | 26.6     | %          | 24.1     | %          |
| Impairment of property and  equipment |       | 8.6      | %          | 11.2     | %          |
| Total cost of revenues                |       | 86.0     | %          | 78.3     | %          |

 

Cost of revenues for 2004 increased by$3,292,633 or 27.3% from $12,074,827 to $15,367,460 compared to the year endedMay 31, 2003.  As a percentage ofrevenues, our costs in 2004 increased to 86.0% from 78.3% in 2003.  The largest contributor to this increase isdepreciation expense due to addition of our new store in December 2003, as wellas lower revenues because of higher payouts at our new store.  Depreciation expense is accelerated in theyear of acquisition for machines and equipment acquired.

 

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Facilities costs include certain start-up costsconsisting of supplies and pachinko balls, associated with the new storeopening in December 2003, which exceeded $300,000.

 

We recorded impairments on land in theamount of $94,881 and $92,821 in 2004 and 2003, respectively, due to adeclining real estate market.  We basedfair value using local property tax assessor’s statements which approximatemarket value.  In addition, we providedimpairments for machines which were removed from service prior to their usefullife.  Machine lives are generally twoyears, depending on technologies, playing habits and customer preference.  During the years ended May 31, 2004 and 2003,impairments of machines amounted to $418,809 and $564,189 respectively.  The lives of our machines are decreasingbecause of technologies and customer expectations.  We find that our machines are averaging justover a one-year period.

 

***Marketingand Advertising Expense***

 

Marketing and advertising expensesincreased by $161,685 from $875,195 in 2003 to $1,036,880 in 2004. The increaseis attributable to the new store which opened in December 2003, whereby wespent $233,725 for marketing and advertising expenses.  Our primary expenses related to preparingflyers for delivery in newspapers aimed at approximately 80,000subscribers.  As a percentage ofrevenues, we spent 5.7% and 5.8%, in fiscal 2003 and 2002, respectively, whichis comparable, but up slightly due to the new store advertising costs incurred.

 

***General andAdministrative Expenses***

 

General and administrative expenses forthe year ended May 31, 2004 increased by $520,282, or 83.6% from $622,333 in2003. General and administrative expenses for 2004 constituted 6.4 % ofrevenues in comparison to 4.0 % for 2003. The increase in general andadministrative costs can be attributed primarily to: (1) increase in salary andbenefits cost to support an expanding infrastructure in Japan and to a limitedextent, the United States, and (2) increases in professional fees and directorfees related in anticipation of becoming a public company.  Director fees were not incurred in 2003, andfor the year ended May 31, 2004, we incurred $300,000 in such fees ($150,000for each of the two non-employee directors). We reduced our non-employee directors’ fees from $150,000 per directorto $100,000, annually, beginning June 2004 (fiscal 2005).

 

***Other Incomeand Expenses***

 

Interestexpense increased by $210,917 to $705,815 in 2004, from $494,898 in 2003, or42.6%.  This increase is due toborrowings under the Company’s credit facility and capital lease financingarrangements and an increase in the interest rates on our borrowings.

 

***Income Taxes***

 

Incometaxes expense decreased by $157,202 to $459,662 for the year ended May 31,2004, from $616,864 in the prior year. We have incurred expenses in the UnitedStates of America totaling approximately $200,000 in 2003 and $602,916 in2004.  We have no income in the UnitedStates, thus such expenses will result in net operating losses to be carriedforward, for which a valuation allowance is deemed required for the relateddeferred tax assets.  The federal incometax rate in Japan is 30% and the state and local tax, net of federal benefit,is 11.4%. After considering the impact of non-deductible expenses in Japan andthe increase in the valuation allowance for net operating losses in the UnitedStates, the effective tax rate is excessively high in 2004.

 

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***Net income(loss)***

 

Weincurred a net loss for fiscal 2004 of $473,042 versus net income of $486,234in fiscal 2003.  This can be attributedto (1) higher payouts, depreciation and start-up costs of our new store whichwe opened in December 2003 and (2) our income taxes because of expensesincurred in the United States which are apparently not deductible as an expensein Japan.  We plan to decrease payouts atour new store which opened in December 2003 during fiscal 2005, to reduce our losses.  We are evaluating our income taxes in Japanand United States to reduce our effective income rate. New store openings willcontinue to have a drag on earnings for the foreseeable future.

 

**Liquidity and Sources of Capital**

 

***Cash Flows***

 

Duringthe years ended May 31, 2004 and 2003, we generated $5,861,734 and $7,314,682,respectively, of cash flows from operating activities.  Our cash provided by operating activities infiscal 2004 and 2003, included non-cash depreciation and impairment losses of$6,672,132 and $5,061,599, respectively. Our decline in cash generated in 2004 relates primarily to the start-upcosts of our new store which opened in December 2003.

 

During the years ended May 31, 2004 and2003, we used cash of $9,922,046 and $4,245,163, respectively on investingactivities.  We spent approximately$13,466,020 and $4,407,031, respectively, for capital additions (including$4,084,666 and $2,378,635 respectively, for capital leases). The increase in2004 expenditures included approximately $4,000,862 to construct a building,$2,139,727 to supply 640 new machines, and $2,737,049 for computer systems andequipment at the new store which opened in December 2003.  We also replaced 1,758 machines in theordinary course of business in 2004, versus 1,861 machines in 2003.

 

During the fiscal year ended May 31,2004, we provided cash of $7,427,993 from financing activities.  During this period, we financed a new storeand expansion in the amount of $16,307,645 from a bank.  In fiscal 2003, we used cash in our financingactivities in the amount of $2,980,231. We repaid notes payable and long-term debt in the amounts of $7,483,865.

 

# ***Liquidity***

 

Our working capital balance as of May31, 2004 was $2,309,463 and our unrestricted cash balance was $6,052,970.During 2005, we expect to spend approximately $9,000,000 on our new storeopening in December 2004.  We arefinancing most of these expenditures with long-term debt and capital leases.

 

We believe that our cash balances, cashflow from operations, and available lines of credit will be sufficient to coverany capital required to fund maturing debt obligations and any othercontemplated capital expenditures and short-term funding requirements for thenext 12 months.  We may also finance ourexpansion through the public or private sale of additional debt or equitysecurities.

 

Our level of indebtedness presents otherrisks to investors, including the possibility that we may be unable to generatecash sufficient to pay the principal of and interest on our indebtedness whendue; and that we may not be able to meet tests and covenants of such debtagreements and achieve satisfactory resolution of such non-compliance with thelenders. In such an event, the holders of our indebtedness may be able todeclare all indebtedness owing to them to be due and payable immediately, andproceed against any collateral securing such indebtedness. These actions couldlimit our ability to borrow additional funds and would likely have a materialadverse effect on our business and results of operations.

 

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**Critical Accounting Policies**

 

Our significant accounting policies areincluded in Note 2 to our Consolidated Financial Statements included elsewherein this Report. These policies, along with the underlying assumptions and judgmentsmade by our management in their application, have a significant impact on ourconsolidated financial statements.

 

***Impairmentof Long-Lived Assets***

 

We review the carrying value of ourlong-lived assets whenever events or changes in circumstances indicate thatsuch carrying values may not be recoverable annually. Unforeseen events andchanges 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 taxes inaccordance with *Statement of FinancialAccounting Standards No. 109, Accounting for Income Taxes* (SFAS No.109) which requires that deferred tax assets and liabilities be recognizedusing enacted tax rates for the effect of temporary differences between thebases used for financial reporting and income tax reporting of recorded assetsand liabilities. SFAS No. 109 also requires that deferred tax assets be reducedby a valuation allowance if it is more likely than not that some portion or allof the deferred tax asset will not be realized. We have provided a valuationallowance at May 31, 2004 because we feel that certain deferred tax assetsgenerated in the United States will not be recovered from future operations.

 

# **ITEM 7****. FINANCIAL STATEMENTS.**

#  

Theconsolidated financial statements of Exam for its fiscal year ended May 31,2004 are provided with this Form 10-KSB and are incorporated herein byreference.

 

# **ITEM 8****. CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

#  

OnSeptember 2, 2004, our Board of Directors of Exam USA, Inc. approved a changein auditors.  The Board of Directorsapproved the dismissal of Malone & Bailey PLLC (“Malone & Bailey”) asour independent public accountants and the selection of McKennon, Wilson &Morgan, LLP as their replacement.

 

Malone& Bailey’s report on our financial statements for the last fiscal yearended December 31, 2003 did not contain any adverse opinion or disclaimer ofopinion, nor was it qualified or modified as to audit scope, procedure oraccounting.  Our financial statements forthe fiscal 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.

 

Duringour two most recent fiscal years ended December 31, 2003 and 2002 and thesubsequent interim periods through September 2, 2004, there were nodisagreements between us and either Malone & Bailey (as to the fiscal yearended December 31, 2003 and the subsequent interim periods through September 2,2004) or Scheifley & Associates on any matter of accounting principles orpractices, financial statement disclosure, or auditing scope or procedure,which disagreements, if not resolved to Malone & Bailey’s or Scheifley’ssatisfaction, would have caused either of them to make reference to the subjectmatter of the disagreement in connection with their respective reports on ourfinancial statements for such years; respectively, and there were no reportableevents as described in Item 304(a)(1)(v) of Regulation S-K.

 

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Inaddition, during our two most recent fiscal years ended December 31, 2003 and2002 and the subsequent interim periods through September 2, 2004, we did notconsult with McKennon, Wilson & Morgan, LLP with respect to the applicationof accounting principles to a specified transaction, either completed orproposed, or the type of audit opinion that might be rendered on our financialstatements, or any other matters or reportable events as set forth in Items304(a)(2)(i) and (ii) of Regulation S-K.

