[LETTERHEAD OF PLAYSTAR CORPORATION]
Dear Stockholder:
The Board of Directors of PlayStar Corporation ("PlayStar Delaware") and
the holders of more than 66-2/3% of the outstanding shares of PlayStar
Delaware's Common Stock (the "Consenting Holders") have approved the
reorganization (the "Reorganization") of PlayStar Delaware pursuant to which
PlayStar Delaware will be merged with and into a wholly-owned subsidiary,
PlayStar Wyoming Holding Corp. ("PlayStar Wyoming"); and immediately thereafter
PlayStar Wyoming will obtain Articles of Continuance from the Director of
International Business Corporations, Antigua, and thereby will become an Antigua
corporation ("PlayStar Antigua"). PlayStar Delaware, PlayStar Wyoming and
PlayStar Antigua are collectively referred to herein as "PlayStar."
Accompanying this letter is an Information Statement/Prospectus describing
in more detail the reorganization and related matters.
The Board of Directors and the Consenting Holders believe that the
reorganization will enable PlayStar to create better returns for its
stockholders. The continuance of PlayStar Delaware into Antigua will allow us to
organize our international business activities so that we will be able to
benefit from more favorable legal, business, tax and financing environments than
would be available to us if the parent were to continue to be a United States
corporation. The United States imposes significant legal and regulatory
restrictions and compliance costs for companies such as PlayStar that conduct
substantially all of their operations outside the United States. United States
Federal and state laws may make Internet gaming illegal whereas such activities,
if licensed, are legal in Antigua. These costs will be minimized to the extent
that our operations are conducted after the reorganization by PlayStar Antigua
or its foreign subsidiaries. The continuance into Antigua will minimize
corporate income taxes because PlayStar Antigua will become an international
business corporation (an "IBC"), which will pay no Antigua corporate income
taxes under the Antigua tax system. By contrast, the United States Internal
Revenue Code imposes corporate income tax on the worldwide income of United
States corporations. The change of domicile may also have a favorable effect on
PlayStar's ability to sell assets or raise additional capital in the future.
Moreover, the Board of Directors and the Consenting Holders believe that a
holding company structure in the form proposed by the Reorganization will
provide greater management flexibility and control, as well as a more suitable
corporate structure for expansion of PlayStar's current business and future
acquisitions and diversification opportunities. Finally, as a result of the
proposed legislation in Congress which would prohibit Internet gaming activities
under United States Federal law and the existence of different state regulatory
schemes, the Board and the Consenting Holders believe that an Antigua domiciled
corporation provides a clearer, more favorable, regulatory environment for
PlayStar's business operations.
At the effective time of the Reorganization, the holders of shares of the
Common Stock, $.0001 par value per share, will become holders of PlayStar
Antigua's Ordinary Shares (the "Ordinary Shares"). The Ordinary Shares will have
substantially the same attributes as PlayStar Delaware's Common Stock and will
be listed on the OTC Bulletin Board under the symbol "PSCKF." For United States
federal income tax purposes, the exchange of PlayStar Delaware Common Stock for
Ordinary Shares of PlayStar Antigua should be a nontaxable transaction in which
no gain or loss would be recognized by exchanging stockholders. However,
PlayStar Delaware stockholders who are United States persons that directly,
indirectly or by attribution own 10% or more of the outstanding stock of
PlayStar Delaware at the Effective Time of the Reorganization could be subject
to materially adverse United States federal income tax consequences as a result
of the Reorganization.
Stockholders should carefully consider the risks associated with ownership
of PlayStar's Common Stock. PlayStar is a development stage company and the
operations of it and its subsidiaries are subject to all of the risks inherent
in connection with the formation of any new business. PlayStar has incurred net
losses since its inception and will continue to incur losses. There can be no
assurance that PlayStar will be able to realize revenues and attain
profitability in the future. There also can be no assurance that other companies
with greater financial and technological resources will not develop gaming
services over the Internet with better capabilities than those offered by
PlayStar's subsidiaries. The gaming industry is highly regulated by Federal and
<PAGE>
state criminal and civil laws. Although PlayStar's operating subsidiary, Antigua
Casino & Sportsbook Limited ("Antigua Casino"), is licensed to provide Internet
gaming services in Antigua, Antigua Casino has not been licensed in any other
jurisdiction. Antigua Casino, therefore, may confront legal obstacles including
civil and/or criminal sanctions, in a jurisdiction in which a user of Antigua
Casino's Internet gaming services is located if that jurisdiction concludes that
the gaming services are illegally taking place in that jurisdiction and not
Antigua.
Stockholders should also be aware of the risks associated with the
Reorganization. PlayStar believes that the consummation of the Reorganization
will be, in part, a taxable transaction to PlayStar in which a portion of the
gain realized on the transaction will be potentially subject to United States
federal income tax. In addition, there is no established trading market for the
PlayStar Antigua Ordinary Shares, and there can be no assurance that such shares
will be approved for listing or that an active public market for the Ordinary
Shares will develop or be sustained. Finally, stockholders should consider the
risks inherent in foreign operations including loss of revenue, property and
equipment from such hazards as expropriation, nationalization, war, insurrection
and other political risks, risks of increase in taxes and governmental
royalties, renegotiation of contracts with governmental entities, as well as
changes in laws and policies governing operations of foreign based companies.
These and other material risk factors are discussed in more detail in the "Risk
Factors" section of the Information Statement/Prospectus.
Holders of PlayStar Delaware Common Stock will have the right to dissent
from the Reorganization and, subject to certain conditions, receive payment in
cash for their shares. These rights are described in greater detail in the
accompanying Information Statement/Prospectus under the caption "Rights of
Dissenting Stockholders" and are set forth in Section 262 of the Delaware
General Corporate Law. A copy of such provisions is attached as Annex III to the
accompanying Information Statement/Prospectus and incorporated therein by
reference.
Please carefully read the accompanying Information Statement/Prospectus
for details of the reorganization and related information. In addition,
exchanging stockholders, especially stockholders of PlayStar Delaware who are
United States persons that directly, indirectly or by attribution own 10% or
more of the outstanding stock of PlayStar Delaware at the Effective Time of the
Reorganization, should consult their own tax advisors as to the United States
federal, state and local, as well as non-United States, tax consequences of the
Reorganization.
Thank you for your attention.
Sincerely,
/s/ Julius Patta
Julius Patta
PRESIDENT
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<PAGE>
[LETTERHEAD OF PLAYSTAR CORPORATION]
PLAYSTAR CORPORATION
1 East North Street
Dover, Delaware 19901
- ---------------------------------------------------------
NOTICE OF ACTION TAKEN BY WRITTEN CONSENT
ON JUNE 30, 1998
TO BE EFFECTIVE
ON SEPTEMBER 4, 1998
- ---------------------------------------------------------
To the Stockholders of
PLAYSTAR CORPORATION
Notice is hereby given that on June 30, 1998, the Board of Directors and
the holders of more than 66-2/3% of the outstanding shares of PlayStar
Corporation, a Delaware corporation ("PlayStar Delaware"), have considered and
approved (i) an Agreement and Plan of Merger, a copy of which is attached as
Annex I to the accompanying Information Statement/Prospectus, pursuant to which
PlayStar Delaware will be merged with and into PlayStar Wyoming Holding Corp., a
newly formed Wyoming company ("PlayStar Wyoming") and (ii) an Application for
Certificate of Transfer, a copy of which is attached as Annex II to the
accompanying Information Statement/Prospectus, upon the acceptance of which and
the issuance of the Certificate of Transfer by the Secretary of State of the
State of Wyoming, PlayStar Wyoming will obtain Articles of Continuance from the
Director of International Business Corporations, Antigua, and thereby will
become an Antigua company through a continuation procedure under Wyoming and
Antigua law, all as more fully described in the accompanying Information
Statement/Prospectus. The foregoing transactions are expected to become
effective on September 4, 1998.
This notice, the Information Statement/Prospectus and the other materials
that are enclosed herewith are sent to you by order of the Board of Directors of
PlayStar Delaware.
By Order of the Board of
Directors
William F.E. Tucker
SECRETARY
St. Johns, Antigua
August 13, 1998
<PAGE>
PLAYSTAR CORPORATION
INFORMATION STATEMENT TO STOCKHOLDERS
---------------------------------------------------
PLAYSTAR WYOMING HOLDING CORP./PLAYSTAR LIMITED
PROSPECTUS FOR UP TO 16,269,500 ORDINARY SHARES
---------------------------------------------------
This Information Statement/Prospectus ("Information Statement/Prospectus")
is being furnished to stockholders of PlayStar Corporation, a Delaware
corporation ("PlayStar Delaware"), in connection with the proposed
reorganization (the "Reorganization") pursuant to which PlayStar Delaware will
obtain Articles of Continuance from the Director of International Business
Corporations, Antigua, and will thereby become an Antigua corporation by merging
(the "Merger") PlayStar Delaware with and into a newly formed Wyoming
corporation, PlayStar Wyoming Holding Corp. ("PlayStar Wyoming"), with PlayStar
Wyoming being the surviving corporation; and, immediately thereafter, PlayStar
Wyoming will become an Antigua corporation ("PlayStar Antigua") pursuant to a
continuation procedure under Antigua and Wyoming law. The Reorganization will be
effected pursuant to an Agreement and Plan of Merger, dated as of June 30, 1998
(the "Merger Agreement"), between PlayStar Delaware and PlayStar Wyoming, and
the Application for Certificate of Transfer of PlayStar Wyoming (the
"Application for Certificate of Transfer"). Upon consummation of the Merger,
each outstanding share of common stock, par value $.0001 per share, of PlayStar
Delaware (the "Common Stock") (other than those shares, if any, held by PlayStar
Delaware in its treasury) will be automatically converted into one share of
Common Stock, par value $.0001 per share, of PlayStar Wyoming (the "PlayStar
Wyoming Shares") and, upon the issuance of the Certificate of Transfer of
PlayStar Wyoming (the "Certificate of Transfer") by the Secretary of State of
the State of Wyoming and obtaining the Articles of Continuance from the Director
of International Business Corporations, Antigua, the PlayStar Wyoming Shares
will be automatically converted into Ordinary Shares, par value U.S. $.0001 per
share (the "Ordinary Shares"), of PlayStar Antigua. PlayStar Delaware and its
subsidiaries, PlayStar Limited, a Channel Islands corporation ("PlayStar
Limited"), and Antigua Casino & Sportsbook Limited, an Antigua corporation
("Antigua Casino," and together with PlayStar Limited, the "Subsidiaries"),
together with PlayStar Wyoming and PlayStar Antigua are sometimes collectively
referred to herein as "PlayStar."
PlayStar Delaware Common Stock is currently listed on the OTC Bulletin
Board ("OTCBB") under the symbol "PSCK" and, immediately following the
Reorganization, the Ordinary Shares will be listed on the OTCBB under a similar
symbol, "PSCKF." The last reported sale price for the PlayStar Delaware Common
Stock on the OTCBB on August 10, 1998, was $0.40. Currently, there is no
established public trading market for the Ordinary Shares.
FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THE REORGANIZATION, SEE "RISK FACTORS," BEGINNING ON PAGE 13.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
This Information Statement/Prospectus is first being mailed to the
stockholders of PlayStar Delaware on or about August 7, 1998.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS INFORMATION STATEMENT/PROSPECTUS IS AUGUST
13, 1998.
<PAGE>
AVAILABLE INFORMATION
PlayStar Delaware is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by PlayStar Delaware may be inspected and
copied at the public reference facilities maintained by the Commission, 450
Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549; and at
regional offices of the Commission at Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60611; and at 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such material may be obtained at
prescribed rates by mail from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, the Commission maintains a website that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's website is
http://www.sec.gov. The PlayStar Delaware Common Stock is listed on the OTCBB.
Commencing after the consummation of the Reorganization, PlayStar Antigua will
file such reports and other information under the Exchange Act.
PlayStar Wyoming has filed with the Commission a Registration Statement on
Form S-4 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Ordinary Shares offered
hereby. This Information Statement/Prospectus, which constitutes a part of that
Registration Statement, does not contain all the information set forth in that
Registration Statement and the exhibits related thereto. Statements made in this
Information Statement/Prospectus as to the contents of any contract, agreement
or other document are not necessarily complete; and while PlayStar Wyoming
believes the descriptions of the material provisions of such contracts,
agreements and other documents contained in this Information
Statement/Prospectus are accurate summaries of such material provisions,
reference is made to such contract, agreement or other document filed as an
Annex to this Information Statement/Prospectus and as an exhibit to the
Registration Statement for a more complete description of the matter involved,
and each such statement is qualified in its entirety by such reference.
This Information Statement/Prospectus incorporates documents by reference
which are not presented herein or delivered herewith. These documents are
available upon request from William F.E. Tucker, Chairman and Chief Executive
Officer of PlayStar, 60 Nevis Street, 2nd Floor, St. John's, Antigua BWI, West
Indies. In order to ensure timely delivery of the documents, any request should
be made by date five business days prior to the date on which the final
investment decision must be made.
Upon completion of the Reorganization, the Ordinary Shares will be listed
on the OTCBB. At the time of such listing, the PlayStar Delaware Common Stock
will be delisted and will no longer be registered pursuant to Section 12 of the
Exchange Act.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS INFORMATION STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
Neither delivery of this Information Statement/Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of PlayStar since the date of this Information
Statement/Prospectus.
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<PAGE>
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
PlayStar Antigua is an Antigua company, certain of its officers and
directors will be residents of various jurisdictions outside the United States
and its Antigua counsel, Roberts & Company, St. John's, Antigua, is a resident
of Antigua. All or a substantial portion of the assets of PlayStar Antigua and
of such persons may be located outside the United States. As a result, it may be
difficult for investors to effect service of process within the United States
upon such persons or to enforce in United States court judgments obtained
against such persons in United States courts and predicated upon the civil
liability provisions of the Securities Act. Notwithstanding the foregoing,
PlayStar Antigua has irrevocably agreed that it may be served with process with
respect to actions based on offers and sales of securities made hereby in the
United States by serving Corporation Service Company, its United States agent
appointed for that purpose. PlayStar Antigua has been advised by its Antigua
counsel, Roberts & Company, St. John's, Antigua, that there is doubt as to
whether Antigua courts would enforce (a) judgments of United States courts
obtained in actions against such persons or PlayStar Antigua that are predicated
upon the civil liability provisions of the Securities Act or (b) in original
actions brought against PlayStar Antigua or such persons predicated upon the
Securities Act. There is no treaty in effect between the United States and
Antigua providing for such enforcement, and there are grounds upon which Antigua
courts may not enforce judgments of United States courts. Certain remedies
available under the United States federal securities laws would not be allowed
in Antigua courts as contrary to that nation's policy.
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<PAGE>
TABLE OF CONTENTS
Page
SUMMARY OF SECURITIES TO BE RECEIVED IN CONNECTION WITH
THE REORGANIZATION............................................7
SUMMARY OF THE REORGANIZATION....................................8
PER SHARE MARKET VALUE OF PLAYSTAR ANTIGUA AND PLAYSTAR
DELAWARE.....................................................12
RISK FACTORS....................................................13
History of Losses and Company's Ability to Continue as a
Going Concern.............................................13
Possible Illegality of Internet Gaming and Government
Regulation................................................13
Proposed Internet Gambling Prohibition Act (Kyl Bill);
Potential Impact of Kyl Bill..............................13
Licensing; Jurisdiction...................................14
Prohibition of Wagering Services..........................15
Certain Tax Consequences.....................................15
Absence of Prior Market......................................16
The Internet Gaming Industry Generally.......................16
Technological Changes/Competition............................16
Risks of Foreign Operations..................................16
Dependence on Key Personnel..................................17
Patents, Copyrights and Trade Secrets........................17
Future Sales of Common Stock; Exercise of Options and
Warrants..................................................17
Possible Volatility of Stock Price...........................18
Risks of Penny Stocks........................................18
Potential Anti-Takeover Effect...............................18
THE REORGANIZATION..............................................19
General......................................................19
Background and Reasons for the Reorganization................19
THE MERGER AGREEMENT AND APPLICATION FOR CERTIFICATE OF
TRANSFER.....................................................20
General......................................................20
Amendment/Termination........................................21
Effective Time...............................................21
Exchange of Share Certificates...............................21
Stock Option Plan............................................21
Stock Listing................................................22
Accounting Treatment of the Reorganization...................22
RIGHTS OF DISSENTING STOCKHOLDERS...............................22
General......................................................22
Section 262..................................................22
CERTAIN TAX CONSIDERATIONS......................................24
United States Federal Income Tax Consequences................24
Definition of United States Holder...........................25
The Reorganization of PlayStar...............................25
Receipt of Ordinary Shares................................25
Reporting Requirements....................................26
The Continuing Business Operations of PlayStar...............27
Taxation of PlayStar Antigua..............................27
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<PAGE>
Taxation of Stockholders - United States Holders..........27
Taxation of Dividends..................................27
Taxation of Dispositions of Ordinary Shares............28
Passive Foreign Investment Company Rules...............28
Foreign Personal Holding Company Rules.................31
Personal Holding Company Rules.........................32
Controlled Foreign Corporation Rules...................32
Taxation of Stockholders - Non-United States Holders......33
United States Backup Withholding Tax and Information
Reporting...............................................33
Antigua Tax Consequences.....................................33
Canadian Tax Consequences....................................34
DESCRIPTION OF PLAYSTAR ANTIGUA CAPITAL STOCK...................35
Capitalization...............................................35
Voting and Other Rights......................................35
Dividend Rights..............................................36
Changes in Capitalization....................................36
Reduction of Capital and Purchase of Shares..................36
Transfer of Shares...........................................36
Preference Shares............................................36
COMPARISON OF STOCKHOLDER RIGHTS................................37
Stockholder Approval of Business Combinations................37
Absence of Required Vote for Certain Mergers.................37
Appraisal Rights.............................................37
Stockholder Consent to Action Without Meeting................38
Special Meetings of Stockholders.............................38
Distributions and Dividends; Repurchases and Redemptions.....38
Vacancies on Board of Directors..............................39
Removal of Directors.........................................39
Inspection of Books and Records..............................39
Amendment of Certificate of Incorporation....................39
Amendment of By-Laws.........................................39
Indemnification of Directors and Officers....................39
Limited Liability of Directors...............................40
Stockholders' Suits..........................................40
PRO FORMA FINANCIAL INFORMATION.................................41
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION....................................................44
PlayStar Delaware/PlayStar Antigua...........................44
PlayStar Limited.............................................44
Antigua Casino...............................................44
Year 2000 Compliance.........................................45
New Accounting Pronouncements................................45
BUSINESS OF PLAYSTAR............................................46
Introduction.................................................46
Description of Business of PlayStar..........................46
PlayStar..................................................46
PlayStar Limited and Antigua Casino.......................46
Customers and Marketing......................................47
Research and Development.....................................48
Employees....................................................48
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<PAGE>
Properties...................................................48
Competition..................................................48
Patents, Copyrights and Trade Secrets........................49
Regulation...................................................49
Proposed Internet Gambling Prohibition Act (Kyl Bill);
Potential Impact of Kyl Bill..............................49
Licensing; Jurisdiction...................................49
Prohibition of Wagering Services..........................51
Legal Proceedings............................................51
MANAGEMENT......................................................51
Executive Compensation.......................................52
Indemnification..............................................53
Certain Relationships and Related Transactions...............53
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...................................................53
LEGAL MATTERS...................................................55
EXPERTS.........................................................55
FINANCIAL STATEMENTS...........................................F-1
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<PAGE>
SUMMARY OF SECURITIES TO BE RECEIVED IN CONNECTION WITH
THE REORGANIZATION
THE FOLLOWING IS A SUMMARY OF THE SECURITIES TO BE RECEIVED IN THE
REORGANIZATION BY HOLDERS OF PLAYSTAR DELAWARE COMMON STOCK. THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION CONTAINED IN THIS
INFORMATION STATEMENT/PROSPECTUS AND THE ANNEXES HERETO. UNLESS OTHERWISE
DEFINED HEREIN, CAPITALIZED TERMS USED IN THIS SUMMARY HAVE THE RESPECTIVE
MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS INFORMATION STATEMENT/PROSPECTUS.
STOCKHOLDERS ARE URGED TO READ CAREFULLY THIS INFORMATION STATEMENT/PROSPECTUS
AND THE ANNEXES HERETO IN THEIR ENTIRETY.
SECURITY RECEIVED IN EXCHANGE
FOR PLAYSTAR DELAWARE
COMMON STOCK IN THE
REORGANIZATION.................Each share of PlayStar Delaware
Common Stock will be automatically
converted into one Ordinary Share
of PlayStar Antigua.
TAX CONSEQUENCES...............The receipt of Ordinary Shares in
exchange for shares of PlayStar
Delaware Common Stock should not be
a taxable exchange for an
exchanging stockholder. However,
an exchanging stockholder who is a
United States person that directly,
indirectly or by attribution owns
10% or more of the outstanding
stock of PlayStar Delaware at the
Effective Time of the
Reorganization (a "10%-or-greater
U.S. holder") could be subject to
materially adverse United States
federal income tax consequences as
a result of the Reorganization, in
that a 10%-or-greater U.S. holder
would be required to recognize,
subsequent to the Reorganization,
deemed royalty income from PlayStar
Antigua. The amount of the deemed
royalty income to be taken into
account for a year would be
"commensurate" with the income
derived by PlayStar Antigua for
that year from the use of the
ratable portion of the transferred
intangible assets of PlayStar
Delaware that was attributable to
the 10%-or-greater U.S. holder's
interest in PlayStar Delaware
immediately prior to the
Reorganization. Such deemed
royalty income would be ordinary
income, and would be taken into
account annually over the remaining
useful life of the transferred
intangible assets (not to exceed
twenty years). Because the deemed
royalty income would be required to
be taken into account for a taxable
year by a 10%-or-greater U.S.
holder regardless of the amount
actually distributed as a dividend
by PlayStar Antigua for such year,
a 10%-or-greater U.S. holder could
be subject to United States federal
income tax on income before it was
received in cash, or even on income
that was never received in cash by
that shareholder. See "Certain Tax
Considerations."
ELECTION PROCEDURE.............As of the Effective Time of the
Merger, stockholders who do not
exercise their statutory
dissenters' rights will
automatically become owners of the
Ordinary Shares without taking any
action.
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<PAGE>
DIVIDENDS......................Holders of Ordinary Shares will be
entitled to receive, at any time,
such dividends as declared by the
Board of Directors of PlayStar
Antigua.
REDEMPTION.....................The Ordinary Shares are not subject
to redemption.
VOTING RIGHTS..................One vote per Ordinary Share with
respect to matters submitted to the
stockholders of PlayStar Antigua.
STOCK LISTING .................OTC Bulletin Board.
SUMMARY OF THE REORGANIZATION
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS INFORMATION
STATEMENT/PROSPECTUS, INCLUDING THE ANNEXES. CERTAIN CAPITALIZED
TERMS USED IN THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS
INFORMATION STATEMENT/PROSPECTUS.
PLAYSTAR DELAWARE..............PlayStar Delaware is a holding
company, which, through its
wholly-owned subsidiaries, PlayStar
Limited and Antigua Casino, is
primarily engaged in an on-line
gaming business and the licensing
of property to such business.
PlayStar Delaware's principal
offices are located at c/o United
Corporate Services, Inc., 15 East
North Street, Dover, Delaware
19901. PlayStar Delaware's
telephone number is (268) 562-0073.
PLAYSTAR WYOMING/ANTIGUA.......PlayStar Wyoming is a newly formed
Wyoming company and a wholly-owned
subsidiary of PlayStar Delaware.
PlayStar Wyoming was formed for the
purpose of effectuating the
reorganization of PlayStar Delaware
as an Antigua corporation. At the
effective time of the Reorganization,
PlayStar Delaware will be merged
with and into PlayStar Wyoming,
which, pursuant to a statutory
continuation procedure, will
become an Antigua corporation and,
through the Subsidiaries continue to
conduct the business in which
PlayStar is now engaged. PlayStar
Antigua's principal offices will be
located at 60 Nevis Street, St.
John's, Antigua BW1, West Indies.
THE REORGANIZATION
GENERAL........................The Board of Directors of PlayStar
Delaware has unanimously approved
and the holders of more than
66-2/3% of the outstanding PlayStar
Delaware Common Stock (the
"Consenting Holders") have
approved, a proposed corporate
reorganization (the
"Reorganization") pursuant to which
PlayStar Antigua, an Antigua
company, will succeed to the
business of the PlayStar
-8-
<PAGE>
companies. The Reorganization will
be effected pursuant to the Merger
Agreement and the Application for
Certificate of Transfer, copies of
which are attached hereto as Annex
I and Annex II, respectively, and
the terms of which are incorporated
herein by reference. After the
consummation of the Reorganization,
PlayStar Antigua will, through the
Subsidiaries, continue to conduct
the businesses in which the
PlayStar companies are now
engaged. The relative voting
rights of PlayStar Delaware
stockholders as stockholders of
PlayStar Antigua will not change as
a result of the Reorganization.
See "The Reorganization,"
"Description of PlayStar Antigua
Capital Stock -- Voting and Other
Rights," "Comparison of
Stockholder" and the Pro Forma
Financial information, included
elsewhere herein.
REASONS FOR THE
REORGANIZATION.................The Board of Directors of PlayStar
Delaware and the Consenting
Holders believe that the
continuation into Antigua will
allow PlayStar Delaware to organize
its international business
activities to take maximum advantage
of business, tax and financing
environments which are more
favorable than those available
in the United States. In particular,
the Board of Directors of PlayStar
Delaware and the Consenting Holders
have approved the Reorganization
for the following reasons: (a) the
creation of an Antigua parent
corporation will reduce corporate
income taxes because, unlike the
United States tax system which
imposes corporate income tax
on the worldwide income of United
States corporations, Antigua imposes
no corporate income taxes on the
income of an Antigua IBC. Income
taxes will therefore be reduced to
the extent operations are conducted
after the Reorganization by PlayStar
Antigua or its foreign (i.e., non-
United States) subsidiaries; (b) the
Reorganization may, in certain
circumstances, have a favorable effect
on PlayStar Antigua's ability to
sell assets or raise additional
capital in the future; (c) the
corporate structure in the form
proposed by the Reorganization will
provide greater management
flexibility and control, as well
as a more suitable corporate
structure for expansion of its
current business and future
acquisitions and diversification
opportunities; and (d) after the
Reorganization, the regulatory
and legal compliance costs, as
well as the legal restrictions on
the business activities of
PlayStar will be reduced.