 

# **ITEM 8A****. CONTROLSAND PROCEDURES**

 

Ourprincipal executive officer and principal financial officer have evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended) as of the end of the period covered by thisannual report on Form 10-KSB. Based on this evaluation, our principal executiveofficer and principal financial officer concluded that these disclosurecontrols and procedures need improvement to ensure that the informationrequired to be disclosed in our reports filed or submitted under the SecuritiesExchange Act of 1934, as amended, is recorded, processed, summarized andreported within the requisite time periods.

 

Inconnection with its review of the our consolidated financial statements for theyear ended May 31, 2004, McKennon, Wilson & Morgan LLP, the Company’sindependent accountants, advised management of certain significant internalcontrol deficiencies that they considered to be, in the aggregate, a materialweakness, including, inadequate staffing and supervision leading to theuntimely identification and resolution of certain accounting matters; failureto 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. McKennon, Wilson & Morgan LLP indicated that they considered thesedeficiencies 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 appropriately low level the risk that materialmisstatements in our financial statements will not be prevented or detected ona timely basis. We considered these matters in connection with the year-endclosing of accounts and preparation of financial statements as and for the yearended May 31, 2004 and determined that no prior period financial statementswere materially affected by such matters.

 

Inresponse to the observations made by McKennon, Wilson & Morgan LLP, we willproceed more expeditiously with our existing plan to enhance our internalcontrols and procedures, which we believe addresses each of the matters raisedby, McKennon, Wilson & Morgan LLP.

 

**Changes inInternal 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 of anannual budget and report budget-to-actual analyses on an annual and quarterlybasis.

 

18

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**PART III**

 

# **ITEM 9****. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROLPERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.**

 

**Executive Officers and Directors**

 

Ourexecutive officers and directors are as follows: 

 
| **Name (1)(2)**      | ** ** | **Age** | ** ** | **Position**                         |
|----------------------|------------|---------|------------|--------------------------------------|
| Yoneji Hirabayashi   |       | 73      |       | Chief Financial Officer and Director |
| Shinichi Hirabayashi |       | 43      |       | Chief Executive Officer and Director |
| Akinori Hirabayashi  |       | 41      |       | Chief Operating Officer and Director |
| Haruo Miyano         |       | 62      |       | Secretary and Director               |

 

----

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

(2)                                  Ourofficers and directors hold office until their successors are elected andqualified, or until their death, resignation or removal.

 

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

 

**Yoneji Hirabayashi.**  age 72, a successful businessman, Mr.Hirabayashi had worked for the Ministry of Agriculture before operating theAccounts Division of the Aichi Prefecture Owari Office.  Possessing an entrepreneurial spirit, heopened up a restaurant, followed by a hotel and then a slew of successfulPachinko and Karaoke stores in the mid 1950’s. He founded Kisorin in 1956, andlater became its President from 1969 to 1999, which was later renamed Exam,Inc.  Mr. Yoneji Hirabayashi is thefather of Shinichi Hirabayashi and Akinori Hirabayashi.  Mr. Hirabayashi oversees Exam, Inc. as itsChairman.

 

**Shinichi Hirabayashi.**  age 43, Mr. Shinichi Hirabayashi is the sonof Mr. Yoneji Hirabayashi.  Mr. ShinichiHirabayashi has been the President of Exam, Inc. since 1999. Following in hisfather’s footsteps, Mr. Hirabayashi joined Exam, Inc. in 1983 after working forToyoshima Inc.  He is a graduate of KeioUniversity and he holds a Bachelor of Commerce.

 

**Akinori Hirabayashi. **age41, Mr. Akinori Hirabayashi is the son of Mr. Yoneji Hirabayashi.  Mr. Akinori Hirabayashi is the Vice Presidentof Exam, Inc.  Mr. Hirabayashi became aDirector of one of Exam, Inc.’s Pachinko stores in 1985.  He has served in his current capacity since1999.  Since then, he has directlyoverseen four Karaoke stores, with the most recent one being assigned to him in2001 (Exam Kaminokawa Branch).  He graduatedfrom Nagoya University where he majored in Mathematics.

 

**Haruo Miyano,** age 62, Mr. Miyano has beenthe Secretary and a Director of the Company and its Delaware subsidiary sinceJune 2004 and its’ inception, respectively. Mr. Miyano has over 30 years of experience in trade between the UnitedStates and Japan.  Prior to joining theCompany and its affiliates, Mr. Miyano served as the Vice Chairman of Pulp MoldPackaging Global, 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 Sports World, Inc.He served as Kasumi’s Vice President of Sales and Marketing and was a Director,and was responsible for handling the sale of sporting goods to 375 franchisesthroughout the United States.

 

# **Financial Expert**

 

TheCompany has no audit committee financial expert, as defined under Section228.401, serving on its audit committee because it has no audit committee andis not required to have an audit committee because it is not a listed securityas defined in Section 240.10A-3.

 

19

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# **Section 16 Compliance**

 

Section16(a) of the Securities Exchange Act of 1934, as amended, requires ourdirectors and executive officers, and persons who beneficially own more than10% of a registered class   of our equitysecurities, to file reports of beneficial ownership and changes in beneficialownership of our securities with the SEC on Forms 3 (Initial Statement ofBeneficial Ownership), 4 (Statement of Changes of Beneficial Ownership   of Securities) and 5  (Annual Statement of Beneficial Ownership ofSecurities).  Directors, executiveofficers and beneficial owners of more than 10% of our Common Stock arerequired by SEC regulations to furnish us with copies of all Section 16(a)forms that they file. Except for Dominic Orsatti and John Holt Smith, formerdirectors and officers (each of whom filed Form 5’s for transactions notpreviously reported on Form 4), based solely on review of the copies of suchforms furnished to us, or written representations that no reports were required,we believe that for the fiscal year ended May 31, 2004 beneficial ownerscomplied with Section 16(a) filing requirements.

 

**Code of Business Conduct and Ethics**

 

OurBoard of Directors has approved a Code of Business Conduct and Ethics, whichapplies to all of our employees, directors and officers, including ourprincipal executive officer, principal financial officer, principal accountingofficer 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 Codeof Business Conduct and Ethics is available free of charge to any shareholderwho sends a request for a paper copy to Exam USA, Inc., 5902 Bolsa Avenue,Suite 108, Huntington Beach, California 92649.

 

# **ITEM 10****. EXECUTIVECOMPENSATION**

 

Thefollowing table sets forth the total cash compensation, paid to or earnedduring each of our last three fiscal years by (i) our Chief Executive Officerand (ii) our two most highly compensated executive officers whose salary andbonus exceeded $100,000 for the fiscal year ended May 31, 2004 (collectivelyreferred to herein as the “Named Executive Officers”).

 

SUMMARY COMPENSATION 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                |       | 5/31/2004        |       | $                        | 365,592    |                        | $          | 45,491 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |
| (President and CEO)                 |       | 5/31/2003        |       | $                        | 207,555    |                        | $          | 24,907 |   | $ | 81,753 |   | 0 |   | 0 |   | 0 |   | 0 |   |
|                                |       | 5/31/2002        |       | $                        | 81,098     |                        | $          | 31,741 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |
|                                |       |             |       |                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Yoneji Hirabayashi                  |       | 5/31/2004        |       | $                        | 250,896    |                        | $          | 19,921 |   | $ | 85,197 |   | 0 |   | 0 |   | 0 |   | 0 |   |
| (CFO)                               |       | 5/31/2003        |       | $                        | 199,253    |                        | $          | 16,604 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |
|                                |       | 5/31/2002        |       | $                        | 80,067     |                        | $          | 15,870 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |
|                                |       |             |       |                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Akinori Hirabayashi                 |       | 5/31/2004        |       | $                        | 334,767    |                        | $          | 35,842 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |
| (COO)                               |       | 5/31/2003        |       | $                        | 207,555    |                        | $          | 24,907 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |
|                                |       | 5/31/2002        |       | $                        | 80,940     |                        | $          | 31,741 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |

 

----

(1)           The salary and bonus figuresrepresent the compensation paid to the Named Officers by our wholly-ownedsubsidiary, in their respective capacities as officers of our wholly-ownoperating subsidiary, Exam Co. Ltd.

(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 Exchange Commission.  Amounts shown represent the value ofautomobiles purchased by Exam Co. Ltd. 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.

 

20

----

 

**Director Compensation**

 

Pursuantto an agreement we paid our non-employee director, Mr. Miyano, an retainer of$150,000 in consideration for his board services to the Company during thefiscal year ended May 31, 2004.  Thisagreement expired on May 31, 2004, and was replaced with a new agreementpursuant to which we are obligated pay Mr. Miyano annual board fees of $100,000for a period of three years.

 

Mr. Miyamoto, who serves as amember of our Delaware subsidiary, was paid an annual fee of $150,000, in considerationfor his board services to such subsidiary. This agreement expired on May 31, 2004, and was replaced with a newagreement pursuant to which our subsidiary is obligated pay Mr. Miyamoto annualboard fees of $100,000 for a period of three years.  During the years ended May 31, 2004, 2003 and2002, our operating company in Japan paid $48,934, $46,409 and $62,758,respectively, for consulting services to SIM International, which is controlledby Mr. Miyamoto.