THE REORGANIZATION.............The Reorganization will be
accomplished through the merger of
PlayStar Delaware with and into
PlayStar Wyoming, which will be the
surviving corporation in the
Merger, at which time each
outstanding share of PlayStar
Delaware Common Stock (other than
shares of PlayStar Delaware Common
Stock held by PlayStar Delaware in
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its treasury) will, subject to the
exercise of statutory dissenters'
rights, be automatically converted
into one outstanding share of
PlayStar Wyoming Common Stock.
Immediately after the Merger,
PlayStar Wyoming will, through a
statutory continuation procedure,
become PlayStar Antigua, at which
time each outstanding share of
PlayStar Wyoming Common Stock will
be automatically converted into one
Ordinary Share subject to
dissenters' appraisal rights. See
"The Merger Agreement and
Application for Certificate of
Transfer," and "Description of
PlayStar Antigua Capital Stock".
EFFECTIVE TIME.................The Reorganization will become
effective (the "Effective Time") at
the close of business on the date
that a certificate of merger is
filed with the Delaware and Wyoming
Secretary of State as required by
Delaware and Wyoming law and at the
time the Certificate of Transfer is
issued by the Wyoming Secretary of
State and the Articles of
Continuance are obtained from the
Director of International Business
Corporations, Antigua. PlayStar
Delaware anticipates that the
Reorganization will become
effective on or about September 4,
1998.
DIVIDENDS......................Holders of Ordinary Shares will be
entitled to receive, at any time,
such dividends as are declared by
the Board of Directors of PlayStar
Antigua. PlayStar Antigua
currently intends to retain
earnings for use in its respective
capital requirements. The payment
of any future cash dividends on the
Ordinary Shares is necessarily
dependent upon the earnings and
financial needs of PlayStar
Antigua, respectively, along with
applicable legal and contractual
restrictions. See "Description of
PlayStar Antigua Capital Stock --
Dividend Rights."
LIQUIDATION....................In the event of the liquidation of
PlayStar Antigua, holders of
Ordinary Shares will participate in
the assets of PlayStar Antigua pari
passu with the holders of any other
class of ordinary shares
outstanding.
VOTING RIGHTS..................Each Ordinary Share will be
entitled to one vote in the affairs
of PlayStar Antigua. See
"Description of PlayStar Antigua
Capital Stock -- Voting and Other
Rights".
COMPARISON OF RIGHTS OF
STOCKHOLDERS...................The principal attributes of the
PlayStar Delaware Common Stock and
the PlayStar Antigua Ordinary
Shares will be similar. However,
there are certain differences
between the rights of stockholders
under Delaware law and Antigua
law. In addition, there will be
differences between PlayStar
Delaware's Certificate of
Incorporation and Bylaws and
PlayStar Antigua's Articles of
Continuance and By-Laws. See
"Comparison of Stockholder Rights".
TAX CONSIDERATIONS.............The following is a brief summary of
the United States federal income
tax consequences of the
Reorganization and is not intended
to be, nor should it be construed
to be, advice to any particular
stockholder of PlayStar Delaware.
Stockholders of PlayStar Delaware
should consult their own tax
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advisors with respect to their
particular circumstances. A more
detailed summary of certain tax
consequences of the Reorganization
is set out under "Certain Tax
Considerations" in the discussion
contained in this Information
Statement/Prospectus. There are no
regulations, published rulings or
judicial decisions directly on
point with respect to certain
aspects of the Reorganization and
the securities to be issued
pursuant thereto. Accordingly,
unqualified conclusions on certain
matters, as indicated below, are
not possible. PlayStar Delaware
does not intend to request a ruling
from the United States Internal
Revenue Service ("IRS") with
respect to the Reorganization.
Stockholders are urged to consult
their own tax advisors as to the
particular tax consequences to them
of the Reorganization.
The receipt of Ordinary Shares
by United States stockholders
in exchange for PlayStar Delaware
Common Stock should not be a taxable
exchange for an exchanging stockholder.
However, an exchanging stockholder
who is a United States person that
directly, indirectly or by attribution
owns 10% or more of the outstanding
stock of PlayStar Delaware at the
Effective Time of the Reorganization
could be subject to materially
adverse United States federal
income tax consequences as a result
of the Reorganization. In addition,
subsequent to the Reorganization, a
stockholder of PlayStar Antigua who
is a United States person could be
subject to potentially adverse
United States federal income tax
consequences if PlayStar Antigua
becomes a "passive foreign investment
company" as defined under United
States federal income tax law.
STOCKHOLDERS ARE ADVISED TO READ
THE MORE DETAILED SUMMARY OF THE TAX
CONSEQUENCES OF THE REORGANIZATION, AS
SET FORTH UNDER "CERTAIN TAX
CONSIDERATIONS".
RIGHTS OF DISSENTING
STOCKHOLDERS..................Under applicable Delaware law, the
holders of PlayStar Delaware Common
Stock are entitled to dissenters'
appraisal rights, subject to
compliance with the procedures set
forth in Section 262 of the
Delaware General Corporation Law
(the "DGCL"), in connection with
the Reorganization. See "Rights of
Dissenting Stockholders".
RISK FACTORS...................See "Risk Factors" for a discussion
of certain risk factors to be
considered in connection with the
Reorganization and the ownership of
the Ordinary Shares of PlayStar
Antigua.
STOCK EXCHANGE LISTING........There is currently no established
public trading market for the
Ordinary Shares. Immediately
following the Reorganization, the
Ordinary Shares will be listed on
the OTCBB under the symbol "PSCKF,"
a symbol which is similar to that
under which the PlayStar Delaware
Common Stock is currently listed.
See "The Reorganization -- Stock
Listing".
EXCHANGE AGENT.................InterWest Transfer Company, Inc.
will act as Exchange Agent in
connection with the Reorganization.
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PER SHARE MARKET VALUE OF PLAYSTAR ANTIGUA AND PLAYSTAR DELAWARE
Until the Effective Time of the Reorganization, there will be no market
for the PlayStar Antigua Ordinary Shares although it is anticipated that the
Ordinary Shares will be approved for trading on the Nasdaq OTC Bulletin Board.
On March 19, 1997 the Common Stock of PlayStar Delaware was approved for trading
on the OTCBB. The following table sets forth, for the periods indicated, the
range of the high and low bid quotations (as reported by NASDAQ). The bid
quotations set forth below, reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not reflect actual transactions:
High Low
---- ----
Fiscal Year Ended June 30, 1997
Third Quarter (from March 19, 1997) $2.50 $0.25
Fourth Quarter.................. $2.50 $1.00
Fiscal Year Ended June 30, 1998
First Quarter................... $2.9375 $1.00
Second Quarter.................. $3.125 $0.38
Third Quarter .................. $1.01 $0.42
Fourth Quarter.................. $0.70 $0.51
Fiscal Year Ended June 30, 1999
First Quarter (through August 10,
1998) $0.77 $0.32
On August 10, 1998, the last reported sales price of the PlayStar Delaware
Common Stock as reported by the OTCBB was $0.40. As of May 19, 1998, there were
51 holders of record of PlayStar Delaware's Common Stock. PlayStar has not
declared or paid any cash dividends on its Common Stock since its inception, and
PlayStar's Board of Directors currently intends to retain all earnings for use
in the business for the foreseeable future. Any future payment of dividends will
depend upon PlayStar's results of operations, financial condition, cash
requirements and other factors deemed relevant by PlayStar's Board of Directors.
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RISK FACTORS
The information contained in this report contains "forward looking
statements" within the meaning of Section 27A of the Securities Act, and Section
21E of the Exchange Act. Actual results may materially differ from those
projected in the forward looking statements as a result of certain risks and
uncertainties set forth in this report. Although management believes that the
assumptions made and expectations reflected in the forward looking statements
are reasonable, there is no assurance that the underlying assumptions will, in
fact, prove to be correct or that actual future results will not be different
from the expectations expressed in this report. An investment in the Common
Stock offered hereby is speculative in nature and involves a high degree of
risk. Accordingly, PlayStar Delaware stockholders should carefully read this
entire Information Statement/Prospectus and the following risk factors should be
considered carefully in evaluating the Reorganization, PlayStar Antigua and its
proposed businesses.
History of Losses and Company's Ability to Continue as a Going Concern
PlayStar is a development stage company and the operations of it and its
subsidiaries are subject to all of the risks inherent in light of the expenses,
difficulties, complications and delays frequently encountered in connection with
the formation of any new business. PlayStar has incurred net losses since its
inception and will continue to incur losses. From its inception on October 3,
1996 through March 31, 1998, PlayStar has incurred cumulative net losses of
$2,603,671, including a net loss of $676,939 for the nine months ended March 31,
1998. PlayStar should be evaluated in light of the delays, expenses, problems
and uncertainties frequently encountered by companies developing markets for new
products and technologies. Due to a number of factors, the ability to
commercialize the products and technology of the Subsidiaries, PlayStar does not
believe that revenues generated by the Subsidiaries will be sufficient to
support its operations in fiscal 1998. Therefore, in the foreseeable future,
PlayStar believes that such expenses will increase its net losses, and there can
be no assurance that PlayStar will ever be profitable.
As of August 13, 1998, PlayStar had approximately $1,720,000 of cash. In
addition, PlayStar Delaware has subscriptions for an additional $160,000 of
Common Stock, subject to the consummation of the Reorganization. Until the
commencement of the Reorganization, PlayStar will expend approximately $160,000
per month. Once the Reorganization is consummated, PlayStar's expenditures will
decline to approximately $60,000 per month. While management anticipates raising
additional capital through sales of unregistered shares of its Common Stock
conducted under exemptions provided by the Securities Act or by the rules of the
Commission, there can be no assurance that the Company will be able to obtain
adequate financing to support its operations. Even if PlayStar is unable to
raise additional capital, management believes that PlayStar will have sufficient
funds to commence and conduct its operations for at least the next 12 months,
not including any revenues generated from the operations of Antigua Casino.
Possible Illegality of Internet Gaming and Government Regulation
Proposed Internet Gambling Prohibition Act (Kyl Bill);
Potential Impact of Kyl Bill
On July 23, 1998, the Senate passed an appropriations bill containing an
amendment by Senator John Kyl of Arizona, which would prohibit gaming on the
Internet in the United States ("the Bill"). If enacted into law, the Bill would
classify gaming over the Internet as a federal offense. Although the Bill allows
certain intrastate wagering, it prohibits operation of most other Internet
gaming businesses, as well as use of the Internet to place, receive or otherwise
make a bet or wager. Individuals convicted of operating an Internet gaming
business in the United States could be punished by up to four years in jail and
a fine equal to the greater of $20,000 or the aggregate amount of bets received
by the operator. Under the Bill, Internet gaming would be a federal crime even
if the states in which bets are placed had legalized the practice. On February
4, 1998, the House Crime Subcommittee held a hearing to discuss issues related
to Internet gaming and the House version of the Bill. The House version of the
Bill would permit Internet gaming if such activities are legal in the bettor's
jurisdiction and in the jurisdiction in which the server is located.
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If the Bill becomes law, it could have a significant effect on PlayStar's
operations. In the near term, PlayStar anticipates that approximately 80% of its
revenues will be generated from United States citizens. If the Bill passes, the
Subsidiaries might be forced to cease all marketing and promotional activities
in the United States to ensure that no solicitation of United States citizens
occurs. Since the Bill also prohibits United States citizens from gaming on the
Internet, the Subsidiaries may be expected to lose a significant portion of
their customer base if the Bill becomes law.
Licensing; Jurisdiction
The gaming industry is highly regulated in many parts of the world,
including the United States, where the ownership and operation of land-based
gaming facilities (i.e., not including sports wagering) of the type to be
conducted by Antigua Casino have traditionally been regulated on a
state-by-state basis with additional federal regulation of certain criminal
activities connected to gambling. Companies engaged in gaming activities must
adhere to the legal requirements of each jurisdiction in which they operate and
offer their services.
Antigua Casino currently intends to offer its services internationally,
including throughout the United States. Antigua Casino does not currently intend
to seek licenses to operate its Internet casino in any other jurisdiction nor
does Antigua Casino intend to restrict or control access to its services based
on user citizenship or location. However, the law of the Internet is not well
developed and there can be no assurance that a jurisdiction in which the user is
located will not successfully assert jurisdiction over the gaming activities of
Antigua Casino. This may be an issue in the United States (discussed further
below) as well as in the other jurisdictions in which Antigua Casino customers
are domiciled. In the event that it is determined that Antigua Casino is subject
to the laws of jurisdictions other than Antigua, Antigua Casino would have to
obtain a license in order to offer its gaming services to customers within these
jurisdictions. There can be no assurance that any such licenses could be
obtained. Moreover, if it is determined that Antigua Casino is operating gaming
operations in a jurisdiction without a license, Antigua Casino and its officers
and directors may become subject to criminal and civil penalties imposed by such
jurisdiction for violating its laws. The occurrence of any of these events could
have a material adverse effect on the business of PlayStar and, if many
jurisdictions were successful in asserting jurisdiction over Antigua Casino,
Antigua Casino could be forced to cease all gaming operations.
A number of United States federal and state statutes could be construed to
prohibit gaming through use of the Internet. All 50 states currently have
statutes or regulations restricting or even prohibiting gambling activities. In
most states it is illegal for anyone operating a gambling business either to
accept or make a wager, with certain state-by-state statutory exceptions. The
Attorneys General for at least three states, Florida, Minnesota and Texas, have
issued either formal opinions or warnings that certain Internet gaming
activities are illegal in those states. The Attorney General for the state of
Wisconsin has also taken action against Internet gaming companies.
In addition, the Federal Interstate Wire Act contains provisions which may
make it a crime for anyone in the business of gambling to use an interstate or
international telephone line to transmit information in the placing of bets,
unless the betting is legal in the jurisdictions from which and into which the
transmission is made. Other federal laws impacting gaming activities include the
Interstate Wagering Paraphernalia Act, the Travel Act and the Organized Crime
Control Act. As discussed below, in March 1998, the United States Attorney for
the Southern District of New York filed several criminal complaints against the
owners and managers of six Internet sports betting companies headquartered in
the Caribbean or Central America. Those cases are the first federal prosecutions
of sports betting over the Internet. PlayStar believes the conduct at issue in
those cases differs from its proposed business which involves casino gaming, not
sports betting. Moreover, unlike the defendants in the sports betting
complaints, PlayStar does not plan to maintain marketing offices in the United
States or mail promotional literature from locations in the United States.
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A risk exists, however, that federal or state authorities may view
PlayStar as having violated gaming regulations. Those authorities could initiate
civil or criminal proceedings against PlayStar and/or its employees. The results
of such proceedings could include substantial litigation expense, fines,
incarceration of company executives, diversion of the attention of key company
employees, disqualification of PlayStar for licensure in the United States, and
injunctions or other prohibitions preventing PlayStar from engaging in its
anticipated business activities.
It is uncertain whether the fact that Antigua Casino's on line gaming
business is legal in Antigua would insulate PlayStar from either civil or
criminal liability under state or federal statutes regulating gambling. Courts
considering whether to exercise personal jurisdiction over a business operating
through the Internet have exercised jurisdiction over defendants who make a
conscious choice to conduct business with the residents of a foreign state. For
example, certain entities engaged in the Internet gaming business have been the
subject of criminal complaints at the state level. In September 1997, the
Minnesota Court of Appeals considered a state civil consumer protection
complaint and concluded that a Belize-based Internet gambling business was
subject to personal jurisdiction in Minnesota because the company conducted
commercial activities in the state over the Internet. See Minnesota v. Granite
Gate Resorts, Inc., 568 N.W.2d 715 (1997), aff'd, 576 N.W.2d 747 (Minn. 1998).
In March 1998, the United States District Court for the Western District of
Texas concluded that a California casino that maintained a website was subject
to jurisdiction in Texas since the site was available in Texas and the casino
accepted business from Texas residents. See Thompson v. Handa-Lopez, Inc., 1998
WL 142300 (W.D. Tex. Mar. 28, 1998).
Further, various regulatory and legislative agencies are conducting
studies of interstate and interactive wagering, including the National Gambling
Impact Study Commission. No assurance can be given that new legislation will not
be adopted which limits, impedes or prohibits either the activities in which
Antigua Casino proposes to engage with respect to actual wagering or the type of
activities associated with such wagering. Any change in either the substance or
the enforcement of the applicable rules and regulations in these areas could
have a material adverse affect on PlayStar's business and prospects. Certain
legislation is currently being considered in Congress (see discussion of the Kyl
Bill above) and individual states in this regard.
Prohibition on Wagering Services
In the future, Antigua Casino may seek to offer (in addition to gaming
services) wagering services on sporting and/or other events. However, Antigua
Casino does not intend to offer wagering services at least until the applicable
legal and regulatory environment is clarified, if at all. The use of the
Internet for such wagering services may violate the United States federal wire
statute. Due to the relatively recent existence of wagering over the Internet,
the laws dealing with this application are not well developed. However, on March
4, 1998, the United States Attorney for the Southern District of New York
indicted 14 owners and managers of six Internet sports wagering companies
headquartered in the Caribbean and Central America. Additional similar
indictments have since been issued. These individuals, all of whom are citizens
of the United States, were charged with conspiracy to transmit bets and wagers
on sporting events via the Internet in violation of the Federal wire statute.
The indictments were made in spite of the fact that the companies operated by
the defendants were licensed to conduct wagering operations, including one which
was licensed by the Government of Antigua.
Certain Tax Consequences
PlayStar believes that the consummation of the Reorganization will be, in
part, a taxable transaction to PlayStar in which a portion of the gain realized
on the transaction will be potentially subject to United States federal income
tax. However, based on the appraised fair market value of the assets of PlayStar
Delaware as of March 31, 1998 (which reflects an appraised fair market value of
$0.37 per share of PlayStar Delaware Common Stock as of March 31, 1998), and the
availability of deductions for, and the net operating loss carry over to, the
taxable year that will include the Reorganization, PlayStar believes a
reasonable position can be taken that the United States federal income tax
imposed on it as a result of the consummation of the Reorganization will not be
material. Nevertheless, there is a risk that it may be ultimately determined
that any gain realized by PlayStar upon the consummation of the Reorganization
would be taxable in full for United States federal income tax purposes. Based on
the current appraised value of the assets, and the tax attributes, of PlayStar
Delaware, the maximum United States federal income tax cost arising from the
Reorganization would be approximately $1.9 Million. The appraisal of PlayStar
Delaware's assets, although performed by an independent appraiser, is not
binding on the IRS or the courts. If the fair market value of PlayStar
Delaware's assets was ultimately determined to be in excess of the appraised
value, the United States federal income tax cost arising from the Reorganization
could be in excess of $1.9 million. In addition, the consummation of the
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Reorganization may also result in potential adverse United States federal income
tax consequences to stockholders of PlayStar Delaware who are United States
persons that directly, indirectly or by attribution, own 10% or more of the
outstanding PlayStar Delaware Common Stock at the Effective Time of the
Reorganization. See "Certain Tax Considerations."
Absence of Prior Market
Currently, there is no established trading market for the PlayStar Antigua
Ordinary Shares. Although an application has been made to list the Ordinary
Shares for trading on the OTCBB, there can be no assurance that such shares will
be approved for listing or that an active public market for the Ordinary Shares
will develop or be sustained.
The Internet Gaming Industry Generally
In general, there can be no assurance that PlayStar will be able to realize
revenues and attain profitability in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations". Moreover, there
are substantial questions regarding the legality of Internet gaming activities.
See "Risk Factors - Legal Impediments and Government Regulation."
Most Internet markets, including the gaming segment, are relatively
accessible to a wide number of entities and individuals. PlayStar believes,
however, that there are certain market barriers facing potential providers,
including technology, commerce, regulation, management and reputation. First,
providers must utilize sophisticated systems to manage casino operations,
process financial transactions, encrypt information and provide an attractive
user interface. Providers must also develop relationships with financial
institutions to process gaming transactions. Additionally, providers should
obtain a casino license from an established regulatory agency before offering
Internet gaming services to the public. Providers must also assemble a team of
software, hardware, telecommunications, marketing, management and gaming
specialists to develop the casino's operations. Finally, due to the sensitive
nature of the casino business, providers must develop and maintain an impeccable
reputation in order to attract and retain customers.
Technological Changes/Competition
The industry of offering gaming services and casino style games over the
Internet is characterized by rapid and significant technological change in the
computer, software and telephony services. Many entities are engaged in research
and development with respect to offering gaming services on the Internet. A
significant number of companies, organizations and individuals are currently
offering or purporting to offer casino gambling services on the Internet similar
to those developed by the PlayStar's Subsidiaries. PlayStar's primary
competition includes, but is not limited to, CryptoLogic Inc., Venturetech Inc.,
Internet Casinos Ltd., Interactive Gaming and Communications Corp. (formerly
Sports International - USA), Wager Net Inc., Casinos of the South Pacific, World
Wide Web Casinos and Virtual Vegas. There can be no assurance that PlayStar's
competitors will not develop technologies and products that are more effective
and efficient than PlayStar Limited's technology and products or that PlayStar
Limited's technology and products will not be rendered obsolete by such
developments. There can be no assurance that other companies with greater
financial and technological resources will not develop gaming services over the
Internet with better capabilities than those offered by the Subsidiaries.
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Risks of Foreign Operations
Antigua Casino and PlayStar Limited will derive all of their revenues from
non-Antigua sources. Risks inherent in foreign operations include loss of
revenue, property and equipment from such hazards as expropriation,
nationalization, war, insurrection and other political risks, risks of increase
in taxes and governmental royalties, renegotiation of contracts with
governmental entities, as well as changes in laws and policies governing
operations of foreign based companies. Other risks inherent in foreign
operations are the possibility of realizing foreign currency exchange losses
when transactions are completed in currencies other than United States dollars
and the Subsidiaries' ability or lack of same to freely repatriate its earnings
under foreign exchange control laws.
Furthermore, Antigua Casino and PlayStar Limited may have to comply with
the local laws and regulations in those foreign jurisdictions in which they
elect or are deemed to elect to offer products and services. There can be no
assurance that the Subsidiaries will be able to comply with such laws and
regulations. See "Regulation". In the past, there have been significant
fluctuations in the exchange rates between the dollar and the currencies in many
of the countries in which PlayStar anticipates its subsidiaries doing business.
Further, foreign countries may impose limitations on the amount of currency that
may be withdrawn or repatriated from such countries. Such limitations, if
imposed, could adversely affect PlayStar's liquidity and business.
Dependence on Key Personnel
The future success of Antigua Casino and PlayStar Limited is dependent on
certain key management and technical personnel. The Subsidiaries primarily rely
upon consultants and advisors who are not employees of the Subsidiaries. The
loss of key personnel by the Subsidiaries could have an adverse effect on the
operations of PlayStar. PlayStar does not maintain key-man life insurance on any
such key personnel. The Subsidiaries also plan to hire additional key employees
in fiscal 1998. Competition for qualified employees is intense, and an inability
to attract, retain and motivate additional, highly-skilled personnel required
for the expansion of PlayStar's operations could adversely affect PlayStar's
business, financial condition and results of operations. The Subsidiaries'
ability to retain existing personnel and attract new personnel may be adversely
affected by its current financial situation. There can be no assurance that the
Subsidiaries will be able to retain its existing personnel or attract
additional, qualified persons when required and on acceptable terms.
Patents, Copyrights and Trade Secrets
As of the date hereof, PlayStar does not own or otherwise control any
registered patents, copyrights or trademarks. As the Subsidiaries' research and
development efforts progress, PlayStar will attempt to protect its Subsidiaries'
proprietary technology by relying on trade secrecy laws and non-disclosure and
confidentiality agreements with their employees and consultants who have access
to their proprietary technology. To date, PlayStar Limited has entered similar
types of agreements only with Dreamplay Research Corp. ("Dreamplay"). Despite
these anticipated protections, no assurance can be given that others will not
independently develop or obtain access to such technology or that PlayStar's
competitive position will not be adversely affected thereby.
The Subsidiaries' businesses are based on technologies acquired or
otherwise licensed from third parties. There can be no assurance that those
entities licensing or developing the Subsidiaries' technology will have the
financial resources necessary to enforce any patent or copyright rights they may
hold. Although PlayStar is not aware of any infringement claim against its
Subsidiaries' technology, in the event that a future claim against the
technology developer and/or the Subsidiaries are successful, it may be necessary
for the Subsidiaries to obtain additional licenses to such patents or to other
patents or proprietary technology. There can be no assurance that the
Subsidiaries will be able to obtain any such licenses on commercially reasonable
terms. Any disclosure of such technology or development of substantially
equivalent technology could result in increased competition that could
materially and adversely affect the Subsidiaries' revenues and costs of sales.
Future Sales of Common Stock; Exercise of Options and Warrants
The number of shares of PlayStar's outstanding Common Stock held by
non-affiliates is large relative to the trading volume of the Common Stock. Any
substantial sale of Common Stock or even the possibility of such sales occurring
may have an adverse effect on the market price of the Common Stock.
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As of August 11, 1998, PlayStar had outstanding options and warrants to
purchase an aggregate of 9,573,000 shares of Common Stock. More than 10% of such
outstanding options and warrants are held by each of Julius Patta and Hemery
Trustees Limited, who beneficially hold 1,250,000 and 700,000 options,
respectively. Holders of such warrants and options are likely to exercise them
when, in all likelihood, PlayStar could obtain additional capital on terms more
favorable than those provided by the options and warrants. Further, while its
warrants and options are outstanding, PlayStar's ability to obtain additional
financing on favorable terms may be adversely affected.
Possible Volatility of Stock Price
The market price of the PlayStar Antigua's Ordinary Shares may be highly
volatile. Quarterly operating results of PlayStar, changes in general conditions
in the economy, the financial markets, or the Internet gaming industry
generally, changes in financial estimates by securities analysts or failure by
PlayStar to meet such estimates, litigation involving PlayStar or its
Subsidiaries, actions by governmental agencies or other developments affecting
PlayStar or its competitors, could cause the market price of the PlayStar
Antigua's Ordinary Shares to fluctuate substantially. In particular, the stock
market may experience significant price and volume fluctuations which may affect
the market price of the Ordinary Shares for reasons that are unrelated to
PlayStar's operating performance and that are beyond PlayStar's control.