 

# **ITEM 11****. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

 

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:

 

•                  eachperson known to beneficially own more than five percent of the Common Stock;

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

•                  alldirectors and executive officers as a group.

 
| **Title of Class** | ** ** | **Name of  Beneficial Owner**                                      | ** ** | **Amount and  Nature of  Beneficial Owner (1)** | ** ** | **Percent of  Class** | ** ** |
|--------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------|------------|
| Common Stock       |       | Yoneji Hirabayashi                                                 |       | 1,922,330 shares  (2)  CFO and Director         |       | 9.6                   | %          |
| Common Stock       |       | Shinichi Hirabayashi                                               |       | 2,097,090  shares (3)  CEO and Director    |       | 10.5                  | %          |
| Common Stock       |       | Akinori Hirabayashi                                                |       | 5,592,230 shares  (3)  COO and Director         |       | 28.0                  | %          |
| Common Stock       |       | Haruo Miyano                                                       |       | 262,137 shares  Secretary and Director          |       | 1.3                   | %          |
| Common Stock       |       | Ai Hirabayashi                                                     |       | 1,048,540 shares  5%  shareholder          |       | 5.2                   | %          |
| Common Stock       |       | Shiho Hirabayashi                                                  |       | 1,048,540 shares  5% shareholder                |       | 5.2                   | %          |
| Common Stock       |       | Yuka Hirabayashi                                                   |       | 1,048,540 shares  5% shareholder                |       | 5.2                   | %          |
| Common Stock       |       | Hirotaka Hirabayashi                                               |       | 1,048,540 shares  5% shareholder                |       | 5.2                   | %          |
| Common Stock       |       | Misaki Hirabayashi                                                 |       | 1,048,540 shares  5% shareholder                |       | 5.2                   | %          |
| Common Stock       |       | Arisa Hirabayashi                                                  |       | 1,048,540 shares  5% shareholder                |       | 5.2                   | %          |
| Common Stock       |       | Mie Hata                                                           |       | 2,796,120 shares  (4)  5% shareholder           |       | 14.0                  | %          |
| Common Stock       |       | All directors and named executive officers  as a group (4 persons) |       | 6,029,127  shares                          |       | 30.3                  | %          |

 

----

(1)Represents the number of shares of common stock that may be acquired upon theconversion of shares of our Series Convertible E Preferred Stock.

 

21

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(2) Includes 873,790 shares of Common Stockowned by Mr. Hirabayashi’s spouse, over which Mr. Hirabayashi disclaimsbeneficial ownership.

(3) Includes a total of 2,970,870 shares ofCommon Stock owned by Mr. Hirabayashi’s spouse and minor children, over whichMr. Hirabayashi disclaims beneficial ownership.

(4) Includes 1,747,580 shares owned by Mr.Hata’s minor children, over which Mr. Hata disclaims beneficial ownership.

 

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

 

Mr. Yoneji Hirabayashi  leases a parcel of land to the Company inJapan. The lease expires on May 31, 2005; however, it is anticipated that theCompany will renew the lease for an additional term. Lease payments paid to Mr.Hirabayashi for each of the fiscal years ended May 31, 2004, 2003, and 2002with respect to such lease were $43,011, $39,920, and $60,919,respectively.  In addition, he receivedcompensation from Daichi Co., Ltd. in the amount of $26,883, $24,950, and$23,806, for the fiscal years ended May 31, 2004, 2003, and 2002, respectively.

 

**ITEM 13****. EXHIBITS, LIST AND REPORTS ON FORM 8-K.**

 

(A)          Reports on Form 8-K

 

Current report on Form 8-Kfiled on May 27, 2004, to report a change in our certified public accountant.

 

 (B)          Exhibits

 

INDEXTO EXHIBITS

 
| **EXHIBITS** | ** ** | **DESCRIPTION**                                                                                                          |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** ** | ** **                                                                                                               |
| 3.5          |       | Certificate  of Amendment to Articles of Incorporation filed on August 9, 2004                                           |
| 31.1         |       | Certification                                                                                                            |
| 31.2         |       | Certification                                                                                                            |
| 32.1         |       | Certification Pursuant To  18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The  Sarbanes-Oxley Act Of 2002 |
| 32.2         |       | Certification Pursuant To  18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The  Sarbanes-Oxley Act Of 2002 |

 

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

 

For the fiscal year ended May 31, 2004,Exam’s fees for professional services rendered by its Independent Auditors wereas follows:

 

(a)           AuditFees: Aggregate fees billed or expected to be billed for professionalservices rendered for the audit of our May 31, 2004 annual financial statementsand review of Form 10-KSB: $135,000.

 

(b)           AuditRelated Fees: $0.

 

(c)           TaxFees: $0

 

(c)           AllOther Fees: The aggregate fees billed for all other professional servicesprovided to Exam (other than the services described above under (a), (b), and(c)) for the fiscal year ended May 31, 2004: $0.

 

The Board of Directors has considered anddetermined that the services rendered by the independent certified publicaccountants with respect to the foregoing fees are compatible with maintainingtheir independence pre-approved by the Board of Directors.

 

22

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EXAMUSA, INC. (FORMERLY OLYMPIC ENTERTAINMENT GROUP, INC.) AND SUBSIDIARIES

 

 
| **Report  of Independent Registered Public Accounting Firm** |                                                                                                                               |
|--------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|
| **Consolidated  Financial Statements**                       | ** **                                                                                                                         |
|                                                         | Consolidated Balance Sheet  as of May 31, 2004                                                                                     |   |
|                                                         | Consolidated  Statements of Operations and Comprehensive Income (Loss) for each of the two  years in the period ended May 31, 2004 |   |
|                                                         | Consolidated  Statements of Shareholders’ Equity for each of the two years in the period  ended May 31, 2004                  |   |
|                                                         | Consolidated  Statements of Cash Flows for each of the two years in the period ended May  31, 2004                                 |   |
|                                                         | Notes to  Consolidated Financial Statements                                                                                        |   |

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

 

Board of Directors

EXAM USA, Inc. (formerly OlympicEntertainment Group, Inc.)

 

We have audited theaccompanying consolidated balance sheet of EXAM USA, Inc. (formerly OlympicEntertainment Group, Inc.) and its subsidiaries (the “Company”) as of May 31,2004, and the related consolidated statements of operations and comprehensiveincome (loss), shareholders’ equity and cash flows for each of the two years inthe period ended May 31, 2004.  Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial 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 of May 31,2004, and the consolidated results of their operations and their cash flows foreach of the two years in the period ended May 31, 2004, in conformity withaccounting principles generally accepted in the United States of America.

 

As discussed in Note 1, EXAMUSA, Inc. and subsidiary completed a reverse acquisition with OlympicEntertainment Group, Inc., a blank-check company, on June 3, 2004.  The financial statements previously reportedby Olympic Entertainment Group, Inc. were retroactively restated for all periodsreported to reflect the historical financial position, results of operationsand cash flows of EXAM USA, Inc. and subsidiaries.

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

 

 

Irvine, California

September 20, 2004

 

F-2

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

 

**CONSOLIDATEDBALANCE SHEET**

 
| ** **                                                                                                                                                           | ** ** | **May 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| **ASSETS (Note 8)**                                                                                                                                                  |       |             |       |
| Current assets:                                                                                                                                                      |       |             |       |
| Cash                                                                                                                                                                 |       | $                | 6,052,970  |   |
| Time deposits (Note 2)                                                                                                                                               |       | 1,159,261        |       |
| Restricted time deposits (Note 2)                                                                                                                                    |       | 2,545,348        |       |
| Marketable securities (Note 4)                                                                                                                                       |       | 908,942          |       |
| Inventories                                                                                                                                                          |       | 448,354          |       |
| Deferred income taxes (Note 11)                                                                                                                                      |       | 102,736          |       |
| Loans receivable from related party (Note  5)                                                                                                                        |       | 362,450          |       |
| Prepaids and other                                                                                                                                                   |       | 487,928          |       |
|                                                                                                                                                                 |       |             |       |
| Total current assets                                                                                                                                                 |       | 12,067,989       |       |
|                                                                                                                                                                 |       |             |       |
| Property and equipment, net (Note 6)                                                                                                                                 |       | 25,349,204       |       |
| Deferred income taxes (Note 11)                                                                                                                                      |       | 324,456          |       |
| Deposits and other assets (Note 7)                                                                                                                                   |       | 990,271          |       |
| Total assets                                                                                                                                                         |       | $                | 38,731,920 |   |
|                                                                                                                                                                 |       |             |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                        |       |             |       |
| Current liabilities:                                                                                                                                                 |       |             |       |
| Accounts payable                                                                                                                                                     |       | $                | 2,589,241  |   |
| Accrued liabilities (Note 7)                                                                                                                                         |       | 1,903,050        |       |
| Current portion of long-term debt (Note 8)                                                                                                                           |       | 4,142,080        |       |
| Current portion of capital lease  obligations (Note 9)                                                                                                               |       | 1,124,155        |       |
| Total current liabilities                                                                                                                                            |       | 9,758,526        |       |
|                                                                                                                                                                 |       |             |       |
| Long-term debt, net of current portion  (Note 8)                                                                                                                     |       | 21,533,617       |       |
| Capital lease obligations, net of current  portion (Note 9)                                                                                                          |       | 3,002,744        |       |
| Asset retirement obligations (Note 6)                                                                                                                                |       | 560,512          |       |
| Minority interest in related entity (Notes  1 and 2)                                                                                                                 |       | 167,132          |       |
| Total liabilities                                                                                                                                                    |       | 35,022,531       |       |
|                                                                                                                                                                 |       |             |       |
| Commitments and contingencies (Note 9)                                                                                                                               |       |             |       |
|                                                                                                                                                                 |       |             |       |
| Shareholders’ Equity (Notes 2 and 10):                                                                                                                          |       |             |       |
| Preferred stock,  5,000,000 shares authorized:                                                                                                                  |       |             |       |
| Series D convertible preferred stock, $0.01  par value, liquidation value of $3.00 per share, 98,000 shares authorized,  none issued and outstanding at May 31, 2004 |       | —           |       |
| Series E convertible preferred stock, $0.01  par value, no liquidation value,1,800,000 shares authorized, issued and  outstanding at May 31, 2004                    |       | 180,000          |       |
| Common stock, $0.01 par value, 100,000,000  shares authorized, none issued and outstanding at May 31, 2004                                                           |       | —           |       |
| Additional required capital                                                                                                                                          |       | —           |       |
| Restricted retained earnings                                                                                                                                         |       | 41,122           |       |
| Unrestricted retained earnings                                                                                                                                       |       | 3,229,186        |       |
| Accumulated other comprehensive loss                                                                                                                                 |       | 259,081          |       |
| Total shareholders’ equity                                                                                                                                      |       | 3,709,389        |       |
| Total liabilities and shareholders’ equity                                                                                                                      |       | $                | 38,731,920 |   |