Risks of Penny Stocks
Rules 15g-1 through 15g-9 promulgated under the Exchange Act impose sales
practice and disclosure requirements on certain brokers-dealers who engage in
certain transactions involving "a penny stock." Subject to certain exceptions, a
penny stock generally includes any non-Nasdaq equity security that has a market
price of less than $5.00 per share. The PlayStar Antigua Ordinary Shares are
expected to be deemed penny stock for purposes of the Exchange Act. The
additional sales practice and disclosure requirements imposed upon
brokers-dealers may discourage broker-dealers from effecting transactions in the
Ordinary Shares, which could severely limit the market liquidity of the Ordinary
Shares and impede the sale of the Ordinary Shares in the secondary market.
Under the penny stock regulations, a broker-dealer selling penny stock to
anyone other than an established customer or "accredited investor" (generally,
an individual with net worth in excess of $1,000,000 or an annual income
exceeding $200,000, or $300,000 together with his or her spouse) must make a
special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to sale, unless the
broker-dealer or the transaction is otherwise exempt. In addition, the penny
stock regulations require the broker-dealer to deliver, prior to any transaction
involving a penny stock, a disclosure schedule prepared by the Commission
relating to the penny stock market, unless the broker-dealer or the transaction
is otherwise exempt. A broker-dealer is also required to disclose commissions
payable to the broker-dealer and the registered representative and current
quotations for the securities. Finally, a broker-dealer is required to send
monthly statements disclosing recent price information with respect to the penny
stock held in a customer's account and information with respect to the limited
market in penny stocks.
Potential Anti-Takeover Effect
PlayStar's Board of Directors has the authority, without further approval
of PlayStar's shareholders, to issue preference shares (the "Series Preference
Shares") having such rights, preferences and privileges as the Board of
Directors may determine. Any such issuance of Series Preference Shares could,
under certain circumstances, have the effect of delaying or preventing a change
in control of PlayStar and may adversely affect the rights of holders of
Ordinary Shares.
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THE REORGANIZATION
General
The Board of Directors of PlayStar Delaware has unanimously approved, and
the Consenting Holders have approved, a corporate reorganization (the
"Reorganization") pursuant to which PlayStar Delaware will become an Antigua
corporation. It is proposed that the Reorganization be effected pursuant to the
Merger Agreement and the Application for Certificate of Transfer. After the
consummation of the Reorganization, PlayStar Antigua will continue to conduct
the business in which PlayStar Delaware is now engaged. The relative voting
rights of PlayStar Antigua will not change as a result of the Reorganization.
See "Description of PlayStar Antigua Capital Stock --Voting and Other Rights"
and "Comparison of Rights of Stockholders".
Background and Reasons for the Reorganization
International activities of PlayStar Delaware's Subsidiaries will be a
significant part of PlayStar Delaware's business activities. PlayStar Delaware's
income is expected to be primarily derived from activities outside of the United
States.
The Board of Directors of PlayStar Delaware believes that the
establishment of an Antigua holding company for PlayStar and the Subsidiaries
will allow PlayStar to organize its international business activities to benefit
from more favorable business, tax and financing environments than would be
available to it if the parent corporation were a United States corporation.
Accordingly, the Board of Directors of PlayStar Delaware and the Consenting
Holders believe the Reorganization should have a favorable impact on the conduct
of PlayStar's future business operations. In particular, the Board of Directors
and the Consenting Holders have approved the Reorganization for the following
reasons:
(i) The Board and the Consenting Holders believe that the creation of
an Antigua parent corporation will reduce corporate income taxes because,
unlike the United States tax system which imposes corporate income tax on
the worldwide income of United States corporations, Antigua imposes no
corporate income taxes on the income of an Antigua IBC. Income taxes will
therefore be reduced to the extent operations are conducted after the
Reorganization by PlayStar Antigua or its Subsidiaries.
(ii) The Board and the Consenting Holders believe that the change of
domicile may have a favorable effect on PlayStar's ability to sell assets
or raise additional capital in the future. The United States Internal
Revenue Code (the "Code") currently provides for the payment of certain
estate taxes in respect of the value of shares in a United States
corporation owned by a non-United States investor. In addition, the
distributions with respect to stock in a United States corporation to
non-resident aliens could be subject to certain withholding taxes under
the Code. The Code currently does not generally provide for withholding
taxes on distributions to non-resident aliens in respect of stock of a
non-United States corporation.
(iii)The Board and the Consenting Holders believe that a holding
company structure in the form proposed by the Reorganization will provide
greater management flexibility and control, as well as a more suitable
corporate structure for expansion of PlayStar's current business and
future acquisitions and diversification opportunities. PlayStar currently
has no plans for specific acquisitions or to diversity its business from
the business it is currently conducting.
(iv) The Board and the Consenting Holders believe that, as a result
of the proposed legislation in Congress which would subject Internet
gaming activities to United States Federal law and the existence of
different regulatory schemes of the various states which currently
regulate gaming activity in the United States, PlayStar faces legal
impediments to conducting its proposed activities within the United
States. An Antigua domiciled corporation provides a clearer, more
favorable, regulatory environment for PlayStar's business operations.
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The Reorganization structure contemplates that PlayStar Delaware will
first become a Wyoming corporation before becoming an Antigua corporation. The
Board and the Consenting Holders structured the Reorganization to include the
merger of PlayStar Delaware with and into PlayStar Wyoming because Wyoming law
provides for a continuation procedure effective upon the consent of a
supermajority of corporate shareholders. In contrast, Delaware law requires the
unanimous consent of stockholders to consummate an offshore reincorporation. In
light of the foregoing, the Board and the Consenting Holders determined that the
proposed Reorganization structure would allow PlayStar to achieve the benefits
discussed above without the logistical hardship of obtaining unanimous
stockholder approval.
The Board and the Consenting Holders consulted with PlayStar Delaware's
management and its financial and legal advisors in considering the foregoing
factors and other factors in determining to approve the Reorganization.
THE BOARD OF DIRECTORS OF PLAYSTAR DELAWARE HAS UNANIMOUSLY APPROVED AND
THE CONSENTING HOLDERS HAVE APPROVED THE PROPOSED REORGANIZATION.
THE MERGER AGREEMENT AND APPLICATION FOR CERTIFICATE OF TRANSFER
General
It is proposed that the Reorganization be effected pursuant to the Merger
Agreement and the Application for Certificate of Transfer. Pursuant to the
Merger Agreement and the Application for Certificate of Transfer:
(i) PlayStar Delaware will be merged with and into PlayStar Wyoming,
with PlayStar Wyoming being the surviving corporation. PlayStar Wyoming
will then file the Application for Certificate of Transfer with the
Secretary of State of the State of Wyoming. A Certificate of Transfer will
be issued by the Secretary of State of the State of Wyoming, and the
Articles of Continuance and a Certificate of Continuance will be issued by
the Director of International Business Corporations, Antigua, which will
result in PlayStar Wyoming becoming an Antigua corporation pursuant to a
continuation procedure under Antigua and Wyoming law.
(ii) The outstanding shares of PlayStar Delaware Common Stock will be
automatically converted into a number of shares of common stock of
PlayStar Wyoming equal to the number of shares of PlayStar Delaware's
Common Stock outstanding immediately prior to the Effective Time of the
Merger.
(iii)Each outstanding share of common stock of PlayStar Wyoming will
be automatically converted into one Ordinary Share of PlayStar Antigua
upon the filing of the Articles of Continuance and the obtaining of a
Certificate of Continuance from the Director of International Business
Corporations, Antigua.
As a result of the foregoing, upon effectiveness of the Merger and the
Certificate of Continuance, PlayStar Delaware and PlayStar Wyoming will cease to
exist as such, and all the Ordinary Shares of PlayStar Antigua outstanding
immediately after the Reorganization will be owned share for share by former
holders of PlayStar Delaware Common Stock.
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The certificate of incorporation of PlayStar Wyoming shall be the
Certificate of Incorporation of the surviving corporation of the Merger and will
read as set forth in the annex to the Merger Agreement and, upon the issuance of
the Certificate of Transfer by the Secretary of State of the State of Wyoming
and the obtaining of the Articles of Continuance and a Certificate of
Continuance from the Director of International Business Corporations, Antigua,
the Articles of Incorporation of PlayStar Wyoming shall be the Articles of
Continuance of PlayStar Antigua.
Amendment/Termination
PlayStar Delaware and PlayStar Wyoming, by action of their respective
Boards of Directors, may amend, modify or supplement the Merger Agreement or the
Application for Certificate of Transfer at any time; provided that no amendment,
modification or supplement may be made or effected that by law requires further
approval by such stockholders without the further approval of such stockholders.
The Merger Agreement provides that it may be terminated, and the
Reorganization abandoned, at any time, by action of the Board of Directors of
PlayStar Delaware or PlayStar Wyoming.
Effective Time
If the Merger Agreement is not terminated, the Reorganization will become
effective (the "Effective Time") at the close of business on the date that an
appropriate certificate of merger is filed with the Delaware Secretary of State
and the Wyoming Secretary of State as required by Delaware and Wyoming law or at
such later time as is specified in such certificate of merger; and the date that
the Certificate of Transfer has been issued by the Secretary of State of the
State of Wyoming and the Articles of Continuance and the Certificate of
Continuance have been obtained from the Director of International Business
Corporations, Antigua, as required by Wyoming and Antigua law. PlayStar Delaware
anticipates that the Reorganization will become effective on or about September
4, 1998.
Immediately following the Effective Time of the Reorganization, PlayStar
Antigua will have the same subsidiaries and affiliates and the same directors
and executive officers as PlayStar Delaware had immediately prior to such date.
Exchange of Share Certificates
Immediately following the Effective Time of the Reorganization, the
stockholders of PlayStar Delaware immediately prior to the Effective Time will
automatically become the owners of PlayStar Antigua's Ordinary Shares and, as of
the Effective Time, will cease to be owners of PlayStar Delaware Common Stock.
Stock certificates representing PlayStar Delaware Common Stock will, at the
Effective Time automatically represent Ordinary Shares. Holders of PlayStar
Delaware Common Stock will not be required to exchange their stock certificates
as a result of the Reorganization. Should a stockholder desire to sell some or
all of his Ordinary Shares after the Effective Time, delivery of the stock
certificate or certificates which previously represented shares of PlayStar
Delaware Common Stock will be sufficient.
Following the Reorganization, certificates bearing the name of PlayStar
Antigua will be issued in the normal course upon surrender for transfer or
exchange of outstanding certificates representing PlayStar Delaware Common
Stock. If any stockholder surrenders a certificate representing shares of
PlayStar Delaware Common Stock for exchange or transfer and the new certificate
to be issued is to be issued in a name other than that appearing on the
surrendered certificate theretofore representing the PlayStar Delaware Common
Stock, it will be a condition to such exchange or transfer that the surrendered
certificate be properly endorsed and otherwise be in proper form for transfer.
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Stock Option Plan
Pursuant to PlayStar Delaware's 1996 Stock Option Plan, such Plan will
become a stock option plan of PlayStar Wyoming upon the Merger, and of PlayStar
Antigua upon the continuance, and each stock option of PlayStar Delaware issued
prior to the Merger will become on stock option of PlayStar Wyoming upon the
Merger and of PlayStar Antigua upon the continuance.
The Consenting Holders' approval of the Reorganization also constitutes
stockholder approval of amendments to the stock option benefit plan providing
for future use of Ordinary Shares in lieu of PlayStar Delaware Common Stock
thereunder.
Stock Listing
There is currently no established public trading market for the Ordinary
Shares. Immediately following the Reorganization, management believes that the
Ordinary Shares will be listed on the OTCBB under the symbol "PSCKF", a symbol
which is substantially similar to that under which the PlayStar Delaware Common
Stock is currently listed.
Accounting Treatment of the Reorganization
The creation of PlayStar Antigua upon the continuation of PlayStar Wyoming
into Antigua in connection with the Reorganization will be accounted for as a
combination of entities under common control (as if it were a pooling of
interests).
RIGHTS OF DISSENTING STOCKHOLDERS
General
Stockholders of PlayStar Delaware who follow the procedures specified in
Section 262 of the DGCL ("Section 262") will be entitled to have their shares of
PlayStar Delaware Common Stock appraised by the Delaware Court of Chancery and
to receive payment of the "fair value" of such shares, exclusive of any element
of value arising from the accomplishment or expectation of the Reorganization,
as determined by such Court. In order to take advantage of such rights, the
procedures set forth in Section 262 must be strictly followed. Failure to comply
with any of such procedures may result in a termination or waiver of appraisal
rights under Section 262.
Section 262
The following discussion of the provisions of Section 262 is not intended
to be a complete statement of its provisions and is qualified in its entirety by
reference to the full text of that section, a copy of which is attached as Annex
III to this Information Statement/Prospectus.
Under Section 262, a stockholder of PlayStar Delaware electing to
exercise appraisal rights must both:
(1) deliver to PlayStar Antigua within 20 days after the date of mailing
of the notice of action taken by written consent relating to the Reorganization,
a written demand for appraisal of his shares which reasonably informs PlayStar
Antigua of the identity of the stockholder of record and that such record
stockholder intends thereby to demand the appraisal of his shares of PlayStar
Delaware Common Stock. Such written demand for appraisal should be delivered
either in person or by mail (certified mail, return receipt requested, being the
recommended form of transmittal) to Mr. William F.E. Tucker, Secretary, PlayStar
Corporation, 60 Nevis Street, 2nd Floor, St. John's, Antigua BW1, West Indies
within such 20 day period; and
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(2) not consent in writing to the proposal relating to the
Reorganization.
The written demand for appraisal must be made by or for the holder of
record of PlayStar Delaware Common Stock registered in his name. Accordingly,
such demand should be executed by or for such stockholder of record, fully and
correctly, as such stockholder's name appears on his stock certificates. If the
stock is owned of record in a fiduciary capacity, such as by a trustee, guardian
or custodian, execution of the demand should be made in such capacity, and if
the stock is owned of record by more than one person as in a joint tenancy or
tenancy in common, such demand should be executed by or for all joint owners. An
authorized agent, including one of two or more joint owners, may execute the
demand for appraisal for a stockholder of record. However, the agent must
identify the record owner or owners and expressly disclose the fact that in
executing the demand he is acting as agent for the record owner.
A record owner, such as a broker, who holds PlayStar Delaware Common Stock
as nominee for others may exercise his right of appraisal with respect to the
shares held for all or less than all of the others. In such case the written
demand should set forth the number of shares so covered. Where no number of
shares is expressly mentioned, the demand will be presumed to cover all shares
held in the name of such record owner.
Within 120 days after the date of the Effective Time, PlayStar Antigua or
any stockholder who has satisfied the foregoing conditions and is otherwise
entitled to appraisal rights under Section 262, may file a petition in the
Delaware Court of Chancery demanding a determination of the value of the shares
of PlayStar Delaware Common Stock held by all stockholders entitled to appraisal
rights. If no such petition is filed, appraisal rights will be lost for all
stockholders who had previously demanded appraisal of their shares. PlayStar
Delaware stockholders seeking to exercise appraisal rights should not assume
that PlayStar Antigua will file a petition with respect to the appraisal of the
value of their shares or that PlayStar Antigua will initiate any negotiations
with respect to the "fair value" of such shares. ACCORDINGLY, STOCKHOLDERS OF
PLAYSTAR DELAWARE WHO WISH TO EXERCISE THEIR APPRAISAL RIGHTS SHOULD REGARD IT
AS THEIR OBLIGATION TO TAKE ALL STEPS NECESSARY TO PERFECT THEIR APPRAISAL
RIGHTS IN THE MANNER PRESCRIBED IN SECTION 262.
Within 120 days after the date of the Effective Time, any PlayStar
Delaware stockholder who has complied with the provisions of Section 262 is
entitled, upon written request, to receive from PlayStar Antigua a statement
setting forth the aggregate number of shares of PlayStar Delaware Common Stock
not voted in favor of adoption of the Reorganization and with respect to which
demands for appraisal were received by PlayStar Antigua, and the number of
holders of such shares. Such statement must be mailed within 10 days after a
written request therefor has been received by PlayStar Antigua or within 10 days
after expiration of the time for delivery of demands for appraisal under Section
262, whichever is later.
If a petition for an appraisal is timely filed, after a hearing on such
petition the Delaware Court of Chancery will determine the stockholders of
PlayStar Delaware entitled to appraisal rights and will appraise the value of
the PlayStar Delaware Common Stock owned by such stockholders, determining its
"fair value" exclusive of any element of value arising from the accomplishment
or expectation of the Reorganization. The Court will direct payment of the fair
value of such shares together with a fair rate of interest, if any, on such fair
value to stockholders entitled thereto upon surrender to PlayStar Antigua of
stock certificates representing such shares. Upon application of a stockholder,
the Court may, in its discretion, order that all or a portion of the expenses
incurred by any stockholder in connection with an appraisal proceeding,
including without limitation, reasonable attorneys' fees and the fees and
expenses of experts, be charged pro rata against the value of all the shares
entitled to appraisal.
Although PlayStar Delaware believes that the consideration per share to be
paid in the Reorganization is fair, it cannot make any representation as to the
outcome of the appraisal of fair value as determined by the Delaware Court of
Chancery, and stockholders should recognize that such an appraisal could result
in a determination of a lower, higher or equivalent value. Moreover, PlayStar
Delaware may or may not argue in an appraisal proceeding for a determination of
fair value by the Delaware Court of Chancery which is lower than the
consideration per share in the Merger Agreement. In determining the fair value
of the shares, the Court is required to take into account all relevant factors.
Therefore, such determination could be based upon considerations in addition to
the price paid in the Reorganization, the market value of the shares, asset
values and earning capacity. In Weinberger v. UOP, Inc. et al. (decided February
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1, 1983), the Delaware Supreme Court stated with respect to Section 262, among
other things, that "proof of value by any techniques or methods which are
generally considered acceptable in the financial community and otherwise
admissible in court" should also be considered in an appraisal proceeding.
Any stockholder of PlayStar Delaware who has duly demanded an appraisal
in compliance with Section 262 will not, after the Effective Time, unless and
until he shall deliver a written withdrawal of his demand for appraisal within
the time period specified, be entitled to vote his shares for any purpose nor be
entitled to the payment of dividends or other distributions on his shares (other
than those payable to holders of record as of a date prior to the Effective
Time).
If no petition for an appraisal is filed within the time provided, or if
a stockholder of PlayStar Delaware delivers to PlayStar Antigua a written
withdrawal of his demand for an appraisal and an acceptance of the
Reorganization, either within 60 days after the Effective Time or with the
written approval of PlayStar Antigua thereafter, then the right of such
stockholder to an appraisal will cease and such stockholder shall be entitled to
receive the consideration, without interest, to which he would have been
entitled had he not demanded appraisal of his shares. No appraisal proceeding in
the Court of Chancery will be dismissed as to any stockholder without the
approval of the Court, which approval may be conditioned on such terms as the
Court deems just.
CERTAIN TAX CONSIDERATIONS
United States Federal Income Tax Consequences
The following summary is based upon an opinion rendered by Baker &
McKenzie, special United States federal income tax counsel to PlayStar,
regarding the material United States federal income tax consequences generally
applicable to holders of PlayStar Delaware Common Stock as a result of the
Reorganization and of the ownership and disposition of PlayStar Antigua Ordinary
Shares, but it does not purport to be a comprehensive description of all of the
tax considerations that may be relevant to a decision to participate in the
Reorganization or to own or dispose of Ordinary Shares. In particular, this
summary of United States federal income tax matters deals only with holders who
will hold shares as capital assets and does not address the tax treatment of the
Reorganization or of the ownership and disposition of the Ordinary Shares under
applicable State or local tax laws or the laws of any jurisdiction other than
the United States. In addition, this summary does not address special federal
income tax situations, such as rules applicable to holders who are securities
dealers, financial institutions, insurance companies, or tax exempt
organizations; who are holding shares as part of a hedging or larger integrated
financial or conversion transaction; who are citizens or residents of a
possession or territory of the United States; who are United States holders (as
defined below) with a currency other than the U.S. dollar as their functional
currency; who are holding shares pursuant to certain retirement plans; or who
are holding shares pursuant to the exercise of an employee stock option or
otherwise as compensation.
This summary is based upon the federal income tax laws of the United
States as in effect on the date hereof, including the United States Internal
Revenue Code of 1986, as amended (the "Code"), which are subject to change,
possibly with retroactive effect. In delivering its opinion, special United
States federal income tax counsel has received and relied upon certain
representations from PlayStar, and certain other information, data,
documentation and other materials as special United States federal income tax
counsel deems necessary. There are no regulations, published rulings or judicial
decisions directly on point with respect to certain aspects of the
Reorganization and the securities to be issued pursuant thereto, or to certain
aspects of the continuing business operations of PlayStar. Accordingly, special
United States federal income tax counsel is unable to reach an unqualified
conclusion on certain matters as indicated below. An opinion of tax counsel is
not binding upon either the United States Internal Revenue Service (the "IRS")
or the courts. Stockholders of PlayStar should note that no rulings have been or
are expected to be sought from the IRS with respect to any of the United States
federal income tax considerations discussed below, and no assurance can be given
that the IRS or ultimately the courts will not take contrary positions.
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Stockholders should consult their own tax advisers as to the United States
federal income tax consequences of the Reorganization, of the continuing
business operations of PlayStar and of the ownership and disposition of PlayStar
Antigua Ordinary Shares, in addition to the effect of any State or local tax
laws or the laws of any jurisdiction other than the United States. It is
particularly important for exchanging stockholders who are United States holders
(as defined below) who directly, indirectly or by attribution own 10% or more of
the outstanding stock of PlayStar Delaware at the Effective Time of the
Reorganization to consult their own tax advisors as to the United States federal
income tax consequences of the Reorganization. Moreover, all stockholders who
are United States holders should consult their own tax advisers as to the rules
summarized below with respect to passive foreign investment companies.
Definition of United States Holder
As used herein, a "United States holder" means a beneficial owner of
PlayStar Delaware Common Stock or PlayStar Antigua Ordinary Shares, as
applicable, who is a United States person. A "United States person," in turn,
means a citizen or resident of the United States, a corporation or partnership
created or organized in or under the laws of the United States or any State
thereof (unless, in the case of a partnership, future Treasury regulations
presently authorized under the Code otherwise provide), or an estate or trust,
the income of which is subject to United States federal income tax regardless of
its source. A "resident" of the United States includes an individual that (i) is
lawfully admitted for permanent residence in the United States, (ii) is present
in the United States for 183 days or more during a calendar year; or (iii)(a) is
present in the United States for 31 days or more during a calendar year, (b) is
present in the United States for an aggregate of 183 days or more, on a weighted
basis, over a 3-year period ending in such calendar year, and (c) does not have
a closer connection to a "tax home" that is located outside the United States.
The Reorganization of PlayStar
Prior to the Reorganization, PlayStar Delaware will own 100% of the
outstanding shares of PlayStar Limited, a Channel Islands company. PlayStar
Limited, in turn, will own 100% of the outstanding shares of Antigua Casino.
(See "Business of PlayStar Delaware and PlayStar Antigua - Description of
Business of PlayStar" below). For United States federal income tax purposes,
each of PlayStar Limited and Antigua Casino has elected to be treated as a
pass-through entity for United States federal income tax purposes. Thus, for all
United States federal income tax purposes, the existence of PlayStar Limited or
Antigua Casino as a separate corporation will be disregarded. For United States
federal income tax purposes, PlayStar Delaware will be deemed to be the direct
owner of the assets (including the intangible assets) held by PlayStar Limited
or Antigua Casino, and PlayStar Delaware will be deemed to conduct the business
operations conducted by PlayStar Limited or Antigua Casino.
Receipt of Ordinary Shares
The merger of PlayStar Delaware into PlayStar Wyoming and the immediately
subsequent continuation of PlayStar Wyoming to Antigua, to become PlayStar
Antigua, should be characterized for United States federal income tax purposes
as one or two reorganizations described under Section 368(a)(1)(F) of the Code
(an "F" reorganization), i.e., a mere change in the place of organization of one
corporation, PlayStar. Generally, an "F" reorganization is a nontaxable
transaction to all persons. However, because PlayStar will change its place of
organization to a jurisdiction outside of the United States, the "F"
reorganization potentially could give rise to United States federal income tax
under Section 367 of the Code.
Pursuant to Section 367(a) of the Code, the temporary Treasury regulations
promulgated thereunder and IRS public pronouncements, the "F" reorganization of
PlayStar should be recharacterized as three separate transactions for purposes
of Section 367 of the Code, namely: (i) a transfer by PlayStar Delaware of all
of its assets (including the assets of PlayStar Delaware held through PlayStar
Limited and Antigua Casino) to PlayStar Antigua in exchange for Ordinary Shares
of PlayStar Antigua, (ii) a distribution of the PlayStar Antigua Ordinary Shares
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by PlayStar Delaware, and (iii) an exchange by the stockholders of PlayStar
Delaware of their PlayStar Delaware Common Stock for the PlayStar Antigua
Ordinary Shares. In addition, upon the establishment of PlayStar Antigua,
PlayStar's taxable year for United States federal income tax purposes will
close, and a new taxable year will commence at the Effective Time of the
Reorganization.
In accordance with Sections 354 and 367 of the Code, for transaction (iii)
of the recharacterized "F" reorganization, both the United States and non-United
States stockholders of PlayStar should not recognize any gain or loss on the
exchange of their PlayStar Delaware Common Stock for PlayStar Antigua Ordinary
Shares. Consequently, for United States federal income tax purposes, the
exchanging stockholders' respective adjusted tax bases in, and holding periods
for, the Common Stock of PlayStar Delaware prior to the Reorganization should
carry over and become their respective adjusted tax bases in, and holding
periods for, the Ordinary Shares received in the Reorganization.
Notwithstanding the nontaxable nature of the exchange of PlayStar Delaware
Common Stock for PlayStar Antigua Ordinary Shares, exchanging stockholders who
are United States persons that directly, indirectly or by attribution own 10% or
more of the outstanding stock of PlayStar Delaware at the Effective Time of the
Reorganization (a "10%-or-greater U.S. stockholder") could be subject to
materially adverse United States federal income tax consequences as a result of
the Reorganization. In accordance with Section 367(d) of the Code and temporary
Treasury regulations thereunder, as a result of the deemed transfer of
intangible assets by PlayStar Delaware to PlayStar Antigua and PlayStar
Delaware's subsequent distribution of PlayStar Antigua Ordinary Shares as part
of transactions (i) and (ii) of the recharacterized "F" reorganization described
in the second preceding paragraph, a 10%-or-greater U.S. stockholder would be
required to recognize, subsequent to the Reorganization, deemed royalty income
from PlayStar Antigua. The amount of deemed royalty income to be taken into
account by a 10%-or-greater U.S. stockholder for a taxable year would be an
amount determined to be "commensurate" with the income derived by PlayStar
Antigua for that year from the use of the ratable portion of the transferred
intangible assets of PlayStar Delaware (including the transferred intangible
assets of PlayStar Delaware held through PlayStar Limited and Antigua Casino)
that was attributable to the 10%-or-greater U.S. stockholder's interest in
PlayStar Delaware immediately prior to the Reorganization. Such deemed royalty
income would be ordinary income, and would be taken into account annually over
the remaining useful life of the transferred intangible assets (not to exceed
twenty years). The source of such deemed royalty income (for United States
foreign tax credit limitation purposes) would be generally determined by where
the intangible assets were used by PlayStar Antigua. In accordance with (and
subject to the rules of) the temporary Treasury regulations under Section
367(d), a 10%-or-greater U.S. stockholder could treat subsequent dividends
distributed on the PlayStar Antigua Ordinary Shares as nontaxable income to the
extent of the prior deemed royalty income taken into account by the stockholder.
However, because a 10%-or-greater U.S. stockholder would not receive any amount
with respect to the Ordinary Shares that would be proportionally in excess of
the amounts paid or distributed to the other stockholders of PlayStar Antigua,
and because the deemed royalty income would be required to be taken into account
for a taxable year by a 10%-or-greater U.S. stockholder regardless of the amount
actually distributed as a dividend by PlayStar Antigua for such year, a
10%-or-greater U.S. stockholder could be subject to United States federal income
tax on income before it was received in cash, or even on income that was never
received in cash by that stockholder, as a result of the Reorganization and the
10%-or-greater U.S. stockholder's retained ownership of the Ordinary Shares of
PlayStar Antigua.
Reporting Requirements
Pursuant to Sections 367(b) and 368 of the Code, and the Treasury
regulations thereunder, a United States holder will be required to file an
information return with such holder's United States federal income tax return
for the taxable year that includes the Reorganization. The information return
must contain a complete statement of all facts pertinent to the nonrecognition
of gain or loss upon the exchange, including:
(i) a statement of the cost or other basis of the PlayStar
Delaware Common Stock transferred in the exchange,
(ii) a statement of the fair market value of the PlayStar
Antigua Ordinary Shares received in the exchange, and
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(iii)if the United States holder realized but did not recognize gain on
the exchange under the Reorganization, a statement that the exchange
is an exchange to which Section 367(b) of the Code potentially
applies.
PlayStar Delaware intends to provide information to each United States
holder so as to enable each such holder to timely file an information return as
indicated above.
The Continuing Business Operations of PlayStar
Taxation of PlayStar Antigua
PlayStar Antigua will be classified as a "corporation" for all United
States federal income tax purposes. The Ordinary Shares will be properly
characterized as equity interests in PlayStar Antigua, and PlayStar Antigua will
so characterize all such shares for all United States federal income tax
purposes. PlayStar Antigua's taxable year end for United States federal income
tax purposes will correspond to its fiscal year end of June 30th. PlayStar
Antigua intends to report as a U.S. dollar functional currency taxpayer to the
extent relevant for United States federal income tax purposes.
Subsequent to the Reorganization, PlayStar Antigua will be subject to
United States federal income tax only to the extent that it derives certain
United States source income or income effectively connected with the conduct of
a trade or business within the United States. PlayStar Antigua intends to
conduct its business operations in a manner so that it should not have any
United States source income or income effectively connected with the conduct of
a trade or business within the United States that would be subject to United
States federal income or withholding tax.
Although not free from doubt, under current United States federal income
tax law, PlayStar Antigua's income derived from providing Internet gaming
services through business operations and activities conducted outside of the
United States should be characterized as non-United States source income, not
subject to United States federal income tax on a gross or net income basis
(provided PlayStar Antigua does not conduct its business within the United
States). However, the United States federal income tax rules applicable to
Internet service providers, such as PlayStar, are currently under review by the
IRS and the United States Congress. Pursuant to future IRS public pronouncements
and/or future United States legislation, to the extent attributable to users of
PlayStar Antigua's gaming services who are located in the United States, it is
possible that all or a portion of the income derived by PlayStar Antigua from
the conduct of its Internet business operations would be treated as United
States source income, and, therefore, potentially subject to United States
federal income tax on either a gross or net income basis. This result might be
possible even though PlayStar Antigua conducts its business operations entirely
outside of the United States.
Nevertheless, because PlayStar Delaware is currently subject to United
States federal income tax on all of its worldwide income, regardless of the
source of that income and regardless of where it conducts its business, it is
anticipated that the United States federal income tax imposed on PlayStar
Antigua's business income will be significantly lower subsequent to the
Reorganization, notwithstanding any future IRS public pronouncements and/or
future United States legislation.
Taxation of Stockholders - United States Holders
Taxation of Dividends
Subject to the discussion of the passive foreign investment company rules
below, a United States holder will be required to include in gross income as a
dividend when received (except as otherwise described above in the context of a
"10%-or-greater U.S. stockholder" - see "United States Federal Income Tax
Consequences - The Reorganization of PlayStar - Receipt of Ordinary Shares"
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above) the gross amount of any cash or the fair market value of any property
distributed by PlayStar Antigua to the extent of its current and accumulated
earnings and profits as determined under United States federal income tax
principles. Distributions paid in any currency other than the U.S. dollar will
be translated into U.S. dollars at the spot rate on the date the dividends are
received, regardless of whether the dividends are in fact converted to U.S.
dollars on that date.
A distribution by PlayStar Antigua with respect to the Ordinary Shares in
excess of its current and accumulated earnings and profits, as determined under
United States federal income tax principles, will be treated as a tax-free
return of basis in the Ordinary Shares to the extent of a United States holder's
adjusted tax basis in such Ordinary Shares, with the balance of the
distribution, if any, treated as a gain realized by the United States holder
from the sale or disposition of the Ordinary Shares that is includible in gross
income.
The dividends paid by PlayStar Antigua will not be eligible for the
dividends received deduction generally allowed to domestic corporations (such as
PlayStar Delaware prior to the Reorganization). For purposes of the United
States foreign tax credit limitation, dividends paid by PlayStar Antigua
generally will constitute foreign source "passive income" (or, in the case of a
holder who is a "financial services entity" as defined in regulations under the
Code, "financial services income"). All non-corporate United States holders, and
all United States holders that are corporations and which own less than 10% of
the voting stock of PlayStar Antigua, will not be entitled to claim a foreign
tax credit for any taxes paid by PlayStar Antigua or its subsidiaries.
Taxation of Dispositions of Ordinary Shares
A gain or loss realized and recognized by a United States holder on the
sale or other disposition of an Ordinary Share will be subject to United States
federal income tax on an amount equal to the difference between such United
States holder's adjusted tax basis in the Ordinary Share and the amount realized
on its disposition. A United States holder's adjusted tax basis in an Ordinary
Share will generally be equal to the holder's adjusted tax basis in a share of
PlayStar Delaware Common Stock prior to the Reorganization reduced (but not
below zero) by the U.S. dollar value of any subsequent distribution by PlayStar
Antigua that is treated as a tax-free return of basis.
With the exception of gain, if any, subject to the passive foreign
investment company rules as discussed below, any gain or loss recognized upon
the sale or other disposition of an Ordinary Share will be either short-term
capital gain or loss or, if held for more than one year, long-term capital gain
or loss. As discussed above (see "United States Federal Income Tax Consequences
- - The Reorganization of PlayStar - Receipt of Ordinary Shares"), a United States
holder's holding period for an Ordinary Share will include the applicable
holding period for the share of PlayStar Delaware Common Stock exchanged by the
holder in the Reorganization. For non-corporate United States holders, the
United States income tax rate applicable to a net long-term capital gain
recognized for a year currently will not exceed 20 percent. For corporate United
States holders, a capital gain is currently taxed at the same rate as ordinary
income. The deductibility of a capital loss, however, is subject to limitations
for both non-corporate and corporate United States holders.
For purposes of the United States foreign tax credit limitation, a
recognized gain arising on the disposition of an Ordinary Share will be United
States source income. There is a substantial risk, however, that a recognized
loss will be allocated against foreign source income by reference to the source
of income received or expected to be received under the Ordinary Share.
Passive Foreign Investment Company Rules
Special United States federal income tax rules apply to holders of equity
interests in a corporation classified as a "passive foreign investment company"
("PFIC") under the Code. A foreign corporation will constitute a PFIC for United
States federal income tax purposes if 75% or more of its gross income for a
taxable year were to consist of passive income (the "passive income" test), or
50% or more of its average assets held during a taxable year were to consist of
passive assets (the "passive asset" test). Passive assets are defined as assets
that give rise, or that reasonably could give rise during the reasonably
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foreseeable future, to passive income. Passive income includes (i) rent and
royalty income, not including rent and royalty income derived from (a) persons
other than related persons from the active conduct of a trade or business and
(b) related persons provided such amounts are properly allocable to the
non-passive income of the related persons, (ii) interest, including interest on
loans extended to customers, (iii) dividends from shares of stock in a
corporation in which the foreign corporation directly or indirectly owns less
than 25% of the value of the stock in the corporation, (iv) income equivalent to
interest and (v) gains from the sale of any property that gives rise to passive
income.
Whether PlayStar Antigua constitutes a PFIC for its short taxable year
commencing at the Effective Time of the Reorganization and ending on June 30,
1999, likely will depend upon (i) whether its business operations commence
during the year and (ii) the classification of its income from rendering
Internet gaming services for United States federal income tax purposes. With
respect to the classification of PlayStar Antigua's business income, PlayStar
Antigua will maintain employees and an office outside the United States that
will (i) regularly perform active and substantial management and operational
functions with respect to its Internet gaming business, (ii) develop and utilize
sophisticated systems to manage casino operations, process financial
transactions, encrypt information and provide user interfaces, and (iii)
regularly market its products and services to unrelated persons. Such activity
is expected to be substantial in relation to the amount of income derived from
its business operations. Thus, the business income of PlayStar Antigua should be
treated as income derived from the active conduct of a trade or business and,
therefore, such income should not constitute "passive income" for PFIC purposes.
However, it is possible that certain income derived from its Internet gaming
services might be viewed by the IRS as passive income.
The determination of whether or not PlayStar Antigua will be a PFIC will
be based upon the composition of the annual income and assets of PlayStar
Antigua. There is an argument that PlayStar Antigua would not be a PFIC for the
taxable year ending June 30, 1999 (i.e., the first taxable year it was a
"foreign corporation" for United States federal income tax purposes), regardless
of its income or asset composition for the taxable year, provided PlayStar
Antigua was not a PFIC for either of its next two succeeding taxable years.
There can be no assurance, however, that PlayStar Antigua will not be considered
a PFIC for any taxable year. If PlayStar Antigua were a PFIC for the taxable
year ending June 30, 1999, or became a PFIC for any subsequent taxable year,
PlayStar Antigua would continue to be a PFIC with respect to a United States
holder for all subsequent taxable years unless a "qualified electing fund"
("QEF") election (as defined below) were made by such United States holder for
the first taxable year in which the holder owned Ordinary Shares and for which
PlayStar Antigua was a PFIC, or unless other conditions were satisfied by the
United States holder. Thus, United States holders should be aware that adverse
tax consequences could result from PlayStar Antigua's classification as a PFIC
for any taxable year even though PlayStar Antigua might later no longer be
classified as a PFIC under the passive income and passive asset tests.
PlayStar Antigua undertakes to determine annually whether or not it is a
PFIC for any taxable year, and promptly to inform stockholders who are United
States persons in the event that PlayStar Antigua is determined to be a PFIC for
any such year. If PlayStar Antigua becomes a PFIC in any year, PlayStar Antigua
promptly will provide any information necessary for such a holder to make an
election to treat PlayStar Antigua as a QEF for United States federal income tax
purposes (as discussed below).
If PlayStar Antigua becomes a PFIC, a United States holder (whether
direct, indirect or by attribution) should be subject to materially adverse
United States tax treatment under the "excess distribution" rule in that the
holder would be subject to a deferred United States federal income tax charge to
the extent that excess distributions on the Ordinary Shares, if any, are
allocable to a prior taxable year in which both the United States holder
(whether direct, indirect or by attribution) held the Ordinary Shares and
PlayStar Antigua constituted a PFIC. In general, the deferred income tax charge
would be equivalent to an interest charge (at the applicable rate imposed on
underpayments of United States federal income tax) on the United States federal
income tax that was imposed on the portion of the excess distribution allocable
to a prior taxable year. For purposes of the PFIC rules, the term "excess
distribution" generally means that portion of the total annual distributions by
PlayStar Antigua that exceeds 125% of the average annual amount distributed
during the three preceding years (or such shorter period as the United States
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holder may have held the Ordinary Shares). In addition, the full amount of any
gain recognized on a disposition or deemed disposition (including a liquidation,
a redemption that is treated as an exchange, a pledge, or a transaction that
fails to qualify for tax-free treatment because the foreign corporation is a
PFIC) of Ordinary Shares by the United States holder will be treated as an
excess distribution.
If PlayStar Antigua is or becomes a PFIC, because the Ordinary Shares
likely will be considered to be "marketable stock" (i.e., stock that is
regularly traded on either a United States national securities exchange that is
registered with the Commission or a non-United States exchange that is
subsequently designated by the IRS), in lieu of the above PFIC rules applicable
to "excess distributions," a United States holder (whether direct, indirect or
by attribution) could make an election to recognize income or loss on the
Ordinary Shares on an annual mark-to-market basis. Pursuant to such an election,
the United States holder would include in income each year an amount equal to
the excess, if any, of the fair market value of the Ordinary Shares as of the
close of the taxable year over the United States holder's adjusted basis in such
Ordinary Shares. A deduction would be allowed for the excess, if any, of the
adjusted basis of the Ordinary Shares over their fair market value as of the
close of the taxable year, but only to the extent of any net mark-to-market
gains with respect to the Ordinary Shares included by the United States holder
for prior taxable years. Amounts included in income under the mark-to-market
election would be treated as United States source, ordinary income for a United
States holder. Any loss recognized under the election would be deductible as an
ordinary loss, but there is a substantial risk that such loss would be
classified as a foreign source loss for United States foreign tax credit
limitation purposes. This election would apply to the taxable year for which it
was made and to all subsequent taxable years, unless the Ordinary Shares cease
to be "marketable" or the IRS consents to the revocation of the election.
The potential adverse tax consequences of the above PFIC rules may be
mitigated if the United States holder can and does make an election to treat
PlayStar Antigua as a QEF for United States federal income tax purposes. If the
United States holder made such an election, and if PlayStar Antigua complied
with certain reporting requirements, the United States holder would be required
to include annually in gross income its pro rata share of PlayStar Antigua's
ordinary earnings (after deduction for all ordinary and necessary business
expenses) and net realized capital gains, whether or not such amounts were
actually distributed to the United States holder. Such deemed net income
inclusions would be required only for those taxable years in which PlayStar
Antigua was a PFIC under either the passive income or the passive asset test
described above. In the event a QEF election were made, and any undistributed
amounts previously taken into income by an electing holder were subsequently
distributed, such subsequent distribution would generally not be taken into
income in such subsequent year and would not be subject to a deferred United
States federal income tax charge.
In the event that PlayStar Antigua becomes a PFIC, PlayStar Antigua
undertakes that it will comply with all accounting, record keeping and reporting
requirements necessary for a United States holder to make an election to treat
PlayStar Antigua as a QEF, and to provide promptly to each stockholder who is a
United States person information reasonably requested by such person to comply
with United States federal income tax reporting requirements.
There can be no assurance that PlayStar Antigua will distribute an amount
for a year equal to a United States holder's annual inclusion amount if PlayStar
Antigua becomes a PFIC and a QEF election with respect to PlayStar Antigua is
made by the holder. However, because PlayStar Antigua would likely be a PFIC
under the passive income or passive asset test only for those taxable years
prior to the commencement of its business operations (i.e., PlayStar Antigua's
ongoing operating income from the conduct of an Internet gaming services
business should be treated as non-passive income for United States federal
income tax purposes), and because PlayStar Antigua would likely have an overall
net operating loss for each of those taxable years, it is possible that a QEF
election by a United States holder with respect to PlayStar Antigua would not
result in material incremental United States federal income tax to the holder.
For purposes of the PFIC rules, under certain circumstances, Ordinary
Shares held by a stockholder other than a United States person may be attributed
to a United States person owning an interest, directly or indirectly, in that
non-United States stockholder. In such event, dividends and other transactions
in respect of the Ordinary Shares held by the non-United States stockholder
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would be attributed to such United States person for purposes of applying the
above PFIC rules. Under certain circumstances, Ordinary Shares held by a United
States holder may also be attributed to another United States person owning an
interest, directly or indirectly, in such United States holder.
A United States holder must file IRS Form 8621 regarding distributions
received with respect to Ordinary Shares and any gain realized on the
disposition or deemed disposition of Ordinary Shares for each taxable year in
which the United States holder owns Ordinary Shares and for which PlayStar
Antigua is a PFIC.
If PlayStar Antigua becomes a PFIC, ownership of Ordinary Shares by a
United States holder could subject the holder to substantial, adverse United
States federal income tax consequences. United States holders should consult
their own tax advisers regarding whether PlayStar Antigua may become a PFIC and
the potential application of the PFIC rules.
Foreign Personal Holding Company Rules
Special United States federal income tax rules also apply to holders of
equity interests in a "foreign personal holding company" ("FPHC"). A foreign
corporation will constitute a FPHC for United States federal income tax purposes
if (i) five or fewer individuals who are United States persons directly,
indirectly or by attribution own more than 50% of the voting power or the value
of the share capital of the foreign corporation (the "FPHC stockholder test")
and (ii) 50% or more (or 60% or more, in certain years) of its gross income, as
specially adjusted, consists of foreign personal holding company income (defined
generally to include dividends, interest, royalties, stock and securities gains,
rents and certain other passive income) (the "FHPC income test").
If the Ordinary Shares represent stock in a FPHC for any year, a United
States holder generally must include in its gross income for the year its
distributive share of the undistributed foreign personal holding company income
of PlayStar Antigua for the year.
Based on PlayStar Antigua's existing and anticipated future operations,
PlayStar Antigua likely would trigger the FPHC income test for any taxable year
prior to the commencement of its business operations. Once PlayStar Antigua
commences its business operations and derives income from users of its Internet
gaming services for an appreciable period of time during a taxable year,
however, PlayStar Antigua expects that it will not meet the FPHC income test.
Moreover, based on the current ownership of PlayStar Delaware Common Stock and
the anticipated ownership of Ordinary Shares after the Reorganization, PlayStar
Antigua does not expect to meet the FHPC stockholder test for any taxable year.
Thus, PlayStar Antigua believes that after the Reorganization that it will not
be a FPHC.
If PlayStar Antigua becomes a FPHC, PlayStar Antigua intends promptly to
notify each United States holder and to furnish to each United States holder the
information that the holder would need in order to determine its share of
PlayStar Antigua's undistributed foreign personal holding company income for a
taxable year. Failure of a United States holder to report and pay tax on the
undistributed foreign personal holding company income of PlayStar Antigua, if it
becomes a FPHC, could subject the holder to substantial penalties and interest
under the Code.
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Personal Holding Company Rules
Special United States federal income tax rules also apply to holders of
equity interests in a corporation classified as a "personal holding company"
("PHC") under the Code. A corporation will constitute a PHC for United States
federal income tax purposes if (i) at least 60% of its adjusted ordinary gross
income consists of enumerated categories of passive income, including dividends,
interest, rents and royalties, but not including active business computer
software royalties (the "PHC income test"), and (ii) at any time during the last
half of the corporation's taxable year five or fewer individuals (regardless of
whether those persons are United States persons or non-United States persons)
directly, indirectly or by attribution own more than 50% of value of the
outstanding stock of the corporation (the "PHC stockholder test"). However, a
foreign corporation will not be a PHC for any taxable year for which it is a
PFIC or FPHC (as defined above).
PlayStar Antigua likely would trigger the PHC stockholder test because
five or fewer individuals would own more than 50% of the value of the PlayStar
Delaware Common Stock before the Reorganization and more than 50% of the value
of the Ordinary Shares after the Reorganization. Based on PlayStar Antigua's
existing and anticipated future operations, PlayStar Antigua also expects to
trigger the PHC income test for any taxable year prior to the commencement of
its business operations. Once PlayStar Antigua commences its business operations
and derives income from users of its Internet gaming services, however, PlayStar
Antigua expects that it would not meet the PHC income test.
If PlayStar Antigua becomes a PHC for a year, PlayStar Antigua (and not
the stockholders of PlayStar Antigua) will be subject to a special United States
federal income tax of 39.6% on its undistributed personal holding company income
derived from United States sources for such year. Because PlayStar Antigua
anticipates that it will not earn any United States source income, PlayStar
Antigua should not have any undistributed personal holding company income. Even
if future IRS public pronouncements and/or future United States legislation
characterizes a portion of its Internet services income as United States source
income, such income should not be personal holding company income, and PlayStar
Antigua should not be a PHC for a taxable year in which it actively conducts its
Internet gaming services business.
Controlled Foreign Corporation Rules
Special United States federal income tax rules also apply to certain
United States holders of equity interests in a corporation classified as a
"controlled foreign corporation" ("CFC") under the Code. Under Section 951(a) of
the Code, each "United States shareholder" of a CFC must include in its gross
income for United States federal income tax purposes (i) its pro rata share of
the CFC's subpart F income for such taxable year, even if the subpart F income
is not distributed, and (ii) its pro rata share of the CFC's increase in
earnings invested in United States property for such year. In addition, gain on
the sale of stock in a CFC recognized by a United States shareholder is treated
as ordinary income to the extent of the CFC's accumulated undistributed earnings
and profits.
Section 951(b) of the Code defines a United States shareholder as any
United States person who directly, indirectly or by attribution owns 10% or more
of the total combined voting power of all classes of stock of a foreign
corporation. In general, a foreign corporation is treated as a CFC only if such
United States shareholders collectively own, directly, indirectly or by
attribution, more than 50% of the total combined voting power or total value of
the corporation's stock.
Based on the current ownership of PlayStar Delaware Common Stock and the
anticipated ownership of Ordinary Shares after the Reorganization, PlayStar
Antigua does not expect that "United States shareholders" will directly,
indirectly or by attribution own more than 50% of the Ordinary Shares for any
taxable year. Thus, PlayStar Antigua believes that after the Reorganization that
it will not be a CFC.
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Taxation of Stockholders - Non-United States Holders
Subject to the discussion of United States backup withholding tax below, a
stockholder of Ordinary Shares other than a United States holder (a "non-United
States holder") will not be subject to United States federal income or
withholding tax on income derived by PlayStar Antigua, dividends paid to a
stockholder by PlayStar Antigua or gains realized on the sale of Ordinary
Shares, provided that (i) such income items are not effectively connected with
the conduct by the non-United States holder of a trade or business within the
United States, (ii) the non-United States holder is not or was not present in,
or does not have or did not have a permanent establishment in, the United
States, (iii) there has not been a present or former connection between the
non-United States holder and the United States, including, without limitation,
such non-United States holder's status as a citizen or former citizen thereof or
resident or former resident thereof, and (iv) in the case of a gain from the
sale or disposition of Ordinary Shares by an individual, the non-United States
holder is not present in the United States for 183 days or more during the
taxable year of the sale or certain other conditions are met.
United States Backup Withholding Tax and Information Reporting
Generally, a 31% "backup" withholding tax and information reporting
requirements apply to dividends paid on shares of stock, and to proceeds from
the sale of shares, to a noncorporate United States holder, if such a holder
fails to provide a correct taxpayer identification number and other information
or fails to comply with certain other requirements.
Currently, dividends paid on Ordinary Shares by PlayStar Antigua will not
be subject to United States backup withholding tax or information reporting.
However, after December 31, 1999, dividends paid on Ordinary Shares to a United
States holder or a non-United States holder through a United States or United
States-related person (i.e., a person other than a "non-U.S. payor" or "non-U.S.
middleman" as defined in Treasury regulations under the Code) will be subject to
United States backup withholding tax and information reporting, unless the
holder has provided the required certification of its non-United States status
or has otherwise established an exemption. In addition, under currently
effective Treasury regulations, the proceeds from the sale of Ordinary Shares by
a United States holder or a non-United States holder through a United States or
United States-related person will be subject to United States backup withholding
tax and information reporting, unless the holder has provided the required
certification of its non-United States status or has otherwise established an
exemption.
A United States holder can establish an exemption from the imposition of
backup withholding tax by providing a duly completed IRS Form W-9 to the
holder's broker or paying agent, reporting the holder's taxpayer identification
number (which for an individual will be his or her social security number), or
by otherwise establishing its corporate or exempt status. A non-United States
holder can establish an exemption from the imposition of backup withholding tax
and information reporting by providing a duly completed IRS Form W-8 to the
holder's broker or paying agent or by otherwise establishing the holder's
non-United States status.
Any amounts withheld under the backup withholding tax rules from a payment
to a holder will be allowed as a refund or a credit against such holder's United
States federal income tax, provided that the required information is furnished
to the IRS.
Antigua Tax Consequences
According to Antigua counsel, Roberts & Company, St. John's, Antigua, at
the present time there is no Antigua income or profits tax, withholding tax,
capital gains tax, capital transfer tax, estate duty, stamp duty or inheritance
tax payable by an Antigua IBC or its shareholders. Moreover, PlayStar Antigua
and its indirect wholly-owned Antigua incorporated subsidiary, Antigua Casino,
are entitled to rely on the provisions of Section 276 of the Antigua
International Business Corporations Act (the "Antigua IBCA"), which provides
that exemption from Antigua tax "shall continue in effect for a period of fifty
(50) years from the date of incorporation".