 

See accompanying notes to theseconsolidated financial statements

 

F-3

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

 

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**AND COMPREHENSIVE INCOME(LOSS)**

 
| ** **                                                        | ** ** | **Year Ended  May 31, 2004** | ** ** | **Year Ended  May 31, 2003** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **REVENUES:**                                                     |       |                         |       |                         |       |
| Gaming                                                            |       | $                            | 17,419,615 |                         | $          | 14,739,741 |   |
| Food, beverage and other                                          |       | 443,361                      |       | 689,812                      |       |
| Total revenues                                                    |       | 17,862,976                   |       | 15,429,553                   |       |
|                                                              |       |                         |       |                         |       |
| **COST OF  REVENUES:**                                            |       |                         |       |                         |       |
| Salaries and wages                                                |       | 3,951,438                    |       | 3,308,855                    |       |
| Depreciation                                                      |       | 5,131,945                    |       | 3,333,024                    |       |
| Facilities and other                                              |       | 4,753,921                    |       | 3,711,470                    |       |
| Impairment of property and  equipment (Note 6)                    |       | 1,530,156                    |       | 1,721,478                    |       |
| Total cost of revenues                                            |       | 15,367,460                   |       | 12,074,827                   |       |
|                                                              |       |                         |       |                         |       |
| Gross profit                                                      |       | 2,495,516                    |       | 3,354,726                    |       |
|                                                              |       |                         |       |                         |       |
| **OPERATING  EXPENSES:**                                          |       |                         |       |                         |       |
| Marketing and advertising                                         |       | 1,036,880                    |       | 875,195                      |       |
| General and administrative                                        |       | 1,183,832                    |       | 622,333                      |       |
| Total operating expenses                                          |       | 2,220,712                    |       | 1,497,528                    |       |
|                                                              |       |                         |       |                         |       |
| Operating income                                                  |       | 274,804                      |       | 1,857,198                    |       |
|                                                              |       |                         |       |                         |       |
| **OTHER INCOME  (EXPENSE), NET:**                                 |       |                         |       |                         |       |
| Interest income                                                   |       | 6,484                        |       | 9,920                        |       |
| Interest expense                                                  |       | (705,815                     | )          | (494,898                     | )          |
| Other income                                                      |       | 242,932                      |       | 97,797                       |       |
| Gains (losses) on marketable  securities                          |       | 241,366                      |       | (204,190                     | )          |
| Other expense                                                     |       | (73,151                      | )          | (162,729                     | )          |
| Total other expense, net                                          |       | (288,184                     | )          | (754,100                     | )          |
|                                                              |       |                         |       |                         |       |
| Income (loss) before  provision for income taxes                  |       | (13,380                      | )          | 1,103,098                    |       |
|                                                              |       |                         |       |                         |       |
| Provision for income taxes  (Note 11)                             |       | 459,662                      |       | 616,864                      |       |
|                                                              |       |                         |       |                         |       |
| **NET INCOME (LOSS)**                                             |       | $                            | (473,042   | )                            | $          | 486,234 |   |
|                                                              |       |                         |       |                         |       |
| Change in foreign currency  translation                           |       | 266,948                      |       | 117,131                      |       |
| Change in unrealized gain  (loss) on marketable securities        |       | (48,041                      | )          | 26,885                       |       |
|                                                              |       |                         |       |                         |       |
| **TOTAL COMPREHENSIVE  INCOME (LOSS)**                            |       | $                            | (254,135   | )                            | $          | 630,250 |   |
|                                                              |       |                         |       |                         |       |
| Basic and dilutive earnings  (loss) per common share:             |       |                         |       |                         |       |
| Weighted average number of  equivalent common shares              |       | 18,000,000                   |       | 18,000,000                   |       |
| Basic and dilutive net income  (loss) per equivalent common share |       | $                            | (0.03      | )                            | $          | 0.03 |   |

 

See accompanying notes to theseconsolidated financial statements

 

F-4

----

 

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

 

**CONSOLIDATED STATEMENTS OFSHAREHOLDERS****’ EQUITY**

 
| ** **                                          | ** ** | ** **               | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|--------------------------|------------|----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                          | ** ** | **Series E Convertible** | ** ** | **Additional** | ** ** | **Restricted** | ** ** | **Unrestricted** | ** ** | **Other**         | ** ** | ** **             | ** ** |
| ** **                                          | ** ** | **Preferred Stock**      | ** ** | **Required**   | ** ** | **Retained**   | ** ** | **Retained**     | ** ** | **Comprehensive** | ** ** | **Shareholders’** | ** ** |
| ** **                                          | ** ** | **Shares**               | ** ** | **Amount**     | ** ** | **Capital**    | ** ** | **Earnings**     | ** ** | **Earnings**      | ** ** | **Income (Loss)**      | ** ** | **Equity** | ** ** |
|                                                |       |                     |       |           |       |           |       |             |       |              |       |                   |       |       |       |
| Balances, June 1, 2002                              |       | 1,800,000                |       | $              | 180,000    |           | $          | —           |       | $                 | 63,744     |                   | $          | 3,349,648  |       | $ | (103,842 | ) | $ | 3,489,550 |   |
| Net income                                          |       | —                   |       | —         |       | —         |       | —           |       | 486,234           |       | —                 |       | 486,234    |       |
| Change in unrealized gain on  marketable securities |       | —                   |       | —         |       | —         |       | —           |       | —            |       | 26,885                 |       | 26,885     |       |
| Foreign currency translation                        |       | —                   |       | —         |       | —         |       | —           |       | —            |       | 117,131                |       | 117,131    |       |
| Dividends paid to  shareholders                     |       | —                   |       | —         |       | —         |       | —           |       | (83,786           | )          | —                 |       | (83,786    | )          |
| Legal and general  appropriations                   |       | —                   |       | —         |       | —         |       | (22,622          | )          | 22,622            |       | —                 |       | —     |       |
| Balances, May 31, 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    | )          |
| Legal and general  appropriations                   |       | —                   |       | —         |       | —         |       | —           |       | —            |       | —                 |       | —     |       |
| Balances, May 31, 2004                              |       | 1,800,000                |       | $              | 180,000    |           | $          | —           |       | $                 | 41,122     |                   | $          | 3,229,186  |       | $ | 259,081 |   | $ | 3,709,389 |   |

 

See accompanying notes to theseconsolidated financial statements

 

F-5

----

 

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                   | ** ** | **Year Ended  May 31, 2004** | ** ** | **Year Ended  May 31, 2003** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Cash flows  from operating activities:**                                                   |       |                         |       |                         |       |
| Net income (loss)                                                                            |       | $                            | (473,042   | )                            | $          | 486,234 |   |
| Adjustments to reconcile net  income (loss) to net cash provided by operating activities:    |       |                         |       |                         |       |
| Depreciation and accretion  expense                                                          |       | 5,141,976                    |       | 3,340,121                    |       |
| Impairment of property and  equipment                                                        |       | 1,530,156                    |       | 1,721,478                    |       |
| (Gains) losses on marketable  securities                                                     |       | (241,366                     | )          | 204,190                      |       |
| Minority interest                                                                            |       | 26,630                       |       | 7,875                        |       |
| Changes in operating assets  and liabilities:                                                |       |                         |       |                         |       |
| Inventories                                                                                  |       | (232,387                     | )          | 167,999                      |       |
| Deferred income taxes                                                                        |       | 118,730                      |       | 190,167                      |       |
| Prepaids and other                                                                           |       | (399,181                     | )          | 409,759                      |       |
| Accounts payable                                                                             |       | 850,466                      |       | 475,711                      |       |
| Accrued liabilities                                                                          |       | (433,618                     | )          | 311,148                      |       |
| Net cash provided by  operating activities                                                   |       | 5,888,364                    |       | 7,314,682                    |       |
|                                                                                         |       |                         |       |                         |       |
| **Cash flows  from investing activities:**                                                   |       |                         |       |                         |       |
| Purchases of property and  equipment                                                         |       | (9,381,354                   | )          | (4,407,031                   | )          |
| Proceeds from sales of  property and equipment                                               |       | 136,064                      |       | 214,595                      |       |
| Purchases of marketable  securities                                                          |       | (2,922,516                   | )          | (1,049,905                   | )          |
| Proceeds from sales of  marketable securities                                                |       | 2,546,772                    |       | 1,242,997                    |       |
| Time deposits                                                                                |       | 49,166                       |       | (171,876                     | )          |
| Increase in loan receivable                                                                  |       | (206,086                     | )          | —                       |       |
| Other assets                                                                                 |       | (144,092                     | )          | (73,943                      | )          |
| Net cash used in investing  activities                                                       |       | (9,922,046                   | )          | (4,245,163                   | )          |
|                                                                                         |       |                         |       |                         |       |
| **Cash flows  from financing activities:**                                                   |       |                         |       |                         |       |
| Payments on capital lease  obligations                                                       |       | (1,323,297                   | )          | (566,641                     | )          |
| Borrowings of long-term debt                                                                 |       | 16,307,645                   |       | 831,636                      |       |
| Payments on long-term debt                                                                   |       | (7,483,865                   | )          | (2,745,622                   | )          |
| Repayments on notes payable                                                                  |       | —                       |       | (415,818                     | )          |
| Dividends paid                                                                               |       | (72,490                      | )          | (83,786                      | )          |
| Net cash provided by (used  in) financing activities                                         |       | 7,427,993                    |       | (2,980,231                   | )          |
|                                                                                         |       |                         |       |                         |       |
| Foreign currency effect on  cash                                                             |       | 249,444                      |       | 65,497                       |       |
|                                                                                         |       |                         |       |                         |       |
| **Net increase  in cash**                                                                    |       | 3,643,755                    |       | 154,785                      |       |
|                                                                                         |       |                         |       |                         |       |
| Cash, beginning of year                                                                      |       | 2,409,215                    |       | 2,254,430                    |       |
|                                                                                         |       |                         |       |                         |       |
| Cash, end of year                                                                            |       | $                            | 6,052,970  |                         | $          | 2,409,215 |   |
|                                                                                         |       |                         |       |                         |       |
| **Non-cash  investing and financing transactions:**                                          |       |                         |       |                         |       |
| Allocation to restricted  retained earnings under legal requirements                         |       | $                            | —     |                         | $          | (22,622 | ) |
| Purchases of equipment under  capital leases                                                 |       | 4,084,666                    |       | —                       |       |
| Increase in property and  equipment from asset retirement obligations from SFAS 143 (Note 6) |       | $                            | 199,048    |                         | $          | — |   |
|                                                                                         |       |                         |       |                         |       |
| **Cash paid  during the year for :**                                                         |       |                         |       |                         |       |
| Interest                                                                                     |       | $                            | 738,303    |                         | $          | 477,663 |   |
| Income taxes                                                                                 |       | $                            | 641,815    |                         | $          | 347,596 |   |