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Canadian Tax Consequences
The following is a summary of certain Canadian federal income tax
consequences under the Income Tax Act (Canada) (the "ITA") that are generally
applicable as a result of the Reorganization to holders of shares of PlayStar
Delaware ("Holders"). This summary does not purport to be a comprehensive
description of all of the Canadian tax considerations that may be relevant to a
decision to participate in the Reorganization. In particular, this summary of
Canadian federal income tax matters does not deal with the liability to taxation
in Canada of any corporation in the PlayStar group. This summary deals only with
Holders who are resident in Canada, deal at arm's length with PlayStar Delaware
and hold their shares of PlayStar Delaware as capital property, all for the
purposes of the ITA, and who are not subject to special rules in the ITA, such
as the "mark-to-market" rules or the "foreign affiliate" rules.
This summary is based on the provisions of the ITA in effect as of the
date hereof, the regulations thereunder in force as of the date hereof, all
specific proposals to amend the ITA and the regulations publicly announced by
the Minister of Finance (Canada) prior to the date hereof, as well as counsel's
understanding of the current administrative practices of the Minister of
National Revenue (Canada) ("Revenue Canada"). Except for the foregoing, this
summary does not take into account or anticipate any future changes in law,
whether by legislative, governmental or judicial action. This summary is of a
general nature only and does not take into account the tax laws of any province
or territory or of any jurisdiction outside Canada. It is not intended to be,
nor should it be construed to be, legal or tax advice to any Holder.
Accordingly, Holders are urged to consult with their tax advisors for advice
with respect to their particular circumstances. This summary reflects the
opinion of Baker & McKenzie, special Canadian tax counsel to PlayStar. In
delivering its opinion, special Canadian tax counsel will receive and rely upon
certain representations from PlayStar, and certain other information, data,
documentation and other materials as special Canadian tax counsel deems
necessary. An opinion of tax counsel is not binding upon either Revenue Canada
or the courts. Holders should note that no rulings have been or are expected to
be sought from Revenue Canada with respect to any of the Canadian federal income
tax considerations discussed below, and no assurance can be given that Revenue
Canada or ultimately the courts will take contrary positions.
The merger of PlayStar Delaware into PlayStar Wyoming will be a nontaxable
transaction to a Holder provided that the conditions in subsections 87(8.1), (8)
and (4) of the ITA are met. It is understood that PlayStar Delaware and PlayStar
Wyoming were incorporated and continue to be organized under the laws of the
United States and all of the assets and liabilities of PlayStar Delaware and
PlayStar Wyoming, except their intercompany shareholdings and receivables, will
become assets and liabilities of PlayStar Wyoming by virtue of the merger. It is
also understood that all of the shares of PlayStar Delaware will become shares
of PlayStar Wyoming by virtue of the merger, subject to the rights of dissenting
shareholders of PlayStar Delaware. On this basis, and assuming that a Canadian
Holder only receives PlayStar Wyoming shares in exchange for the Holder's
PlayStar Delaware shares, the conditions in subsections 87(8.1), (8) and (4)
will be substantially met, and the merger will be a nontaxable event to a Holder
provided that the condition discussed immediately below is also met, or is
considered by Revenue Canada to be met.
Paragraph 87(8.1)(c) of the ITA requires that all or substantially all the
shares of the capital stock of PlayStar Delaware be exchanged for or become
shares of the capital stock of PlayStar Wyoming by virtue of the merger. It is
understood that issued shares owned by a dissenting shareholder of PlayStar
Delaware who receives cash after the merger as a result of exercising
dissenter's rights will not become issued shares of PlayStar Wyoming. Revenue
Canada has publicly stated that "substantially all" generally means 90%, but the
courts have held that it may mean less than 90%, depending on the circumstances.
Where, as a result of shareholders exercising dissenting rights, substantially
all of the issued shares of PlayStar Delaware do not become issued shares of
PlayStar Wyoming, the condition in paragraph 87(8.1)(c) may not be met. Revenue
Canada has publicly stated that where domestic Canadian corporations amalgamate,
the amalgamation will not be disqualified as a section 87 nontaxable
amalgamation by reason only of some shareholders of an amalgamating corporation
exercising their dissenting rights and receiving cash instead of shares of the
amalgamated corporation. Revenue Canada has not publicly stated that it will
extend this administrative concession to mergers of United States corporations
that otherwise qualify as section 87 nontaxable foreign mergers. However,
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Revenue Canada has indicated in an informal opinion that it will extend this
administrative concession to such mergers. Revenue Canada's informal opinion is
not binding on Revenue Canada or the courts and there are no assurances that
Revenue Canada will not withdraw its administrative concession.
Where the conditions of subsections 87(8.1), (8) and (4) are met, a Holder
will generally be deemed to have disposed of the shares of PlayStar Delaware on
the merger for proceeds of disposition equal to the Holder's adjusted cost base
of the shares of PlayStar Delaware, resulting in no gain for Canadian tax
purposes, and will be deemed to have acquired the shares of PlayStar Wyoming for
the same amount.
Antigua counsel to PlayStar Antigua has indicated that the continuation of
PlayStar Wyoming to Antigua to become PlayStar Antigua will not result in a new
company being formed. Wyoming counsel to PlayStar Wyoming has indicated that
under Wyoming law PlayStar Wyoming will be continued in Antigua as if it had
been incorporated under the laws of Antigua. On this basis the continuation
should be a nontaxable event to a Holder for Canadian tax purposes.
DESCRIPTION OF PLAYSTAR ANTIGUA CAPITAL STOCK
The following statements with respect to PlayStar Antigua's capital stock
are subject to the detailed provisions of PlayStar Antigua's Articles of
Continuance (the "Articles of Continuance"), which will become effective
immediately upon the Effective Time. These statements do not purport to be
complete and, while PlayStar believes the descriptions of the material
provisions of the Articles of Continuance, contained in this Information
Statement/Prospectus will be accurate statements with respect to such material
provisions, such statements are subject to the detailed provisions in the
Articles of Continuance to which reference is hereby made for a full description
of such provisions.
Capitalization
The Articles of Continuance will provide that the authorized share capital
of PlayStar Antigua will be divided into 50,000,000 Ordinary Shares, par value
U.S. $.0001 per share, and 1,000,000 shares of Series Preference Stock, par
value U.S. $.0001 per share.
Voting and Other Rights
Under the Articles of Continuance, the holders of Ordinary Shares will be
entitled to one vote for each share held on all matters submitted to
stockholders' meetings, including the election and removal of directors, and
will vote together as a single class with any voting preference shares unless
the terms of any voting preference shares otherwise provide. The By-Laws of
PlayStar Antigua will provide that the quorum required for a general meeting of
the stockholders is a majority of the outstanding Ordinary Shares entitled to
vote at such meeting. All matters voted upon at any duly held stockholders'
meeting shall be carried by a majority of the votes cast at the meeting by
stockholders represented in person or by proxy, except (i) approval of a merger
or a similar arrangement, which, pursuant to Antigua law, requires the approval
by way of Special Resolution, as defined in the Antigua IBCA, namely a
resolution that is submitted to a special meeting of the shareholders duly
called for the purposes of considering the same, and passed with or without
amendment at the meeting by at least two-thirds of the votes cast (a "Special
Resolution"). See "Comparison of Stockholder Rights -- Stockholder Approval of
Business Combinations." A change of corporate name, the voluntary dissolution,
liquidation or winding-up of the affairs of PlayStar Antigua, a reduction of
paid-up share capital, and any amendment to PlayStar Antigua's Articles of
Continuance require approval by a Special Resolution. The Board of Directors or
the President may at any time proceed to convene a special meeting of PlayStar
Antigua. PlayStar Antigua will have to provide at least twenty-one (21) days'
notice of a special meeting.
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Because holders are not entitled to cumulate their votes, stockholders
holding a majority of the outstanding Ordinary Shares, voting together as a
class with the holders of any voting preference shares which may be issued, will
be able to elect all members of the board of directors of PlayStar Antigua. In
accordance with the By-Laws of PlayStar Antigua, holders of Ordinary Shares have
no preemptive rights.
There are no limitations on the right of nonresident stockholders to hold
or vote their Ordinary Shares imposed by Antigua law or PlayStar Antigua's
Articles of Continuance.
Dividend Rights
The holders of Ordinary Shares will be entitled at any time to receive
such dividends as are declared by the Board of Directors. PlayStar Antigua
currently intends to retain earnings for use in PlayStar Antigua's business and
the financing of its capital requirements. The payment of any future cash
dividends is necessarily dependent upon the earnings and financial needs of
PlayStar, along with applicable legal and contractual restrictions.
Changes in Capitalization
PlayStar Antigua will be able by Special Resolution, to (i) increase its
share capital by new shares of such amounts as the resolution prescribes; (ii)
consolidate all or any of its share capital into shares of larger amount than
its existing shares (similar to a stock combination); (iii) subject to the
provisions of the Antigua IBCA subdivide its shares or any of them, into shares
of smaller amount than is fixed by its Articles of Continuance; and (iv) cancel
shares which, at the date of the passing of the resolution, have not been taken
or agreed to be taken by any person and diminish the amount of its share capital
by the amount of the shares so canceled.
Reduction of Capital and Purchase of Shares
Subject to the provisions of the Antigua IBCA, PlayStar Antigua will be
able by Special Resolution to reduce its share capital in any way. Subject to
the provisions of PlayStar's Articles of Continuance and to the Antigua IBCA,
PlayStar Antigua may purchase or otherwise acquire any of its issued Ordinary
Shares, in such circumstances and on such terms as shall be agreed by PlayStar
Antigua and the holder thereof. PlayStar Antigua will be able to purchase all or
part of the Ordinary Shares of any holder upon the agreement of such holder
whether or not it has made a similar offer to all or any other holders.
Transfer of Shares
Upon surrender to PlayStar Antigua or the transfer agent of PlayStar
Antigua of a certificate for Ordinary Shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, and
otherwise meeting all legal requirements for transfer, PlayStar Antigua or its
duly authorized registrar and transfer agent shall issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction on its books.
Preference Shares
Under the Articles of Continuance, PlayStar Antigua will have the
authority to issue 1,000,000 shares of Series Preferred Stock (the "Series
Preference Stock"). There are currently no Series Preference Stock outstanding
nor does the Board of Directors have any present intention to issue any such
shares. Under the Articles of Continuance of PlayStar Antigua, the Board of
Directors of PlayStar Antigua will be able to establish one or more additional
classes or series of Series Preference Stock having the number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences, and limitations that the Board of Directors fixes without
any stockholder approval. Such provisions could hinder an attempt to acquire
control of PlayStar Antigua.
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COMPARISON OF STOCKHOLDER RIGHTS
The rights of stockholders of PlayStar Delaware are governed by Delaware
law and PlayStar Delaware's Certificate of Incorporation and By-Laws. After the
Reorganization, the stockholders of PlayStar Delaware will become stockholders
of PlayStar Antigua and their rights will be governed by the Antigua IBCA and
PlayStar Antigua's Articles of Continuance and By-Laws.
The principal attributes of the PlayStar Delaware Common Stock and the
PlayStar Antigua Ordinary Shares will be similar; however, there will be certain
differences between the rights of stockholders under Delaware law and Antigua
law. In addition, there are certain differences between PlayStar Delaware's
Certificate of Incorporation and By-Laws, and PlayStar Antigua's Articles of
Continuance and By-Laws. The following discussion is a summary of all material
differences in the rights of stockholders resulting from the Reorganization
described in this Information Statement/Prospectus. This summary does not
purport to be complete or to cover all of the respects in which Antigua law may
differ from laws generally applicable to Delaware corporations and their
stockholders and, while PlayStar Delaware and PlayStar Antigua believe that this
summary is accurate, this summary is subject to the complete text of the
relevant provisions of the Antigua IBCA, the Delaware General Corporation Law
("DGCL"), PlayStar Delaware's Certificate of Incorporation and By-Laws and
PlayStar Antigua's Articles of Continuance and By-Laws.
Stockholder Approval of Business Combinations
Under the DGCL, there is no statutory restriction on a Delaware
corporation's ability to acquire the business of another corporation. However, a
merger or consolidation, sale, lease, exchange or other disposition of all or
substantially all of the property of the corporation (a "Disposition") not in
the usual and regular course of the corporation's business, or a dissolution of
the corporation, is required under the DGCL to be approved by the holders of a
majority of the shares entitled to vote thereon unless the certificate of
incorporation provides otherwise. In addition, under the DGCL, class voting
rights exist with respect to amendments to the certificate of incorporation that
adversely affect the terms of the shares of a class. See "Amendment of Charter"
below. Such class voting rights do not exist as to other extraordinary matters,
unless the certificate of incorporation provides otherwise; the Certificate of
Incorporation of PlayStar Delaware does not provide otherwise.
The Antigua IBCA requires the approval of the holders of at least
two-thirds (2/3) of the votes cast at a Special Meeting called for such purpose
for PlayStar Antigua to (i) merge, consolidate or amalgamate with another
company or (ii) reorganize or reconstruct itself pursuant to a plan sanctioned
by the Antigua courts.
Absence of Required Vote for Certain Mergers
Under the DGCL, no vote of the stockholders of a corporation surviving a
merger is required to approve a merger if (i) the agreement of merger does not
amend the certificate of incorporation of such corporation, (ii) each share of
stock of such corporation outstanding immediately before the merger is to be an
identical outstanding or treasury share of the surviving corporation thereafter
and (iii) the number of shares of common stock of such corporation to be issued
in the merger, if any, does not exceed 20% of the number of shares outstanding
immediately before the merger.
There is no equivalent provision in the Antigua IBCA and therefore the
stockholders of the surviving company in such a situation would be entitled to
vote on the merger as described above. See "Stockholder Approval of Business
Combinations" above.
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Appraisal Rights
Under the DGCL, a stockholder of a corporation does not have appraisal
rights in connection with a merger or consolidation or, in the case of a
Disposition, if (i) the shares of such corporation are listed on a national
securities exchange or held of record by more than 2,000 stockholders, as is
presently not the case with PlayStar Delaware, or (ii) such corporation will be
the surviving corporation of the merger and no vote of the stockholders of the
surviving corporation is required to approve such merger; provided, however,
that a stockholder is entitled to appraisal rights in the case of a merger or
consolidation if such stockholder is required by the terms of an agreement of
merger or consolidation to accept in exchange for the shares of such stockholder
anything other than (i) shares of stock of the corporation surviving or
resulting from such merger or consolidation, (ii) shares of any other
corporation that on the effective date of the merger or consolidation will be
either listed on a national securities exchange or held of record by more than
2,000 stockholders, (iii) cash in lieu of fractional shares of the corporation
described in the foregoing clauses (i) and (ii), or (iv) any combination of the
foregoing.
The Antigua IBCA does not provide for appraisal rights. However, in the
case of a court sanctioned reorganization of an Antigua company as described in
"Stockholder Approval of Business Combinations" above, a dissenting stockholder
has the right to express to the court such stockholder's view that the
transaction sought to be approved would not provide the stockholders with the
fair value of their shares.
Stockholder Consent to Action Without Meeting
Under the DGCL, unless otherwise provided in the certificate of
incorporation, any action that can be taken at a meeting of the stockholders may
be taken without a meeting if written consent thereto is signed by the holders
of outstanding stock having the minimum number of votes necessary to authorize
or take such action at a meeting of the stockholders.
There is no equivalent provision under the Antigua IBCA. However, the
Articles of Continuance may provide that a resolution in writing signed by all
of the stockholders entitled to vote thereon at a meeting of stockholders is as
valid as if that resolution had been approved at a meeting of the stockholders.
Special Meetings of Stockholders
Under the DGCL, a special meeting of stockholders may be called only by
the board of directors or by persons authorized in the certificate of
incorporation or the Bylaws. The By-Laws of PlayStar Delaware provide for the
call of a special meeting of stockholders only by the President or Secretary, or
by resolution of the Board of Directors of PlayStar Delaware.
Under the Antigua IBCA, a Special Meeting will be able to be called by the
Board of Directors of PlayStar Antigua or by the holders of not less than five
percent (5%) of the issued shares of a corporation that carry the right to vote
at the meeting sought to be held.
Distributions and Dividends; Repurchases and Redemptions
Under the DGCL, a corporation may pay dividends out of surplus and, if
there is no surplus, out of net profits for the current and/or the preceding
fiscal year, unless the net assets of the corporation are less than the capital
represented by issued and outstanding stock having a preference on asset
distributions. Surplus is defined in the DGCL as the excess of the net assets
over capital, as such capital may be adjusted by the board. A Delaware
corporation may purchase or redeem shares of any class except when its capital
is impaired or would be impaired by such purchase or redemption. A corporation
may, however, purchase or redeem out of capital shares that are entitled upon
any distribution of its assets to a preference over another class or series of
its stock if such shares are to be retired and the capital reduced.
Under the Antigua IBCA, the directors may pay to the stockholders such
dividends as appear to the directors to be justified by the profits of PlayStar
Antigua unless the corporation is unable or would, after the payment, be unable
to pay its liabilities as they become due, or the realizable value of the
corporation's assets would thereby be less than the aggregate of its liabilities
and stated capital of all classes.
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Vacancies on Board of Directors
Under the DGCL, a vacancy and a newly created directorship may be filled
by a majority of the remaining directors, although less than a quorum, unless
otherwise provided in the certificate of incorporation or Bylaws. Neither the
Certificate of Incorporation nor the By-Laws of PlayStar Delaware otherwise so
provides.
The Antigua IBCA and the By-Laws of PlayStar Antigua will provide that a
vacancy and a newly created directorship may be filled by a majority of the
remaining directors, so long as a quorum of directors continues to exist at all
times.
Removal of Directors
Under the DGCL, except in the case of a corporation with a classified
board, any director or the entire board may be removed, with or without cause,
by the holders of a majority of the shares entitled to vote at an election of
directors.
The Antigua IBCA provides that directors may be removed by the affirmative
vote of the holders of at least a majority of the outstanding shares entitled to
vote.
Inspection of Books and Records
Under the DGCL, any stockholder may inspect the corporation's books and
records for a proper purpose.
Shareholders of an Antigua company may inspect or obtain copies of the
list of shareholders, corporate records or financial statements pertaining
thereto.
Amendment of Certificate of Incorporation
Under the DGCL, the certificate of incorporation may be amended if (i) the
board of directors sets forth the proposed amendment in a resolution, declares
the advisability of the amendment and directs that it be submitted to a vote at
the meeting of stockholders and (ii) the holders of at least a majority of
shares of stock entitled to vote thereon approve the amendment, unless the
certificate of incorporation requires the vote of a greater number of shares. If
the holders of the outstanding shares of a class are entitled to vote as a class
upon a proposed amendment, the holders of a majority of the outstanding shares
of such class must also vote in favor of the amendment.
Under the Antigua IBCA, the Articles of Continuance may only be amended by
a Special Resolution.
Amendment of By-Laws
Under the DGCL, the board of directors may amend Bylaws if so authorized
in the certificate of incorporation. The stockholders of a Delaware corporation
also have the power to amend Bylaws. The Certificate of Incorporation of
PlayStar Delaware authorizes the Board of Directors to alter, amend, repeal or
adopt its By-Laws.
Under the Antigua IBCA, the By-Laws of PlayStar Antigua may only be
amended by a Special Resolution.
Indemnification of Directors and Officers
The Antigua IBCA and the DGCL have different provisions and limitations
regarding indemnification by a corporation of its officers, directors, employees
and agents. If the Reorganization is approved, the Antigua IBCA indemnification
provisions will not apply to any act or omission that occurs before the
Effective Time. The following is a summary comparison of the Antigua IBCA and
DGCL indemnification provisions:
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Under the DGCL, indemnification rights are expressly non-exclusive. A
corporation is permitted to provide indemnification or advancement of expenses,
by by-law provisions, agreement or otherwise, against judgments, fines, expenses
and amounts paid in settlement actually and reasonably incurred by the person in
connection with such proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation. The Certificate of Incorporation and the By-Laws of PlayStar
Delaware make indemnification mandatory on the part of the PlayStar Delaware to
the fullest extent permitted by law.
Antigua law does not limit the extent to which a company's Articles of
Incorporation and/or By-Laws may provide for the indemnification of officers and
directors, except to the extent that such provision may be held by the Antigua
courts to be contrary to public policy (for instance, for purporting to provide
indemnification against the consequences of committing a crime). In addition, an
officer or director may not be indemnified for his own dishonesty or willful
neglect or default.
The Articles of Continuance of PlayStar Antigua will contain provisions
providing for the indemnity by PlayStar Antigua of an officer, director,
employee or agent of PlayStar Antigua to the same extent as permitted under the
Certificate of Incorporation of PlayStar Delaware.
Limited Liability of Directors
Section 102(b)(7) ("Section 102") of the DGCL permits the adoption of a
certificate of incorporation provision limiting or eliminating the monetary
liability of a director to a corporation or its stockholders by reason of a
director's breach of the fiduciary duty of care. Section 102 does not permit any
limitation of the liability of a director for (i) breaching the duty of loyalty
to the corporation or its stockholders, (ii) failing to act in good faith, (iii)
engaging in intentional misconduct or a known violation of law, (iv) obtaining
an improper personal benefit from the corporation or (v) paying a dividend or
approving a stock repurchase that was illegal under the DGCL. The Certificate of
Incorporation of PlayStar Delaware eliminates the monetary liability of a
director to the fullest extent permitted by the DGCL.
There is no equivalent provision under the Antigua IBCA.
Stockholders' Suits
Section 327 of the DGCL requires only that the stockholder bringing a
derivative suit must have been a stockholder at the time of the wrong complained
of or that the stock devolved to him by operation of law from a person who was
such a stockholder. In addition, the stockholder must remain a stockholder
throughout the litigation.
Under section 201 of the IBCA a complainant may, for the purpose of
prosecuting, defending or discontinuing an action on behalf of a corporation,
apply to an Antigua court for leave to bring an action in the name and on behalf
of the corporation or any of its subsidiaries, or intervene in an action to
which any such corporation or any of its subsidiaries is a party. However, no
derivative action may be brought and no intervention may be made unless the
court is satisfied (i) that the complainant has given reasonable notice to the
directors of the corporation or its subsidiary of his intention to apply to the
court if the directors of the corporation or its subsidiary do not bring,
diligently prosecute or defend or discontinue the action, (ii) that the
complainant is acting in good faith and (iii) that it appears to be in the
interest of the corporation or its subsidiary that the action be brought,
prosecuted, defended or discontinued.
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PRO FORMA FINANCIAL INFORMATION
PLAYSTAR ANTIGUA AND SUBSIDIARIES
Pro Forma Consolidated Balance Sheet and Statement of Operations
(Unaudited)
(Restated)
The following unaudited pro-forma consolidated balance sheet at March 31,
1998 and statements of loss for the period October 3, 1996 (date of inception)
to June 30, 1997 and for the nine months ended March 31, 1998 are presented for
PlayStar Delaware and PlayStar Antigua. The statements give effect to the Merger
of PlayStar Delaware into PlayStar Antigua, as if the transaction had occurred
on October 3, 1996. Additionally, the pro-forma balance sheet information gives
effect to the issuance subsequent to March 31, 1998 of 10,213,870 common shares
(including 929,370 common shares issued as a placement fee and 400,000 common
shares issued upon the exercise of options at $0.05 per share) resulting in net
proceeds of $2,315,935. These proceeds will be used by PlayStar for professional
fees, licensing fees, marketing, continued development of systems and general
working capital purposes. These pro-forma statements may not be indicative of
the results of operations that actually would have occurred if the merger had
been in effect on the date indicated or which may be obtained in the future. The
pro-forma financial statements should be read in conjunction with the historical
financial statements and notes of PlayStar Delaware, which are included
elsewhere this Joint Prospectus/Proxy Statement.
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CONSOLIDATED PRO FORMA BALANCE SHEETS
AS AT MARCH 31, 1998
(U.S.$)
(Restated)
PlayStar PlayStar Pro Forma Pro Forma
Delaware Antigua Adjustments(a) Combined
-------- -------- -------------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $184,075 $ - $2,315,935 $2,500,010
Other current assets 200,791 - - 200,791
-------- ------- ---------- ----------
$384,866 $ - $2,315,935 $2,700,801
======== ======= ========== ==========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued $ 38,826 $ - $ 38,826
liabilities -------- -------- --------
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Authorized
30,000,000 common shares
at par value $.0001 per share;
(50,000,000 common shares at
par value $.0001 per share
pro forma)
Issued and outstanding
18,378,774 common shares at
March 31, 1998 1,834 -
28,592,644 common shares pro
forma 1,021 2,855
ADDITIONAL PAID-IN CAPITAL 2,947,877 - $2,314,914 5,262,791
-------
DEFICIT, accumulated during the
development stage (2,603,671) - - (2,603,671)
---------- ------- ----------- -----------
346,040 - 2,315,935 2,661,975
---------- ------- ----------- -----------
$ 384,866 $ - $2,315,935 $2,700,801
---------- ------- ----------- ----------
(a)To reflect the issuance of 10,213,870 common shares (including 400,000
common shares issued upon the exercise of options at $0.05 per share)
subsequent to March 31, 1998, resulting in net proceeds to the Company of
$2,315,935.
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CONSOLIDATED PRO FORMA STATEMENTS OF LOSS
FOR THE PERIOD FROM INCEPTION, OCTOBER 3, 1996, TO JUNE 30, 1997
(U.S.$)
(Restated)
PlayStar PlayStar Pro Forma
Delaware Antigua Combined
-------- -------- ---------
REVENUE
Interest income $3,022 $ - $3,002
--------
EXPENSES
Development costs $1,215,527 $1,215,527
Options granted as employee 682,500 682,500
compensation
General and administrative 13,856 13,856
Professional fees 14,415 14,415
Incorporation costs 3,456 3,456
----------- ---------
$1,929,754 - $1,929,754
---------- --------- ----------
NET LOSS $(1,926,732) $ - $(1,926,732)
========= -------- ============
LOSS PER SHARE $(.13) $ (.13)
======== ===========
WEIGHTED AVERAGE NUMBER 15,035,880 15,035,880
OF SHARES OUTSTANDING
CONSOLIDATED PRO FORMA STATEMENT OF LOSS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
(U.S.$)
(Restated)
PlayStar PlayStar Pro Forma
Delaware Antigua Combined
-------- -------- ---------
REVENUE
Interest income $ 1,628 $ - $ 1,628
--------- ---------
EXPENSES
Development costs 458,959 458,959
General and administrative 12,718 12,718
Professional fees 206,890 $ 206,890
--------- -------- ---------
$678,567 $ - $678,567
--------- ---------- ---------
NET LOSS $(676,939)$ - $(676,939)
========= ========== ==========
LOSS PER SHARE (.04) $ (.04)
----- ------------
WEIGHTED AVERAGE NUMBER 16,726,815 16,726,815
OF SHARES OUTSTANDING
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following Management's Discussion and Analysis of Financial Condition
and Plan of Operations includes forward-looking statements with respect to
PlayStar's future financial performance. These forward-looking statements are
subject to various risks and uncertainties, including the factors described
under "Risk Factors" and elsewhere in this Prospectus, that could cause actual
results to differ materially from historical results or those currently
anticipated.
PlayStar Delaware/PlayStar Antigua
PlayStar Delaware is a holding company which, through its subsidiaries,
PlayStar Limited and Antigua Casino, intends to operate, promote and
commercialize an on-line gaming service which will offer interactive,
software-based games of chance. Antigua Casino will conduct PlayStar's Internet
gaming business, and PlayStar Limited will license gaming technology to Antigua
Casino's Internet gaming business. Antigua Casino has not yet commenced
operation of its Internet gaming service, but expects to do so immediately
following the consummation of the Reorganization. For the period from inception
on October 3, 1996 until March 31, 1998, PlayStar Delaware's cumulative earned
interest income was $4,650 and its accumulated deficit was $2,603,671.
PlayStar Delaware was incorporated in the State of Delaware on October 3,
1996. During the succeeding months, PlayStar raised an aggregate of $825,000 in
cash through three private placements completed pursuant to Rule 504 promulgated
under the Securities Act. In November and December, 1997, and January, 1998,
PlayStar Delaware raised an additional $1,004,639 through two additional private
placements completed pursuant to Section 4(2) of the Securities Act and
Regulations D and S promulgated thereunder. In May, June, July and August, 1998,
PlayStar Delaware raised an additional $2,159,700 through additional private
placements completed pursuant to Regulation S promulgated under the Securities
Act. In addition, PlayStar Delaware has subscriptions for an additional $160,000
of Common Stock, subject to completion of the Reorganization. These financings
have been sufficient to satisfy PlayStar's cash requirements through the date
hereof. From these proceeds, the Subsidiaries paid approximately $910,000 for
products provided by Dreamplay Research Corp. ("Dreamplay") and approximately
$730,000 for legal, accounting, public relations and administrative services
through July 31, 1998. PlayStar estimates, however, that the total amount of
capital required to proceed with current operations and to bring the
Subsidiaries' products and services to market will be approximately $2,300,000,
including approximately $300,000 for research and development, approximately
$1,500,000 for advertising, marketing and promotional efforts, and approximately
$500,000 for working capital.
Management believes that PlayStar will have sufficient funds to commence
and conduct its operations for at least the next 12 months, excluding any
revenues generated from the operations of Antigua Casino.
PlayStar Limited
PlayStar Limited's initial efforts for its first twelve months centered on
the purchase of on-line gaming and financial transaction processing software.
During this period, PlayStar Limited developed its software games and system
test site. PlayStar Limited's casino management system recently entered the
final stages of development, and PlayStar Limited has begun beta testing of the
system. PlayStar Limited intends to license its gaming technology to Antigua
Casino which will then operate the electronic casino.
Antigua Casino
In December 1997, PlayStar Limited, on behalf of Antigua Casino, applied
to the government of Antigua for an electronic casino gaming license. On January
28, 1998, the Antigua government granted approval for the issuance of the
license to Antigua Casino. Although Antigua Casino has established its
operations base, it has not yet commenced operations. Management anticipates
that Antigua Casino will begin operation of its Internet casino immediately
following the consummation of the Reorganization.
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The launch of the on-line casino will be a critical factor for Antigua
Casino's success. Accordingly, PlayStar's management plans to announce the
opening of the casino through selected world media, press conferences and an
advertising campaign. Management is currently negotiating with an established
marketing communications firm and media buying company to oversee Antigua
Casino's promotional efforts and advertising needs.
During the next twelve months, Antigua Casino intends to acquire and lease
computer and telecommunications equipment to facilitate its computer operations
center. The estimated cost of this equipment will be approximately $1,200,000.
Dreamplay has bought approximately $300,000 worth of hardware/software, which it
will provide to Antigua Casino and install into the casino as part of its
agreement with PlayStar Limited.
Finally, since Antigua Casino's revenues depend on customer gaming
activities, PlayStar's management will endeavor to develop a loyal customer
base. Antigua Casino marketing will be directed to establish PlayStar and its
PlayStar-brand products as the mark of integrity, quality and innovation in both
the Internet gaming and interactive entertainment markets. Ultimately,
PlayStar's management foresees that such efforts will establish the "PlayStar"
name as a premier brand in on-line gaming.
Year 2000 Compliance
PlayStar uses a significant number of computer software programs and
operating systems in its internal operations. PlayStar has initiated a review of
its computer hardware and software to ensure that its computer-related
applications will not fail or create erroneous results as a result of the use of
two digits in various program date fields (the "Year 2000 issue"). PlayStar's
cost of addressing the Year 2000 issue is not expected to be material. While the
consequences of an incomplete or untimely resolution of the Year 2000 issue
could be expected to have a negative effect on the future financial results of
PlayStar, PlayStar expects that its Year 2000 issues will be satisfactorily
resolved well before the year 2000. Certain of PlayStar's major suppliers have
informed PlayStar that such suppliers do not anticipate problems in business
operations due to Year 2000 issues. PlayStar is currently unable to determine
the extent to which Year 2000 issues will affect its other suppliers, or the
extent to which it would be vulnerable to the suppliers' failure to remediate
any of their Year 2000 issues.
New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This Statement establishes standards for computing and presenting
earnings per share ("EPS") and applies to all entities with publicly-held common
shares or potential common shares. This Statement replaces the presentation of
primary EPS and fully-diluted EPS with a presentation of basic EPS and diluted
EPS, respectively. Basic EPS excludes dilution and is computed by dividing
earnings available to common stockholders by the weighted-average number of
common shares outstanding for the period. Similar to fully diluted EPS, diluted
EPS reflects the potential dilution of securities that could share in the
earnings. The Statement is effective for PlayStar's financial statements for the
quarter ending December 31, 1997. The adoption of this Statement did not have a
material effect on PlayStar's reported EPS amounts.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997.
This Statement establishes standards for reporting and display of comprehensive
income and its components in financial statements. The Statement is effective
for PlayStar's financial statements for the year ending June 30, 1999. The
adoption of this Statement will not have a material effect on PlayStar's
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This Statement establishes standards for the
way a public business enterprise reports certain information about operating
segments, and discloses enterprise-wide information about its products and
services, activities in different geographic areas, and its reliance on major
customers. The Statement is effective for PlayStar's financial statements for
the year ending June 30, 1999. The adoption of this Statement will not have a
material effect on PlayStar's financial statements.
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<PAGE>
BUSINESS OF PLAYSTAR
Introduction
Following the Effective Time of the Reorganization, PlayStar Antigua will
conduct the business previously carried on by PlayStar Delaware. Except for
PlayStar Antigua's domicile, the activities of PlayStar Antigua will be
identical to that of PlayStar Delaware prior to the Effective Time. Accordingly,
references in the discussion of the business of PlayStar include the operations
of PlayStar Delaware and PlayStar Antigua.
Description of Business of PlayStar
PlayStar
PlayStar Delaware, through the Subsidiaries, PlayStar Limited and Antigua
Casino, intends to operate, promote and commercialize interactive,
software-based games of chance which will be offered as an on-line service
accessible world-wide on the Internet. PlayStar Delaware was incorporated in the
State of Delaware on October 3, 1996 under the name Global Games Corporation. On
October 9, 1996, PlayStar Delaware acquired all of the issued and outstanding
shares of common stock of PlayStar Limited, incorporated on October 9, 1996.
PlayStar Limited and Antigua Casino
PlayStar Limited has purchased and intends to license, promote and
commercialize an on-line casino system offering casino operators interactive,
software-based games of chance accessible world-wide through the Internet. These
products are being tested at www.antigua.org.
Antigua Casino's Articles of Incorporation enable it to operate an
Internet-based casino. Using the technology developed by PlayStar Limited and
licensed to it, Antigua Casino's casino service will allow patrons to play
interactive games in real time either in "free" mode or in "live" mode. In
"live" mode, patrons will wager with real money in various forms, including
electronic money or "e-cash," credit cards, wire-transfers, money-orders and
personal account debits. Antigua Casino will initially offer a selection of
casino-style games, including, but not limited to, blackjack, draw poker,
baccarat, roulette and three different slot machines.
In December 1997, PlayStar Limited, on behalf of Antigua Casino, applied
to the government of Antigua for an electronic casino gaming license. On January
28, 1998, the Antigua government granted approval for the issuance of the
license to Antigua Casino. Although Antigua Casino has established its
operations base, it has not yet commenced operations. Management anticipates
that Antigua Casino will begin operation of its Internet casino immediately
following the consummation of the Reorganization.
PlayStar Limited's games are designed to be entertaining and captivating.
Moreover, the games have been adapted to the idiosyncrasies of the Internet. For
example, at times, due to "noise" on telephone lines or other unpredictable
technical glitches, connections between computers may terminate. To respond to
such problems, PlayStar Limited's software keeps track of the precise status of
the game. If a game is interrupted, the patron needs only to return to the
casino website and the game will be restored to the moment the disconnection
occurred.
PlayStar Limited began testing its games on March 31, 1997. PlayStar
Limited's client/server systems have performed as expected during this testing,
and PlayStar Limited believes that its systems require only minor improvements.
The number of visitors to the casino site and the total amount "wagered" during
the testing period, however, has greatly exceeded PlayStar's expectations. From
the beginning of the test period until April 30, 1998, over three million games
were played and over $80 million of test currency was wagered. During this
period, over 4,000 visitors registered for the system test and final beta
programs. These visitors have provided Antigua Casino with valuable comments and
feedback, which have been incorporated by PlayStar Limited to improve Antigua
Casino's products. Antigua Casino's casino site continues to attract new
visitors and receives approximately 1.5 million hits per month. The historical
data from beta testing summarized above may not accurately indicate future
results when Antigua Casino's gaming services are played in live mode and actual
money is wagered.
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Antigua Casino does not plan to require patrons to maintain a minimum
account balance or place any restrictions on amounts accumulated through
winnings. Antigua Casino does plan, however, to establish a maximum bet limit
for new customers. Antigua Casino may, at its discretion, grant custom wagering
and account options to its regular customers based upon their established
profiles. At the present time, Antigua Casino does not intend to extend credit
services to its patrons. In addition to the foregoing, management has agreed to
adhere to the Code of Conduct of the Interactive Gaming Council ("IGC"), a
gaming industry organization of which PlayStar is a member. Among other things,
the Code of Conduct requires IGC members to post loss limits and to provide
referrals and direct access to help and counseling organizations as a means to
identify and curtail compulsive gambling. Moreover, Antigua Casino's managers
may suspend a patron's account activity at any time if they suspect or observe
compulsive gambling behavior. Notwithstanding these procedures, however, there
can be no assurance that Antigua Casino will be able to successfully identify or
curtail compulsive gambling by its patrons.
Antigua Casino intends to attract patrons to its service by providing
quality content through innovative use of animation and graphic design. The
Antigua Casino website has been designed with simplicity and effectiveness in
mind. Patrons are able to browse the website and try any game in "free" mode.
When a patron decides to open an account, Antigua Casino will process certain
billing information, including the patron's name, address and credit card or
other payment information. Once an account is open, patrons may elect to play
any of Antigua Casino games in "live" mode and wager against the patrons'
accounts. Antigua Casino will also allow patrons to review their accounts and
cash-out at any time.
Antigua Casino intends to accept several forms of payment to process
customer financial transactions, including e-cash, credit cards, wire-transfers,
money-orders and personal account debits. Antigua Casino will license certain
software which will permit Antigua Casino to authenticate and process credit
card and other financial transactions which occur over the Internet. Antigua
Casino intends to work closely with international banking institutions that have
experience providing electronic and Internet payment clearing services. Antigua
Casino is also currently negotiating with several banks to establish check, wire
transfer and third-party funds transfer services.
Customers and Marketing
Antigua Casino's target market is individuals located throughout the world
who are current Internet users and at least 18 years of age. According to the
Internet Society, there are currently 60 to 80 million such people world-wide
who regularly access the Internet. Moreover, Internet use is expected to grow by
as much as 80% each year.
Antigua Casino plans to protect all customer data and information with
high-level security systems and password encryption software. Patrons will be
issued both an account identification number and a PIN number. Any wagering or
patron functions, such as an account review or a cash-out, will require the
correct identification numbers. Antigua Casino will not require identification
numbers to browse its website or play games in "free" mode.
In order to create an awareness of Antigua Casino's existence among
individuals in the target market, Antigua Casino intends to focus its marketing
efforts primarily on traditional media advertising, public relations programs,
on-line promotions, business development, third-party relationships and social
programs. While Antigua Casino is not currently conducting any marketing
programs, Antigua Casino is preparing a detailed marketing and advertising plan
which will commence upon the launch of the on-line casino. To ensure the
creation of an effective advertising program, Antigua Casino is currently
negotiating with an established marketing communications firm and a media buying
company to oversee Antigua Casino's promotional efforts and advertising needs.
Antigua Casino expects to expend approximately $1.5 million this year and
approximately $4.0 million next year on marketing activities. Such expenditures
for marketing activities will commence only upon consummation of the
Reorganization.
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Antigua Casino does not currently intend to limit its marketing and
advertising program to particular jurisdictions. However, Antigua Casino may
exclude the United States or any other jurisdiction from its promotional efforts
if such efforts or activities are determined to be prohibited by applicable law.
See "Regulation."
Research and Development
Since PlayStar Delaware's inception in October 1996, the Subsidiaries have
expended approximately $1,800,000 on research and development activities.
Effective April 1, 1998, PlayStar Limited and Dreamplay entered into an
agreement (the "Dreamplay Agreement") pursuant to which PlayStar Limited
retained Dreamplay to provide PlayStar Limited's gaming software. Pursuant to
the terms of the Dreamplay Agreement, Dreamplay has assigned to PlayStar Limited
all right, title and interest in the software designed and developed for
PlayStar Limited. To date, PlayStar Limited has paid Dreamplay approximately
$910,000 for the provision and installation of gaming software.
PlayStar Limited intends to continue the development of additional casino
games, including, but not limited to, Caribbean poker, pai gow, sic bo, craps
and two-up. Additionally, PlayStar Limited believes that other games, more
interactive in nature, will become highly popular in the gaming community in the
future.
Employees
PlayStar currently has two full-time employees who serve as PlayStar
Delaware's President and its Chairman, Chief Executive Officer, Treasurer and
Secretary, respectively. From time to time, PlayStar also retains consultants
and consulting firms which provide PlayStar Delaware with certain expertise in
financing, developing, marketing and software and telecommunications
technologies.
Properties
Antigua Casino occupies approximately 1,200 square feet on the top floor
of the Dollar Building, Nevis Street, St. John's, Antigua pursuant to a lease
which expires on March 31, 1999. The monthly payments under the lease are
approximately $1,480. Antigua Casino has committed to revise its lease to secure
an additional 2,500 square feet commencing July 1, 1998. Management anticipates
that the amended lease will expire on March 31, 2001. Except for the foregoing,
neither PlayStar Delaware nor the Subsidiaries presently own or lease any
property or real estate.
Competition
A significant number of companies, organizations and individuals are
currently offering or purporting to offer casino gambling services on the
Internet similar to those of Antigua Casino. PlayStar's primary competition
includes, but is not limited to, CryptoLogic Inc., Venturetech Inc., Internet
Casinos Ltd., Interactive Gaming and Communications Corp. (formerly Sports
International - USA), Wager Net Inc., Casinos of the South Pacific, World Wide
Web Casinos and Virtual Vegas. PlayStar is aware of several firms currently
accepting wagers on various sporting events with financial transactions being
administered from off-shore accounts. Additionally, several organizations
currently offer lottery tickets for sale on the Internet for international
lotteries.
Most Internet markets, including the gaming segment, are relatively
accessible to a wide number of entities and individuals. PlayStar believes,
however, that there are certain market barriers facing potential providers,
including technology, commerce, regulation, management and reputation. First,
providers must utilize sophisticated systems to manage casino operations,
process financial transactions, encrypt information and provide an attractive
user interface. Providers must also develop relationships with financial
institutions to process gaming transactions. Additionally, providers should
obtain a casino license from an established regulatory agency before offering
Internet gaming services to the public. Providers must also assemble a team of
software, hardware, telecommunications, marketing, management and gaming
specialists to develop the casino's operations. Finally, due to the sensitive
nature of the casino business, providers must develop and maintain an impeccable
reputation in order to attract and retain customers.
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Patents, Copyrights and Trade Secrets
As of the date hereof, neither PlayStar nor either of its Subsidiaries
owns or otherwise controls any registered patents, copyrights or trademarks.
PlayStar and the Subsidiaries will attempt to protect their proprietary
technology by relying on trade secret laws and non-disclosure and
confidentiality agreements with their employees and consultants who have access
to their proprietary technology.
Regulation
Proposed Internet Gambling Prohibition Act (Kyl Bill);
Potential Impact of Kyl Bill
On July 23, 1998, the Senate passed an appropriations bill containing an
amendment by Senator John Kyl of Arizona, which would prohibit gaming on the
Internet in the United States ("the Bill"). If enacted into law, the Bill would
classify gaming over the Internet as a federal offense. Although the Bill allows
certain intrastate wagering, it prohibits operation of most other Internet
gaming businesses, as well as use of the Internet to place, receive or otherwise
make a bet or wager. Individuals convicted of operating an Internet gaming
business in the United States could be punished by up to four years in jail and
a fine equal to the greater of $20,000 or the aggregate amount of bets received
by the operator. Under the Bill, Internet gaming would be a federal crime even
if the states in which bets are placed had legalized the practice. On February
4, 1998, the House Crime Subcommittee held a hearing to discuss issues related
to Internet gaming and the House version of the Bill. The House version of the
Bill would permit Internet gaming if such activities are legal in the bettor's
jurisdiction and in the jurisdiction in which the server is located.
If the Bill becomes law, it could have a significant effect on PlayStar's
operations. In the near term, PlayStar anticipates that approximately 80% of its
revenues will be generated from United States citizens. If the Bill passes, the
Subsidiaries might be forced to cease all marketing and promotional activities
in the United States to ensure that no solicitation of United States citizens
occurs. Since the Bill also prohibits United States citizens from gaming on the
Internet, the Subsidiaries may be expected to lose a significant portion of
their customer base if the Bill becomes law.
Licensing; Jurisdiction
Antigua Casino must adhere to the legal requirements of each jurisdiction
in which it operates or offers its services or is deemed to operate or offer its
services. Management believes that Antigua Casino is one of the few
Internet-based casinos to be licensed by an established, first-world casino
regulatory agency. While many jurisdictions have no Internet casino licensing
requirements, in January 1998, Antigua Casino was granted a license to operate
its Internet casino by the Antigua government, under the "Virtual Casino
Wagering and Sports Book Wagering Regulations" promulgated under Section 27 of
the Antigua Free Trade and Processing Zone Act, 1994.
The gaming industry is highly regulated in many parts of the world,
including the United States, where the ownership and operation of land-based
gaming facilities (i.e., not including sports wagering) of the type to be
conducted by Antigua Casino have traditionally been regulated on a
state-by-state basis with additional federal regulation of certain criminal
activities connected to gambling. Companies engaged in gaming activities must
adhere to the legal requirements of each jurisdiction in which they operate and
offer their services.
Antigua Casino currently intends to offer its services internationally,
including throughout the United States. Antigua Casino does not currently intend
to seek licenses to operate its Internet casino in any other jurisdiction nor
does Antigua Casino intend to restrict or control access to its services based
on user citizenship or location. However, the law of the Internet is not well
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developed and there can be no assurance that a jurisdiction in which the user is
located will not successfully assert jurisdiction over the gaming activities of
Antigua Casino. This may be an issue in the United States (discussed further
below) as well as in the other jurisdictions in which Antigua Casino customers
are domiciled. In the event that it is determined that Antigua Casino is subject
to the laws of jurisdictions other than Antigua, Antigua Casino would have to
obtain a license in order to offer its gaming services to customers within these
jurisdictions. There can be no assurance that any such licenses could be
obtained. Moreover, if it is determined that Antigua Casino is operating gaming
operations in a jurisdiction without a license, Antigua Casino and its officers
and directors may become subject to criminal and civil penalties imposed by such
jurisdiction for violating its laws. The occurrence of any of these events could
have a material adverse effect on the business of PlayStar and, if many
jurisdictions were successful in asserting jurisdiction over Antigua Casino,
Antigua Casino could be forced to cease all gaming operations.
A number of United States federal and state statutes could be construed to
prohibit gaming through use of the Internet. All 50 states currently have
statutes or regulations restricting or even prohibiting gambling activities. In
most states it is illegal for anyone operating a gambling business either to
accept or make a wager, with certain state-by-state statutory exceptions. The
Attorneys General for at least three states, Florida, Minnesota and Texas, have
issued either formal opinions or warnings that certain Internet gaming
activities are illegal in those states. The Attorney General for the state of
Wisconsin has also taken action against Internet gaming companies.
In addition, the Federal Interstate Wire Act contains provisions which may
make it a crime for anyone in the business of gambling to use an interstate or
international telephone line to transmit information in the placing of bets,
unless the betting is legal in the jurisdictions from which and into which the
transmission is made. Other federal laws impacting gaming activities include the
Interstate Wagering Paraphernalia Act, the Travel Act and the Organized Crime
Control Act. As discussed below, in March 1998, the United States Attorney for
the Southern District of New York filed several criminal complaints against the
owners and managers of six Internet sports betting companies headquartered in
the Caribbean or Central America. Those cases are the first federal prosecutions
of sports betting over the Internet. PlayStar believes the conduct at issue in
those cases differs from its proposed business which involves casino gaming, not
sports betting. Moreover, unlike the defendants in the sports betting
complaints, PlayStar does not plan to maintain marketing offices in the United
States or mail promotional literature from locations in the United States.
A risk exists, however, that federal or state authorities may view
PlayStar as having violated gaming regulations. Those authorities could initiate
civil or criminal proceedings against PlayStar and/or its employees. The results
of such proceedings could include substantial litigation expense, fines,
incarceration of company executives, diversion of the attention of key company
employees, disqualification of PlayStar for licensure in the United States, and
injunctions or other prohibitions preventing PlayStar from engaging in its
anticipated business activities.
It is uncertain whether the fact that Antigua Casino's on line gaming
business is legal in Antigua would insulate PlayStar from either civil or
criminal liability under state or federal statutes regulating gambling. Courts
considering whether to exercise personal jurisdiction over a business operating
through the Internet have exercised jurisdiction over defendants who make a
conscious choice to conduct business with the residents of a foreign state. For
example, certain entities engaged in the Internet gaming business have been the
subject of criminal complaints at the state level. In September 1997, the
Minnesota Court of Appeals considered a state civil consumer protection
complaint and concluded that a Belize-based Internet gambling business was
subject to personal jurisdiction in Minnesota because the company conducted
commercial activities in the state over the Internet. See Minnesota v. Granite
Gate Resorts, Inc., 568 N.W.2d 715 (1997), aff'd, 576 N.W.2d 747 (Minn. 1998).
In March 1998, the United States District Court for the Western District of
Texas concluded that a California casino that maintained a website was subject
to jurisdiction in Texas since the site was available in Texas and the casino
accepted business from Texas residents. See Thompson v. Handa-Lopez, Inc., 1998
WL 142300 (W.D. Tex. Mar. 28, 1998).
Further, various regulatory and legislative agencies are conducting
studies of interstate and interactive wagering, including the National Gambling
Impact Study Commission. No assurance can be given that new legislation will not
be adopted which limits, impedes or prohibits either the activities in which
Antigua Casino proposes to engage with respect to actual wagering or the type of
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activities associated with such wagering. Any change in either the substance or
the enforcement of the applicable rules and regulations in these areas could
have a material adverse affect on PlayStar's business and prospects. Certain
legislation is currently being considered in Congress (see discussion of the Kyl
Bill above) and individual states in this regard.
Prohibition on Wagering Services
In the future, Antigua Casino may seek to offer (in addition to gaming
services) wagering services on sporting and/or other events. However, Antigua
Casino does not intend to offer wagering services at least until the applicable
legal and regulatory environment is clarified, if at all. The use of the
Internet for such wagering services may violate the United States federal wire
statute. Due to the relatively recent existence of wagering over the Internet,
the laws dealing with this application are not well developed. However, on March
4, 1998, the United States Attorney for the Southern District of New York
indicted 14 owners and managers of six Internet sports wagering companies
headquartered in the Caribbean and Central America. Additional similar
indictments have since been issued. These individuals, all of whom are citizens
of the United States, were charged with conspiracy to transmit bets and wagers
on sporting events via the Internet in violation of the Federal wire statute.
The indictments were made in spite of the fact that the companies operated by
the defendants were licensed to conduct wagering operations, including one which
was licensed by the Government of Antigua.
Legal Proceedings
Neither PlayStar nor the Subsidiaries are parties to any pending legal
proceedings.
MANAGEMENT
The following table sets forth information regarding the directors and
executive officers of PlayStar Delaware as of August 1, 1998, which directors
and executive officers will hold the same positions, respectively, with PlayStar
Antigua after the Effective Time.
Name Age Position
- ---- ---- --------
William F.E. Tucker.......... 65 Chairman, Chief Executive
Officer, Secretary and
Treasurer
Julius Patta.................. 31 President
- --------------------
Julius Patta has served as President of PlayStar Delaware since its
inception. From inception until April 1, 1998, he also served as Chief Executive
Officer, Chief Financial Officer and Treasurer of PlayStar Delaware. Mr. Patta
has fourteen years of international business, finance, games software and
telecommunications technology experience. From April 1996 until September 1996,
Mr. Patta was Vice President of Netron Interactive, a division of Netron, Inc.