 

F-6

----

 

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

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

**NOTE 1 - ORGANIZATION AND BUSINESS**

 

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

 

On June 3,2004, the Company completed a reverse acquisition of Olympic EntertainmentGroup, Inc. (“Olympic”), a Nevada Corporation, pursuant to an agreement datedFebruary 9, 2004, as amended June 3, 2004. At the time of acquisition, Olympic had no revenues and no significantassets.  It was considered a blank-checkcompany prior to the acquisition.  Inconnection with the acquisition, Olympic issued the Company 1,800,000 shares ofOlympic Series E preferred stock convertible into 18,000,000 newly issued,post-split shares of its common stock or 90% of the outstanding common stock ofOlympic; Olympic shareholders retained 1,000,000 post-split shares of commonstock and 40,000 Series D convertible preferred, convertible into 1,000,000shares of common stock.  Merger expensesincurred by the Company amounted to approximately $500,000, of which $360,000was a non-cash 1% investment banking fee (Note 9), which was charged tooperations in 2004.  Effective August 9,2004 the Company changed its name from Olympic Entertainment Group, Inc to EXAMUSA, INC.

 

The Companyoperated four (4) stores which offer Pachinko (Japanese pinball) gamingentertainment, three (3) stores are located in the Aichi prefecture and one (1)store is in the Tochigi prefecture just north of Greater Kanto Area in Japan asof May 31, 2003.  In December 2003, theCompany opened a new store in Jimokuji, and now currently operates five (5)stores.  The Company receives income fromcigarettes, non-alcoholic beverages and sundry items, as well as from two smallrestaurants which are not considered significant.  Japanese law regulates Pachinko gaming and thelocal police enforce laws.  Pachinkogaming is one of the largest business segments in Japan.

 

The Companyholds a 50% equity interest in Daichi Co., Ltd., an entity which procurestobacco products for EXAM.  The remaining50% ownership is held by parties affiliated with EXAM.  See Note 2 for further discussion.

 

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

 

*Change in Reporting Entity*

 

As discussedabove, the acquisition of Exam by Olympic will be accounted for as a reverseacquisition, whereby the assets and liabilities of Exam are reported at theirhistorical cost.  The assets andliabilities of Olympic will be recorded at fair value on June 3, 2004, the dateof close.  No goodwill will be recordedin connection with the reverse acquisition. The reverse acquisition resulted in a change in reporting entity ofOlympic for accounting and reporting purposes. Accordingly, the financial statements reported herein have retroactivelyrestated for all periods presented to report the historical financial position,results of operations and cash flows of Exam. Since the shareholders of Examretained 1,800,000 shares of Series E convertible preferred stock in theconnection with the reverse acquisition, which are yet to be exercised intocommon stock, such shares of Series E preferred stock are reflected in theaccompanying statements of stockholders’ equity as if these were outstandingfor all periods presented.  The Series Dconvertible preferred stock and the common stock retained by the Olympicshareholders will be reported on the date of acquisition on June 3, 2004.

 

F-7

----

 

*Acquisition of Entities Under Common Control*

 

Theacquisition of EXAM by EXAM USA was accounted for at historical cost becausethe entities are under common control. The consolidated results of operationsfor the periods reported herein include the historical results of operations ofEXAM, and includes EXAM USA since June 10, 2003.

 

*Consolidation of Variable-Interest Entity*

 

Under FASB InterpretationNo. 46 “Consolidation of Variable Interest Entities” (FIN 46) and revised FIN46 (FIN 46R), certain special purpose entities are required to be consolidatedif it is determined that an enterprise is the primary beneficiary because it isdeemed to have controlling financial interest in the entity. The Company hasdetermined that it has a controlling financial interest in Daichi Co., Ltd.since the Company is required to absorb any expected losses, will receive themajority of expected residual returns and is the primary beneficiary.

 

*Principles of Consolidation*

 

Theaccompanying consolidated financial statements include the accounts of EXAMUSA, EXAM, and Daichi Co., Ltd.  Allsignificant inter-company transactions have been eliminated in consolidation.Minority interest losses related to the consolidation of Daichi Co., Ltd havebeen included in other expense on the accompanying consolidated statements ofoperations.

 

*Use of Estimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from thoseestimates. Significant estimates made by management include the evaluation ofimpairment of property and equipment, as well as the valuation allowance forcertain deferred tax assets.  Managementbelieves that the estimates are reasonable.

 

*Fair Value of Financial Instruments*

 

Financialinstruments consist of cash and cash equivalents, restricted and unrestrictedtime deposits, marketable securities, receivables, inventories, accountspayable, short-term notes payable and long-term debt.** The fair value offinancial instruments approximated their carrying values at May 31, 2004.

 

*Cash Equivalents*

 

The Companyconsiders highly liquid investments with a remaining maturity of 90 days orless from the purchase date to be cash equivalents.  During the periods presented, there were nocash equivalents outstanding.

 

The Companymaintains deposits in United States, which are federally insured, and Japanesebanks, which are not federally insured, but the payoff of the entire depositsare guaranteed by the Japanese government.

 

*Time Deposits*

 

The Companyinvests in time deposits with maturities of one to three years. Time depositsmaturing in excess of one year from the balance sheet date are classified aslong-term time deposits.  At May 31,2004, interest rates on all certificates of deposits were 0.03%, per annum.Time deposits are carried at cost.  Undershort-term note agreements with two commercial banks, the Company is requiredto maintain certain amounts in time deposits as additional collateral on thenotes with banks. These amounts have been classified as restricted timedeposits and have been classified as a current asset consistent with thecurrent portion of long-term debt with the banks.

 

F-8

----

 

*Marketable Securities*

 

Marketable securities are accounted for underthe provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115,“Accounting for Certain Investments in Debt and Equity Securities.”  The Company’s long-term investments consistedof marketable debt and equity securities, which were classified as“available-for-sale” in accordance with the provisions of SFAS No. 115.  Such investments are presented as non-currentassets since management does not intend to sell the securities within one year,and these are carried at their estimated fair values in the accompanyingconsolidated balance sheet.  Fair valuewas determined based on quoted market prices. The specific identification method has been used to determine cost foreach security.  Unrealized gains andlosses are excluded from net income (loss) and reported as a separate componentof shareholders’ equity, net of the related tax effect and as a component ofcomprehensive income (loss), unless the decline is other than temporary (seebelow).

 

The Companymonitors and evaluates the realizable value of its marketable securities. Whenassessing marketable securities for other-than-temporary declines in value, theCompany considers such factors as, among other things, how significant thedecline in value is as a percentage of the original cost, how long the marketvalue of the investment has been less than its original cost, the performanceof the investee’s stock price in relation to the stock price of its competitorswithin the 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.

 

*Inventories*

 

Inventoriesconsist of gaming prizes, food and beverages and are stated at the lower ofcost (determined by the first-in, first-out method) or market.

 

*Property and Equipment*

 

Property andequipment is stated at cost, less accumulated depreciation.  Major 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  |   |

 

Pachinkomachines generally have a useful life of two (2) to three (3) years; however,technology changes and changes in patron playing habits may cause pachinkomachines to become obsolete.  Managementevaluates utilization of machines daily. In the event certain machines become underutilized, management must sellor dispose of the assets.

 

SFAS No. 143“Accounting for Asset Retirement Obligations,” requires that a liability forthe fair value of an asset retirement obligation be recognized in the period whichit is incurred, with the offsetting associated asset retirement costcapitalized as part of the carrying amount of the long-lived asset.  The Company adopted SFAS No. 143 effectiveMay 31, 2001, the effects of which are disclosed in Note 6.