("Netron"), a Canadian software company. While with Netron Interactive, Mr.
Patta managed corporate sales, third-party relationships, staff, production
development and key projects. From June 1994 until March 1996, Mr. Patta was
Vice President, Research and Development of Netron where he managed product
planning, product development, staff, public relations and strategic customer
sales. From January 1992 until May 1994, Mr. Patta was Vice President,
Consulting Services of Netron where he managed business development and sales,
third-party partnering, contract negotiations and key projects. Prior to joining
Netron, Mr. Patta was the owner and principal consultant of CASE Consulting
Services, which provided high-end information systems services.
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William F.E. Tucker has served as Chairman and Chief Executive Officer,
Treasurer and Secretary of PlayStar since April 1, 1998. Since 1992, Mr. Tucker
has been a private investor. From 1974 to 1992, Mr. Tucker was a principal of
Malabar Ltd., the largest Canadian supplier of manufacturing and rental services
to the North American theater industry.
Executive Compensation.
The following table discloses the executive compensation paid to Julius
Patta, the President of PlayStar Delaware from its inception (October 9, 1996)
through June 30, 1997. Mr. Patta's compensation with PlayStar Antigua after the
Reorganization will be the same as set forth below. No other executive officer's
compensation exceeded $100,000 during the periods covered below.
Summary Compensation Table
- -------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
Awards
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Other Securities
Name and fiscal Annual Underlyig All
Principal Year Salary Bonus Compensation Options Other
Position Compensation
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Julius Patta 1998 -0- -0- -0- -0- -0-
President 1997 -0- -0- -0- 1,250,000 -0-
- -------------------------------------------------------------------------
The following table contains information concerning the grant of stock
options to PlayStar Delaware's executive officer named in the Summary
Compensation Table during the fiscal year ended June 30, 1997. Such person's
options will become identical options of PlayStar Antigua after the consummation
of the Reorganization.
----------------------------------------------------------
Number of Percent of
Securities Total
Underlying Options
Options Granted to Exercise or Expiration
Name Granted Employees Base Price Date
in per Share
Fiscal Year
----------------------------------------------------------
----------------------------------------------------------
Julius Patta - 1,250,000 100% $0.05 October
President 9, 2001
----------------------------------------------------------
----------------------------------------------------------
Total........ 1,250,000 100% $0.05 October
9, 2001
----------------------------------------------------------
No stock options have been exercised by Mr. Patta to date.
Directors of PlayStar do not receive any stated salary for their services
as directors or members of committees of the Board of Directors, but by
resolution of the Board a fixed fee and expenses of attendance may be allowed
for attendance at each meeting. Directors of PlayStar may also serve PlayStar in
other capacities as an officer, agent or otherwise, and may receive compensation
for their services in such other capacity.
PlayStar is not a party to any employment or consulting agreements between
PlayStar Delaware and any executive officer.
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Indemnification
PlayStar Antigua will indemnify a director or officer of PlayStar Antigua
against all costs, charges and expenses (including an amount paid to settle an
action or satisfy a judgment) reasonably incurred by him in respect of any
civil, criminal or administrative action or proceeding to which he is made a
party by reason of being or having been a director or officer of PlayStar
Antigua provided he acted honestly and in good faith with a view to the best
interests of PlayStar Antigua and in the case of a criminal or administrative
action or proceeding that is enforced by a monetary penalty, had reasonable
grounds for believing that his conduct was lawful.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers or persons
controlling PlayStar pursuant to the foregoing provisions, PlayStar has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act of 1933, as amended, and is
therefore unenforceable.
Certain Relationships and Related Transactions.
On October 9, 1996, PlayStar Delaware issued 12,000,000 unregistered
shares of Common Stock to the stockholders of PlayStar Limited, in exchange for
all of the issued and outstanding shares of PlayStar Limited. Certain of the
beneficial owners of PlayStar Delaware were stockholders of PlayStar Limited,
and therefore received shares of Common Stock of PlayStar Delaware in this
transaction. These beneficial owners include Julius Patta who received 3,000,000
shares through his beneficial ownership of Hemery Nominees Limited, Trust f/b/o
Allan Bramson, Evan Bramson and Joanne Bramson which received 3,000,000 shares
through its beneficial ownership of Hemery Trustees Limited, William F.E. Tucker
who received 3,000,000 shares through his beneficial ownership of Powerstock
Consultants Limited and Trust f/b/o Irving Litvack, Michael Leonard Litvack,
Lori Lee Litvack, Kari Lynn Freesman, Jeffrey Eliot Litvack, Andrew David
Litvack and Dora Litvack which received 3,000,000 shares through its beneficial
ownership of Powerstock Limited in the transaction.
PlayStar Limited was a party to a certain Agreement dated April 16, 1997
with Dreamplay Research Corp. (the "Original Dreamplay Agreement"), an entity
which is 100% owned by Mr. Patta, the Company's President, and is a party to an
Agreement with Dreamplay dated April 1, 1998 which superseded the Original
Dreamplay Agreement. The Agreements with Dreamplay were approved by PlayStar
Limited's disinterested directors and were made in the ordinary course of
business. PlayStar Limited's management believes that the Agreements contained
or contain substantially the same terms as those prevailing at the time for
comparable agreements and transactions with other technology development
companies. From inception through December 31, 1997, PlayStar Limited has paid
Dreamplay an aggregate of $785,000 under the Agreements with Dreamplay.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of PlayStar Delaware's Common Stock as of April 15, 1998 by (i) each
director of PlayStar Delaware, (ii) each executive officer of PlayStar Delaware
and each executive officer named in the Compensation Table below, (iii) all
directors and officers of PlayStar Delaware as a group and (iv) each person
known by PlayStar Delaware to be the beneficial owner of more than five percent
of the Common Stock of PlayStar Delaware. Each of such individuals will own the
same number and percentage of PlayStar Antigua Ordinary Shares following the
Reorganization.
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- ---------------------------------------------------------------------
Beneficial Current Percent
Ownership of of Class(1)
Name and Address Common Stock
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Julius Patta, President 4,330,500 (2) 23.56%
P.O. Box W 612
Woods Centre
Antigua BW1
West Indies
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
William F.E. Tucker -- Chairman and 3,362,500 (3) 18.30%
Chief Executive Officer, Treasurer
and Secretary
West Dunes
44 South Road
Paget PG 04
Bermuda
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Trust f/b/o Allan Bramson, Evan 3,694,500 (4) 20.10%
Bramson and
Joanne Bramson
c/o Hemery Trustees Limited
31 Broad Street
St. Helier
Jersey Channel Islands JE4 8XN
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Trust f/b/o Irving Litvack, Michael 3,353,100 (5) 18.24%
Leonard Litvack, Lori Lee Litvack,
Kari Lynn Freesman, Jeffrey Eliot
Litvack, Andrew David Litvack and
Dora Litvack
c/o Powerstock Limited
31 Broad Street
St. Helier
Jersey, Channel Islands JE4 8XN
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
All directors and executive 7,693,000 (6) 41.86%
officers as a group
- ---------------------------------------------------------------------
(1)Based upon 18,378,774 issued and outstanding shares of PlayStar Delaware's
Common Stock and, with respect to those persons holding warrants or options
to purchase Common Stock exercisable within sixty (60) days, the number of
shares of Common Stock that are issuable upon the exercise thereof.
(2)Includes options to purchase 1,250,000 shares of PlayStar Delaware Common
Stock exercisable within 60 days.
(3)Includes options to purchase 250,000 shares of PlayStar Delaware Common
Stock exercisable within 60 days.
(4)Includes options to purchase 700,000 shares of PlayStar Delaware Common
Stock exercisable within 60 days.
(5)Includes options to purchase 250,000 shares of PlayStar Delaware Common
Stock exercisable within 60 days.
(6)Includes options to purchase 1,500,000 shares of PlayStar Delaware Common
Stock exercisable within 60 days.
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LEGAL MATTERS
Certain legal matters in connection with shares of Common Stock of
PlayStar Wyoming to be issued in the Reorganization have been passed upon for
PlayStar by Holland & Hart, Cheyenne, Wyoming. Certain legal matters in
connection with Ordinary Shares to be issued in the Reorganization have been
passed upon for PlayStar Antigua by Roberts & Company, St. John's, Antigua.
Roberts & Company has also rendered an opinion regarding the Antigua tax
consequences of the Reorganization referred to in "Certain Tax Considerations."
Certain legal matters in connection with shares of Common Stock of PlayStar
Delaware to be exchanged in the Reorganization have been passed upon for
PlayStar by Piper & Marbury L.L.P., New York, New York. The discussion of
certain United States federal income tax consequences of the Reorganization and
of the ownership and disposition of PlayStar Antigua Ordinary Shares under the
heading "Certain Tax Considerations" was based upon an opinion rendered by Baker
& McKenzie, Washington, D.C. The discussion of certain Canadian federal income
tax consequences of the Reorganization was based on an opinion rendered by Baker
& McKenzie, Toronto, Canada.
EXPERTS
The financial statements of PlayStar Delaware as of June 30, 1997 and for
the period October 3, 1996 (date of inception) to June 30, 1997 included in this
Information Statement/Prospectus have been audited by Fruitman Kates,
independent public accountants, as indicated in their report with respect
thereto and are included herein in reliance upon the authority of said firm as
experts in auditing and accounting in giving said report.
-55-
<PAGE>
PLAYSTAR CORPORATION
(A development stage company)
INDEX TO FINANCIAL STATEMENTS
Page
Audited Consolidated Financial Statements as of June 30, F-2
1997.
Independent Auditors' Report. F-3
Consolidated Balance Sheet as of June 30, 1997. F-4
Consolidated Statement of Loss for the Period from
Inception, October 3, 1996 to June 30, 1997. F-5
Consolidated Statement of Shareholders' Equity for
the Period from Inception, October 3, 1996 to
June 30, 1997. F-6
Consolidated Statement of Cash Flows for the Period
from Inception, October 3, 1996 to June 30, 1997. F-7
Notes to Consolidated Financial Statements for
the Period from Inception, October 3, 1996 to
June 30, 1997. F-8
Unaudited Consolidated Financial Statements as of March
31, 1998. F-9
Consolidated Balance Sheet at March 31, 1998. F-13
Consolidated Statement of Loss for the Three Months
and Nine Months Ending March 31, 1998 and
Cumulative from Inception. F-14
Consolidated Statement of Shareholders' Equity for
the Nine Month Period Ending March 31, 1998 and
Cumulative from Inception. F-15
Consolidated Statement of Cash Flows for the Nine
Month Period Ending March 31, 1998 and Cumulative
from Inception. F-16
Notes to Consolidated Financial Statements. F-17
F-1
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Restated)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of PLAYSTAR CORPORATION
We have audited the consolidated balance sheet of PLAYSTAR CORPORATION (a
Development Stage Company) and subsidiary, as at June 30, 1997 and the
related consolidated statements of loss, shareholders' equity and cash flows
for the period from inception October 3, 1996 to June 30, 1997. These
consolidated financial statements are the responsibility of PLAYSTAR
CORPORATION's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of PLAYSTAR CORPORATION and
subsidiary, as at June 30, 1997 and the results of their operations and
their cash flows for the period from inception October 3, 1996 to June 30,
1997, in conformity with generally accepted principles in the United States.
As described in Note 5 to the financial statements, these financial
statements have been revised to correct an error in the method of
determining charges to operations with respect to various stock options
granted by PLAYSTAR CORPORATION.
Toronto, Canada FRUITMAN KATES
June 2, 1998 CHARTERED ACCOUNTANTS
F-3
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 1997
(U.S.$)
(Restated)
ASSETS
CURRENT
Cash and cash equivalents $109,138
Accounts receivable 166
Prepaid expenses 1,694 $110,998
------- --------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $56,045
-------
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Authorized
30,000,000 common shares at stated value
$.0001 per share
Issued and outstanding
15,812,500 common shares $ 1,581
ADDITIONAL PAID-IN CAPITAL 1,980,104
DEFICIT, accumulated during the development stage (1,926,732)
----------
TOTAL SHAREHOLDERS' EQUITY 54,953
------
$110,998
--------
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF LOSS
FOR THE PERIOD FROM INCEPTION, OCTOBER 3, 1996, TO JUNE 30, 1997
(U.S.$)
(Restated)
REVENUE
Interest income $ 3,022
EXPENSES
Development costs $1,215,527
Options granted as employee compensation 682,500
General and administrative 13,856
Professional fees 14,415
Incorporation costs 3,456 1,929,754
------ ---------
NET LOSS $(1,926,732)
-----------
LOSS PER SHARE $ 0.13
---------
WEIGHTED AVERAGE NUMBER OF SHARES 15,035,880
----------
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION, OCTOBER 3, 1996, TO JUNE 30, 1997
(U.S.$)
(Restated)
Deficit
accumulated
Common Additional during Total
stock paid-in development shareholders'
shares Amount capital stage equity
---------------------------------------------------------
October 3, 1996 - $ $ $ $ -
Common stock
issued in exchange
for all of the
issued and
outstanding shares
of PlayStar
Limited in October
1996 (@
$0.0001/share 12,000,000 1,200 - - 1,200
Options granted to
employees and
consultants for
development costs
and services - - 1,143,500 - 1,143,500
Issuance of stock
in October 1996
and January 1997
for development
costs based on
Fair Market Value
of services
performed;
(@ $0.10/share 1,750,000 175 174,825 - 175,000
Issuance of stock
for $825,000 U.S.
in November 1996,
in connection with
a private
placement
offering; (@
$0.40/share, net
of issue costs of
$163,015) 2,062,500 206 661,779 - 661,985
NET LOSS, June
30, 1997 - - - (1,926,732) (1,926,732)
--------- ---- -------- --------- ---------
15,812,500 $1,581 $1,980,104 $(1,926,732) $54,953
---------- ------ ---------- ----------- ----------
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION, OCTOBER 3, 1996, TO JUNE 30, 1997
(U.S.$)
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,926,732)
Adjustments to reconcile net loss to net
cash provided by operating activities -
Development costs paid through issuance of stock 175,000
Development costs paid through granting of options 461,000
Employee compensation paid through
granting of options 682,500
Changes in operating assets and liabilities
- accounts receivable (166)
- prepaid expenses (1,694)
- accounts payable 56,045
-------
Net cash used in operating activities (554,047)
--------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common shares
net of issue costs) 663,185
-------
Net cash provided from financing activities 663,185
-------
NET INCREASE IN CASH AND CASH EQUIVALENTS 109,138
CASH AND CASH EQUIVALENTS, beginning of period -
-------
CASH AND CASH EQUIVALENTS, end of period $109,138
--------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company paid for development costs in the amount of $175,000 through the
issuance of common shares.
The Company paid for development costs $461,000 and employee compensation
$682,500 through the granting of options.
For the purposes of presentation in the statement of cash flows, cash and
marketable securities with original maturities of less than three months, have
been classified as cash and cash equivalents.
The carrying value of these items approximates fair value.
The accompanying notes to financial statements are an integral part of these
statements.
F-7
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION, OCTOBER 3, 1996, TO JUNE 30, 1997
(U.S.$)
(Restated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States.
a) NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
PlayStar Corporation ("the Company") and its wholly owned subsidiary
PlayStar Limited. All intercompany accounts and transactions have
been eliminated on consolidation.
The Company has been in the development stage since its incorporation
on October 3, 1996. The Company, through its subsidiary, designs,
develops and intends to operate, promote and commercialize an on-line
gaming service operating interactive, software-based games of chance,
accessible world-wide through the Internet.
The Company's fiscal year end is June 30th.
b) DEVELOPMENT COSTS
Development costs associated with the design, development, operation,
promotion and commercialization of an on-line gaming service are
charged to expense in the period incurred.
c) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
d) CASH EQUIVALENTS
The Company considers highly liquid investments with original
maturities of three months or less to be cash equivalents.
(continues ...)
F-8
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION, OCTOBER 3, 1996, TO JUNE 30, 1997
(U.S.$)
(Restated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (... continued)
e) EARNINGS PER SHARE
The Company adopted SFAS No. 128 "Earnings per Share". This statement
requires that the Company report basic and diluted earnings (loss)
per share for all periods reported. Basic net income (loss) per share
is calculated by dividing net income (loss) by the weighted average
number of common shares outstanding for the period. Diluted net
income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding for the
period, adjusted for the dilutive effect of common stock equivalents,
consisting of dilutive common stock options using the treasury stock
method.
For all periods presented, common stock options are not included in
the computation as they would be anti-dilutive.
Subsequent to June 30, 1997, the Company issued 9,669,524 common
shares. Additionally, 457,000 options were exercised at $0.05 per
share resulting in the issuance of 457,000 common shares.
2. BUSINESS ACQUISITIONS
PLAYSTAR LIMITED
On October 9, 1996, the Company acquired 100% of the issued and
outstanding common shares of PlayStar Limited, in exchange for 12,000,000
common shares of the Company.
The business combination has been accounted for as an "as if pooling of
interests", since both, the Company and PlayStar Limited, are entities
under common control. Accordingly, the assets and liabilities of the
combining companies are recorded at their historical cost and results of
operations include both entities from inception.
F-9
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION, OCTOBER 3, 1996, TO JUNE 30, 1997
(U.S.$)
(Restated)
3. STOCK OPTION PLANS
On October 9, 1996, the Company adopted a stock option plan authorizing the
granting of options to purchase an additional 10,000,000 common shares.
A total of 1,950,000 options exercisable at $0.05/share until October 9,
2001 have been granted during the period to company officers, directors,
employees and/or entities affiliated. In connection with the granting of these
employee options, the Company has recognized expense of $682,500. No stock
options have been exercised through June 30, 1997.
During the period October 3, 1996 (inception) to June 30, 1997, the Company
granted 2,150,000 stock options to consultants as payment for developmental
costs. The options granted are exercisable for a period of 5 years at $0.05 per
share. The Company recorded compensation (included in development costs) of
$461,000 with respect to these options. The consultants granted the options are
employed by an entity, which is owned by the president of the Company.
Subsequent to June 30, 1997, options to acquire 565,000 shares at between
$0.50-$0.75 expiring two years from date of granting were granted to
consultants. 670,000 options to acquire shares previously issued to consultants
were cancelled.
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation". The pronouncement requires entities to recognize as compensation
expense over the vesting period the fair value of stock-based awards on the date
of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of APB No. 25 and provide pro forma net income and pro forma income
(loss) per share disclosures for employee stock option grants made from 1995
forward as if the fair-value-based method, defined in SFAS No. 123, had been
applied.
The Company has elected to adopt the disclosure-only provision of SFAS No.
123, and as described above, will continue to apply APB No. 25 to account for
stock options. Had compensation expense been determined as provided in SFAS No.
123, the pro forma effect would have been:
Net loss - as reported $(1,926,732)
Net loss - pro forma $(2,001,732)
Loss per share - as reported $(0.13)
Loss per share - pro forma $(0.13)
The fair value of these options was estimated at the date of grant using
the "minimum value" method. The fair value of the stock at the date of grant of
approximately $0.05 per share was determined.
(continues...)
F-10
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION, OCTOBER 3, 1996, TO JUNE 30, 1997
(U.S.$)
(Restated)
3. STOCK OPTION PLANS (...continued)
The table below summarizes the activity in the plan.
Weighted-average
Shares exercise price
------ -------------------
Outstanding at beginning of period - -
Granted 4,100,000 $0.05
Exercised - -
Cancelled - -
Outstanding at the end of period 4,100,000 $0.05
Options exercisable at the end of period 4,100,000 $0.05
Weighted-average fair value of options
granted during the period - $0.05
Weighted-average remaining contractual
rights - $0.05
4. INCOME TAXES
Deferred tax liabilities and assets are determined based on the difference
between financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which differences are expected
to reverse.
The Company has net operating loss carry-forwards of approximately
$783,000, which expire through the year 2012. The future tax benefit has
been fully reserved by the use of valuation allowances.
5. RESTATEMENT OF FINANCIAL INFORMATION
The financial statements have been restated to comply with the
requirements of APB No. 25 and SFAS 123 as disclosed fully in Note 3.
The effect of the correction with respect to the recording of stock
options granted to employees and consultants during the period has been to
increase development costs charged to operations by $461,000, and to
increase employee compensation charged to operations by $682,500.
In total the effect of the restatement has been to charge operations with
$1,143,500 ($0.08 per share).
F-11
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Unaudited)
(Restated)
F-12
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 1998
(U.S.$)
(Restated)
ASSETS
MAR 31,1998 JUNE 30,1997
----------- ------------
(Unaudited) (Audited)
CURRENT
Cash and cash equivalents $184,075 $109,138
Share subscriptions receivable 2,850 -
Accounts receivable - 166
Prepaid expenses and sundry assets 197,941 1,694
----------- ----------
$384,866 $110,998
-------- --------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $38,826 $56,045
------- -------
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Authorized
30,000,000 common shares at stated value
$.0001 per share
Issued and outstanding
18,378,774 common shares 1,834 1,581
ADDITIONAL PAID-IN CAPITAL 2,947,877 1,980,104
DEFICIT, accumulated during the development
stage (2,603,671) (1,926,732)
---------- -----------
TOTAL SHAREHOLDERS' EQUITY 346,040 54,953
------- --------
$384,866 $110,998
-------- --------
The accompanying notes to financial statements are an integral part of these
statements.
F-13
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF LOSS
(U.S.$)
(Restated)
THREE MONTHS ENDING NINE MONTHS ENDING CUMULATIVE
------------------- ------------------ ----------
(NOTE 6)
MAR 31,1998 MAR 31,1997 MAR 31,1998 MAR 31,1997 MAR 31,1998
----------- ----------- ----------- ----------- ------------
REVENUE (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest income $1,104 $2,280 $1,628 $2,280 $ 4,650
------ ------ ------ ------ -----------
EXPENSES
Professional fees 181,224 4,000 206,890 5,041 221,305
Development costs 49,915 28,125 458,959 1,198,327 1,674,486
Options granted as
employee
compensation - - - 682,500 682,500
General and
administrative 4,681 3,028 8,218 5,185 22,074
Promotion - - 4,500 - 4,500
Incorporation costs - - - - 3,456
Amortization - 66 - 66 -
------ ------ ------ ------ -------
235,820 35,219 678,567 1,891,119 2,608,321
------- ------- ------- --------- ---------
NET LOSS $(234,716) $(32,939) $(676,939)$(1,888,839) $ (2,603,671)
---------- -------- --------- ------------ -----------
LOSS PER SHARE $ (.01) $ (.01) $ (.04) $ (.13) $ (.16)
------- -------- -------- --------- ---------
WEIGHTED AVERAGE
NUMBER OF SHARES 18,165,947 15,812,500 16,726,815 14,641,061 15,887,564
---------- ---------- ---------- ---------- ----------
The accompanying notes to financial statements are an integral part of these
statements.
F-14
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTH PERIOD ENDING MARCH 31, 1998
(U.S.$)
(Restated)
<TABLE>
<S> <C> <C> <C>
Deficit
accumulated
Common Additional during Total
stock paid-in development shareholders'
shares Amount capital stage equity
------ ----- ---------- ----------- -------------
Beginning balance,
July 1, 1997 15,812,500 $ 1,581 $1,980,104 $(1,926,732) $ 54,953
Issuance of stock for
$500,000 U.S.
in November 1997 in
connection with a
private placement
offering;
(@ $0.40/share, net of
issue costs of $50,000) 1,250,000 125 449,875 - 450,000
Issuance of stock for
$362,139 U.S.
in December 1997, in
connection with a private
placement offering;
(@ $0.50/share, net of issue
costs of $24,749) 724,274 72 337,318 - 337,390
Options granted to
consultants
as compensation for
development costs in the six
months ending in December,
1997 - - 23,000 - 23,000
Issuance of stock for
$142,500 U.S. in January 1998,
in connection with a private
placement offering;
(@ $0.50/share, net of issue
costs of $25,714) 285,000 29 116,757 - 116,786
Issuance of 250,000 shares in
January 1998, as a fee in
connection with the November
1997 private placement offering;
(Fair Market Value $0.85/share,
$212,500 U.S.) 250,000 25 (25) - -
Issuance of stock for $1,500 U.S.
in January 1998, in connection
with exercise of stock options;
(@ $0.05/share) 30,000 1 1,499 - 1,500
Issuance of stock for $1,350 U.S.
in February 1998, in connection
with exercise of stock options;
(@ $0.05/share) 27,000 1 1,349 - 1,350
Options granted to consultants
as compensation for development
costs in the three months
ending March 31, 1998 - - 38,000 - 38,000
NET LOSS, March 31, 1998 - - - (676,939) (676,939)
-------- -------- -------- ---------- ------------
18,378,774 $ 1,834 $2,947,877 $(2,603,671) $346,040
---------- ------- ----------- ------------- ------------
</TABLE>
F-15
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDING MARCH 31, 1998
(U.S.$)
(Restated)
Cumulative
MAR 31,1998 MAR 31,1997 MAR 31,1998
----------- ----------- ----------
(Unaudited) (Unaudited) (Unaudited)
(Note 6)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (676,939) $(1,888,839)$(2,603,671)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Development costs paid through
issuance of stock - 175,000 175,000
Development costs paid through
granting of options 61,000 461,000 522,000
Employee compensation paid through
granting of options - 682,500 682,500
Changes in operating assets and
liabilities
- share subscriptions receivable (2,850) - (2,850)
- accounts receivable 166 - -
- prepaid expenses and sundry assets (196,248) 2,604) (197,941)
- other assets - (3,390) -
- accounts payable (17,219) 34,277 38,826
-------- -------- ----------
Net cash used in operating activities (832,089) (542,056)(1,386,136)
-------- -------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common
shares (net of issue costs) 907,026 663,185 1,570,211
------- ------- ---------
Net cash provided from financing
activities 907,026 663,185 1,570,211
------- ------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 74,937 121,129 184,075
CASH AND CASH EQUIVALENTS, beginning of
period 109,138 - -
------- ------- ---------
CASH AND CASH EQUIVALENTS, end of period $184,075 $121,129 $184,075
-------- -------- ---------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Since inception the Company paid for development costs in the amount of $175,000
through the issuance of common shares.
Since inception the Company paid for development costs $522,000 and employee
compensation $682,500 through the granting of options.
The Company paid for issue costs in the amount of $212,500 through the issuance
of common shares.
For the purposes of presentation in the statement of cash flows, cash and
marketable securities with original maturities of less than three months, have
been classified as cash and cash equivalents.
The carrying value of these items approximates fair value.
The accompanying notes to financial statements are an integral part of these
statements.
F-16
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIOD ENDING MARCH 31, 1998
(Unaudited)
(U.S.$)
(Restated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States.
a) BASIS OF PRESENTATION
The unaudited consolidated balance sheet as of March 31, 1998,
audited balance sheet as of June 30, 1997 and unaudited consolidated
statements of loss, accumulated deficit and cash flows for the three
and nine months then ended, together with cumulative unaudited
financial information since inception, October 3, 1996, have been
prepared in accordance with generally accepted accounting principles
and include all adjustments, which in the opinion of management, are
necessary to present fairly the results of operations for the periods
then ended. All such adjustments are of a normal recurring nature.
These financial statements should be read in conjunction with the
restated audited financial statements for the period from inception,
October 3, 1996 to June 30, 1997, and the notes thereto included in
the Company's Form 10-K filed with the Securities and Exchange
Commission.
b) NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
PlayStar Corporation ("the Company") and its wholly owned
subsidiaries, PlayStar Limited and Antigua Casino and Sports Book
Limited. All intercompany accounts and transactions have been
eliminated on consolidation. The Company has been in the development
stage since its incorporation on October 3, 1996. The Company,
through its subsidiaries, designs, develops and intends to operate,
promote and commercialize an on-line gaming service operating
interactive, software-based games of chance, accessible world-wide
through the Internet.
c) DEVELOPMENT COSTS
Development costs associated with the design, development, operation,
promotion and commercialization of an on-line gaming service are
charged to expense in the period incurred.
d) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(continues...)
F-17
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIOD ENDING MARCH 31, 1998
(Unaudited)
(U.S.$)
(Restated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (...continued)
e) EARNINGS PER SHARE
The Company adopted SFAS No. 128 "Earnings per Share". This statement
requires that the Company report basic and diluted earnings (loss) per
share for all periods reported. Basic net income (loss) per share is
calculated by dividing net income (loss) by the weighted average number
of common shares outstanding for the period. Diluted net income (loss)
per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding for the period, adjusted for
the dilutive effect of common stock equivalents, consisting of dilutive
common stock options using the treasury stock method.
For all periods presented, common stock options are not included in the
computation as they would be anti-dilutive.
f) CASH EQUIVALENTS
The Company considers highly liquid investments with original maturities
of three months or less to be cash equivalents.
2. BUSINESS ACQUISITIONS
PLAYSTAR LIMITED
On October 9, 1996, the Corporation acquired 100% of the issued and
outstanding common shares of PlayStar Limited, in exchange for 12,000,000
common shares of the Company.
On January 28, 1998, Antigua Casino and Sports Book Limited, an Antiguan
company, was incorporated as a wholly owned subsidiary of PlayStar Limited.
The business combination has been accounted for as an "as if pooling of
interests", since both, the Company and PlayStar Limited, are entities under
common control. Accordingly, the assets and liabilities of the combining
companies are recorded at their historical cost and results of operations
include all entities from inception.
F-18
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIOD ENDING MARCH 31, 1998
(Unaudited)
(U.S.$)
(Restated)
3. STOCK OPTION PLANS
On October 9, 1996, the Company adopted a stock option plan authorizing the
granting of options to purchase an additional 10,000,000 common shares. On
August 11, 1998, the stock option plan was terminated as to additional option
grants.
During the period, an additional 550,000 options exercisable at $0.50-$0.75
per share, expiring between December 4, 2002 and March 30, 2003, have been
granted. In addition, 670,000 options, at $0.05 per share, were cancelled
bringing the total options outstanding as of March 31, 1998 to 3,923,000. Of
this amount, 315,000 options were granted to consultants to the Company
(including 15,000 options granted to consultants in April 1998), resulting in a
charge to operations of $61,000.
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation". The pronouncement requires entities to recognize as compensation
expense over the vesting period the fair value of stock-based awards on the date
of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of APB No. 25 and provide pro forma net income and pro forma income
(loss) per share disclosures for employee stock option grants made from 1995
forward as if the fair-value-based method, defined in SFAS No. 123, had been
applied.
The Company has elected to adopt the disclosure-only provision of SFAS No.
123, and as described above, will continue to apply APB No. 25 to account for
stock options. Had compensation expense been determined as provided in SFAS No.
123, the pro forma effect would have been:
Nine months Cumulative
----------- ----------
Net loss - as reported $(676,939) $(2,603,671)
Net loss - pro forma (676,939) (2,678,671)
Loss per share - as reported (0.04) (0.16)
Loss per share - pro forma (0.04) (0.17)
The fair value of each option granted subsequent to 1996 is estimated on
the date of the grant using the Black-Scholes option pricing model with the
following assumptions used for the grants in 1997 and 1998: dividend yield of
0%, expected volatility of 142%; risk free interest rate of 6% and expected
lives of 5 years.
The table below summarizes the activity in the plan.
Weighted-average
Shares exercise price
------- ----------------
Outstanding at beginning of period 4,100,000 $0.05
Granted 550,000 $0.69
Exercised 57,000 $0.05
Cancelled (670,000) $0.05
Outstanding at the end of period 3,923,000 $0.14
Options exercisable at the end of
period 3,923,000 $0.14
Weighted-average fair value of
options granted during the
period - $0.65
Weighted-average remaining contractual
rights (months) - 59
F-19
<PAGE>
PLAYSTAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIOD ENDING MARCH 31, 1998
(Unaudited)
(U.S.$)
(Restated)
4. SUBSEQUENT EVENTS
In April 1998, the company granted an additional 15,000 options exercisable
at $0.50 per share, expiring on April 9, 2003.
During May, June, July and August, 1998, through a private placement
offering, the company issued a further 7,683,226 shares at $0.2580645-$0.50
per share, realizing total net proceeds of $2,021,435. In conjunction with
the offering, the Company issued 4,835,000 warrants exercisable at $0.80 per
share and expiring in May 2000, 1,000,000 warrants exercisable at $1.25 per
share and expiring in May 2000, 100,000 warrants exercisable at $1.00 per
share and expiring in May 2000 and 100,000 warrants exercisable at $0.50 per
share and expiring in May 2000.
Also in May 1998, 400,000 options outstanding as of March 31, 1998 were
exercised at $0.05 per share.
5. INCOME TAXES
Deferred tax liabilities and assets are determined based on the difference
between financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which differences are expected
to reverse.
The Company has net operating loss carry-forwards of approximately
$1,400,000, which expires through the year 2012. The future tax benefit has
been fully reserved by the use of valuation allowances.
6. RESTATEMENT OF FINANCIAL INFORMATION
The financial statements have been restated to comply with the requirements
of APB No. 25 and SFAS 123 as disclosed fully in Note 3.
The effect of the correction with respect to the recording of stock options
granted to consultants during the period has been to increase development
costs charged to operations by $61,000 ($0.01 per share).
On a cumulative basis the effect of recording stock options granted to
employees and consultants has been to increase development costs charged to
operations by $522,000 and to increase employee compensation charged to
operations by $682,500.
The total cumulative effect of the restatement has been to charge operations
with $1,204,500 ($0.08 per share).
7. COMPARABLE FIGURES
Information reported as of March 31, 1997 represents the period from
inception, October 3, 1996 to March 31, 1997.
F-20
<PAGE>
ANNEX I
PLAN AND AGREEMENT OF MERGER
OF
PLAYSTAR CORPORATION ("PlayStar-DE")
(a Delaware corporation)
AND
PLAYSTAR WYOMING HOLDING CORP. ("PlayStar-WY")
(a Wyoming corporation)
PLAN AND AGREEMENT OF MERGER entered into as of June 30, 1998 by
PlayStar-DE, a business corporation of the State of Delaware, and approved by
resolution adopted by its Board of Directors on said date, and entered into as
of June 30, 1998 by PlayStar-WY, a business corporation of the State of Wyoming,
and approved by resolution adopted by its Board of Directors on said date.
WHEREAS, PlayStar-DE is a business corporation of the State of
Delaware with its registered office therein located at c/o United Corporate
Services, Inc., 15 East North Street, Dover, DE 19901; and
WHEREAS, the total number of shares of stock which PlayStar-DE has
authority to issue is 30,000,000, all of which are of one class and with a par
value of $.0001 per share (each, a "PlayStar-DE" Share); and
WHEREAS, PlayStar-WY is a business corporation of the State of
Wyoming with its registered office therein located at c/o CT Corporation, 1720
Carey Avenue, Suite 200, Cheyenne, WY 82001; and
WHEREAS, the total number of shares of stock which PlayStar-WY has
authority to issue is 50,000,000 shares of common stock, each with a par value
of $0.0001 (each, a "PlayStar-WY Share"), and 1,000,000 shares of series
preferred stock, each with a par value of $0.0001; and
WHEREAS, the General Corporation Law of the State of Delaware permits
a merger of a business corporation of the State of Delaware with and into a
business corporation of another jurisdiction; and
WHEREAS, the Wyoming Business Corporation Act permits the merger of a
business corporation of another jurisdiction with and into a business
corporation of the State of Wyoming; and
WHEREAS, PlayStar-DE and PlayStar-WY and the respective Boards of
Directors thereof deem it advisable and to the advantage, welfare, and best
interests of said corporations and their respective stockholders to merge
PlayStar-DE with and into PlayStar-WY pursuant to the provisions of the General
Corporation Law of the State of Delaware and pursuant to the provisions of the
Wyoming Business Corporation Act upon the terms and conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreement of the parties hereto, being thereunto duly entered into by
PlayStar-DE and approved by a resolution adopted by its Board of Directors and
further approved by its shareholders and being thereunto duly entered into by
PlayStar-WY and approved by a resolution adopted by its Board of Directors and
further approved by its shareholders, the Plan and Agreement of Merger and the
terms and conditions thereof and the mode of carrying the same into effect,
1
<PAGE>
together with any provisions required or permitted to be set forth therein, are
hereby determined and agreed upon as hereinafter in this Plan and Agreement set
forth.
1. PlayStar-DE and PlayStar-WY shall, pursuant to the provisions of the General
Corporation Law of the State of Delaware and the provisions of the Wyoming
Business Corporation Act, be merged with and into a single corporation, to wit,
PlayStar-WY, which shall be the surviving corporation from and after the
effective time of the merger, and which is sometimes hereinafter referred to as
the "surviving corporation", and which shall continue to exist as said surviving
corporation under its present name pursuant to the provisions of the Wyoming
Business Corporation Act. The separate existence of PlayStar-DE, which is
sometimes hereinafter referred to as the "terminating corporation", shall cease
at said effective time in accordance with the provisions of the General
Corporation Law of the State of Delaware.
2. Annexed hereto and made a part hereof is a copy of the Articles of
Incorporation, as amended, of the surviving corporation as the same shall be in
force and effect at the effective time in the State of Wyoming of the merger
herein provided for; and said Articles of Incorporation shall continue to be the
Articles of Incorporation of said surviving corporation until amended and
changed pursuant to the provisions of the Wyoming Business Corporation Act.
3. The present by-laws of the surviving corporation will be the by-laws of said
surviving corporation and will continue in full force and effect until changed,
altered or amended as therein provided and in the manner prescribed by the
provisions of the Wyoming Business Corporation Act.
4. The directors and officers in office of the surviving corporation at the
effective time of the merger shall be the members of the first Board of
Directors and the first officers of the surviving corporation, all of whom shall
hold their directorships and offices until the election and qualification of
their respective successors or until their tenure is otherwise terminated in
accordance with the by-laws of the surviving corporation.
5. Each issued share of the terminating corporation shall, at the effective time
of the merger, be converted into one share of the surviving corporation. The
issued shares of the surviving corporation prior to the merger shall not be
converted or exchanged in any manner, but each said share which is issued as of
the effective date of the merger shall cease to be outstanding.
6. (a) At the effective time of the merger, each outstanding option to purchase
PlayStar-DE Shares (a "Stock Option"), whether vested or unvested, shall be
deemed to constitute an option to acquire, on the same terms and conditions as
were applicable under such Stock Option, the same number of PlayStar-WY Shares
as the holder of such Stock Option would have been entitled to receive pursuant
to the merger had such holder exercised such option in full immediately prior to
the effective time of the merger (not taking into account whether or not such
option was in fact exercisable). In the case of any Stock Option to which
Section 421 of the Internal Revenue Code of 1986 (the "Code") applies by reason
of its qualification under any of Sections 422-423 of the Code ("qualified stock
options"), the option price, the number of shares purchasable pursuant to such
option and the terms and conditions of exercise of such option shall comply with
Section 424(a) of the Code.
(b) As soon as practicable after the effective time of the merger,
PlayStar-WY shall deliver to each holder of an outstanding Stock Option, an
appropriate notice setting forth such holder's rights pursuant thereto and such
Stock Option shall continue in effect on the same terms and conditions.
PlayStar-WY shall comply with the terms of all such Stock Options and ensure, to
the extent required by, and subject to the provisions of, any such PlayStar-DE
Stock Option Plan that Stock Options which qualified as qualified stock options
prior to the effective time of the merger continue to qualify as qualified stock
options after the effective time of the merger. PlayStar-WY shall take all
corporate action necessary to reserve for issuance a sufficient number of
PlayStar-WY Shares for delivery pursuant to the terms set forth in this Section
6.
2
<PAGE>
7. If appraisal rights are available under the Delaware General Corporation Law
("DGCL") to holders of PlayStar-DE Shares in connection with the merger, any
issued and outstanding PlayStar-DE Shares which have not been voted for approval
of this Agreement and the transactions contemplated hereby and with respect to
which appraisal shall have been properly demanded in accordance with Section 262
of the DGCL ("Dissenting Shares") shall not be converted into the right to
receive consideration for the merger and the holders thereof shall have only
such rights as are provided in such Section 262 of the DGCL unless and until the
holder of any such PlayStar-DE Shares withdraws his demand for such appraisal in
accordance with Section 262(k) of the DGCL or otherwise loses his right to such
appraisal. If a holder of Dissenting Shares shall properly withdraw his demand
for appraisal or shall otherwise lose his right to such appraisal, then as of
the effective time of the merger or the occurrence of such event, whichever last
occurs, such holder's Dissenting Shares shall cease to be Dissenting Shares and
shall be converted into and represent the right to receive consideration for the
merger. Prior to the effective time of the merger, PlayStar-DE shall give
PlayStar-WY prompt notice of any written demand for appraisal or withdrawals of
demands for appraisal received by PlayStar-DE and, except with the prior written
consent of PlayStar-WY, shall not settle or offer to settle any such demands.
8. In the event that this Plan and Agreement of Merger shall have been fully
approved and adopted upon behalf of the terminating corporation in accordance
with the provisions of the General Corporation Law of the State of Delaware and
upon behalf of the surviving corporation in accordance with the provisions of
the Wyoming Business Corporation Act, the said corporations agree that they will
cause to be executed and filed and recorded any document or documents prescribed
by the laws of the State of Delaware and by the laws of the State of Wyoming,
and that they will cause to be performed all necessary acts within the State of
Delaware and the State of Wyoming and elsewhere to effectuate the merger herein
provided for.
9. The Board of Directors and the proper officers of the terminating corporation
and of the surviving corporation are hereby authorized, empowered, and directed
to do any and all acts and things, and to make, execute, deliver, file, and
record any and all instruments, papers, and documents which shall be or become
necessary, proper, or convenient to carry out or put into effect any of the
provisions of this Plan and Agreement of Merger or of the merger herein provided
for.
3
<PAGE>
IN WITNESS WHEREOF, this Plan and Agreement of Merger is hereby
executed upon behalf of each of the constituent corporations parties thereto.
Executed as of June 30, 1998.
PLAYSTAR CORPORATION
(a Delaware corporation)
By:_________________________
Julius Patta
President
PLAYSTAR WYOMING HOLDING
CORP. (a Wyoming
corporation)
By:_________________________
William F.E. Tucker
Chairman and Chief
Executive Officer
4
<PAGE>
ARTICLES OF INCORPORATION
OF
PLAYSTAR WYOMING HOLDING CORP.
The undersigned person, acting as incorporator of a corporation under the
Wyoming Business Corporation Act (the "Act"), adopts the following Articles of
Incorporation for PlayStar Wyoming Holding Corp. (the "Corporation"):
ARTICLE I
Name
The name of the Corporation is: PLAYSTAR WYOMING HOLDING CORP.
ARTICLE II
Purpose
The Corporation is organized for the purpose of engaging in any lawful act
or activity for which corporations may be organized under the Act.
ARTICLE III
Powers
The Corporation shall have the power to do all things necessary or
convenient to carry out its business and affairs.
ARTICLE IV
Shares
Number of Shares. The Corporation shall have authority to issue 30,000,000
shares of common stock, each with a par value of $0.0001 ("Common Stock"), and
1,000,000 shares of Series Preferred Stock, $.0001 par value ("Series Preference
Stock").
Stock Class and Series Distinctions. A statement of the designations and
the powers, preferences and rights of such classes of stock and the
qualifications, limitations or restrictions thereof, the fixing of which by the
Articles of Incorporation is desired, and the authority of the Board of
Directors to fix, by resolution or resolutions, the designations and the powers,
preferences and rights of such classes of stock or the qualifications,
limitations or restrictions thereof, which are not fixed hereby, are as follows:
Part I. Provisions Applicable to All Series of Series
Preference Stock.
(a) Shares of Series Preference Stock may be issued from time to
time in one or more series. The preferences and relative participating,
optional and other special rights of each series and the qualifications,
limitations or restrictions thereof, if any, may differ from those of any
and all other series already outstanding; the terms of each series shall
be as specified in this Part I and in the resolution or resolutions
hereinafter referred to; and the Board of Directors of the Corporation is
hereby expressly granted authority to fix, by resolution or resolutions
adopted prior to the issuance of any shares of a particular series of
Series Preference Stock, the designations, preferences and relative
participating, optional and other special rights, or the qualifications,
limitations or restrictions thereof, of such series, including, but
without limiting the generality of the foregoing, the following:
1
<PAGE>
(i) The rate and times at which, and the terms and conditions on
which, dividends on the Series Preference Stock of such series shall
be paid;
(ii) The right, if any, of holders of Series Preference Stock of
such series to convert the same into, or exchange the same for, other
classes of stock of the Corporation and the terms and conditions of
such conversion or exchange;
(iii)The redemption price or prices and the time at which, and
the terms and conditions on which, Series Preference Stock of such
series may be redeemed;
(iv) The rights of the holders of Series Preference Stock of
such series upon the voluntary or involuntary liquidation,
distribution or sale of assets, dissolution or winding up of the
Corporation;
(v) The voting power, if any, of the Series
Preference Stock of such series; and
(vi) The terms of the sinking fund or redemption or purchase
account, if any, to be provided for the Series Preference Stock of
such series.
(b) All shares of each series shall be identical in all respects to
the other shares of such series. The rights of the Common Stock of the
Corporation shall be subject to the preferences and relative
participating, optional and other special rights of the Series Preference
Stock of each series as fixed herein and from time to time by the Board of
Directors as aforesaid.
Part II. Provisions Applicable to Common Stock.
(a) After the requirements with respect to preferential dividends
upon the Series Preference Stock of all classes and series thereof shall
have been met and after the Corporation shall have complied with all
requirements, if any, with respect to the setting aside of sums as a
sinking fund or redemption or purchase account for the benefit of any
class or series thereof, then, and not otherwise, the holders of Common
Stock shall be entitled to receive such dividends as may be declared from
time to time by the Board of Directors.
(b) After distribution in full of the preferential amounts to be
distributed to the holders of all classes and series thereof of Series
Preference Stock then outstanding in the event of a voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of the Common Stock shall be entitled to receive all the remaining
assets of the Corporation available for distribution to its stockholders
ratably in proportion to the number of shares of Common Stock held by them
respectively.
(c) Each holder of Common Stock shall have one vote in respect of
each share of such stock held by him.
ARTICLE V
Indemnification
Except as may be prohibited under the Act, in addition to the other powers
now or hereafter conferred upon the Corporation by these Articles of
Incorporation, the Act or otherwise, the Corporation shall possess and may
exercise all powers to indemnify directors, officers, employees, fiduciaries and
other persons and all powers whatsoever incidental thereto (including, without
limitation, the power to advance expenses and the power to purchase and maintain
2
<PAGE>
insurance with respect thereto), without regard to whether such powers are
expressly provided for by the Act. The board of directors is hereby authorized
on behalf of the Corporation and without shareholder action to exercise all of
the Corporation's powers of indemnification, whether by provision in the By-Laws
or otherwise.
ARTICLE VI
Elimination of Certain Liabilities of Directors
There shall be no personal liability, either direct or indirect, of any
director of the Corporation to the Corporation or its shareholders for monetary
damages for any breach or breaches of fiduciary duty as a director; provided,
however, that this provision shall not eliminate or limit the liability of a
director to the Corporation or its shareholders for monetary damages for any
breach, act, omission, or transaction as to which the Act (as in effect from
time to time) expressly prohibits the elimination of liability. This provision
shall not limit the rights of directors of the Corporation for indemnification
or other assistance from the Corporation. Any repeal or modification of the
foregoing provisions of this Article by the shareholders of the Corporation or
any repeal or modification of the provisions of the Act that permits the
elimination of liability of directors by this Article shall not affect adversely
any elimination of liability, right or protection of a director of the
Corporation with respect to any breach, act, omission, or transaction of such
director occurring prior to the time of such repeal or modification.
ARTICLE VII
Board of Directors
The number of Directors of the Corporation shall be such as from time to
time shall be fixed by, or in the manner provided in, the By-Laws.
ARTICLE VIII
Transfer of Corporation
Upon due authorization by the Corporation's directors and shareholders as
required by the Act, the Corporation may apply to the proper officer of a
jurisdiction outside Wyoming for a certificate of registration, and to the
Wyoming Secretary of State for a certificate of transfer, the effect of which is
that, after entry of all certificates as required by the Act and the laws of
such other jurisdiction, the Corporation will be continued as if it had been
incorporated under the laws of such other jurisdiction.
ARTICLE IX
Registered Office and Agent
The address of the initial registered office of the Corporation is 1720
Carey Avenue, Suite 200, Cheyenne, Wyoming 82001. The name of the Corporation's
initial registered agent at
such address is CT Corporation.
ARTICLE X
Incorporator
The name and address of the incorporator is:
James R. Belcher, P.C.
Holland & Hart
2020 Carey Avenue, Suite 500
Cheyenne, WY 82001
IN WITNESS WHEREOF, the undersigned has executed these Articles of Incorporation
on April 1, 1998.
/s/ James R. Belcher, P.C.
------------------------------------
James R. Belcher, P.C., as
Incorporator
3
<PAGE>
1
SECRETARY OF STATE
STATE OF WYOMING
THE CAPITOL
CHEYENNE, WY 82002-0020
ARTICLES OF AMENDMENT
PLAYSTAR WYOMING HOLDING CORP.
Pursuant to Sections 17-16-1005 AND 1006 of the Wyoming Business
Corporation Act, James R. Belcher, P.C. as incorporator of PlayStar Wyoming
Holding Corp., a Wyoming corporation (the "Corporation"), hereby adopts these
Articles of Amendment on behalf of the Corporation. The Corporation's Articles
of Incorporation were filed with the Wyoming Secretary of State on April 2,
1998.
A. The name of the Corporation is PlayStar Wyoming Holding Corp.
B. Effective as of the date of filing of these Articles of Amendment with
the Wyoming Secretary of State, the first paragraph of Article IV of the
Articles of Incorporation is hereby amended to read as follows:
ARTICLE IV
Shares
Number of Shares. The Corporation shall have authority to issue
50,000,000 shares of common stock, each with a par value of $0.0001
("Common Stock"), and 1,000,000 shares of Series Preferred Stock, $.0001
par value ("Series Preference Stock").
C. The foregoing amendment was adopted by the incorporator
of the Corporation on April 13, 1998.
D. These Articles of Amendment, made on behalf of the
Corporation by the incorporator, are effective without
shareholder action because the Corporation has not yet issued
shares.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment of the Corporation this 13th day of April, 1998.
By: /s/ James R. Belcher, P.C.
---------------------------------
James R. Belcher, P.C.
1
<PAGE>
ANNEX II
APPLICATION FOR CERTIFICATE OF TRANSFER
Pursuant to W.S. 17-16-1720, the undersigned corporation hereby applies for a
Certificate of Transfer from the State of Wyoming, and for that purpose submits
the following statements:
1. The Name of the corporation is: PlayStar Wyoming Holding Corp.
2. It hereby requests a Certificate of Transfer from the State of Wyoming,
and wishes to become incorporated under the laws of the state or nation of:
Antigua
3. The address of the principal place of business in the jurisdiction to
which the corporation is transferring is: 60 Nevis Street, 2nd Floor, St.
John's, Antigua BVI, West Indies.
4. This transfer was authorized by resolution duly adopted by a vote of
two-thirds (2/3) of the holders of the issued shares of each class of stock of
the corporation on June __, 1998.
5. The corporation will maintain within the State of Wyoming an agent for
service of process for at least one (1) year after the transfer is effected. The
address of such registered office in Wyoming, and the name of the registered
agent at that address is: CT Corporation, 1720 Carey Avenue, Suite 200,
Cheyenne, WY 82001.
6. No legal actions have been instituted by or against the company or are
pending.
7. The net actual value of assets, wherever located, is $_____________. (A
copy of the most current audited financial report of the corporation is
attached.) (See instructions.)
8. The SPECIAL TOLL CHARGE based on net value of assets for the Certificate
of Transfer is $_________. (See instructions to determine toll charge.)
Date: June , 1998
By: _________________________
-------------------------
(Title)
<PAGE>
ANNEX III
DGCL SECTION 262: APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sections 251 (other than a merger effected pursuant to
Section 251(g) of this title), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to Sections 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class of series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
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corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
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(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