 

SFAS No. 144,“Accounting for Impairment or Disposal of Long-Lived Assets,” requires thatlong-lived assets, such as property and equipment and purchased intangiblessubject to amortization, be reviewed for impairment whenever events or changesin circumstances 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 

 

F-9

----

 

reasonable andsupportable assumptions.  Any impairmentrecognized in accordance with SFAS No. 144 is permanent and may not berestored.  See Note 6 for discussion ofimpairments of property and equipment.

 

*Interest Rate Swap Agreements*

 

Interest rate swapagreements (see Note 8) and the hedged items are such that the hedges areconsidered effective against changes in the fair value of the debt due tochanges in the benchmark interest rates over their terms. As a result, theshortcut method provided by SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” as amended by SFAS No. 149, is applied andthere is no need to periodically reassess the effectiveness of the hedgesduring the terms of the swaps. Interest expense on the debt is adjusted toinclude net payments made or received under the hedge agreements. The fairvalue of the swaps will be carried as an asset or a liability in theconsolidated balance sheet and the carrying value of the hedged debt isadjusted accordingly, when the impact is significant. The fair values of Exam’sinterest rate swaps are the estimated amounts it would receive or pay toterminate the agreements as of the reporting dates.  As discussed in Note 8, theeffects are not considered significant.

 

*Revenue Recognition*

 

Revenues frompachinko and pachislo games represent the gross pay-ins, less payouts tocustomers.  Revenues are recorded whencash is received for game balls or game tokens when rented to the patrons.

 

Payouts arerecorded when 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.

 

*Advertising*

 

Advertisingcosts are expensed as incurred. Advertising expenses for the years ended May 31, 2004 and 2003 were$959,726 and $792,574, respectively.

 

*Accounting for stock-based compensation*

 

The Companyhas not adopted a fair value-based method of accounting for stock-basedcompensation plans for employees and non-employee directors.  The Company will use the intrinsicvalue-based approach, and supplement disclosure of the pro forma impact onoperations and per share information using the fair value-based approach asrequired by SFAS No. 148 “Accounting for Stock-Based Compensation - Transitionand Disclosure”.  Stock-basedcompensation issued to non-employees and consultants are measured at fair valuein accordance with SFAS No. 123.  Commonstock purchase options and warrants issued to non-employees and consultantswill be measured at fair value using the Black-Scholes valuation model.  As of May 31, 2004, there were no options orwarrants outstanding.

 

*Foreign Currency*

 

The functionalcurrency of  EXAM and Daichi Co., Ltd. isthe Japanese Yen.  The financialstatements of EXAM and Daichi Co., Ltd. are translated into United StatesDollars at year-end exchange rates for assets and liabilities, andweighted-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 (loss) and theconsolidated statements of shareholders’ equity.  Transaction gains and losses, if any, inforeign currencies are reflected in operations. During the years ended May 31,2004 and 2003, foreign currency transaction gains or losses were experienced.

 

F-10

----

 

*Income Taxes*

 

The Companyaccounts for its income taxes in accordance with SFAS No. 109, “Accounting forIncome Taxes”.  Under SFAS No. 109,deferred tax assets and liabilities are determined based on temporarydifferences between bases used for financial reporting and income tax reportingpurposes. Income taxes are provided based on the enacted tax rates in effect atthe time such temporary differences are expected to reverse.  A valuation allowance is provided for certaindeferred tax assets if it is more likely than not that the Company will notrealize tax assets through future operations. The Company and its subsidiaries file separate national and local incometax returns in Japan and the United States of America.

 

*Comprehensive Income (Loss)*

 

Comprehensiveincome (loss) is defined as the change in equity of a business enterpriseduring a period from transactions and other events and circumstances fromnon-owner sources, including foreign currency translation adjustments andunrealized gains and losses on marketable securities.

 

Accumulatedother comprehensive income at May 31, 2004, consisted of foreign currencytranslation gain $286,426 and unrealized gains on marketable securities of($27,345), net of tax.

 

**NOTE 3 - RISKS AND UNCERTAINTIES**

 

*Innovations in Technologies*

 

The Company’sgaming machines 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.

 

*Cyclical Nature of Business*

 

The Company’sprimary business involves gaming entertainment. During periods of recession oreconomic downturn, consumers may reduce or eliminate spending on gamingentertainment activities. In the event that any of the Company’s demographicmarkets suffer adverse economic conditions, the Company’s revenues may bematerially adversely affected. In addition, the operations of the pachinkostores are typically seasonal in nature. The sales during the holiday seasonsare higher than the regular months. The biggest holiday season in Japan lies inthe end of December through the beginning of January.  Additionally, revenues can fluctuate when anew type of pachinko machine is introduced at the stores.

 

*Japanese Gaming Regulation*

 

The Company’sbusiness is regulated.  The EntertainmentEstablishment Control Law (EECL) governs a variety of entertainmentestablishments, including pachinko and pachislot stores. The National PublicSafety Commission (NPSC) sets out the general standard of the pachinko storeswithin the scope of EECL. The ability of the Company to remain in business andto operate profitably depends upon the Company’s ability to satisfy allapplicable NPSC gaming laws and regulations governed by EECL

 

*Political Climate*

 

The Company’sability to remain in the gaming business depends on the continued politicalacceptability of pachinko gaming activities to both the public and governmentalofficials. In addition, the gaming laws regulate payout rates which, ifaltered, may diminish the Company’s profitability. Management is aware ofnothing to indicate that NPSC officials will change its policies toward gamingactivities in general; however, there are no assurances that such policies willnot be changed. Any substantial, unfavorable change in the enabling laws or taxrates on gaming revenues could make the Company’s business substantially moreonerous, less profitable or illegal, which would have a material adverse effecton the Company’s business.

 

F-11

----

 

*Competition*

 

The Companyfaces substantial competition in each of the markets in which its gamingfacilities are located. Some of the competitors have significantly greater namerecognition and financial and marketing resources than the Company. Suchcompetition results, in part, from the geographic concentration of competitors.All of the Company’s gaming operations primarily compete with other gamingoperations in their geographic areas. New expansion and development activity isoccurring in each of the relevant markets, which may be expected to intensifycompetitive pressures.

 

*Foreign Currency*

 

Since thelocal currency is the Japanese Yen, the Company may experience significantfluctuations in the value of reported assets and liabilities in United StatesDollars.

 

**NOTE 4 – MARKETABLE SECURITIES**

 

Cost, as adjusted for impairments, andfair market values of marketable securities, accounted for asavailable-for-sale securities, at May 31, 2004, are as follows:

 
| **Securities available for sale**   | ** ** | **Adjusted  Cost Basis** | ** ** | **Unrealized  Gain** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-------------------------------------|------------|--------------------------|------------|----------------------|------------|------------------------|------------|----------------|------------|
| Equity Mutual Fund –  Japan    |       | $                        | 19,301     |                 | $          | 2,927                  |       | $              | —     |   | $ | 22,228 |   |
| Common stocks – Japan          |       | 936,352                  |       | 19,109               |       | (69,102                | )          | 886,359        |       |
| Government securities –  Japan |       | 355                      |       | —               |       | —                 |       | 355            |       |
| Total                               |       | $                        | 956,008    |                 | $          | 22,036                 |       | $              | (69,102    | ) | $ | 908,942 |   |

######  

###### During the year endedMay 31, 2003, we recorded an other than temporary decline in the value of ourmarketable securities in the amount of $39,414, which was charged tooperations.  No unrealized losses werecharged to operations in 2004.

######  

###### **NOTE5 – RELATED PARTY LOANS RECEIVABLE AND INVESTMENT**

 

*Loans Receivable from Related Parties*

 

On March 10,1998, Exam loaned $135,919 to Next Creation Co., Ltd., a related party throughcommon relationship, to finance its operations.   In December 2003 and January 2004, the Company loaned aggregate amounts of$117,796 to Next Creation Co., Ltd.   Thetotal loaned to Next Creation Co., Ltd is $253,715 at May 31, 2004. The loanaccrues interest at 3.65% from 1998 until February 28, 2002 and at 1.83%thereafter. The loan was due and fully satisfied on August 31, 2004.

 

On December17, 2003, Daichi Co., Ltd. loaned $108,735 to Next Creation Co., Ltd. tofinance its operations. The interest rate is 1.825%, due and payable monthly,with the principal portion due at the Company’s demand loan was due and fullysatisfied on August 31, 2004.

 

Also, see Note13 for additional related party transactions.

 

F-12

----

 

**NOTE 6 - PROPERTY AND EQUIPMENT**

 

At May 31,2004, property and equipment consisted of the following:

 
| Land                                      |   | $           | 2,426,463  |   |
|-------------------------------------------|--------|-------------|------------|--------|
| Buildings and improvements                |   | 23,342,616  |       |
| Pachinko machines and  computer equipment |   | 14,707,492  |       |
| Construction in progress                  |   | 138,653     |       |
|                                      |   | 40,615,224  |       |
| Less accumulated depreciation             |   | (15,266,020 | )          |
|                                      |   | $           | 25,349,204 |   |

 

*Land Impairments*

 

Property taxesare assessed yearly on real property (land) based on estimated fair value bythe local cities and towns.  The Companyuses these estimates to determine if investments in real property (land) havebeen impaired. During the years ended May 31, 2004 and 2003, managementrecorded impairments totaling $93,819 and $85,190, respectively.

 

*Other Impairments*

 

During theyears ended May 31, 2004 and 2003, the Company retired pachinko and pachislotmachines, and certain computer equipment prior to the end of their useful liferesulting in losses in such years in the amount of $414,141 and $1,636,288,respectively.

 

*Asset Retirement Obligations*

 

The Companyadopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” duringfiscal year 2003 and applied this change retroactively to all previous yearseffected.  The statement requires that aliability for the fair value of an asset retirement obligation be recognized inthe period which it is incurred with the offset associated asset retirementcost capitalized 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 original condition.  It has been determined that in all cases thelessors will require the Company to restore the land.  At May 31, 2004, the Company increased theirobligated long-lived assets under property and equipment by $199,048 due to thefuture estimated costs related to the new store. The Company used an averagerisk free rate of 2% to discount the estimated obligations and a 40-year usefullife for their retired assets in computing the net retirement obligations as ofMay 31, 2004.  Accretion expense for theyears ended May 31, 2004 and May 31, 2003, was $10,031 and $6,911,respectively.

 

 The reconciliation of the asset retirementobligation is as follows:

 
| Balance, June 1, 2003 –  foreign currency rate effective |   | $       | 351,433 |   |
|---------------------------------------------------------------|--------|---------|---------|--------|
| Liabilities incurred                                          |   | 199,048 |    |
| Accretion expense                                             |   | 10,031  |    |
|                                                          |   |    |    |
| Balance, May 31,2004                                          |   | $       | 560,512 |   |

 

F-13

----

 

*Depreciation*

 

Depreciationexpense charged to operations related to property and equipment during theyears ended May 31, 2004 and 2003 was $5,131,945 and $3,340,051, respectively.  See Note 9 for Equipment under capitalleases.

 

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

 

At May 31,2004, deposits and other assets consisted of the following:

** **
| Deposits                   |   | $       | 755,590 |   |
|----------------------------|--------|---------|---------|--------|
| Prepaid insurance          |   | 112,509 |    |
| Long-term prepaid expenses |   | 85,771  |    |
| Other                      |   | 36,401  |    |
|                       |   |    |    |
|                       |   | $       | 990,271 |   |

 

At May 31,2004, accrued liabilities consisted of the following:

 
| Deferred revenue              |   | $       | 681,443   |   |
|-------------------------------|--------|---------|-----------|--------|
| Salaries and related benefits |   | 482,793 |      |
| Professional fees             |   | 234,615 |      |
| Income taxes payable          |   | 137,508 |      |
| Other                         |   | 366,691 |      |
|                          |   |    |      |
|                          |   | $       | 1,903,050 |   |

 

**NOTE 8 – LONG-TERM DEBT**

 

In July,November, December 2003, and May 2004, the Company entered into five additionallong-term debt agreements with commercial banks totaling approximately$16,491482. The loans were for the construction of the new store.  The loans bear interest rates ranging from2.01% to 2.75% per annum.  These loansare secured by substantially all of the Company’s assets including therestricted time deposits. Long-term debt at May 31, 2004, consisted of thefollowing:

 
| Loans payable to commercial  bank, payable monthly in principal and interest installments ranging from  $3,715 to $362,450, interest between 2.5%-2.75% per annum, due 2004 through  2013, secured by substantially all of the Company’s assets including the  restricted cash and restricted time deposits. |   | $          | 21,129,213 |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|--------|
|                                                                                                                                                                                                                                                                                                              |   |       |       |   |
| 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 2004 through 2006,  secured by substantially all of the Company’s assets.                                                                      |   | 1,877,492  |       |
|                                                                                                                                                                                                                                                                                                              |   |       |       |
| Loan payable to commercial  bank, payable monthly in principal and interest installments at $49,384,  interest at 2.01 per annum, due 2004 through 2008, unsecured.                                                                                                                                               |   | 2,668,992  |       |
| Total long-term debt                                                                                                                                                                                                                                                                                              |   | 25,675,697 |       |
|                                                                                                                                                                                                                                                                                                              |   |       |       |
| Less current portion of  long-term debt                                                                                                                                                                                                                                                                           |   | (4,142,080 | )          |
|                                                                                                                                                                                                                                                                                                              |   |       |       |
| Long-term debt, net of  current portion                                                                                                                                                                                                                                                                           |   | $          | 21,533,617 |   |

 

F-14

----

 

The Company’sobligations are collateralized by substantially all of the Company’sassets.  As a common practice in Japan,the Company’s collateral 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 $452,171 and $383,348, during the years ended May31, 2004 and 2003, respectively.  Futureannual minimum principal payments under long-term debt contracts as of May 31,2004 are as follows:

 
| **Years  ending May 31,** | ** ** | ** ** | ** ** |
|---------------------------|------------|------------|------------|
| 2005                      |       | $          | 4,142,080  |   |
| 2006                      |       | 7,871,693  |       |
| 2007                      |       | 3,896,520  |       |
| 2008                      |       | 2,345,687  |       |
| 2009                      |       | 2,030,355  |       |
| Thereafter                |       | 5,389,362  |       |
|                      |       |       |       |
| Total long-term debt      |       | $          | 25,675,697 |   |

 

Exam enteredinto two interest rate swap and finance commitments on November 28, 2003 andMarch 24, 2004 with Mitsui Sumitomo Bank. First, Exam entered into an agreementwhereby they obtained a commitment for financing in the amount of ¥300,000,000(approximately $2,700,000), which expires on November 28, 2008.  In connection therewith, Exam agreed to pay interestat 1.67%, per annum on the commitment amount, offset by the receipt of interestat 3-month TIBOR (“Tokyo Interbank Offered Rate”).  The proceeds from the loan can be used torefinance or fund new expansion.  Interest payments start on February 29, 2004and at the end of every three months thereafter until expiration. The effect ofthe arrangement was to increase interest expense by approximately $22,336during the year ended May 31, 2004.

 

Inaddition, Exam entered into an agreement whereby they obtained a commitment forfinancing in the amount of ¥100,000,000 (approximately $900,000),which expires on March 24, 2009.  In connection therewith, Exam agreed to payinterest at 1.89%, per annum on the commitment amount, offset by the receipt ofinterest at 3-month TIBOR.  The proceeds from the loan can be used torefinance or fund new expansion.  Interest payments start on June 24, 2004 andat the end of every three months thereafter until expiration. The effect of thearrangement was to increase interest expense by approximately $3,129 during theyear ended May 31, 2004.

 

The termsof the swap agreements and the hedged items are such that the hedges areconsidered effective against changes in the fair value of the debt due tochanges in the benchmark interest rates over their terms. The fair values ofExam’s interest rate swaps are the estimated amounts it would receive or pay toterminate the agreements as of the reporting dates.  As of May 31, 2004, the fair value of theoutstanding swaps was a loss of approximately $122,000.

 

**NOTE 9 - COMMITMENTS AND CONTINGENCIES**

 

*Investment Banking Agreement*

 

OnSeptember 2, 2003, management entered into an agreement for services related toseek a reverse merger partner, a strategic partner or strategic alliances, and,on a best efforts basis, raise additional equity capital.  The Company paid $2,500 per month for seven(7) months, at which date the agreement was cancelled and the monthly feeceased.  In addition, the Company wasrequired to pay a cash fee of 3.5% for equity financing, and issue common stockequal to 1.0% to 1.5% of the outstanding post-merger shares, upon the close ofa transaction.  On June 3, 2004, thetransaction was closed with Olympic.  Theinvestment banker earned a fee of 1% of the post merger, post-reverse-stock-splitcommon stock outstanding of Olympic, in accordance with the contract.  The estimated fair value of $360,000 based onthe average closing ask prices 15 days prior to, and after, the acquisition of$2.00 per share, less a 10% discount for restricted stock or $1.80 pershare.  Also see Note 10.

 

F-15

----

 

*Director Agreements*

 

On June17, 2003, the Company’s retained two (2) outside directors. The agreementsprovide for annual payments of $150,000, plus reimbursement of reasonableexpenses.  The agreements expired on June16, 2004.  Each director was paid$150,000 for the period ending May 31, 2004. In June 2004, new agreements wereexecuted and these provide for annual payments of $100,000, plus reimbursementof reasonable expenses.

 

*Capital Leases*

 

TheCompany leases pachinko machines and computer equipment under leases thatqualify as capital leases.  The pachinkomachine leases were for two years and expired on December 24, 2005.  The computer equipment lease is for a term ofsix years and expires on December 23, 2010.

 

Inconnection with the opening of a new store, the Company entered into a leaseagreement for various pachinko and slot machines at a cost of $1,339,924.  The lease is for a period of 24 months andrequires monthly lease payments ranging from $2,432 to $25,507. Additionally,the Company entered into an agreement to lease computer equipment for$2,721,424. The lease is for 72 months and requires a monthly lease payment of$29,578 and $40,785.  These leases willbe accounted for as a capital leases.

 

Futureannual minimum lease payments for equipment accounted for as capital leases asof May 31, 2004 are as follows:

 
| **Years ending May 31,**                           | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|------------|------------|
| 2005                                               |       | $          | 1,258,767  |   |
| 2006                                               |       | 1,054,251  |       |
| 2007                                               |       | 849,735    |       |
| 2008                                               |       | 522,304    |       |
| 2009                                               |       | 492,537    |       |
| 2010                                               |       | 246,269    |       |
| Total minimum lease  payments                      |       | 4,423,863  |       |
| Less amounts  representing interest                |       | (296,964   | )          |
|                                               |       |       |       |
| Present value of future  minimum lease payments    |       | 4,126,899  |       |
| Less current portion of  capital lease obligations |       | (1,124,155 | )          |
|                                               |       |       |       |
| Capital lease  obligations, net of current portion |       | $          | 3,002,744  |   |

 

Interestexpense related to capital lease obligations amounted to $131,111 and $43,906during the years ended May 31, 2004 and 2003, respectively.

 

Propertyand equipment at May 31, 2004, include the following amounts for capitalizedleases:

 
| Equipment under capital  leases      |   | $          | 6,633,748 |   |
|--------------------------------------|--------|------------|-----------|--------|
| Less accumulated  depreciation       |   | (2,136,612 | )         |
|                                 |   |       |      |
| Equipment under capital  leases, net |   | $          | 4,497,136 |   |

 

F-16

----

 

*Operating Leases*

 

TheCompany leases land at five (5) of its gaming locations.  Minimum monthly rental payments under theseleases range from $4,927 to $60,756, aggregating total payments of $135,462 permonth.  Under Japanese custom, there are oftenno written agreements for the land leases, and terms are agreed uponorally.  The Company has entered intowritten agreements for new leases which last twenty (20) years.  Additionally, under Japanese custom, if significantimprovements are made to the leased land, the land leases are required to beextended by the lessor for as long as the Company is in operation.  The Company has made significantmodifications to the land through construction of buildings and parkinglots.  Thus, the terms of the land leasesin most cases are indefinite.  TheCompany leases land from one of its officers. The monthly lease fee from the officer is $1,792, and the contractexpires on May 31, 2005.  For the yearsended May 31, 2004 and 2003, total rental expense under all land leases wasapproximately $1,219,420 and $801,049, respectively.

 

Futureannual minimum payments under non-cancelable operating leases as of May 31,2004, are as follows:

 
| **Years ending May 31,**                    | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2005                                        |       | $          | 985,874    |   |
| 2006                                        |       | 1,021,391  |       |
| 2007                                        |       | 984,797    |       |
| 2008                                        |       | 981,783    |       |
| 2009                                        |       | 974,786    |       |
| Thereafter                                  |       | 14,046,656 |       |
| Total future annual  minimum lease payments |       | $          | 18,995,287 |   |

 

**NOTE 10 - SHAREHOLDERS’ EQUITY**

 

*Preferred Stock*

 

Theare 5,000,000 shares of preferred stock authorized to be issued.

 

Inconnection with the reverse acquisition of Olympic, Exam shareholders received1,800,000 Series E convertible preferred stock. Each share is convertible into ten (10) shares of common stock or atotal of 18,000,000 shares.  Since Olympicexperienced a change in reporting entity, such shares have been retroactivelyreflected as outstanding for the periods presented.  The shareholders of Exam contributed 26,100shares, each, of Series E Preferred stock to two (2) directors for servicesrendered in connection with going public in the United States on June 3, 2004and to be rendered in fiscal 2005.  Theshares vest 25% on June 3, 2004 and 25% quarterly thereafter.  The shares are convertible into an aggregateof 522,000 shares of common stock.  Examwill record a non-cash charge of $939,600 as compensation expense in fiscal2005, based on the average closing ask prices 15 days prior to, and after, theacquisition of $2.00 per share, less a 10% discount for restricted stock or$1.80 per share.

 

Inconnection with the reverse acquisition on June 3, 2004, the shareholders ofOlympic retained 1,000,000 shares of common stock (post stock split asdiscussed below) and 40,000 shares of Series D convertible preferred stock;each share of Series D preferred is convertible into 25 shares of common stockor an aggregate of 1,000,000 shares. There is a liquidation preference on theSeries D of $3.00 per share if not converted. These shares of common stock and Series D convertible preferred stockare not reflected as outstanding at May 31, 2004, because they will be reportedas part of reverse acquisition on June 3, 2004, as a result of the change inreporting entity.  Exam’s investmentbankers earned 1% of the transaction, or 200,000 shares with an estimated fairvalue of $360,000 (see Note 9). Such compensation is to be paid out of escrowby the holder of Series D convertible preferred stock after September 3, 2004.

 

*Stock Spilt*

 

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.

 

*Restricted Retained Earnings*

 

Asrequired under Japanese laws, the Company must accumulate 10% of dividends paiduntil restricted retained earnings amounts to 25% of common stock.  As of May 31, 2004, the Company was insatisfaction of this requirement.

 

F-17

----

 

*Dividends*

 

Duringthe years ended May 31, 2004 and 2003, the Company paid cash dividends of$72,490 and $83,786, respectively.

 

**NOTE 11 - INCOME TAXES**

 

Thefollowing summarizes the provision for income taxes for the years ended May 31,2004 and 2003:

 
| ** **                  | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Current -                   |       |     |       |     |       |
| Foreign                     |       | $        | 373,502    |     | $          | 420,144 |   |
| Deferred -                  |       |     |       |     |       |
| Foreign                     |       | 86,160   |       | 196,720  |       |
|                        |       |     |       |     |       |
| Provision for income  taxes |       | $        | 459,662    |     | $          | 616,864 |   |

 

Incometaxes in the United States of America were not material.  A reconciliation of the expected statutorynational income tax provision to the provision for income taxes for the yearsended May 31, 2004 and 2003 is as follows:

 
| ** **                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| 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                                               |       | 453.1    | %          | 7.6      | %          |
| Penalties                                           |       | 365.4    | %          | —   |       |
| Other                                               |       | 308.2    | %          | —   |       |
| Increase in valuation  allowance                    |       | 2,349.0  | %          | 7.9      | %          |
|                                                |       |     |       |     |       |
| Provision for income  taxes                         |       | 3,435.3  | %          | 55.9     | %          |

 

At May31, 2004, significant components of the Company’s net deferred taxes are asfollows:

 
| ** **                                                        | ** ** | **2004**  | ** ** |
|-------------------------------------------------------------------|------------|-----------|------------|
| Deferred tax assets  (liability)                                  |       |      |       |
| Current assets:                                                   |       |      |       |
| Accrued liabilities                                               |       | $         | 121,064    |   |
| Unrealized losses on  marketable securities                       |       | 79,976    |       |
| Less - Valuation  allowance                                       |       | (98,304   | )          |
| Total current deferred  tax assets                                |       | 102,736   |       |
| Noncurrent assets:                                                |       |      |       |
| Impairment charges                                                |       | 1,121,143 |       |
| Net operating loss  carryforward — United States             |       | 378,322   |       |
| Other                                                             |       | 181,529   |       |
| Noncurrent deferred tax  liability – Excess tax depreciation |       | (602,523  | )          |
| Less – Valuation  allowance                                  |       | (754,015  | )          |
|                                                              |       | 324,456   |       |
| Total deferred tax  assets                                        |       | $         | 427,192    |   |

 

Managementincreased its valuation allowance by $314,299 and $87,367 during the yearsended May 31, 2004 and 2003, 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 20 yearsfor United States federal tax purposes and five (5) years for the State ofCalifornia tax purposes.

 

F-18

----

 

**NOTE 12 - GAMING OPERATIONS**

 

TheCompany derives revenue from the operation of pachinko and pachislotgames.  The Company is subject to annuallicensing requirements established by the Prefectural Public SafetyCommission.  The Company must renew thislicense yearly to operate.  The Company payssales taxes of 4% of net revenues.

 

A summaryof gross wagers, less winning patron payouts, for the years ended May 31, 2004and 2003, are as follows:

 
| ** **                     | ** ** | **2004**     | ** **  | **2003**     | ** ** |
|--------------------------------|------------|--------------|-------------|--------------|------------|
| Total gross pay-ins            |       | $            | 166,022,684 |         | $          | 130,084,727 |   |
| Less - winning patron pay outs |       | (148,603,069 | )           | (115,344,986 | )          |
|                           |       |         |        |         |       |
| Gaming Revenues                |       | $            | 17,419,615  |         | $          | 14,739,741 |   |

 

**NOTE 13 – RELATED PARTY TRANSACTIONS**

 

Adirector of the Company provides Information Technology services to Exam.  During the years ended May 31, 2004 and 2003,the Company paid $48,934 and $46,409, respectively, to this related party.

 

The Company’sfounder and chairman of the board leases land to the Company.  During the years ended May 31, 2004 and 2003,amounts paid were $43,011 and $39,920, respectively.

 

**NOTE 14 – SUBSEQUENT EVENTS**

 

*New Store Opening*

 

InDecember 2004, the Company plans to open a new store in Oyama, Tochigi,Japan.  The Company purchased portion ofthe land it will use for $208,409 in July 2004.   In addition, the Company entered into a rentagreement for a portion of the land and parking lots.  The deposit of the land agreement was$137,659 and paid in July 2004.

 

*Loan Receivable in Related Party*

 

On August31, 2004, the Company received the total due of $250,000 from Next CreationCo., Ltd.

 

F-19

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
|                         | EXAM USA, INC. |
|------------------------------|----------------|
|                         |           |
|                         |           |
| Date:  October 13, 2004 | By:            | /s/Shinichi Hirabayashi |
|                         |           | **Shinichi Hirabayashi****Chief Executive Officer****(Principal Executive Officer)** |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in their capacities and onthe dates indicated.

 
| **Signature**            | ** ** | **Capacity**                                                   | ** ** | **Date**         |
|--------------------------|------------|----------------------------------------------------------------|------------|------------------|
|                     |       |                                                           |       |             |
| /s/Shinichi Hirabayashi  |       | Chief Executive Officer and Director                           |       | October 13, 2004 |
| **Shinichi Hirabayashi** |       |                                                           |       |             |
| ** **               |       |                                                           |       |             |
| ** **               |       |                                                           |       |             |
| /s/Yoneji Hirabayashi    |       | Chief Financial and Principal  Accounting Officer and Director |       | October 13, 2004 |
| **Yoneji Hirabayashis**  |       |                                                           |       |             |
| ** **               |       |                                                           |       |             |
| ** **               |       |                                                           |       |             |
| /s/Akinori Hirabayashi   |       | Director                                                       |       | October 13, 2004 |
| **Akinori Hirabayashid** |       |                                                           |       |             |

 

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